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Edited Transcript of FSB earnings conference call or presentation 25-Apr-19 1:00pm GMT

Q1 2019 Franklin Financial Network Inc Earnings Call

FRANKLIN Jul 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Franklin Financial Network Inc earnings conference call or presentation Thursday, April 25, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Black

Franklin Financial Network, Inc. - Executive VP & CFO

* J. Myers Jones

Franklin Financial Network, Inc. - Interim 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

* 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, Inc. 2019 First Quarter Earnings Conference Call. Hosting the call today from Franklin Financial Network is Mr. Myers Jones, Interim CEO of Franklin Financial Network, Inc.

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 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 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 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 are 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 Interim CEO. Sir, you may begin.

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

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Good morning, and thank you for joining our first quarter 2019 call. 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.

During the first quarter of 2019, we started to see the fruits of our labor from our previously communicated strategic shifts. Our core business grew organically at an impressive rate, margin expanded meaningfully and we continued to position the bank for strong performance in the quarters and years to come.

We are focused on driving our core customer relationships in both loans and core deposits. Retail plus reciprocal expanded at annual rates in excess of 20% during the quarter. At the same time, we reduced our reliance on wholesale funding and shrank the securities portfolio.

The interest rate environment remains challenging with a very flat or even inverted yield curve, but the combination of our strategic actions and core customer focus resulted in net interest margin expansion of 11 basis points from last quarter. We have previously talked about our balance sheet rotation and optimization strategy, and we made significant progress on these initiatives during the quarter, and they are now more than 70% complete.

Earlier this month, we disclosed a significant credit event related to a single loan relationship. It remains a key strategic priority of our team to conduct ourselves with the highest level of transparency possible. This instance is a prime example where we wanted to proactively inform all of our stakeholders of a material change related to our company and financial situation. The relationship is a shared national credit, and we established a specific reserve of approximately $3.5 million for this credit. After a thorough review, we believe this to be an isolated incident and that the reserve is adequate. Aside from this one incident, our credit metrics remain strong.

Our team is focused on becoming more efficient and profitable with our capital. And based upon all of our capital metrics, we remain well capitalized and continue to accrete capital as a result of our sustainable earnings power, which we expect to support our ongoing growth. We declared a quarterly dividend of $0.04 per share and we grew tangible book value per share to more than $25.

It would be remiss if I didn't mention the retirement of our Chairman and CEO, Richard Herrington. Under his leadership, we grew from a de novo bank in 2007 to a publicly traded bank with over 300 employees and $4.2 billion in assets today. We will all miss Richard both professionally and personally but wish him the best in his much deserved retirement.

In addition to my appointment as Interim CEO, Jim Cross was appointed Chairman of our Board of Directors. Additionally, we promoted 2 additional key people in our organization. Terry Howell added Interim Chief Operating Officer responsibilities to his Corporate Risk Officer duties while a long time teammate, Eddie Maynard, was promoted to Chief Credit Officer. These promotions further illustrate the deep strength of our team and our commitment to enhancing shareholder value.

Additionally, our Board of Directors has formed a search committee and has begun the process of actively searching for a permanent CEO. As the plan currently stands, we will employ a highly reputable executive search firm who will conduct a search both internally and externally. We will continue to update you as the progress forward on our plan.

I'm very proud of this team and this franchise. It was an impressive quarter of growth and progress as we have worked intently on refocusing our strategic priorities, but we have much more left to do.

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

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

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Thank you, Myers, and good morning, everyone. On Page 2 of our investor presentation, we list a number of specific financial highlights and results for the quarter. We experienced annualized organic loan growth of $142 million or 21.6% annualized. Our core deposits grew by $117 million or 25.6% annualized.

As Myers mentioned, we are more than 70% of the way through our balance sheet rotation and optimization initiatives. We reduced noncore brokered deposits by $79 million and the securities portfolio by $234 million in the quarter and have reduced our securities portfolio by $482 million since the end of the first quarter of last year. Securities now represent 21.7% of assets compared to 34.3% from a year ago.

Taken together, our significant loan growth combined with progress in our rotation and optimization initiatives resulted in a meaningful 11 basis point improvement to our net interest margin which is 2.8% for the quarter.

Importantly, as our balance sheet efforts gained steam throughout the quarter, from February and March our monthly net interest margin was [about 5 basis] -- 8 basis points higher than the 2.8% for the overall quarter foreshadowing continued improvement to the second quarter. By refocusing our franchise, our core business grew more than 20% and became more profitable through margin expansion.

I would also like to point out a couple of things on this quarter's loan growth. Our production for the quarter was above our previous guidance of low double digits due to 2 factors. The first factor was it was the extremely wet weather we experienced for much of the quarter across our footprint which led to abnormally low payoffs which has subsequently picked up as our weather has returned to more normalcy.

The second factor was our ability to be nimble and capture core customer driven loan projects that allowed us to accelerate our balance sheet rotation. This positive development allows us to enjoy the interest income from those newly originated customer loans more quickly than we anticipated. Once the rotation strategy is complete, we remain comfortable with our view that we expect low double-digit loan growth going forward.

On the right side of Page 2, you will notice some of our key performance metrics for the quarter presented from both a GAAP reported perspective as well as a non-GAAP core perspective. We had a sizable noncore expense in the quarter related to post employment and retirement costs that we exclude in order to present what we view as a cleaner representation of our core operating performance.

GAAP reported diluted EPS of $0.19 for the first quarter includes the $4.1 million onetime expense related to those post retirement and severance benefits. When considering these onetime items, the company estimates first quarter diluted EPS of $0.41.

Turning to Page 3. 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 a loan loss provision of approximately $5 million. The charge was related to the previously disclosed $3.5 million reserve related to a single shared national credit. Our net interest income has grown at a 38% annualized rate since 2013 and is up 9% from the first quarter of 2018 driven by the 11 basis point expansion of our net interest margin. This was largely a result of our core loan and deposit growth coupled with the shrinking of our noncore funding and securities portfolios.

Non-interest expenses increased to $22.6 million. However, when adjusting for the previously described $4.1 million post-retirement and severance benefits, our core efficiency ratio remains steady at just under 60%. Further, total core non-interest expenses are essentially flat from the fourth quarter of 2018 and are up slightly just over 3% annualized since the second quarter of 2018, which was the first full quarter with the impact of the Civic acquisition. We are working hard to control expenses while demonstrating strong core franchise growth.

Page 4 illustrates the trends over time of our core earnings and tangible book value per share metrics. Our core diluted EPS of $0.41 for the first quarter was negatively impacted by the previously mentioned loan loss provision. Our tangible book value per share grew 12.5% year-over-year to $25.

As the bond market continued to rally strongly during the first quarter and we accelerate our securities rotation strategy, we were able to gain another material benefit. With the $234 million reduction in securities, we were able to significantly reduce the amount of our capital base that is vulnerable to bond market volatility and the associated mark-to-market accounting impacts effectively positively locking in part of the increase in our tangible book value.

Turning to Page 5. You can see our 21.6% annualized loan growth spread across our loan portfolio. Total loans held for investment grew $142 million in the quarter. Our team is focused on loan diversification and credit discipline as we move forward.

You can also see on the right-hand side of the page that our concentration ratios continued 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 shared national credit and health care portfolios. We are not at all satisfied with the credit event in the quarter related to the SNC and we want to provide as much transparency around this portfolio as we possibly can. SNCs represent roughly 1/3 of our health care lending portfolio and approximately 8% of our overall loans. While the franchise previously purchased these loans to supplement growth, our team is committed to quality organic customer driven loan growth now and going forward.

With that said, we believe it is very important to draw a distinction within our SNC portfolio. We view 50% to 60% of our SNC portfolio as core customer relationship banking and are comfortable with the opportunities this lending creates for our franchise. In some cases, our only access to do business with some of our best relationships might be through the SNC market, and we will continue to service those types of relationships.

With that said, you can see that we have reduced the size of our overall SNC portfolio by nearly $20 million from last quarter. Overall, we expect to see the size of the SNC portfolio continue to decline as we seek to eliminate noncore, nonrelationship banking activities.

On Page 6, you'll see the growth and mix of our deposit funding. We maintained our retail deposits and grew our reciprocal deposit balances by $122 million. As previously discussed, our ability to reciprocate deposits from local governments is a 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 $79 million in the quarter. These strategic actions allowed us to reduce the size of our securities portfolio, as I mentioned before, both from last quarter and on a year-over-year basis. The proceeds from shrinking securities and SNC portfolios 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 the re-engineering of our incentive compensation structure to emphasize deposit generation, realigning elements of our corporate structure and very recently hiring a Director of Deposits position who is an experienced executive who will oversee coordination of our daily deposit activities as well as our strategic deposit generation initiatives. We are committed to driving core deposit growth as it represents a key tenant of our overall strategy to further improve our balance sheet composition, liquidity position and profitability of our business.

As 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 periods. We maintain very strong regulatory capital ratios which are supported by our strong internal capital generation.

Turning to Page 8. Our asset quality ratios remain very strong. We're not at all satisfied, as I said, with the credit expense taken in the first quarter, and we are committed to building a strong, disciplined core franchise. Although we had that elevated expense in the first quarter, we are convinced that it was an isolated incident and our metrics remain quite strong. Our reserve has been built to 99 basis points of loans held for investment, and we believe it is adequate for the portfolio we continue to build. Absent the impact of the SNC downgrades that occurred at 12/31/2018, our nonperforming assets actually declined from the fourth quarter to the first quarter.

Further, as seen in the previous quarter, our total reserve to nonperforming assets was 4.15 times higher than our NPAs meaning that we reserved more than 4 times our actual nonperforming assets. When comparing this to both the average fourth quarter [ALLLs] NPA ratio for peer banks, we are relatively over-reserved by a factor of 2 comparatively. When taking the current reserve to NPA ratio for the first quarter, our coverage drops from that 4.15% to 2.34%. When compared to peer banks, we are now more in line with the performance of our portfolio and our reserve is allocated appropriately.

Lastly, during the quarter, 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'll turn it back to Myers for some closing remarks.

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

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Thanks, Chris. With the notable exception of the isolated credit expense, I am incredibly excited about what this franchise accomplished in the quarter. Our strategy is taking hold, core customer growth is strong and our profitability metrics have improved. The bank maintained leading positions in some of the best banking markets around. We are #1 in Williamson County, #2 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 expect to continue to grow and gain scale. We will continue to execute our balance sheet rotation and optimization initiatives and focus on organic core 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [2]

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So maybe just start just on credit and thank you guys for the additional disclosures around the SNC portfolio. So first the SNC credit that surfaced this quarter, was that part of the 50% or so increase of those balances in the fourth quarter?

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J. Myers Jones, Franklin Financial Network, Inc. - Interim CEO [3]

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Well, it's part of that, but this credit has been in the bank longer than that, Tyler and so it was included...

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [4]

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What, Tyler, are you talking about the substandard -- you talking about the increase in the substandard in the first -- the fourth quarter.

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Tyler Stafford, Stephens Inc., Research Division - MD [5]

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No, just the absolute balances of SNC. I was just wondering if this credit -- how long they've been at the bank, if it was originated in that big increase in the balance in the fourth quarter? How long have they been on the bank?

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J. Myers Jones, Franklin Financial Network, Inc. - Interim CEO [6]

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Without getting too granular, Tyler, which I never do, that credit has been in the bank approximately 3 years.

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Tyler Stafford, Stephens Inc., Research Division - MD [7]

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Okay. So it would be your expectation then if 50% to 60% of the SNC books are [made] to be core, that the remainder should decline over time? Is that right?

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J. Myers Jones, Franklin Financial Network, Inc. - Interim CEO [8]

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I think you will see that. I don't know if Chris has any comment.

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

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I think that's exactly right. So there are a number of ways that can happen, but we're -- to not be granular and walk all the way back out as we said a couple of times in the prepared comments that we are absolutely focused on core customer banking relationship activities and so we don't view this in that regard and so over time, those balances will decrease one way or the other.

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Tyler Stafford, Stephens Inc., Research Division - MD [10]

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Okay. Chris, towards the end, you mentioned that NPAs declined quarter-over-quarter.

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [11]

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So I said excluding -- if you exclude this credit. That's what we're trying to say is that if you want to strip this out and look at the overall health of the remainder of the portfolio, it was actually improvement.

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Tyler Stafford, Stephens Inc., Research Division - MD [12]

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Okay. Got it. Do you have handy what the total dollar balance of classified and doubtful loans are or loans classified as doubtful at March 31?

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

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We -- yes, so that will be out in the Q. I believe it's in the $11 million ballpark.

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Tyler Stafford, Stephens Inc., Research Division - MD [14]

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And just lastly for me and then I'll hop out, just thoughts on a buyback potential just given where the valuation is right now?

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [15]

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Yes, Tyler, I think it remains on the table and approved and if we go back to the concept that last quarter we introduced that any company, any bank has certain lanes and avenues of how they're going to deploy their capital and again our overall message is a focused, disciplined, very deliberate way of responding to any opportunity we have. So we have capital that can be levered either organically, through M&A activity or returning to shareholders and so we're going to look at that as situations unfold.

The last 2 options are obviously more impacted by the stock price and so no doubt, our screens are attuned to what's going on and we're prepared to execute that if we feel like that is our best deployment of our capital base.

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Operator [16]

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(Operator Instructions) 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 [17]

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I joined a few minutes late, but I don't think you covered this. Can you talk about the total SNCs? So the total SNCs are about $230 million and $107 million of that is health care, if I'm looking at this right. Can you talk about what the remaining piece of that SNC book is? Is it categorized in any specific industries?

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [18]

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I would say it is distributed. And so we're not as -- the reason we put health care in is again because it is a hot button issue in the market. We've had lots of questions about it and we're here -- if we say that we're going to strive to deliver shareholder value, a huge part of that is that we are transparent and provide you guys all the information that you can -- that we can to enable you to make high-quality decisions on our actions.

And so that's why we provided the health care specifically, but I would say the remaining is distributed over kind of evenly across industries. I think the C&I portfolio in and of itself is very diversified, and we intently apply the focus -- a granular focus to that. What I would rather focus on with the SNC portfolio is our concept of kind of relationship-based versus non-relationship-based. And so that's where a lot of our efforts will continue to be.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [19]

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Okay. Maybe we can talk later about that. And then I just wanted to talk about the margin from here as you continue to deploy your strategy with the balance sheet. I guess I'm curious, one, from a cost of funds perspective, just thinking about the deposit beta from here and what you've accomplished versus kind of what the trend has been in costs, how much more do you think that the funding cost base rises and then just, can the margin continue to move up 5 or 10 basis points as this thing plays out.

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [20]

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Yes, it's a great question. I ask it every day and then seeking the same answers that you are. And so I think this notion of deposit betas in the market has maybe been simplified a little bit too much as in a direct mathematical correlation to market interest trends and levels as opposed to there's the other element of competition, right, and of specific markets. And so our perception is that has slowed a little bit, but I think that pressure remains. So we're really focused on right-sizing not just our exposure, but our sensitivity to the interest rate environment. And so I think we have made a lot of progress in that in mitigating I think risk that we had before interest rate risk-wise. So that's one.

I think deposit costs, it could be a little bit choppy from here, right? This is not a -- as we said last quarter, this is not a one quarter snap your fingers fix. I think we're going to have wins and then we're going to have some setbacks, but our team is incredibly focused. This is -- it is pretty much the top strategic focus inside the company, is driving core growth and really understanding that so much of the enterprise value for a community bank is derived from that. And so we're working hard on that. Again, we'll take time. I'll ask you to judge us on our longer-term actions and results.

And then I think the net interest margin, as I said, we weren't really able to get focus in earnest until kind of after January and the fruits of that labor, month of February and March, played out even more so. Again, I don't want to get too overly optimistic here as things will bounce around, but I think you'll see continued improvement from this quarter into the second quarter, and we're working hard to -- we put out an intermediate-term goal of 3.2% on the net interest margin and we're going to be working to get there. So if we can get from [2.80%] to the next level, we get there, we're going to try to keep going. And so I don't really want to get into time and level of forecasting, but directionally, that is what our goals are.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [21]

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Okay. Fair enough. And then one last one, if I can sneak it in, is just around management and kind of like Interim CEO. Can you give us any timeline for -- kind of having things settled down in terms of upper management, what the plan is?

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J. Myers Jones, Franklin Financial Network, Inc. - Interim CEO [22]

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This is Myers. The Board has established a search committee, timetable, the committee has identified search firms. They are currently evaluating those and intend to interview approximately 3 or 4 such firms on May 15th with a recommendation for the May Board Meeting for the Board to select one and that process at that point obviously will commence in earnest.

So that's today's timetable, subject to change and while I have the floor, let me dial back a little bit of the health care sector. We operate in approximately 19 NAICS codes within that sector and no sector represents more than 7% of risk-based capital. So we monitor that very closely. We do not want to see a concentration and we have established risk-based capital caps for each one of those sectors if that makes it any clearer.

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Operator [23]

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The next question will be from Laurie Hunsicker with Compass Point.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [24]

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Just quickly, tax rate. How should we be thinking about that going forward, I know it was low this quarter?

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [25]

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Yes, it was and that's -- so when you look at the core, right, that's where we adjust, as we're coming back to get fair, so it was I think around 17.3% is what we had core [wise]. And so going forward, I think it may trend up a little bit from there, maybe to 18%, 19% range is what I'd expect over the remainder of this year, all things equal.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [26]

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Okay. Great. And then just going back to deposit costs. Can you help us think a little bit and I realize there's the volatility because of the governments and the reciprocals, but can you help us think a little bit about specifically that interest checking and that money market line because they're so high? Are you guys doing additional specials, is it going higher from here? I'm just looking at the interest checking this quarter costs 2.09% and your money markets were 2.44%. How should we be thinking about those 2 categories?

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [27]

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You should be thinking the same way that we are, is that what we're focused on and our team is focused on bringing this down. I think I've -- simple ways to looking at life and one of them is if you want more of something, subsidize it and if you want less of something, tax it and so we're going to help motivate our team to focus on the very numbers. In fact, what you've pointed out has been a topic of discussion and we're going to focus people on how that is really meaningful to them to help us bring that down.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [28]

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Okay. And so in the interim as we think about your forward guide on margin. I mean I guess you're just looking at your overall cost of deposits at 2.06%. Where can we be expecting that just shake out as we just roll just to next quarter? How should we be thinking about that?

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [29]

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Yes, so next quarter. These things like I said this is a longer-term effort and things will bounce around and so we're working on turning the trend. I think if you go back and look at our long-term NIM chart, I'm not sure what you had in your model, but it probably didn't show what happened this quarter. And so I think this showed a lot of progress and lot of turnaround but we are absolutely focused on the definition of a balance sheet having balance and us being focused on the left side and the right side of that balance sheet. And so I'm not, the second quarter, and forecasting where deposit costs are going to be, there's not a lot of upside in that for us.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [30]

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Okay. Got it. And then can you just remind us, I know you are 70% complete. Can you just remind us what's in the works for this quarter on the remix?

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

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Yes, so I think last quarter, we had said we should have it done by the end of 2019. Unless something changes drastically in the market, I think clearly we'll beat that. I'm not sure that we'll get it all done by the end of this quarter, but again market conditions allowing, very focus on the funding base and I would look at, so we've got the overall kind of maybe Version 1.0 and 2.0 or the rotation of the securities, so higher yielding assets and so over time and this will take longer right because we have to rely on pay downs and refinancings and M&A activities and other things that can happen with loan customers, but these noncore SNCs also are almost a mini rotation within a larger rotation that will happen.

So I think that the announced rotation the [$300 million] clearly by the end of the year, hopefully by the end of second quarter, but I wouldn't be shocked if it extended into the third quarter depending on market conditions.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [32]

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Okay. And I'm sorry, Chris, do you have any details specifically though about the remix that is going to occur this quarter? Or is it just a benefit from what we've just seen with that being kicked a little bit more?

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [33]

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Well, I think it will look like that. So if we've accomplished 70% of it and that wasn't all done in the beginning of the first quarter clearly, right. So a quarter has 3 months and so I don't know that we got the full impact of that over the quarter. So I think that will improve first of all and second of all, I don't know if you're looking for a mixture of loans and securities. It's higher on the loan side than on the security side and I would expect that trend to continue by the time that we're all done with it and I think that should be easily reflected and understood that we went from 34% of assets -- securities representing 34% of assets from a year ago, March of '18 down to just under 22% in this quarter and I don't think we're quite at the level where we would be a steady state, but again none of this can be done in isolation.

We're extremely focused on liquidity ratios, on reducing our reliance on noncore funding sources and so we're not focused on the size of the balance sheet, we're focused on the quality of the balance sheet and it's pretty much what a good number of us do almost all day every day thinking about this.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [34]

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Okay. Great. And then just credit, I have a few questions around that, starting with your $11.7 million of non-accrual loans. Can you tell us how much was C&I non-accruals?

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [35]

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I think almost all of it.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [36]

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Almost all of it. Okay. And then almost all of it was the health care?

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [37]

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Correct. Yes, the vast majority of that was...

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J. Myers Jones, Franklin Financial Network, Inc. - Interim CEO [38]

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Yes, far and away, Laurie, the -- certainly, the majority was, if not, absolutely right there at 99.9%.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [39]

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Okay. Good. And then the substandard, third quarter total substandard, $17 million, went to $39 million in December. Do you have a March number on substandard?

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [40]

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I think -- hold on, let me look in our sheets here, I believe we do.

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

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Okay. And then while you're looking for that, I'm also looking for within the category of substandard what's C&I and then specifically what's health care.

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

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Yes. So Laurie, if you look on Page 13 of the earnings release, I think this was a much asked for disclosure. That loan portfolio and asset quality, if you look down under the recoveries, there's loans classified as substandard or worse. So as you said, $17 million in September; $38.7 million in December; and $35.7 million in March and that's basically what I was alluding to with Tyler as they came down excluding obviously what happened with the SNCs.

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

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Got it. Okay. I missed that. And of the $35.7 million, how much is C&I?

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

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We have not made that disclosure, but in the 10-Q, we will.

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

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Okay. And then just going back up here to the health care book, previously you had disclosed health care and then you also had health care that was hooked to CRE, which round number is another $100 million higher. Is that just being re-classed separately now? Or how are you thinking about that?

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

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I'm sorry, I didn't understand -- the last part of the health care, what did you call it?

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

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So you had health care pure C&I, right, and then you used to have health care, some was included in commercial real estate. So for example, I'm just giving you December numbers, you used to have $272 million that you laid out as health care C&I only, but $400 million of total health care exposure that included a CRE element to it. Is that just no longer how you're looking at it?

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

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No, that is not -- since I've been here, that is not how we've looked at it. I'm happy to talk with the team and see if there was a specific reason for that. Like I said we're -- and, Laurie, we're -- step back if you can and zoom out a little bit and we're focused on the relationship versus nonrelationship and that is just at the absolute heart of what we're getting at. Whatever industry, whatever segment of our balance sheet or income statement, that's where we're focused.

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

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Okay. Okay. I mean I like how you've broken this out here. So just a little bit of details on that, on the health care book, can you let us know what is your average balance both SNC and non-SNC? And then what is your geographical breakdown?

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

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So I would say in the SNC book, average balance -- I'm a little bit guessing, so just give me some leeway, yes, probably in the $10 million to $12 million.

Okay. And then geographically, again, this is not something that we disclose on a granular basis, but I would say there are -- a good portion of them are in our neck of the woods, but there are a number of them obviously being SNCs, right, that they're all over. But I would again challenge the notion of geography and I would think more about relationship.

All things equal, geography typically equals relationship quite clearly. But if you look at our geography and you look at the types of companies who have access to the SNC market and you think about because their headquarters is here, does that define their geography or are they national companies who operate across the nation and potentially across the globe. And so I think that's -- particularly as banking and technology continue to globalize every facet of our lives, just to focus myopically on geography isn't the only solution. It is obviously incredibly important for a community bank, and we are very focused on that, but we're more focused on the relationship and how well we know the credit.

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

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Okay. So maybe just specifically on the non-SNC piece, the $211 million, what percentage of that or what dollar number of that $211 million sits in the Nashville MSA and I hear you that you could have things that take it outside, but what's it from the Nashville MSA, that $211 million?

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

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Give me a minute and we will try because I understand what you're getting and what you're getting at is important, so give me a minute and we got someone here to (inaudible).

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

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And then, just also on the $211 million, how much of that was your originators the lead on the team versus it's a participation of some form?

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

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So if you think about -- the $211 million of which part -- of the...

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

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Just the non-SNC piece of the health care, the $211 million? I mean you've seen such sharp growth in this whole book, right, this whole book basically didn't exist at the beginning of 2016, so I'm just trying to get a little bit more color here on how much of it is national, how much of it is originated by your team versus your team is more in a participation mode.

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

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Yes, so I think if maybe what I would look at is if you look on the disclosure in the deck on Page 10, right, so the sharp growth was due to the fact that we brought on a team that we previously did not have and so they have targets and they have networks and capabilities and relationships that take time to work into and what I think happened, right, backward looking, I was not here, but what I believe happened from discussions and trying like you to get the historical facts of where we were and to help us figure out where we're going is we had to focus a lot on the SNC credits as our team got established and built that.

And so if you look in the health care specifically, which is why we broke that out between SNC and non-SNC for you, you can see SNC balance first quarter of '18, $89.2 million and then you can see by this current quarter at $107 million, right, so those not large growth increases, 20% year-over-year increase, again for a team that's still establishing itself, building its book, that shows the relatively reduced reliance upon SNCs which will likely continue to go down in that health care portfolio and then you can see in terms of non-SNC, the $110 million in the first quarter of '18 moving up to about $211 million in '19.

And so I'm not sure that we're prepared to disclose where we were the lead and where we were not, but it's more about again, Laurie, the relationship of that lending group. Is this something that we have deep ties and we've had business relationships and we have high confidence in how those are originated and who the groups are comprised of or not and so that's where again we're focused on the relationship because again our balance sheet, we have an expertise in this area, we have a team who's quite capable at originating and servicing and monitoring and evaluating these credits [due] the size of our balance sheet some of these opportunities just are not accessible or not appropriate for us to be the lead originating bank even if we had the capabilities and even if we had the relationship, that might not be the most appropriate from a risk management standpoint and a legal lending frankly standpoint.

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

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Okay. And then were you able to ascertain the $211 million? How much was just specifically in the greater Nashville MSA? Or should I follow up with you offline? I'm sorry.

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J. Myers Jones, Franklin Financial Network, Inc. - Interim CEO [58]

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Laurie, this is Myers. 60% to 65% of that number -- of total SNCs would be in the Nashville MSA.

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

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Total non-SNCs.

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

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Total non-SNCs. Yes, total non-SNCs.

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J. Myers Jones, Franklin Financial Network, Inc. - Interim CEO [61]

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Yes, I'm sorry.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [62]

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Is in the Nashville MSA, okay. And then just same question here on your total C&I book of $636 million. How much of that $636 million resides in the Greater Nashville MSA?

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Christopher Black, Franklin Financial Network, Inc. - Executive VP & CFO [63]

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So why don't we work on this, so we can have a little bit more fully thought out on this, Laurie, because this is not, again, I get your point, this is not our focus of...

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [64]

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You bet, you bet. You know what? I will leave it there. I know that the plan was to give a little bit more color on this call around loans and I appreciate that.

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Operator [65]

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Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Myers Jones for any closing remarks.

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J. Myers Jones, Franklin Financial Network, Inc. - Interim CEO [66]

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Thanks, and I just would like to say thanks for everyone joining us. We appreciate your time this morning. We're excited about our bank, we're excited about our franchise. Nashville is a very dynamic market evidenced by the fact that the name has been changed for this weekend to Draftville. So we wish everyone a good weekend and again, thanks for joining us.

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Operator [67]

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