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Edited Transcript of SFBS earnings conference call or presentation 17-Jul-17 9:15pm GMT

Q2 2017 ServisFirst Bancshares Inc Earnings Call

Birmingham Jun 12, 2019 (Thomson StreetEvents) -- Edited Transcript of ServisFirst Bancshares Inc earnings conference call or presentation Monday, July 17, 2017 at 9:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Davis S. Mange

ServisFirst Bancshares, Inc. - VP IR Accounting Manager

* Thomas Ashford Broughton

ServisFirst Bancshares, Inc. - Chairman, President & CEO

* William M. Foshee

ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary

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Conference Call Participants

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* Kevin William Swanson

Hovde Group, LLC, Research Division - Director & VP

* Nancy Avans Bush

NAB Research, LLC, Research Division - Research Analyst

* William Jefferson Wallace

Raymond James & Associates, Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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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 conference is being recorded.

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

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Davis S. Mange, ServisFirst Bancshares, Inc. - VP IR Accounting Manager [2]

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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'll open with some second quarter highlights, and then open the floor for questions.

I'll now cover our forward-looking statements disclosure, and we can 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 projection 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're made and ServisFirst assumes no duty to update forward-looking statements.

I'll now turn the call over to Tom Broughton.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [3]

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Thank you, Davis, and good afternoon to all on the call. Thank you for joining us. And I'll cover a few highlights quickly and before turning it 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 -- usually 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're pleased there.

From a deposit growth standpoint, it's reverted to our seasonal pattern that we've had most years, where we have negative outflow in the first quarter, then we have -- it picks back up in the following quarters. And again, also, we try 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 the 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 in all of our footprint. Really no change there.

From a quarterly deposit growth standpoint, Nashville and Atlanta had the largest growth for the quarter. And for a -- on a year-over-year basis, Mobile, Nashville through Austin, Atlanta and Birmingham all had very strong growth on a year-over-year basis.

In our production headcount standpoint, it was down by 2 at the end of the quarter. We hired 4 new producers in the quarter to replace 4. And we had 2 people that moved to support roles from production roles. And we continue to stress, we're trying to grow the productivity of our producers rather than growing the headcount of our producers. We still think there's a great deal of capacity within the existing staff to add to our production.

Bud, I'm going to turn it over to you to talk on the financial numbers now.

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [4]

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Thanks, John. Good afternoon.

First, on our net interest margin we improved by 24 basis points in the second quarter, increase 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 on June 15, and I won't go over those rate changes. It's really 3 different categories.

We had a $1,052,000,000 of loans that had immediate reset dates, so it's with our prime or LIBOR-based loans. We had $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 to prime, 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. One -- all the loans that reset mid-June 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, first of July.

Let's see, deposit counts. We went up about 4 basis points. In the second quarter, we went from 0.60% to 0.64%. And that's interest-bearing, co-interest-bearing deposits.

Efficiency ratio, we improved to 36.23% in the second quarter. We were 37.58% in the first quarter. Most of the increase had -- or improvement had to do with the margin improving. That's was where the primary cause of our margin -- our efficiency ratio improvement.

Credit quality, nonperforming loans to total loans 0.21%. It was 0.23% at March. And nonperforming 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.

Nonperforming assets decreased. They were $14.9 million at June 30, and they were $17.2 million at March 31.

ORE also decreased. ORE was $3.9 million at June, $5.1 million at March 31. ORE expense is very low, $57,000 for the second quarter versus $76,000 for the first quarter.

Our tax rate for the second quarter, 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 for the year, our year-to-date tax rates is 27.6%, 33.1% without the stock option credit.

And I'll turn it back over to Tom for the credit discussion.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [5]

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I think on the expense growth in the first-- in the second quarter, Bud, in terms of -- about half of the headcount, was it not in -- all in Tampa Bay?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [6]

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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've added 11 people to their staff in 2017.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [7]

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Yes. We moved into our permanent office in Tampa Bay in Hillsborough County.

From a standpoint of credit quality, people were -- all of you analysts asked, 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 2 contractors, both in different industries, but they were both contractors. Interesting thing is, contractors are doing better than they've done since 2010 as a group. So there not -- the deterioration of those 2 was isolated to those 2 just lack of good business practices actually, rather than any industry trends or concerns.

We still haven't seen any turndown in any particular industry. We're certainly watching. We added 1 TDR in the second quarter. That's 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 payments, 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 into the TDR bucket. We didn't choose 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 we're certainly on the lookout to see if we see anything.

So we'll be happy to answer any questions that anyone has. We feel pretty good about where we are. And I'll turn it back over to Davis.

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Davis S. Mange, ServisFirst Bancshares, Inc. - VP IR Accounting Manager [8]

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And William, if you want to connect us to Wally, we'll get started.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And it looks like our first questioner today is going to be William Wallace with Raymond James.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [2]

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So maybe the first question is just kind of talk about the earning asset mix. Looks like you deployed, and I believe, you mentioned in the prepared remarks, you've 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?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [3]

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I think so. From an excess liquidity standpoint, we're comfortable at 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.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [4]

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And then, when you speak of excess liquidity, are you including shortly dated securities? Or just cash on hand?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [5]

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Cash on hand. Part of that's a Federal Reserve and part of it's pledge funds so -- with correspondence.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [6]

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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 sounded 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?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [7]

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Well, I guess -- let me go back over at -- for June, immediate reset that was $1,052,000,000 in loans.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [8]

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Wally, do you want the numbers? Or the dollars? Do you want loan income or (inaudible)...?

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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You had the -- the interest income dollars that we'll see, that's great if you have it handy. Otherwise just tell me the balances and I can calculate it.

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [10]

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Yes. So for June, with the change of 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'll have a full month. And then we had loans that reprice on July 1. So you get that also.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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So that's the $275,000 are the loans that priced up on July 1?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [12]

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

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [13]

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

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [14]

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It would increase by another $275,000. Yes. In other words, it increased by -- yes, yes. Little confused. A lot of components.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [15]

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It's inclusive.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [16]

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And then so, what's the balance of loans that's -- that resets July 1?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [17]

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Well, let's see. 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 prime was $593 million.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [18]

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And that's on top of the $275,000 that you're talking about?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [19]

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No. No. All those are included in the...

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [20]

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They're all included in the $275,000.

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [21]

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Yes.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [22]

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Okay. All right. I apologize. I just...

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [23]

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Oh no, it's -- believe me, it's confusing to get all these numbers to get what you're...

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [24]

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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.

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [25]

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Correct. It will increase -- yes, that will be an increase in July's margin.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [26]

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Right. Okay. Great. So Tom, a question for you. Maybe could just give an update on what you're seeing production-wise in the Tampa market now? I mean, pipeline or how that market has been growing?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [27]

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Yes, we've got a really -- I don't have the pipeline in front of me, Wally, but we certainly have a robust pipeline in every market, including Tampa. And so we feel really good. We just added -- the staff is just -- we have a number of new production people who have just joined us in the last 90 days. So they're not certainly -- haven't built a pipeline as yet. But we feel really good about where we are. There's good opportunities down there.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [28]

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So what do you kind of runway to, to break even in that market? And where -- how far do you think you are?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [29]

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I mean, I would think that we're probably a year away breaking in. We got a ways to go, Wally.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [30]

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Sure. Okay. And then as -- are you breakeven or profitable now in all the other markets, the newer markets?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [31]

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We are in, certainly, Nashville, we achieved profitability. We're solidly profitable there. Not in the Charleston. We are in Atlanta, but we're not in Charleston.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [32]

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Okay. And you're closer in Charleston than Tampa. Is that correct?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [33]

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Right, right, right. It's certainly been open a little bit longer there.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [34]

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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.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [35]

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Right. We have nothing pending to-date, Wally, that is imminent. We're certainly talking to people in -- actively in 2 markets right now. And we think there's good opportunity. We're being really selective about where we go and who we go with. As we see so much opportunity in our existing footprint, that obviously, the cheapest growth is going to be within our existing footprint today.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [36]

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Great. Okay. That's all I had.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [37]

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Wally.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [38]

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Yes sir.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [39]

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I will e-mail you these numbers. I know it gets confusing between the dollar. Let me -- I'll e-mail it to you when we get off, so that you can have that. I'll show you the -- they'll show the computation on the June and July.

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William Jefferson Wallace, Raymond James & Associates, Inc., Research Division - Research Analyst [40]

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Sure. The only reason I ask is just because the margin moved 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'm trying to figure out is, how should I forecast margin, Tom, from pricing benefits rather than earning asset shift moving forward.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [41]

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

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Operator [42]

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And our next questioner today is going to be Nancy Bush with NAB Research.

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Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [43]

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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. Are there any thoughts about sort of accelerating spending plans or adding to existing markets? I mean, you've got that opportunity here. Could you just talk about expenses and your thoughts about managing them?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [44]

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Yes, Nancy, this is Tom. From the standpoint of -- we'll hire all the good produces we can find. It's just hard to find. It sounds easy to -- when I read people are, "Oh, we're going to open a loan production office and hire some talent" is -- it's hard to find and really -- as you well know, the best people don't talk -- often aren't talking to recruiters on the phone. So that's problematic to add them in that fashion. So we're always looking for people that we can source through friendships or other relationships that we have around the Southeast.

We continue to -- from a regulatory standpoint, it's not getting any easier, and we have to continue to add people from a risk management standpoint, a compliance standpoint that we're continually talking to people in that arena. Certainly that doesn't enhance revenues, but it will certainly -- we've got to keep all that in order. So we look at those people as well. So we think there's opportunity. But there's certainly a lot of competition for talent in the Southeast. And especially, when you get into a pretty vibrant market then their people are -- a lot of bankers looking for to hire people around the Southeast today.

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Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [45]

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

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [46]

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Yes, we're -- people that are interested in immediate cash compensation probably aren't the best fit with us. There is a lot of banks that they're the best fit with. And we're looking for people that want to build their career here, and build some equity with time. So those are 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're not interested in that sort of thing. So they -- we see a lot of people that I guess, that are more the mercenary-type in the market. And they are -- you can look at the resume, you've seen them because 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 meet them through friends, or friends of friends in that fashion. So certainly you're there in Atlanta, that's certainly a very competitive market for talent. And certainly you know people that -- bankers there that have had 4, 5 stops, and they're not all like me. So they've been around -- they get around over there in Atlanta, so...

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Nancy Avans Bush, NAB Research, LLC, Research Division - Research Analyst [47]

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They do in Charlotte as well, so. Just wondering, I mean, you said that you had hired 4 new producers in the quarter to replace 4. Were those 4 who selected out? Or were selected out? Or is that kind of normal churn?

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [48]

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Yes, that's probably pretty normal at the size we are today to have that much, whatever reason, it's either wasn't good fit from their standpoint or our standpoint. And some of them just realized they were not a good fit, and chose to make a career change. So that is pretty normal from that standpoint. You typically add people at the end of the first quarter, somewhere in there, or when you're taking the team. But the people we've added this past quarter were -- they were all in 4 different markets, for example. 4 individuals from selected markets.

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Operator [49]

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(Operator Instructions) And we do have another questioner today. It is Kevin Swanson with the Hovde Group.

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Kevin William Swanson, Hovde Group, LLC, Research Division - Director & VP [50]

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I just wanted to ask quickly, with the loan-to-deposit ratio, I mean, it's kind of just under 100% now. I think in the past calls, you mentioned that it's going to be in the top side and where you guys might be comfortable at. Obviously, with continued strong loan growth, does that number still stick? And if you -- maybe you're looking to lower that level at any deposit related initiatives going forward?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [51]

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Kevin, it's Bud. We're still comfortable at that level, a little bit higher. We still look at the centralized purchase with our corresponding group as really part of core deposits. That has decreased. I think the correspondents have had some difficulty keeping deposits like everybody has. But I mean, it's still a good number. I think it's 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's been very few days when we had been a net borrower over our 12-year history. We've never had that many 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 passed.

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Kevin William Swanson, Hovde Group, LLC, Research Division - Director & VP [52]

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Okay. Have you see any competitors at all raising their deposit rates? Or do you think that kind of in general people are holding firm the -- despite the rate hike?

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William M. Foshee, ServisFirst Bancshares, Inc. - Executive VP, CFO, Treasurer & Secretary [53]

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Yes, from what we've seen, on their core rates -- base rates, they're pretty well holding steady. Everybody's always running a special of some kind. But I think we haven't really seen increases in the -- in their base rates with any of that. With -- we've had 3 rate increases since December. And everybody has pretty well held steady.

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Kevin William Swanson, Hovde Group, LLC, Research Division - Director & VP [54]

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Okay, that's helpful. And then just shifting gears maybe to ask a [quality] quickly. Obviously, it looks like it's continued to improve. Was there any more color you could give on what type of credits was in the TDR, just specifically? And then anything maybe you're seeing specifically in C&I loans? Maybe market-to-market? I know you mentioned overall, it seems pretty solid. But maybe if there's anything specifically in the faster growing markets.

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Thomas Ashford Broughton, ServisFirst Bancshares, Inc. - Chairman, President & CEO [55]

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Yes, Kevin, it was a manufacturing company that just had some difficulties. But it was a manufacturing company that has -- a traditional C&I company. They have -- just had some issues from a -- it was really they -- strong sales and strong growth profit. It's a company, we think, will fix itself.

C&I credits, I 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 AD&C Credit, they get in a ditch and stay there forever, it seems like. We had them all through the recession that stayed in the ditch. So we'd rather have a -- if we're going to have -- if we have to have one have a problem, we'd rather have it be a traditional C&I credit. They tend to self-correct much more quickly than -- it's a pretty good-sized company. But it's a good-sized company with good sales and good gross profit margins. Just had a working capital issue.

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Operator [56]

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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.