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Edited Transcript of FSB earnings conference call or presentation 24-Oct-19 1:00pm GMT

Q3 2019 Franklin Financial Network Inc Earnings Call

FRANKLIN Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Franklin Financial Network Inc earnings conference call or presentation Thursday, October 24, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Black

Franklin Financial Network, Inc. - Executive VP & CFO

* J. Myers Jones

Franklin Financial Network, Inc. - CEO

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Conference Call Participants

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* Brett D. Rabatin

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Laurie Katherine Havener Hunsicker

Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst

* Stephen Kendall Scouten

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research

* Tyler Stafford

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning and welcome to the Franklin Financial Network Incorporated's 2019 Third Quarter Earnings Conference Call. Hosting the call today from Franklin Financial Network is Mr. Myers Jones, CEO of Franklin Financial Network Incorporated. Please note the Franklin Financial Network Earnings Release and this morning's presentation are available on the Investor Relations page of the Bank's website at www.franklinsynergybank.com. Today's call is being recorded and will be available for replay on the Franklin Synergy Bank's 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 facts that may cause 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 are beyond Franklin Financial Network's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in the Franklin Financial Network's most recent Annual Report on Form 10-K. Franklin Financial Network 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-GAAP financial measures as defined by SEC Regulation G.

With that, I am now going to turn the call over to Mr. Myers Jones, Franklin Financial Network's CEO. Sir, you may begin.

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J. Myers Jones, Franklin Financial Network, Inc. - CEO [2]

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Good morning, everyone and thank you for joining this morning's call to review our third quarter 2019 results. We appreciate your continued interest in our company. I'm here this morning with Chris Black, 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. Our company's strength continues to be our team from our originators to our frontline branch folks and our support group, and I could not be more proud of the attitude and excellence they show each and every day.

As evidenced by this quarter's net interest margin expansion, we continue to benefit from the results of our balance sheet rotation and optimization strategies, which continue to unlock the value of our core bank, although the financial benefits of the balance sheet shift has been powerful, our bankers' daily focus remains on driving profitable growth through our core customer relationships. As expected during the third quarter, total loans held for investments declined almost 12% annualized driven by the SNC portfolio reduction of $87 million. Core deposit growth was more than 28% from the same time last year as we continue to focus on growing retail deposits and the reciprocation of local government deposits. Strong growth in the core franchise allowed us to rotate away from securities and wholesale funding as we further de-leverage noncore assets and liabilities.

We achieved that growth while also maintaining discipline on expenses. The result was a net interest margin expansion of 14 basis points from last quarter and 28 basis points from the third quarter last year as well as continued growth in pre-tax pre-provision profit, which increased 23% when compared with the third quarter of 2018. We also maintain strong capital ratios and grew tangible book value per share by nearly 15% from this time last year, while at the same time return into our shareholders' capital by increase in our stock dividend by 50% and continuing our share repurchase program.

Now I'll turn it over to Chris to discuss the financial results in more detail.

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [3]

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Thank you, Myers and good morning everyone. I'll be referring to the Quarterly Earnings presentation that's available on our Investor Relations page. On page 2, we list a number of specific financial highlights and results to summarize the quarter. In line with our guidance, we experienced the reduction in total loans during the third quarter as we further reduced the SNC portfolio by almost $87 million, which now represents 5.2% of loans held for investment. This conscious effort to bring the SNC portfolio to lowest concentration of loans held for investment since the second quarter of 2018 represents our commitment to shedding noncore, nonrelationship items from our balance sheet.

In addition to the SNC reduction, we further shrunk our securities portfolio by over $221 million during the quarter, which now represents 16% of assets down from 32% a year ago when the securities portfolio stood at more than $1.3 billion. Core deposits, which consist of our retail and reciprocal deposits grew by almost $156 million during the third quarter, or as Myers said earlier, more than 28% when compared with the same time last year. Since the second quarter of 2019, we further reduced our broker deposit portfolio by nearly $110 million, which has solidified our continued reduction in noncore funding as broker deposits have declined by nearly $300 million since this time last year.

As a result of the focus on core deposit growth and the continued strategic reduction of noncore assets and liabilities from the balance sheet, our net interest margin expanded 14 basis points from last quarter to 2.98%. Our cost of deposits declined 16 basis points from last quarter to 1.9% in our contractual yield on loans held for investment declined 4 basis points from last quarter to 5.28%.

Our balance sheet rotation optimization strategies along with tailwinds from the inverted yield curve have allowed us to expand our net interest margin in what remains a low and difficult interest rate environment. As mentioned in previous quarters, our intention is to continue to opportunistically reduce the SNCs in our loan portfolio that we consider to be nonrelationship based. This may occur in a number of ways: Repayment, M&A activities, run off, or sales. We want to continue to be wise and judicious in balancing risk and return for our shareholders as we execute this strategy.

Going forward, we would expect to see continued balance sheet optimization and SNC reductions and look for overall near term loan growth in the mid-single digits with expectations for low double-digit core customer loan growth. Our bankers are focused on and incentivized to 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 58%, an improvement from the 60% recorded in the second quarter and our core noninterest expenses were flat relative to the second quarter of this year, and up about 6% year-over-year as we remain committed to investment in our business.

We are pleased to announce that our Board of Directors has also authorized a 50% increase of our quarterly dividend of $0.06 per share. We will continue to evaluate our best options for the deployment of capital through organic growth, share repurchases and strategic M&A, and assuming favorable market conditions, going forward, we will likely continue to execute our share repurchase program.

On the right side of page 2, you will notice some of our key performance metrics for the quarter. The third quarter of 2019 GAAP reported diluted EPS was $0.75 and diluted core EPS is estimated at $0.72. Non-core items for the quarter included in nonrecurring FDI assessment credit of approximately $750,000, gain on sales of securities of $1.5 million, and loss on sales of loans of about $1.75 million. These result in core return on assets of 108 basis points. Core return on tangible common equity of 11.4% and a core efficiency ratio at 58% as I mentioned earlier. Each of which represent encouraging and positive improvements from last quarter and from the third quarter of 2018.

As already mentioned, our NIM on an FTE basis is 2.98%, with quarterly expansion of 14 basis points. These metrics represent meaningful progress towards the intermediate performance objectives we laid out back in May, which strive for a sustainable return on assets of 120 basis points, return on tangible common equity of 14%, and a NIM of greater than 3%. We are by no means satisfied with these results as a destination, but are proud of the work done by our entire team to have achieved these important milestones along the path to creating sustainable performance and core earnings momentum.

Turning to page 3, key long-term profitably trends are shown. Our net interest income has grown at a 38% annualized rate during the period from 2013 to 2018 is up 6.4% from the third quarter of last year driven by that 28 basis point expansion in the NIM. This is largely a result of our continued balance sheet rotation optimization, which included this quarter's deleveraging of our noncore funding and securities portfolios, which resulted in overall balance sheets shrinkage of approximately $250 million quarter-over-quarter.

When considering the previously mentioned FDIC assessment credit, core noninterest expenses were flat from last quarter and were up a controlled 6% year-over-year. Our core efficiency ratio also declined as I said 58% further demonstrating our commitment to continuing to work hard to control expenses while driving strong core franchise growth.

Page 4 illustrates the trends over time of our earnings per share and tangible book value per share metrics. Our estimated diluted core EPS of $0.72 for the third quarter, represents a $0.02 per share increase from the same time a year ago. Furthermore, we continue to experience strong growth in our tangible book value per share, which is up 14.8% year-over-year to $26.61, further demonstrating our internal capital generation capacity, while continuing to unlock the value of the core bank. Importantly, these actions have further reduced the amount of our capital base as vulnerable to bond market price volatility.

Turning to page 5, you can see our loan portfolio composition and growth profile. Total loans held for investment declined by $84 million this quarter driven by the previously mentioned $87 million reduction of the SNC portfolio, as expected, non-SNC loan growth was essentially flat due mainly to construction paydowns during the quarter.

Our team remains focused on core customer loan growth, loan diversification and credit discipline. As I mentioned previously over the intermediate term, we expect it to be low double-digit core loan growth. You can also see on the right hand side of the page their 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.

In the appendix we have included information on our Shared National Credit & Healthcare Portfolios. We remain highly focused on the size and composition of our SNCs portfolios evidenced by this quarter's reduction to near 5% of loans/. We expect to see the size of this portfolio continue to decline as we seek to eliminate noncore, nonrelationship banking activities.

On page 6, you will see the change in mix of our deposit funding from a year ago. During the third quarter, we grew our retail deposits by more than $225 million, while our retail deposit growth was solid throughout our business in the quarter, it was also somewhat lumpy and we are not anticipating the same level of quarterly growth in the near term. We expect to continue to gradually leverage our loan to deposit ratio while we made progress on the further growth build out of our deposit gathering and sanitization program. We are optimistic about our ability to successfully enhance the growth of our core deposit franchise. We are realistic in our understanding that this process will be measured in quarters and years as it's both a structural change and a cultural change for our team.

Shown on page 7, 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 period. We maintain very strong regulatory capital ratios, which are supported by our strong internal capital generation. As indicated previously, we are pleased to announce the 50% increase in our quarterly dividend at $0.06 per share.

Turning to page 8, I'll review our asset quality trends. As disclosed last quarter, the Company had allocated a specific reserve for a single SNC relationship in the amount of approximately $2.2 million, which then represented the total remaining relationship balance. During the third quarter of 2019, the Company determined that excluding a principal payment of nearly $500,000, the balance of this relationship should be charged-off resulting in the recognition of a charge-off of approximately $1.7 million this quarter.

Given that the specific reserve had been established during the second quarter of 2019, there is no further potential negative financial impact related to this relationship. Further we have determined to hold our allowance for loan losses steady from last quarter at 95 basis points of loans held for investment despite the 12% annualized decline in loans. The allowance level this quarter is due to a variety of factors, including an uptick in and the developments relating to our classified assets as well as anticipation of changes related to CECL.

Classified assets to loans held for investment stand at 1.77%, an increase from 1.45% last quarter causes us take a cautious stance, as we continue to evaluate substandard loans in our portfolio just as we always do. We also continue to monitor all of our asset quality metrics, including our loans that are 90 plus days delinquent, which stand at 2 basis points of total assets as well as our nonperforming assets, which stand at 8 basis points of total assets, both of which are at or very near cycle lows.

Our allowance for loan losses covers our nonperforming assets at a ratio of 8.5 to 1, up from 4.1 to 1 at the end of last year. It is also important to note that we have no bank-owned real estate or repossessed assets on our balance sheet. As a real estate focused bank, this is a strong indicator of the quality of the portfolio that we have built.

Now I just want to spend a moment discussing CECL, which we plan to implement on January 1, 2020. It will be highly influenced by macroeconomic forecasts and our loan composition at point in time. We are in the final stages of validating our model in which we anticipate using an 18-month forecast period with reversion to historical loss rates. Our current visibility indicates that our allowance for credit losses will likely be very close in magnitude to today's current allowance for loan and lease losses with perhaps slight variations due to changes in SNC loan balances as well as a fairly short duration of our residential construction portfolio. We plan to provide a full update and disclosure during January's Earnings Call.

Now I'll turn it back to Myers for some closing remarks.

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J. Myers Jones, Franklin Financial Network, Inc. - CEO [4]

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Thanks, Chris. Again, I'm very proud of what this franchise has accomplished during the quarter. Our strategy continues to take hold as we continue to emphasize core customer growth and our deleveraging from noncore asset and liabilities is driving margin expansion, which is thereby leading to improved returns.

The bank maintains leading positions and some of the best banking markets around. Based on the FDIC's Deposit Market Share Report as of June 30, 2019, we are number 1 in Williamson County, number 6 in Rutherford County and have a growing presence in Davidson County. Taken together, we are the sixth largest bank in the Nashville MSA. And we 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 will turn the call over to the operator to see if there are any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Stephen Scouten with Sandler O'Neill.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [2]

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Congrats on the quarter, it's nice to see a lot of these strategies that you guys have been working hard on kind of coming through this quarter, so, well done. Curious kind of along with the balance sheet optimization strategies, if there is some more to be done here or with where you've now gotten the loan to deposit ratio and securities as a percentage of assets and so forth, if this is a more static place for the bank and we'll see more kind of incremental improvement from here? And then also around that with the timing of the balance sheet optimization that was done in 3Q and the lag effect upon 4Q if we'll see some incremental benefit there?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [3]

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Hey, Stephen. Thanks, I appreciate it. This is Chris. So I think that the lion's share, I guess of the optimization rotations, financial engineering, however, you want to look at it, that's largely been done, like I said earlier, I think we'll continue to leverage the loan-deposit ratio incrementally but at this point in the cycle as well, we'll be cautious with that. I think also I had mentioned or maybe I didn't mention it, but part of what we were optimistic that I think we should be able to hold fairly steady on the margin going forward, maybe we'll have to see how the Fed moves and how the markets respond to that and what competition looks like, particularly on the deposit side. But in terms of loan yields, we've done, I'd say, our bankers have done a pretty incredible job over the past couple of years in terms of structuring floors, pretty much standard in most of our loan documents and so that's starting to show through as we've had 2 cuts, which is evidenced by the 4 basis point decline in loan yields. So we'll have to see how, it's more a matter of competition, I would say on the deposit side. So yes, I think the summary is we're largely done with most of the moving on the balance sheet, maybe securities tweak a little bit more, maybe tweak here a little bit, here or there a little bit more, but I think we're getting set pretty well on our course.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [4]

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Okay. It looked like some of -- maybe some of the securities' activity was later in the quarter though. So I guess would you expect to see some average earning assets shrinkage next quarter as a result, but maybe some incremental benefit in the margin given the timing of the securities' transactions or is that?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [5]

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Yes, I mean that could happen. I think that could happen a little bit. We'll have to see, I think we've had a reasonable balances come on towards the beginning of the quarter as well from a loan perspective. Like I said, we're thinking the guidance of mid-single-digit for total loans annualized in the fourth quarter and probably a little bit higher than that from a core customer basis, but so, I think averages have been bolstered a little bit towards the front end of the fourth quarter. So I think that should mitigate some of the securities' declines as well.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [6]

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Okay. And then you touched on the NIM there a little bit, but can you remind us if you have this data handy kind of the percentage of your loans that are tied to prime and you mentioned the floors, but do you have any data about what percentage are at their floors currently are close to them that some sort of insight there that would be helpful to think about loan yields moving forward?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [7]

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Yes. So the tied to prime, I can't tell you the exact percentage tied to prime, I'd say 55% to 60% are variable and a high majority of those are prime but I don't know the exact number percentage that are actually prime. One, and then on the floors, I'm not sure -- let's look at that, Stephen, we haven't really disclosed that before, but it's, I think you see coming through in the numbers we were expecting, we hadn't really said anything before we want to see how it worked in practice, but that's kind of a testament, I'd say, to our team and the value of our customers' place on the services we provide.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [8]

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Sure. And maybe one last thing for me, just to kind of tie up one number on that FDIC assessment, I guess $750,000 benefit you got and then does that put the run rate around $400,000 moving forward or would go back to that kind of $650,000 level we saw in 2Q?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [9]

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Yes. As with the government, you never totally know, and so it was a little bit of a surprise, I think we got the check pretty much on the last day of the quarter almost and we're expecting a little bit more to come in, I don't know if you've heard that from the other banks. But we're expecting a little bit more to come in this quarter. So I'd say $400,000 feels a little bit low to me, but $600,000 would be higher, so maybe I'm planning on something in the middle of that and then, we'll actually see what happens.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [10]

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Perfect, thank you. And congrats, again, on the great quarter guys.

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Operator [11]

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Our next question comes from Brett Rabatin with Piper Jaffray.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [12]

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I wanted to go back to the SNC reduction. Can you just give us some color on how those came off the balance sheet? Were they refinanced away the Company? Maybe give some flavor on the reduction that you had in the third quarter.

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [13]

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Yes, Brett. So it was a blend of the 2. I don't have the percentage of that in front of me, but we had some -- a mixture, we had some pay downs, some notably as we flagged, I think last quarter some of those entities are using the interest rate environment and just the overall competitive environment search for yield, however you want to think about it to use facilities to lever up, which is a convenient exit point for us out of any of those situation. So I would say we're not just seeing that in the SNC portfolio, we're seeing that in different pockets around our portfolios. So we're cautious and mindful of that. But there were definitely a good number of sales and hence some of these were brought on with slight premiums and some of them just market wise trading with variable rate nature at some interest rate marks to them, but that generated the $1.7 million, $1.8 million loss on loans.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [14]

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Okay. And it sounds like you're getting close to having done what you want to do with the SNC book. Well, I guess I'm just curious to make -- I want to make sure I understand kind of what you guys view as core from these levels and how much more, if any, you want to reduce the SNC book from here?

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J. Myers Jones, Franklin Financial Network, Inc. - CEO [15]

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This is Myers and my goal is to get that portion of the portfolio down to 4% or less, which obviously becomes much less material. So we are getting close to that number at 5.2% at the end of Q3. But we still have a reduction goal in mind.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [16]

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Okay. And then the other thing I wanted to ask about was capital. I mean you guys have optimized the balance sheet and now your capital levels are higher than they were last year by a significant margin. I know you just increased the cash dividend. What do you plan on doing with the capital here as it's built?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [17]

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Brett, it's Chris. So I think, good question. The first is that we felt like the bank was -- the model of the bank was somewhat out of balance. And so I think it's coming more into balance, particularly at this point in the cycle, last year, roughly 8% TCE ratio, this year 10% in ROAs and ROEs are coming much more in line. As I said, not where we want them longer term, but coming in line showing progress. And so I think one of the main constraints that we have from a capital perspective, first is concentration ratios. So we're very mindful of those. And so we do -- we're very cautious about, in terms of any kind of repurchase or massive share repurchase program. That's one. But I think that we have had and continue to have discussions with other ways, whether it's team lift-outs or producers who would come on board and make a pretty strong impact and having that capital and kind of deleveraged available for those folks is also something that we've been working through. So I think there have been so many changes over the last 9 months that we're really cautious to send too much capital back to shareholders or to over lever just to squeak out some incremental returns that we would view more noncore. Hopefully, that answers the question for you.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [18]

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Yes, that's helpful. And just one point of clarification. I want to make sure I have this right. So you're talking about low double-digit loan growth, is that inclusive or exclusive of what you might have left to do with repositioning the balance sheet?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [19]

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Yes, that's exclusive of that. So I think visibility into the fourth quarter, total loans including SNCs and any other noncore type of loan, that's the mid-single-digit. But I think we're looking at least near term customer -- core customer growth of the low-double-digits.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [20]

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Okay. I thought I heard that. Okay, great. I see the margin expansion and thanks for all the answers.

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Operator [21]

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(Operator Instructions) Our next question comes from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [22]

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Nice quarter. I was hoping you guys, Chris, could start maybe or Myers just around the details of the substandard increase what you can share there? How many loans that was, what types of loans, etc.? Thanks.

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J. Myers Jones, Franklin Financial Network, Inc. - CEO [23]

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Well, Tyler, there -- let me first say that the increase in classified assets was internally driven, it was a result of our relationship managers, credit admin or internal loan review. It was not driven by any third-party, outside party. So again we are very diligent in monitoring our entire portfolio. So we're looking at it very regularly and taking what action we deem necessary. It was not performance related. As you can see our nonperforming numbers, our delinquency numbers continue to be very, very good. So again, I think it's an internal -- early recognition of some potential issues that we want to monitor. So we put them on the radar screen.

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Tyler Stafford, Stephens Inc., Research Division - MD [24]

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Can you tell us how many loans it was or the chunkiness of the increase?

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J. Myers Jones, Franklin Financial Network, Inc. - CEO [25]

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Well, I think I'm not exactly certain from absolute number perspective, but there were multiple customers. And again that's a sector that you have loans going in, you have loans going out. Every quarter we look at the migration analysis of anything that's rated below par in our portfolio. So we look at the various AQRs as they move up and down, but not necessarily look at them individually. We look at them cumulatively.

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Tyler Stafford, Stephens Inc., Research Division - MD [26]

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Okay. Are any of those SNCs? I apologize if you said that earlier and I missed it.

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J. Myers Jones, Franklin Financial Network, Inc. - CEO [27]

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Not to my knowledge. I don't think any of them were.

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [28]

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I think it was a blend. There was a blend. There was one that was I believe was a SNC.

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J. Myers Jones, Franklin Financial Network, Inc. - CEO [29]

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Exactly, that would -- excuse me, Tyler, it was one that would be coated as SNC but everything else was outside of that portfolio.

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Tyler Stafford, Stephens Inc., Research Division - MD [30]

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Okay, thanks for the detail. The non-SNC health care loans declined this quarter, was that more of an intentional decline or the refinancing away that you mentioned earlier, Chris and what's the outlook for that portfolio?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [31]

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Yes, that's -- I think that's probably the right characterization, Tyler and we're -- I think we're in evaluation mode. As we said, we've obviously, there have been some public -- some losses that everyone has ascertained and coming from the healthcare portfolio. And so we continue as Myers said to evaluate and be really judicious to make sure that we're strategically aligned and how we want to move forward with that portfolio. I think we have more to talk about in the future, but I think particularly as we've seen, just overall, a couple of things. The classified asset move up. And that's been a couple of quarter move and we watch the market. We watch lots of our peers and people in different markets. Looking at the macroeconomic, all these things together at this point in the cycle, people, as I indicated earlier covenant light deals or leveraging out of our portfolio into other people's portfolios, causes caution. We balance that against what Meyer said the performance of the portfolio is it the case it's been which those things all come to an end. Right. All good things do come to an end for -- no matter who you are or where you are. So it's a period of evaluation for us and just overall caution. And then, specifically like we said, we're watching a couple of things.

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J. Myers Jones, Franklin Financial Network, Inc. - CEO [32]

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Tyler, this is Myers. I think we've seen some conditions that Chris mentioned earlier out of that sector. And that's a request for higher leverage lower covenants coming out of that portfolio that we declined to do.

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Tyler Stafford, Stephens Inc., Research Division - MD [33]

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Okay, thanks for the detail there. Just on the capital return and the buyback, I guess a question and answer earlier. Did you guys repurchase shares this quarter? In your prepared comments made me think that you did, but then I didn't see any reference to activity in the earnings release or the deck but I may have just missed it.

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [34]

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So Tyler, yes, I mentioned it. There was -- it was minimal. De minimis, I'd say muted. Basically, the stock was above prescribed levels in our program. So I think we're going to look at that and we'll likely look to adjust the repurchase program in the future. So it's more effective. So that really wasn't intentional. Stock price moved above levels where we were in the market and as you know, it's 10b5 programs. We're somewhat handcuffed in what we can do, so we'll sit back down with our advisors and work through what the next appropriate steps are there.

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Tyler Stafford, Stephens Inc., Research Division - MD [35]

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Okay, got it. That clears it up. And then just lastly, do you happen to have the average cost of the brokers in the public funds for the quarter?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [36]

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Haven't seen the run yet of the call report but looking, I've got some of the weekly sheets here. So I'd say public funds, probably in the -- I'd call it in the 240-ish ballpark plus or minus. Importantly, first couple of weeks we just kind of do the average here. First couple of weeks, I'd say you've had at least 15 basis points on average decline from the 3Q average in public funds and that's expected. We've talked about that before. They're really sticky. They're tied to mostly index here in Tennessee -- the local index here in Tennessee and that they governed by that. So they do lag and we've seen that flow through. And yes, brokered also?

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Tyler Stafford, Stephens Inc., Research Division - MD [37]

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Yes, brokered as well, if you have it.

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [38]

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Yes. So a little bit -- it's a little bit lower. They typically run a few 5, 10 basis points lower than public funds that got 2.30. And we've also seen some downtick. And that's more tied to 1, just the CD laddering of those portion broker funds that are CDs. And then secondly, you probably noticed just some stickiness relative to treasuries and the yield curve in general with broker funds. That seems -- I don't if it's a fever or what is but seems that have kind of broken toward the end of the third quarter and it's getting to more rational level. So those are 2 areas that we do think there will be some movement in relative to third quarter on the downside, which is also encouraging. Hopefully, that answers your question.

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Tyler Stafford, Stephens Inc., Research Division - MD [39]

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Yes, that's all right. Thanks, Chris. Bye.

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Operator [40]

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Our next question comes from Laurie Hunsicker with Compass Point.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [41]

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Just wondered if we could go back to net interest income for a moment. How much was the accretion income in this current quarter?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [42]

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So it's in the press release.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [43]

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I'm sorry. I must have missed that.

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [44]

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Okay. So let's see. Accretion for the third quarter of 2019 is $123,000, 2 basis points. Down from $174,000 last quarter, 2 basis points.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [45]

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Got it. And was there anything else within net interest income? In other words, did you have any kind of reversal in terms of a nonaccrual that would have jumped interest income?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [46]

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Yes. So again, same -- the average balance and yield tables that are in there. There is a decomposition of the total loan yields. So contractual 5.28% origination and other fee income 26%. That's basically flat from the previous quarter, down slightly. Accretion like I said 2 basis points in 0 for nonaccrual collection.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [47]

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Okay, good. I just wanted to double check that. Okay. And then in terms of tax rate going forward, what is the good rate to be using for 2020?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [48]

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Yes, I think 2020 that 2017 to 2019 ballpark. I mean a modeling 2018. It was a little bit below that this year and explanation for that continues to be just the noise that we had in first half of the year on a GAAP basis between we had the charge-offs related to the SNC that we've talked a lot about. And then we also had some of the retirement-related expenses and so those dragged down the tax rate for the full year. So we continue to play catch-up a little bit on that.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [49]

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Okay, great. And then obviously you gave some color around C&I. I just wondered, outside of the onetime adjustment your balance sheet is very different. Can you help us think about ongoing well loss provisioning as we look forward in 2020 what that's going to look like?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [50]

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So I think we're comfortable with where we are 95 basis points. And I think following total loan growth with everything else equal from what we see in the C&I models, which really frankly isn't all that different than what we see in our current model. We're looking at 18 months and I think outside of any either macroeconomic drivers, the change our view or outside of any specific portfolio stress. We would expect basically to maintain this level adjusted for and then the provision adjusted for total loan growth.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [51]

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Okay, great. And then just lastly, I want to go back to credit here. It was a big jump in substandard going from June to September. Of the $49.5 million, do you have a breakdown as to how much of that is C&I? And how much of that is health in terms of raw dollars?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [52]

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Yes. And I know we'll have that in the queue. So at my hands, I don't -- I'm looking -- I've got folks in the room who can help. Raw dollars, I don't have. But in terms of the increase, Laurie, it was a 100%. Well, maybe not 100%. Very close. Vast majority would be C&I. These numbers will be in our -- I'm sorry, 50-50. My mischaracterization.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [53]

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Okay. Because I mean your construction -- just looking back here over the last few quarters, Chris, had really no substandard construction has been de minimis. Resi has been bouncing around between 4 and 5 which suggests that your C&I substandard could be upwards of $44 million or $45 million which would put that standard rate on that bucket close to 8%. And obviously then within that, the majority of that is healthcare. That's an even bigger number. So I just wanted to make sure that I've got those details correct or if I'm thinking if I should be thinking about it in a different way?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [54]

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Let me help. Well, we were doing sign language here. Let me try to clear up on that . So of the increase, the increase is almost exclusively C&I like I said the first time. And then more than 50% of that, of the increase is nonhealthcare.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [55]

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It's nonhealthcare. Okay. So if I'm just looking on in you're talking linked quarter from June to September?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [56]

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That's correct. Talking about the increase that why.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [57]

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Okay. I'm sorry 50%, so that -- so if I'm looking there was a $21 million increase in June to September, you're saying half of that was C&I?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [58]

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So the increased -- almost 100% of the increase is C&I.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [59]

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Is C&I. Okay so that portfolio is, in fact, sitting at $45 million. So that is 8% sub-standard. And then, of the increase, you said half of that was --

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [60]

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We talked about, yes, so we talked about the increase being C&I.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [61]

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Being C&I. Correct. And then how much of that was healthcare?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [62]

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Less than half of that increase is healthcare.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [63]

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Okay. So that was $20 million last quarter. So in round numbers let's call it $33 million or somewhere in that neighborhood?

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [64]

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Laurie, I don't have in front of me. So I don't want -- that's -- if those year numbers, I think you could work through your numbers and then when we put the queue out we'll have more clarity.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [65]

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Okay. But I mean that's a dramatic -- it's a dramatic increase to your substandard rate, right? That's putting you 12%, 13%. I'm just trying to get a little bit more color around that. You know what, I will follow up with you offline. I appreciate the color. Thanks so much.

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Christopher J. Black, Franklin Financial Network, Inc. - Executive VP & CFO [66]

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Thanks, Laurie.

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Operator [67]

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This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Myers Jones for any closing remarks.

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J. Myers Jones, Franklin Financial Network, Inc. - CEO [68]

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Really don't have any. Again, we thank you for participating today. Any questions that you may have later, feel free to give us a call. Otherwise have a great day.

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Operator [69]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.