Q2 2019 Earnings Call
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Today's call is being recorded and will be available for replay on Franklin synergy banks website.
Before we begin Franklin financial network does not provide earnings guidance or forecasts.
During this presentation, we may make comments.
That may constitute forward looking statements all forward looking statements are subject to risks and uncertainties and other factors that may cause the actual results performance or achievements of Franklin financial network.
To differ materially from any results expressed or implied by such forward looking statements.
Many of such factors beyond Franklin financial network's ability to control or predict and listeners are cautioned not to.
I would caution to put undue reliance on such forward looking statements a more detailed description of these and other risks is contained in the Franklin financial networks. Most recent annual report on Form 10-K , Franklin financial networks disclaims any obligation to update or revise any forward looking statements.
In this presentation, whether as a result of new information future events or otherwise.
In addition, these remarks may include certain non G.A.P. financial measures as defined by SCC regulation G.
With that.
I am now going to turn the call over to Mr. Myers Jones Franklin financial networks interim CEO , Sir you may begin.
Good morning, everyone and thank you for joining this morning's call to review our second quarter 2019 results. We appreciate your continued interest in our company.
I'm here this morning, with Chris Walker, our Chief Financial Officer.
I'd like to give a brief overview of the quarter and then Chris will review the detailed financial results.
I'm proud to report that our entire team of employees from each area of our company.
Has continued to execute our business plan and we are creating a stronger and more profitable franchise.
We're seeing the results of our planned and previously discussed balance sheet rotation and optimization.
Our bankers are focusing on profitable growth through core customer relationships.
During the second quarter loans grew organically at a rate of more than 10% annualized.
Core deposit growth was more than 16% from the same time last year.
Strong growth in the core franchise allowed us to rotate away from securities and wholesale funding.
We achieved that growth while also remaining disciplined on expenses. The result is a net interest margin expansion by four basis points and continued growth in pretax pre provision profit.
We also maintained strong capital ratios and grew tangible book value per share at nearly 13% from this time last year, while at the same time, returning capital to our shareholders by paying a common stock dividend and Bob beginning a share repurchase program.
On the credit side, we had a pre announced we as pre announced or we had one nonrecurring credit of that take place in the second quarter and we filed a form 8-K last week, providing details about the situation.
We expect no further negative impact as we have fully accounted for the amount of our exposure through either a specific reserve or charging off the balance of this relationship.
We see no deterioration in the rest of our portfolio. In fact, we recently had a third party perform a top to bottom.
Portfolio review of our corporate healthcare loans, including our Snicks, resulting in no material risk rate changes.
This is effectively a clean bill of health at this given point in time.
Aside from the single event, our credit and that might tricks and asset quality remained strong.
Regarding our ongoing search for a permanent CEO to date, we have gone through a very deliberate process, whereby we have identified a search firm we expect to announce the results of that process in due course as we continued to make.
Positive progress toward achieving the long term objectives set forth by our board of directors.
Now I'll turn over to Chris to discuss the final the financial results in more detail.
Thank you Myers and good morning, everyone I'll be referring to the quarterly earnings presentation is available on our Investor Relations page.
On page two we list a number specific financial highlights and results as summarized the quarter.
We had core organic loan growth of $73 million or just over 10% on annualized basis within our guidance of low double digits.
Growth came from all areas of the franchise and the composition of our Pope portfolio is consistent with the first quarter.
We further reduced our securities portfolio, which now represents 20% of assets down from 32% a year ago.
That is the reduction of more than $520 million during the last 12 months.
Core deposits, which consists of our retail and reciprocal deposits grew at a rate of 16% from the same time last year and are basically flat from the first quarter.
During the same time, we reduced our broker deposit portfolio by 14.5% as we continue to focus on strengthening our balance sheet through the reduction of noncore funding sources.
Taking that altogether strong organic loan growth funded with core deposits a reduction in our securities portfolio and a reduction in our wholesale funding our net interest margin expanded by four basis points to 2.84%.
And the monthly trend through the quarter remained strong.
Our cost of deposits remained essentially flat from last quarter at 2.7%.
And our yield on loans held for investment rate remained flat from last quarter at 5.61%.
Our balance sheet optimization strategies have allowed us to protect margin in this low interest rate environment.
I also like to mention that as we discussed last quarter. Our intention is to opportunistically reduce the snicks in our loan portfolio.
That we consider to be non relationship base.
This can occur in a number of ways repayment M&A activities runoff for sales.
We want to be wise, and judicious in balancing risk and return for our shareholders as we execute this strategy.
To that end during the first few weeks of the third quarter conditions improved and the snick loan market, allowing us to sell $30 million of non relationships nicks with minimal financial impact.
This is a positive step in our intentional and responsible plan.
To gradually reduce the balance of the snake portfolio overtime.
Given this development along with some other anticipated payoffs from our healthcare lending and construction portfolios.
We anticipate overall loan growth in the third quarter to be negative.
Likely in the low to mid single digits.
As we continue to optimize our balance sheet.
We maintain our expectation for low double digit core customer loan growth during the intermediate term.
Consistent with prior periods.
Our bankers are focused on and incentivized generate quality core banking relationships.
This fundamental banking strategy will drive our profitable growth into the future.
Our core efficiency ratio for the quarter was 60%.
Basically flat from the fourth quarter first quarter.
In our core non interest expenses were essentially flat relative to the fourth quarter of 2018.
Additionally, we are very pleased to announce that we began returning capital to shareholders through a previously announced share repurchase program.
During the quarter approximately half a million dollars used to repurchase shares we will continue to evaluate our best options for the deployment of capital through organic growth repurchases in strategic M&A and assuming favorable market conditions going forward.
We are likely to continue to execute our share repurchase program in the third quarter.
Our board of Directors has also authorized the continued payment of our quarterly dividend of four cents per share.
On the right side of page two you'll notice some of our key metric key performance metrics for the quarter.
We had a sizable nonrecurring credit expense at Myers reference as opening remarks.
GAAP reported diluted EPS of 34 cents for the second quarter include the 7 million dollar loan loss provision expense.
The charge completely covers the relationship in question marks our exposure to zero through either a specific reserve or charge off.
When normalizing taxes, and our loan loss provision to exclude the nonrecurring credit expense, we view, our EPS trend in the 68% to 69 cent range for the second quarter.
Turning to page three.
In the chart on the top left of the page you can see the trend in net income growth net income for the quarter was negatively impacted by the aforementioned loan loss provision of approximately $7 million.
Our net interest income has grown at third at a 38% annualized rate since 2013.
And is up slightly from the second quarter of 2018.
Driven by 10 basis point expansion in our net interest margin.
This was largely a result of our core loan and deposit growth coupled with the shrinking of our non core funding and securities portfolios, which resulted in overall balance sheet shrinkage of approximately $166 million quarter over quarter.
Non interest expenses decreased to $19.4 million when compared to the first quarter.
Our core efficiency ratio remained steady at 60% to 60%, we're working hard to control expenses, while demonstrating.
Strong core franchise growth.
Page four illustrates the trends over time of our core earnings and tangible book value per share metrics.
Our diluted EPS of 34 cents for the second quarter was negatively impacted by the previously discussed loan loss provision. Despite this highly elevated.
Expense, our tangible book value per share grew 13% year over year to $25.61 further demonstrated the balance sheet strengthening we've been able to accomplish.
While at the same time further reducing the amount of our capital base is vulnerable to the bond market volatility.
Turning to page five you can see our 10.4% annualized loan growth spread across our large loan portfolio.
Our team is focused on core customer loan growth loan diversification and credit discipline.
You can also see on the right hand side of the page that our concentration ratios continue to remain manageable.
And within our targeted internal guidelines driven primarily by our increased scale granular credit administration processes.
Incremental loan diversification and robust capital generation.
I want to emphasize that our loan growth in the quarter was organic and based on lending to our core clients.
In the appendix we've included information on our share Napa National credit and healthcare portfolios.
We are not all satisfied is the credit event in the quarter related to this Nick and remain valid and will remain very vigilant and transparent about the situation.
As I mentioned earlier in the call. We are highly focused on the size and composition of our snic portfolio and expect to see the size of that portfolio continued to decline as we seek to eliminate non core non relationship banking activity.
On page six.
You will see the growth and mix of our deposit funding from a year ago.
We maintain our core deposits basically flat for the quarter.
As discussed previously our ability to reciprocate deposits from local governments of the game changing development for our franchise.
Allowing us to redeploy lower yielding securities into higher yielding longer term assets.
At the same time, we reduced our reliance on noncore brokered deposits by over $19 million in the quarter.
These strategic actions allowed us to reduce the size of our securities portfolio by $524 million since the second quarter of 2018.
The proceeds from shrinking securities and Snic portfolio were used to fund organic loan growth improving our overall strength profitability and interest rate sensitivity positioning.
As our management team continues to collaboratively work together.
One of the most critical areas of our focus is on enhancing and growing our core deposit portfolio.
We've already taken a number of important steps in this regard, including reengineering, our incentive compensation structure emphasize deposit generation.
Realigning elements of our corporate structure and setting into motion a number of deposit gathering initiatives, including an overhaul of our sales philosophy with our senior bankers and recently hired director deposit proactively engaging in driving our salesforce in these critical core deposit gathering activities.
We are committed to driving this core deposit growth as it represents a key tenet of our overall strategy to further improve our balance sheet composition liquidity position and profitability of our business.
Shown on page seven you can see that we continue to maintain a well capitalized liquid balance sheet, which is well positioned to support our anticipated loan growth in coming periods.
We maintained very strong regulatory capital ratios, which are supported by our strong internal capital capital generation.
Turning to page eight our asset quality ratios remained very strong we are committed to continuing to build a strong disciplined and dynamic core franchise.
Although we had that elevated expense, we're convinced that there was an isolated incident and our credit or men metrics remain quite strong.
Excluding this elevated credit expense, our net charge offs will be approximately two basis points for the quarter consistent with prior quarters.
Our reserve has been built to 95 basis points of loans held for investment.
And we believe is adequate for the portfolio, we continue to build.
Importantly, as Meyer stated earlier.
Potential negative financial impact of this Nick has been mitigated going forward as the remaining relationship balances fully reserved.
Our ratio of nonperforming assets to total assets has trended down to just 12 basis points and our allowance for loan losses covers our nonperforming assets at a ratio of 5.8 to one.
It is also important to note that we have no bank owned real estate or repossessed assets on the balance sheet.
As a real estate focused bank. This is a strong indicator of the quality of the portfolio that we have built.
I'll now turn it back to Myers for some closing remarks.
Thanks, Chris I'm incredibly excited by what this franchise accomplished in the quarter.
Our strategy is taking hold.
Core customer growth is strong and margin expansion is leading to improved returns.
None of us are satisfied with a credit event that we have been working through in the first half of the year.
We have taken that issue off the table, while making the loan exposure to zero.
And we remain confident that it was a modest related event.
The bank maintained leading positions and some of the best banking markets around.
We are number one and Williamson County number two in Rutherford County, and have a growing presence in Davidson County.
Taken together, we were the sixth largest bank international and MRSA.
And we expect to continue to grow and gain scale.
We will continue to execute our strategic initiatives and focus on organic core profitable growth.
We remain committed to and focused on creating long term shareholder value.
I'll turn the call over to the operator.
To see if there are any questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speaker phone please pick up your handset before pressing the keys if that anytime. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble roster.
The first question comes from Stephen Scouten with Sandler O'neill. Please go ahead.
Hey, good morning, everyone.
Good morning.
I'm curious as to your views on the NIM trajectory from here I Didnt see that any longer in the slide deck kind of an expectation of where that would go and so I'm kind of curious one what the impact of the the snick sale here will do to the NIM.
In Twoq kind of what rate those loans had and then.
What you expect them to do with the projected rate cuts to come.
Yeah. Thanks Steven.
Good question I don't think we've we've changed any of our intermediate NIM target, which was over 3% I think we're making good progress towards that I've said during.
During the comments that the.
NIM trajectory expansion continued throughout the course of the three months during the second quarter. So we were a little bit higher in June than than what the overall quarterly rate was so we continue to see progress we continue to get.
On the on the on the incremental on the margin some.
Improvement in deposit pricing, which is encouraging.
And as of now we're still holding pretty steady as you see.
In the loan yield so don't don't want to overstate it but we continue to expect that we're going to have good progress there.
Related to this mix.
It's absolutely the right question and that's why when we talk about we're going to balance be responsible and judicious.
These these loans that.
That are are going out or our high quality loans, but it's not where we want to be and were.
Focus on.
The core banking business that we've talked about.
I would say.
In that $30 million I talked about that we have done in the last few weeks.
In this quarter in the third quarter.
Private L plus.
2% to 225 on average is what I'd look out from that so a little bit of an impact.
But it's absolutely the right move going forward.
And we're confident of that.
Okay, but I mean that LIBOR, plus 200 will be below your average loan yield. So theoretically this should pull up your average loan yields Zara.
Well as we as we on the margin sure as we rotate through I wouldn't say that.
The entirety of what we would see over the next 12 months going out of that Snic portfolio would be the same characterization.
So.
I want to overstate it doing it gets you guys too far in the weeds on that one I don't think it's going to be huge impact.
Okay, and when you say continued kind of outflows over the next 12 months of that.
Total Snic book was $231 million at quarter end do you guys have a target in mind of how how low you want to work that down or what we should expect beyond the $30 million thats been done quarter to date.
Yes member last quarter, we said.
Roughly.
We said, 40% to 50% was non relationship I think at this point.
We'd be we'd say.
About 40%, maybe a little bit lower than that.
Don't don't want to give the timing like I said these things happen they happen gradually naturally or if we get the right opportunity in the market that we're comfortable with.
We have that opportunity so.
I could see it.
Over the next 12 months trending to half that maybe we'll see that's not a promise that just a potentiality to give you. Some context, yes. Okay helpful. And then I mean, obviously you I think you spoke to I guess threeq growth in.
Negative, 5% to 6% range negative single digits for Threeq you.
What do you think growth will be like beyond that given this continued theoretical headwind here in the snic portfolio is it going to be.
Maybe a kind of a low single digit growth for a while or how are you guys thinking about what what net growth looks like maybe for the next two or three quarters.
Yeah, So let's talk about the core first right so that core customer growth, we're comfortable with that that low double digits.
And then it's going to be opportunistic I mean, you can do the math that I don't think outside of likely with what we're seeing here in third quarter. It will weigh terribly, but if you wanted to be conservative and said.
High single digits that probably seems reasonable when you combined on a total portfolio basis.
I would expect probably in that ballpark.
Okay, great ill, let somebody else hop on thanks for the time.
All right. Thanks.
The next question comes from.
Tyler Stafford with Stephens.
Please go ahead.
Hey, good morning, guys and thanks for taking the questions.
Hey, Tom Hey, maybe just to start were Steven left off just on the on the Threeq loan growth, maybe I'm missing something here, but you guys have done on coal on an average of around $100 million per quarter of gross.
Each quarter in the first and second quarters. So why is this 30 million sale early in Threeq is going to put growth at a negative starting point for the third quarter.
Yes, Tyler I'd say, if you go back to that for the first quarter's elevated right. So we had a we had talked about back in January on the earnings call for the fourth quarter.
Fourth quarter of 18.
They were that's where we started the guide that low.
Double digits and.
We had I think we'd talk through some of the weather issues. The construction, we said the paydowns were a little bit slower during the first quarter, we really had a wet spring here and so that has elevated the growth numbers in the first quarter.
And so this is probably just the effect of that normalizing a little bit we had some.
Expected pay downs in the healthcare lending portfolio that were also a little bit delayed.
And so I think on balance then you combine that with with the snick sales that we just talked about.
It all it all sums up to that.
But.
So we are as we said, we're not going to grow for growth sake, we're focused on our customers on our balance sheet exists for them. There is no. Other reason for it is that it has no other purpose and so they're going to be quarters, where it can be above that range and below and then you mix and you know as we were rotating these snakes.
We don't want on the balance sheet out it's going to create a little noise hopefully that clears up for us.
Yes. This is mark certainly during the summer season, we see a good many.
Construction loans payoff.
Particularly on the residential side.
We are reloading.
Similar number of projects, but you pay all funded balances and you reload commitments. So the summer side from the residential construction oftentimes is lower not that you are doing less business youre just fundamental smaller amount. So I really expect that to catch up.
Late third quarter early fourth quarter.
Okay.
That helps and maybe just going back to the credit review.
The third party credit view that you mentioned in your prepared comments.
Can you just give us some more details about that review and.
I guess, how many loans did they look at any migration one way or the other that came about as a result of that review I guess Jim.
Bigger picture, how can we get comfortable that the credit issues seen in the first and second quarter at least from how you see the world today over the near term or indeed.
More of a kind of a one off issue and that the underlying health of the book is.
It's still kind of matching up with your prior expectations.
Tyler This is Mars again.
In 44 years of being in this business I've never seen a sector reviewed as many times as the corporate health care sector of our our overall portfolio has been.
It's been looked at internally by our internal analyst it's been looked at by our internal loan review people. It's been looked at by our external loan review farm and its also been looked at in total.
Other review.
Parties.
All in all of those reviews.
Other than the one credit that we have outlined numerous times I think in this.
Coal.
We have seen no credit downgrades.
Merrell is or is there a guarantee to that no. Okay make you a guarantee by by the portfolio of loans secured by cash, but we absolutely know migration and we have seen no downgrades by any of those reviews if that helps yep.
That's helpful. Thank you.
Do you have what the special mention and substandard loan balances were at quarter end June 30.
I'm, sorry, say that one more time, Tyler just the balances of the special mention and substandard loans at the end of the quarter.
We do let me let me find it for you.
Yes, so 30 million at the end of Twoq and that's down from about 35.7 last quarter.
Thats substandard.
Correct.
Okay. Thanks for that and then just on the margin to the 3% margin goal over time that you mentioned do you.
Chris do you think thats still possible with fed cuts and I guess, if so can you just talk about how you expect both sides of the balance sheet to react in any details on the deposit kind of repricing opportunities lower and then just the protection that you might have on the earning asset side.
Yes, sure. We so I think we've talked about before.
It's just a philosophical shift that is underway cultural sales driven.
And we have we have a lot of people are extremely focused on this it's.
One of the most critical things that.
Not that we're we are doing and are going to continue to do so.
We're not we don't have the same liability sensitive sensitivity that we once did that's intentional.
We're not in the business.
My view and I think we shared across our team we're not in the business of making.
Forecasts and bets on what the interest rate environment is going to be and what the yield curve is going to be we're interested in mitigating our risk and positioning our balance sheet.
To perform the absolute best it can in a risk adjusted manner. So that's the first thing.
But we still so were fairly neutral, which is which is where we think we should be.
With that said our deposit costs right are not something we're extremely proud of and so we're working on that and that gives us levers and it gives us room.
To to be competition in the market, while still improving our own pricing and so.
When we get to that 3% we will.
I can't tell you exactly when we're making great progress.
Rome wasn't built in a day and neither is.
Is really kind of changing the culture of how we view the funding side, but we're making tons of progress people are energized I think we've got a lot of excitement across.
And.
Interest anticipation of what this means for our franchise, so I feel pretty good that we're going to get there Tyler.
And on the on the asset side.
We have a fairly decent percentage of loans that have Florida is built into them.
And so we actively manage I think to follow up to Steven's question earlier about the snacks that rolled off.
So we actually.
Newly generated production in the quarter was it closer to five.
Five and three quarters percent.
So that as he said that's accretive we continue to have pricing power.
Particularly as we've.
Intentionally slowed down some of that loan growth.
We're focused on that we're focused on ensuring we're there with the right customers.
That and they are focused on the service and expertise that we give and so we've always had pricing power from that.
So I think we're I think we're pretty comfortable that we were in a good.
We're at a fairly decent margin protection position.
Okay, Thanks, Chris and I'll hop out.
All right. Thanks, Sir.
The next question comes from.
Daniel Cardenas with Raymond James.
Please go ahead.
Hey, good morning, guys.
It's one of them.
So just kind of following up on on.
Your comments on the loan floors or can you give us a percentage as to how much of your loan portfolio has floors and how much would rates have to go down before.
You kind of break through those floors.
Dan This is Myers.
Certainly the majority I mean it it is a very high percentage of loans as they are booked are booked wood floors.
Oh, so from a contractual standpoint, we expect those floors to.
To be effective as we all know it's a fairly competitive market you may have some some issues in regard to that but.
Far and away the majority of the loans. We're booking today are are up four supported.
All right and so we would need want like about 100 basis point drop before you hit some of those floors are.
How much how much we will analyze in there.
And I think if you look at floors would be the majority of those are in the low fives afirma for perspective.
So.
All right and then.
Looking at the securities to assets here about 20% right. Now is is that about as low as you guys would like to go or is there still room to reduce that that percentage of securities.
Good.
Dan We we've definitely made good progress I think you know, we'll continue to tweak and optimize but I mean, we're getting we're getting in the ballpark, particularly as I think let's see most of you know were in the low season for public funds that were managing that we're comfortable with how to manage that we've gotten really good at managing that and so part of that is.
We still we can't reciprocate all of those are clearly so we've got to have some some pledging against that and so I think we could tweak a little bit lower but we're in the ballpark.
All right Fair and then what was the average price paid for the for the stock that you bought back this quarter.
Average price off the top of my head I mean, they are $27 a share ballpark.
And just kind of given the capital is building I mean, how aggressive do you think you guys can be.
In buyback efforts without compromising capital for growth sake.
Yes, sure that and that's.
All right now from a stock price perspective, I'm confident we will be at some point in the future and then returning capital to shareholders and as we were.
We look at ourselves and look at our business and our credit portfolio and our opportunities.
Theres a point at which.
I think ourselves with our board of directors talking a lot about the about these things and where we view ourselves and where we're going.
We just said theres with with the stock trading where it was trading.
Theres just no way, we're going to pass up that opportunity to buyer on stock back at that kind of value. So we did it.
Well, we continue to we're going to be responsible weve as weve de levered, a little bit Tcs up at 9.2%.
Having capital for a rainy day is a great thing. So I think we will we could do a little bit.
But we are definitely more focus on the organic opportunities we have around this but we just couldn't pass it up at those kind of values.
All right fair enough.
And then last question and I'll step back on your CEO search so you've identified a search firm correct have have you identified a.
Preliminary list of candidates and are you keeping your search.
Kind of Nash.
Someone in the Nashville market are you going out beyond that.
Dan This is mark.
The.
From has been identified.
There have been no candidates.
Submitted to date.
There was an extensive conversation with the board only two days ago regarding this process, but as Weve said before.
The board does not think they're desperate in this search they are going to be very deliberative.
They won't the results to be and what they focus on not the speed.
And I think that process is continuing.
And we will continue.
What they are anxious about is to make sure. The existing management team continues to focus on the plan and we execute the plan and is they've looked at each month for the second quarter month. After month, I think they're they're confident thats being done.
Great is the expectations that by year end, you should have an announcement.
Yes, it would be be a guest only on my part, but I would I would certainly expect that to be the case or far along on the process.
All right great. Thanks, I'll step back now.
Thanks, Dan.
The next question comes from Laurie Hunsicker with Compass point.
Please go ahead.
Great Hi, Thanks, Mary Congrats good morning.
Good morning, I, just wondered if we could start just some quick items on the income statement you have accretion income for the June quarter.
At this point it's de Minimis.
Lori just I think it's getting to an immaterial level. It's I don't have it in front of me.
If we look though if you look at the actually Im sorry, if you look at the average.
Alan.
April .
You've got $174000 for the second quarter two basis points into the into the loan yield.
Okay. Thank you.
And Dan.
But I find that yep that that's that thinking so okay. So your core margin also expanded because you had two basis points off quarter. That's helpful. Can you just talk a little about about within the expense line. The other other.
Jumped up how should we be thinking about that was there anything nonrecurring in that.
The and I'm looking specifically at the 2.688 relative to two and a half. It's it's been running a lot lower just wondered if there was anything sort of onetime in nature and that.
I would say there there's a little bit.
As we were working through transitions and different things, but.
No nothing.
We're we're not.
Philosophically.
One one time to me has to be really a one time.
So so I count securities gains losses outside of something big like we did in the fourth quarter same thing through the expense is running a business from time to time you know we're looking we've we've looked at our franchise top to bottom and Weve got folks, helping us and some folks we think are really smart really talented.
With with you know.
Hope help produce tremendous result results in the past and so there's a little there's there's a little bit elevated from those types of things.
As we have people continue to help us to.
To really transform as we as we move to the next phase of our company's story. So there's some of that in there because we I think I think we all view that is we're investing for growth.
Okay. So basically that's a continuing run I should think about in other words, there's nothing something unusual you did.
Inside of some sort of promotion campaign or something like that that's as well.
Continuing the sense working team continue to invest but yet getting you. It's moved line I don't I don't necessarily know that that's true it could bounce around a little bit but my point is when you see things like that it's typically we're we're making investments.
That we think are important for the future. They may not continue throughout time, but they could bounce around a little bit and we are and how that all the main messages were focused on the efficiency ratio were at 60%.
I think our goal would be moving that toward 55.
And then we'll see what happens so as we continue to invest and grow and expand the margin those things will happen naturally so were more focused on.
Where the overall efficiency ratio is to make sure we're properly investing in our growth.
Okay, and then how should we be thinking about tax right.
So the tax rate you know.
I think we'll get through some of the noise that we've had in the past.
If you know I think somewhere between 18, 20% would probably be a logical go forward tax rate.
Okay, and that's what we could actually see next quarter as well.
I think trending in that direction that we're modeling in that in that ballpark.
Okay. So.
Okay, Great and then just to jump back over here tier Cnine your health care I'm. So the substandard I just want to make sure I had just crack. So your total substandard right now is 30 million and that compares to 38 million last quarter.
I think 35 to one follow up on last quarter.
I have 37.7 from your Q, Okay, but I guess, specifically, where I'm getting at is that 30 million how much of that is health care.
So about I would say two thirds of that.
Okay.
Because we had so health care last quarter and this is just an extrapolation round numbers was 32 million.
I'm, obviously dropping out the seven and a half was there anything else that came out.
Or if I'm thinking about that I, just want to make sure I'm thinking about this the right way then you're you're 60 under half years around 20, 424 and a half.
I think there's been some puts and takes and there are some improvements some others that have have moved in and I'll yeah. Okay.
Okay. So if I'm using two cents around 20 million or so.
If I'm looking at that done here. This I mean, the substandard rate on your health care back is still 6%.
I mean, I guess, how should be thinking about that and the provision I realize this credit. This particular credit now sits at zero, but how should we be thinking about that as as we're looking at loan loss provision going forward, obviously, you've guided to sort of slower loan growth you know a drop another quarter, but can you help us think about how you're approaching reserves are we still going to see a reserve build or how should we be thinking about loan loss provision.
You know I think I think we're pretty comfortable as we continued to provision for for loan growth I think where we are you know given seasonal noise coming forward you know probably maintaining in the ballpark of where we are so if you adjust out.
If you adjust out for this specific reserve on the credit that we've talked about we basically were flat as a ratio we built it for the loan growth that we had in the quarter and for right now we don't see anything on the horizon, we don't see anything outside of the previous risk from a macroeconomic and local market conditions.
And the condition of our portfolio like Meyer said.
We clean bill of health as well as a point in time thing and we're never going to overstate or or glorified something that doesn't need to be.
Held in that regard, but but we have had enormous focus on that very portfolio that you're concerned about.
And a big focus on how we calculate our reserve and how we estimate.
Qualitative factors in that regard and so I think we're comfortable where we are is is the message from what we had to eat.
So I mean, if I just might as well have Myers.
The.
The reserve component of the healthcare corporate health care sector is the highest in the bank gets 192.
Oh and as I stated earlier I've never seen a portfolio review this many times and one thing I failed to mention Mr. Is when this portfolio is reviewed its reviewed in my house. There are few or customers. So you really don't see a cut off as far as size you don't see a sample you see a top to bottom look at the portfolio.
And Laurie to that point, so overall right. This theres nothing that has been inconsistent with previous.
With previous periods. So if we go all the way Im looking at a monthly graph actually.
Of of Npls as a percentage of total assets and we're sitting right now at June Thirtyth. It 12 Bips.
And that is basically the realm that we've been in outside.
The credit event, right, which is now no longer but the majority that's no longer on nonperforming status, because it's no longer on the balance sheet.
So we're back to where we were and I think if you. If you take a look at peers I get I guess the health care.
Argument, we understand that no one's more focus on it and quantifying that risk and we are I promise you that.
But when we look at it our peer group either we every single month.
And our Chief credit officer, he looks at it I bet almost every single day that he can raise at least thinking about it where we are versus local peers, where we are first we look at our you BPR a peer group $3 billion to $10 billion across the country and on every metric.
Were there I get that I know I understand that I understand that I guess im just trying to put all that together as I'm thinking about loan loss provision then for next quarter, you know given given the healthcare sale and stuff right. I mean is it is it possible that we see your loan loss provision of running you know something like three four or 500000, I guess I'm I'm just trying to get at you know meringue your comments around sort of my background with without.
Okay, just wanted to make sure I was thinking about that the right way.
Okay, Good and then.
Well, Okay nice if you're just trying to I understand understand if you're just trying to.
To to get a modeling for next quarter I mean, like I said were as a percentage basis, we're pretty comfortable where we are.
And so we're going to follow our provisions likely going to fall or loan group growth as long as we don't view any risk factors, having change for the better or for the worse, but we don't anticipate that changing any of those factors changing and so if we have flat loan growth.
It would be likely that our provision would be flat unless unless we see a need for a reserve build which which we could.
So that's you know that's that's kind of my disclaimer on that.
Okay. Okay. That's helpful. Okay, and then I just I just wanted to talk a little bit too about you know just specifically your your snack.
Your non snack it looks like I mean, it looks like you've restated from your last slide deck.
You know that the slide deck, where you have the shared national credits and health care health care portfolio broken down it looks like there was just a restatement.
With health care non snack.
And then total snack and was that part of the review and and who is the person that did their view.
Or that the company did the review I mean as I.
Is there any color around that.
No there's no color Laurie we we really can't we'll disclose third parties that we use highly reputable extremely well versed well respected in the in the community banking space.
Right down the middle of fairway.
For them and I think.
As we look through that if the numbers it was just.
Little Reclassifications, probably from an accounting basis as we looked at that.
If you remember this was the first time that we'd put this together last quarter. So I'd say nothing more than kinda clerical administrative so nothing to read into.
Read into there at all.
Okay do you have the geographical breakdown of where your health care rounds are located.
So sitting you know kind of similar to what we talked about last quarter.
We don't think that that is the determining factor in no I'm not I'm not aware and I just wonder if if you do have that if that's available if you can share that with us.
Now to this point, we haven't we've chosen to not share that because we don't really view it as a material factor.
We'll continue to talk about it were open we take a lot of feedback from our analysts from our investors from all of our stakeholders we value that.
But at this point, we just don't think that it.
We don't think it is the determining factor or really a part of considering what the risk factors are.
I see okay, and and can you just help us think about.
The 330 million of health care, the 230 million or so snack how we should see those portfolios. If we fast forward a year from now what does that look like in terms of balance.
Right, so kind of similar to what we were talking about Tyler and Stephen earlier.
Maybe maybe in the 40% ballpark, we would call non relationship.
And could see that you know all things equal if I, if the crystal ball worked.
M&A run off pay downs, maybe opportunistic opportunities maybe that noncore is cut in half.
So the noncore is around 90, or so million you were just talking about the snack.
Correct correct.
Okay. So so that comes out, but I mean, how should we be thinking about.
You know, where you where you're adding and what you consider of course, Nick are you not in other words.
You look at that portfolio and you say a year from now we'd like that portfolio sitting at a 130 million or how do you think about that.
So so again, we follow all the customers and opportunities and the way that we're looking at that more core or relationship driven that.
We're seeking to expand relationships, primarily on the deposit side through through those portfolios. So that's that's how we look at is we get opportunities that we can we can expand that and not just.
It will be a member and a group.
That's how that's how we view it.
So those those plans and those initiatives are are underway crystal ball on that one doesn't.
Doesn't yield.
Great visibility at this point, but we're very focused on on that that those are the criteria of how that portfolio will grow.
Okay, Florida only smarter. So my my take is that the health care sector will basically be flat I don't see a lot of movement up or down I think it will be flat and obviously then it would contribute less as a percentage of the overall portfolio as the as the the total loan portfolio continues to grow.
Right.
Okay. Thanks, and just one last question.
Just simply around that you know you mentioned M&A.
Over buybacks I mean, it looks like you repurchased 19000, or so shares this quarter, which is.
Which is a very small amount relative to your whatever almost 1 million share authorization can you talk a little bit about how you think about it.
M&A over buybacks and you know what your approach to M&A, yes.
Yeah, so so M&A.
I mean, I think we have some pretty clearly defined objective guard rails from a financial perspective, and we're not going to go out in terms of earn back the type EPS accretion all predicated upon.
Cultural and in corporate synergies right and the ability to execute through that so do we see deals right now with where our currency is trading no. We don't but not as many people I think in our community banking community understand that banks are sold not bought and relationships are built over time and so when we talk about that we have we have the expectation Laurie that.
As we perform we execute and we have continued to increase our credibility with investors it will regain our currency.
And when once we do that we want to be in position.
To be able to execute any kind of M&A that makes sense from a strategic and financial standpoint, all is that the idea of driving shareholder value.
And so how were your threshold and I realize you're not quite there yet, but where your thresholds in terms of how you approach tangible book dilution and her back.
Got you know after that.
Sure. Thanks.
So I think.
In terms of timing.
I think the guardrail that most people again, an industry use of the three year.
Tangible book value dilution is a good guardrail is it a line in the sand, but you know I think it all depends on the merits of the deal and what.
You know what the long term strategic value of is of that deal. So boxing yourself in for the sake of that but I think if you go over that because it is a norm because we communicate very frequently with our investors and are always listening and looking to collaborate with them.
We're not going to go over that unless it was just you know.
Something something we viewed is so incredibly attractive so that's a very high bar to get over but I'll just say.
I say that because things change life changes views change.
And also when sometimes.
All right and then just just to find enough last night to what how much tangible book dilution. Once you take in a deal or do you not looking at it that way.
No I don't think it's as important Laurie because that's it's all it's all relative right its relative on the size of the other party and what that what that deal is so it's more what are the prospects for arnie. It back what what are the assumptions that you have to deliver upon from executing our the cost save assumptions achievable.
Our the cultural synergies such that.
Such that we can execute this because that's what matters not numbers that we put on a pay on a piece of paper.
So I think the the period of time it takes to earn it back.
It is a very logical guide post a little bit less might be the percentage, but obviously they play together and you have to look at both of them, but it would be ranked below.
I think for us below just pure earn back period metric.
Okay I'll leave it there thank you.
Thanks Tyler.
The next question comes from Stephen Scouten with Sandler O'neill.
Please go ahead.
Hey, sorry for the follow up guys appreciate it.
Just curious and I may have missed it I heard you talking about kind of that other expense line item, but I was curious.
Chris maybe if you could comment on the other increases in expenses that I. It looks like they are up 5% overall, specifically more in the salaries line.
Is that a build we should continue to see or is that more from the.
This deposit officer and other recent hires or can you kind of give us some color.
To that increase in what we should expect moving forward.
Yeah, I think I think thats, probably the upper in terms of a growth rate upper end of what were looking for but like I said, we're engaged in a bit of a transitory period for us in a number of.
Respects and.
You do have to invest for that growth and we do not we do not want to start.
Our franchise of the proper investments, but we're extremely focused on it so quickly I mean, if you're looking at just percentages, yeah, I think thats. The upper end of of what we are targeting always would love to see it come down.
But we're we're in a transformational period and that's just that's kind of a fact that we have to deal with.
To invest for the future.
Now that makes sense and maybe if I ask the question a better way do you think you can see actual operating leverage in the next several quarters or in that transitory state is it kind of hey, we're making some investments we're re shaping the loan book and and this is kind of be kind of be where we are from an efficiency ratio standpoint for for some time.
So I think we can see it im cautious to promise too much but I can I think I think we're starting to see incremental operating leverage that's our expectation thats right.
Perfect very helpful. Thanks, guys.
You bet.
That's all the time, we have for questions. This concludes our question and answer session I would like to turn the conference back over to Mr. Myers Jones for any closing remarks.
I just want to thank everyone for their participation and I wish you a very good national wine and cheese that.
Right.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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