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Franklin Financial Network Inc  (NYSE:FSB)
Q4 2018 Earnings Conference Call
Jan. 24, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Franklin Financial Network, Inc. Fourth quarter Earnings Conference call. Hosting the call today from Franklin Financial Network is Mr. Richard Harrington, Chairman, President and CEO of Franklin Financial Network, Inc. Please note that the Franklin Financial Network earnings release in 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 forecast. 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 on 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 the SEC Regulation G.

With that, I am going to turn the conference call over to Mr. Richard Herrington, Franklin Financial Network's Chairman and CEO. Sir, you may begin.

Richard E. Herrington -- Chairman & Chief Executive Officer

Good morning, everyone. And thank you for joining our fourth quarter 2018 earnings call. I'm here this morning with Chris Black, our new Chief Financial Officer, and Myers Jones, our longtime Chief Credit Officer. I'd like to give a brief overview of the quarter and then Chris will review the detailed financial results and Myers will provide an overview of some of our asset quality metrics.

I'm very proud of this team and this franchise. The fourth quarter of 2018 marked a turning point for us and our list of actions and accomplishments is long. We still have work to do, but I'm excited about our future. To start, I'd like to highlight that just over a week ago, on January 14, our Board of Directors received notice that our regulators terminated the memorandum of understanding previously entered into in November 2016. Since the Bank's entry into the MOU, management has been actively implementing plans and processes to comply with the MOU's requirement and we are very pleased that our regulators have recognized the improvements we have accomplished resulting in the termination of the MOU.

Going forward, we will focus on our three long-term strategic goals of soundness, growth and profitability. On Page two of our earnings information, we list a number of specific highlights and recent developments, which are numerous over the last several months. I would like to point out several of these. During the quarter, we opened our 15th branch located here in Franklin, Tennessee, and we will continue to invest and grow within the communities we serve. We have a Number one deposit market share in Williamson County, Number two in Rutherford County and Number six in the Nashville MSA, which consists of 13 Middle Tennessee counties. We are very proud that we have achieved this position in our first 11 years of operations.

Franklin Synergy has work [scale] and market share in some of the best markets in the country.

We have been a high growth company for more than a decade. And we expect to continue our strong loan and deposit growth enabled by underlying economic growth of our markets. As our franchise continues to evolve and as we achieve sufficient operating leverage to overcome inherent diseconomies of scale of any relatively young company, we are now at a point where we can focus on bringing more balance between our growth and profitability reflecting the operating and market environment in which we operate. To that end, we have accelerated our balance sheet rotations and are preparing an additional phase of balance sheet optimization geared toward reducing our reliance upon noncore funding sources. A significant amount of our lower yielding fixed rates securities were sold and that liquidity will be deployed responsibly into higher yielding assets over time without sacrificing our high credit quality standards.

Our mix of earning assets continues to improve and we expect to see slower absolute asset growth as our liquidity is rotated into loans, which we also expect to grow at a slightly slower rate as we enter the new phase of balanced growth and profitability. I am also very happy to announce that for the first time in franchise history, we are initiating a quarterly dividend of $0.04 per share. Further, we have authorized a $30 million common share repurchase program.

Both of these programs reflect our confidence in the company's solid foundation as well as our outlook for continued growth and focus on long-term building and driving long-term shareholder value. Our strategic capital priorities remain organic growth and maintaining flexibility to fuel and to fund potential acquisitions. The repurchase program will be balanced with these objectives to maximize earnings per share accretion while limiting tangible book value dilution.

This is an important tool enabling us to optimize shareholder value. Together the dividend initiation and the share repurchase program are powerful levers that we will deploy to best manage our balance sheet and financial returns. We are not satisfied with the level of our core earnings. We expect our balance sheet rotation and optimization to have a significant impact on our core profitability and return metrics once these action are fully phased into the operating run rate and I think we are well positioned for the coming year. There was quite a bit of noise in the fourth quarter from our securities sales and some one-time expenses but our core earnings and tangible book value per share continue to reflect a robust earnings power and underpinning our franchise. Our soundness remains strong, we retain disciplined asset quality, strong capital and liquidity metrics, improved our asset sensitivity and work through our last OREO property at a small gain. The previously mentioned MOU termination further reflects the work that we have done to continue to improve our franchise while maintaining our soundness both operationally in regard to asset quality.

I'd like to take this opportunity to publicly welcome Chris Black to our team. He joined us during the quarter as CFO and will be a major contributor to our company long into the future.

Now I'll turn this over to Chris to discuss the quarter's detailed financial information.

Chris Black -- Chief Financial Officer

Thank you, Richard, and good morning everyone. I'd first like to say how happy I am to join the Franklin Synergy team. It truly is an impressive franchise with terrific people and strong culture and I'm humbled to be a part of this fine institution. Focusing on the right side of Page two, you'll notice some of our key performance metrics for the fourth quarter of 2018 presented from both a GAAP reported perspective as well as a non-GAAP core perspective. As Richard previously mentioned, we had a couple of sizable one-time, non-core charges in the fourth quarter that we exclude from our GAAP results in order to present what we view as a clean representation of our core operating performance.

GAAP reported diluted EPS of $0.25 for the fourth quarter includes the $4.2 million pre-tax loss on the sale of securities driven solely by the acceleration of our previously planned balance sheet rotation, which I'll describe in greater detail in a few minutes. Additionally, the company incurred an approximately $3.2 million one time expense related to certain post retirement and severance benefit driven by events specific to the fourth quarter as well as the changing of our estimates of future liabilities triggering a one-time adjustment. In considering these two one-time items, the company estimates fourth quarter core diluted EPS of $0.61. This translates the full year GAAP reported diluted EPS of $2.34 and full year core diluted EPS of $2.71.

Turning to Page three in the chart on the top left of the page, you can see the continued trend in net income growth with core net income of $39.9 million for 2018 and $9.2 million for the fourth quarter, when factoring in the previously mentioned one-time non core items. Our net interest income has grown at a 38% annualized rate since 2013 and is up 9% year-over-year, but was relatively flat on a quarter-over-quarter basis driven by a decline of 1 basis point in our net interest margin. This was largely as a result of an increase in our cost of deposit funding of 19 basis points against the 16 basis points increase in our asset yields. We're still moving in the right direction, our return metrics of 87 basis points of core return on assets and 10.7% core return on tangible common equity for the fourth quarter are below where our team would like them and I'll speak shortly about our balance sheet rotation and optimization efforts to drive improved performance.

The core banking business remains strong, and we're working hard to continue to better align our balance sheet strategy to support those efforts. Additionally, non interest expenses increased $3.4 million in the third quarter of 2018 to the fourth quarter of 2018. However, when adjusting for the previously described $3.2 million post retirement and service benefits, non-interest expenses were up less than $300,000 quarter-over-quarter and are up less than $500,000 from the second quarter of 2018, the first full quarter with the impact of the Civic acquisition in our run rate further amplifying the point salary and employee benefit expenses are down slightly from the third quarter and basically flat since the second quarter. We're working hard to control expenses while still investing for our future. We believe this quarter represents a clear picture of our expense trajectory going forward as we continue to focus on our efficiency ratio. Turning to Page four, it illustrates the impressive build over time of our core earnings and tangible book value per share metrics. Our core EPS of $0.61 for the fourth quarter is 9% higher on a year-over-year basis, and our full year core EPS of $2.71 also increased 9% over the previous year.

Since 2013. we've grown our core EPS at a 19% annualized rate and have grown tangible book value per share at a 17% annualized rate driven by our long-term strategic focus on delivering strong shareholder value through the execution of our primary strategic objectives of soundness, growth and profitability.

Turning to Page five, you can see the double-digit loan growth for the year spread across our loan portfolio. Total loans grew $115 million in the quarter or 18% annualized and $409 million for the year, also up 18% since December of 2017. We've always focused on diversified and low risk portfolio that reflects the deep and differentiated real-estate experience of this team.

We maintained that focus in the fourth quarter and throughout 2018 while further building the commercial and industrial loan book by $69 million in the quarter, or 18% year-over-year growth rate. We expect to continue to grow our C&I loans going forward, continuing to diversify and balance our loan mix.

As Richard detailed earlier, our company is continuing to evolve as we seek to better balance growth with profitability, and will have an increased emphasis on manage our loan growth as opposed to growing for growth sake. As most on this call are aware, we're fortunate to operate in some of the best markets in the country. Our markets continue to perform well and strong secular growth driven by strong employment growth remains the theme. Recent announcements by a number of top employers such as Amazon are sustaining this momentum. I would also like to highlight that we completed the Civic Bank & Trust acquisition this past April, which added approximately $160 million in assets and just under $100 million in loans with a loan to deposit ratio of 79%.

More importantly, this acquisition provided a physical presence in Nashville proper, a market in which we already had many important customers. We plan to continue to build on this firm foundation in the national market in the coming years. You can also see on the right side of the page that our concentration ratio has 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.

Turning to Page six, you'll see the growth and mix of our deposit funding, which tends to have some seasonal characteristics that we actively manage. Total deposits grew $60 million or 7% annualized for the quarter, while brokered deposits declined by $89 million as we continue to focus on reducing our reliance on non-core funding. For the full year, total deposits increased $265 million or 8% year-over-year growth rate. Importantly, given the improving asset mix associated with our balance sheet rotation and optimization strategies, we're more efficiently levering our deposit base as demonstrated with the increase in loans to deposits of 78% at year-end. For reference, at December 31st, our loan to deposit ratio was 71% and was 74% at year-end 2016.

As discussed previously, our ability to reciprocate deposits from the local governments is a game-changing development for our franchise, allowing us to redeploy lower yielding securities into higher yielding longer-term assets. I don't think it is widely understood how meaningful this development is for our company and our ability to improve our core profitability metrics including EPS, ROA, ROE and net interest margin.

Due to the previously mentioned acceleration of our already planned balance sheet rotation strategy, we have reduced our investment portfolio by approximately $246 million of securities with virtually no impact on our capital position. Due to the decline in bond yields toward the end of December, we made the strategic decision to accelerate our actions by proactively selling selected securities with the view that a short-term GAAP securities loss while never desired was the prudent course of action to bring forward the improved earnings stream enabled by an asset rotation.

Only approximately 25% of that has been redeployed as of December 31, and we'd expect the full $300 million to take the better part of 2019 to be deployed. In the meantime, proceeds from securities sales are sitting as liquidity on our balance sheet with very little yield to give up from the securities sold. This has improved our asset sensitivity and positions us for strong earnings momentum as the liquidity rotates into longer term assets. We're also focused on a second phase of balance sheet optimization mainly related to the reduction of higher cost noncore brokered deposit funding, which has recently been supporting a lower yielding liquidity portfolio.

With the reciprocation deposits taking place in the build up of our liquidity portfolio, there's no longer a need to maintain this positioning of our balance sheet. We are targeting a reduction of up to $200 million of brokered deposits and lower yielding securities mostly during the first quarter of 2019 as brokered CDs mature and roll off the balance sheet. We expect that this will have no major short-term impact on our core earnings and are confident it will free up capital to be deployed more profitably while at the same time improving core profitability metrics such as ROA and net interest margin.

I would like to turn the call over to Myers, to discuss our asset quality and capital position.

J. Myers Jones -- Executive Vice President & Chief Credit Officer

Thanks, Chris, and good morning, everyone. Turning to Page seven, you can see that we continue to maintain a well-capitalized, low risk balance sheet, which is highly liquid and 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 and extraordinary asset quality, which I will detail on the next slide.

So turning to Page eight, our asset quality ratios are very strong, particularly when viewed through the multiple lenses of historical losses, current reserve and non-performing asset levels as well as delinquency trends. We constantly evaluate our asset quality in multiple dimensions and at highly granular levels, particularly within our commercial real-estate portfolios, which are tracked and monitored a highly experienced team on a high frequency basis. We also view our asset quality relative to our peers and on every relevant metric that we track, we line up favorably, which gives us an added measure of confidence that we are well reserved, in addition to our own internal evaluation process.

As of the fourth quarter, our allowance for loan losses is 88 basis points of our period end loans, which is flat from the last quarter and down 6 basis points from year-end 2017. We feel it is prudent to maintain our level of reserves, given some of the more national macro economic developments during the last quarter and have paused any reduction in the allowance percentage this quarter. On an absolute basis due to continued strong loan growth, we had a loan provision of just under $975,000 with low charge-offs during the quarter.

The allowance for loan losses represents 415% of our nonperforming assets of $5.7 million, which is well in excess of the majority of our peer group. Lastly, during the quarter, we worked out our last ORE property and now have no other bank-owned real estate or repossessed assets on the balance sheet. While this represents a moment in time and clearly can change over time, we view it as a strong positive indicator of our underwriting and credit administration processes and think it is noteworthy for a real estate focus bank to have zero ORE at year-end. Now I'll turn it back to Richard for some closing comments.

Richard E. Herrington -- Chairman & Chief Executive Officer

Thank you, Myers. We are at an exciting time for our company, community and shareholders. So much was accomplished in 2018 to continue building upon our strong foundation and position the franchise for a pivotal 2019. Our bank has strong and accelerating momentum behind us and we remain focused on creating long-term value of our shareholders. I'll turn the call over to the operator so that we can answer any questions that are presented. Thank you.

Questions and Answers:

Operator

We will now begin the question and answer session (Operator Instructions) Our first question comes from Tyler Stafford with Stephens Inc. Please go ahead with your question.

Tyler Stafford -- Stephens Inc -- Analyst

Hi, good morning, everyone.

Richard E. Herrington -- Chairman & Chief Executive Officer

Good morning.

Tyler Stafford -- Stephens Inc -- Analyst

Chris, welcome aboard.

Chris Black -- Chief Financial Officer

Thank you, Tyler, appreciate that.

Tyler Stafford -- Stephens Inc -- Analyst

I appreciate all the details on the balance sheet restructuring so maybe just to kind of start high level. You mentioned managing loan growth, can you just talk about what exactly that means as you're approaching 2019 in terms of loan growth expectations for the year?

J. Myers Jones -- Executive Vice President & Chief Credit Officer

Tyler, this is Myers. We think that we're well-positioned to continue to grow loans in the low double digit area and we're managing, obviously, the portfolio at a more aggressive level today than we were two years ago. As far as sectors go, we continue to be a real-estate bank as you can see, we have approximately just under 60 loan sectors in the real estate portfolio. So we continue to manage those, our intent is to continue to manage the portfolio, whether that involves the participation sold part of the portfolio. But we think there is a strong opportunity for organic growth again to continue to build the portfolio in the low double digits.

Tyler Stafford -- Stephens Inc -- Analyst

Okay. So given that expectation and remixing from the securities portfolio into the loan book and longer fixed rate assets, can you talk about just the total earning asset growth that you'd expect to see this year. I'm just trying to think about the balance sheet size as we approach the end of '19.

Chris Black -- Chief Financial Officer

Tyler, this is Chris. I think it's an important question and it's one I'd like to think of it more of a trend line that may oscillate as we work through the reality of different funding measures and when things mature when they come on and then clearly the opportunities of funding into as remixing and also just funding our organic growth. So I wouldn't be surprised. We're very much focused on the loan portion of that. Meyer said, the low double digit responsible keeping within, which I view as quite impressive credit processes. And so the balance sheet itself as we look to reduce on the broker side, really trying to optimize the profitability and leveraging of that capital. We're not as concerned about what the total earning asset picture looks like, we're more focused on the loan growth and we're going to seek to have funding to meet those objectives. So you could see a period where the balance sheet could be flattish. It could come down a little bit and then it could resume its course but once we get the remixing thing done, I would view the balance sheet to be growing more in lockstep with with the loans, but that's going to take time. I think it is going to be all the way through 2019 before we're fully through but we're very optimistic about what the run rates look like. The short term could have some noise but the run rates are very encouraging from an EPS net interest margin ROA/ROE perspective, which is what we're focused upon.

Tyler Stafford -- Stephens Inc -- Analyst

Okay, that's helpful. Thanks, Chris. And just lastly from me, the $200 million of brokered that you expect to reduce or up to $200 million mostly in the first quarter, what's the cost of those funds right now?

Chris Black -- Chief Financial Officer

So they bounce around. It depends on the maturity, some of them could have been on the books for a while and some may have been shorter term, we always seek [to ladder] and manage that liquidity. So it's not so much about what's coming off, it's what the replacement cost would be, the marginal replacement cost that we're focused on the go forward. So what's coming off is probably collectively in the -- it's maybe a little bit more of a lag right now, in the $230 million, $240 million range.

But when we look at this, those are maturing, right? Those leave the balance sheet one way or the other. And so the evaluation is what the incremental marginal replacement cost of those is. And with the flat yield curve as we look out, the whole key to this situation as I alluded to which I do think is game changing, I didn't -- and the reason I say I don't know that everyone understands exactly how meaningful this is. Because as of a couple months ago, I didn't either. And so as I got to analyzing and got to looking at it, visibility to reciprocate frees up what had previously been held for liquidity purposes and it's a big deal. And so that's really where we're focused.

Tyler Stafford -- Stephens Inc -- Analyst

Okay. So what is which has ballparked that replacement cost then?

Chris Black -- Chief Financial Officer

So, well if you look at the brokered curve, right, depending on maturities, it means the brokered curve that everyone looks at, it could be anywhere from $240 million to $275 million, kind of in the duration that we would be looking for. And so the idea here is that there were low yielding securities on the books prior to the reciprocation capability that in a flat yield -- they work when the yield curve is in a normal position but when the yield curve is flat those don't work. And the real point is that trade doesn't need to happen anymore because of our ability to reciprocate our local government deposits, and so we can now free up the requirement, the securities are no longer required and we can move them into higher yielding longer-term assets, loans, the things that we do extraordinarily well. And that's why there are two steps. The first step is the previously announced rotation, which is under way, that is of minimal impact on the asset side by definition because we're rotating. But then the second is to continue to optimize because the reciprocation of these deposits enables both things. It's the key lever and it's probably a lever for us greater than most banks I know of and so in a condition that's been very punitive to our balance sheet and our net interest margin, we now have the opportunity to take advantage of a major change in a way that's extraordinarily positive for us.

Tyler Stafford -- Stephens Inc -- Analyst

Okay. All right. Thanks, Chris, very helpful.

Operator

And the next question comes from Stephen Scouten with Sandler O'Neill. Please go ahead with your question.

Stephen Scouten -- Sandler O'Neill -- Analyst

Hi. Good morning, everyone.

Richard E. Herrington -- Chairman & Chief Executive Officer

Hi, Stephen, good to listen to you.

Stephen Scouten -- Sandler O'Neill -- Analyst

Thanks, Richard. So I think I just got a little turned around here on this last discussion around the optimization. So I just want to make sure I'm hearing this correctly. On the $200 million incremental of brokered deposits and low yielding short term securities you're talking about, is that an incremental amount that can be put in reciprocal deposits and thus shrink the securities book even further than the additional $300 million? Are you saying that those are just going to be put in a different duration type of funding source, that is $240 million to $275 million, and you're basically just going to get longer duration and thus less sensitivity on the funding side. I'm a little confused on which that is.

Chris Black -- Chief Financial Officer

Yes, Stephen, I think your first option was the right one. Though to be clear, we no longer -- there were securities that we were holding, right, effectively for pledging purposes and they were providing liquidity and they were shorter term in nature that we no longer have to have, because we can reciprocate. We can free up securities and so that's why if you look on the slide deck, maybe to Page six, we've got a step one, step two and at the top where it says the public funds reciprocation is the key to unlocking the balance sheet because it does both these things. The first one which we'd identified well before I got here, we were able to accelerate the first -- probably the most difficult part of that and we did that near the end of December. And then the second is because we can continue to reciprocate more, we can maintain the liquidity profile that we need to maintain and eliminate the additional negative impacts of flat yield curve that the brokered deposits against lower shorter-term securities on the left side of the balance sheet.

Stephen Scouten -- Sandler O'Neill -- Analyst

So on a cumulative basis, basically where we see $500 million on a cumulative basis come out of securities and over time throughout 2019 be put into loans or other higher yielding assets?

Chris Black -- Chief Financial Officer

Yes, I think if you look at that in isolation but then again this is the real world and real funding and speaking more in the ebb and flow, almost like a stock chart right? So we're going to look at trend lines, averages will probably be helpful and sure by the time we get through the end of 2019. Importantly though as the asset opportunities come along, we're going to maximize our capital right, so we have three buckets of deployment of capital that we think about. The first is organic growth, the second is M&A opportunities and then the third is returning capital to the shareholders, which we've taken two, I think, really positive strong actions. The Board has taken two positive strong actions. And so that's the lens through which we'll view all of these. So if the right opportunities come along to lever that capital in outstanding organic growth opportunities and we need funding to fill that and it meets our hurdle rates and helps us. It's accretive to net interest margin, all those things, then that's how things will change. So we're looking here what we see today, the loan growth that we're guiding toward, that we're focusing more on balancing growth and profitability. This is the second step in doing that, but it's a new lens, right, it's a lens that we're looking through and we're going to continue to be dynamic and adjust that lens as the interest rate markets change, as our markets change and as opportunities come our way.

Stephen Scouten -- Sandler O'Neill -- Analyst

And with the little bit lower loan growth guidance and looks like a bigger bucket of remixing over 2019 in [Kim], how should we think about the thoughts around participation. I know previously that's been a thought that there may be some some participations to kind of accelerate that redeployment, is that still a possibility or with the lower growth guidance, does that kind of wipe out that potential option?

Richard E. Herrington -- Chairman & Chief Executive Officer

Stephen, when we look at our loan growth, we start with our capital position, where can our loans grow, we're focusing, as Myers mentioned, more on managing the growth and just accepting the growth that comes in. We've developed a participation network that can help us on both sides, loan growth is a little less than we anticipated. We can acquire a few participations, we don't anticipate. Where we really think we'll use the participation network is that our local growth will be considerably higher than the low 10% to 12% range and we can participate that, that's a profitable situation because we earn participation fees plus we get the balances from the customer, the deposit balances. So the participation network is our primary way to balance our loan growth. We can get more out of participation network, if loan growth is weak. We don't anticipate that. Our focus will be with the strong loan growth, we'll use it to manage our numbers down to the position we want to.

Chris Black -- Chief Financial Officer

And I think to add to Richard's comments, Stephen, as we've been talking through and understanding that dynamic of our participation sold. I mean, I think that's another thing that it really shows the underlying strength in the franchise and our ability to originate, underwrite and maintain the strong credit quality is that, there are lots of folks, lots of banks, who seek our credit, our originated credit and that's something also that we think is a strong indicator, just as Meyer said in his comments.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay, perfect. That's simple. And I guess last one from me and probably most importantly, I suppose, is really how should we think about the NIM throughout the year, maybe especially in light of what looks like probably no further Fed rate hikes from here. So can you talk a little bit about how funding costs should trend from here? I guess especially after 1Q, we might still, I would assume, still see some upside there in funding costs in 1Q but kind of how that will trend throughout the year on the funding side and then overall for the NIM?

Richard E. Herrington -- Chairman & Chief Executive Officer

Well, let me reverse it. Overall, we perceive that we're close to the bottom relative to our net interest margin. The biggest plus will be the transition or the rebalancing of our balance sheet where we're moving out of lower-yielding investment securities into higher-yielding alternative investments or loans, et cetera, that will be very positive for our net interest margin. It is difficult to estimate the impact of deposit cost. We are in a highly competitive market. We are seeing some very, very strange deals being offered by competitors on the deposit rates. We don't try to match those all the time. We try to be good to our customers, but we're not going to be match some of the things that we see. We are also seeing a lot of disintermediation. When rates are low, people don't really -- customers don't bother to be concerned about CD rates versus money market rates. But as we're seeing rates jump up, we're seeing disintermediation taking place.

So it's a little hard to judge the overall deposit cost. If there is not another change in rates, I think our deposit costs will pick up a little bit. But I don't think it will be significant. But again, if our competitors continue to offer some of the rates we see and it could pick up a little bit more.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay. Thanks so much for the color and the time guys. Appreciate it.

Richard E. Herrington -- Chairman & Chief Executive Officer

Thank you.

Operator

And the next question comes from Joe Fenech with the Hovde Group. Please go ahead with your question.

Joe Fenech -- Hovde Group -- Analyst

Good morning, guys.

Richard E. Herrington -- Chairman & Chief Executive Officer

Good morning.

Joe Fenech -- Hovde Group -- Analyst

Appreciate there might be a challenge to kind of get some of these near-term targets even through 2019 with the restructuring and all the moving parts. But I have a far longer-term perspective. Are there any targets at all you can give us that you're shooting for? Whether it's earnings profitability or balance sheet? Just trying to get a sense for the end goal way down the line that you're focused on with all these actions. If there are certain metrics that you'd like to see or certain sort of balance sheet composition? And what does that look like, whether it's ratios or what have you that you can share with us?

Chris Black -- Chief Financial Officer

Yes, Joe, I absolutely appreciate the question. I think right now, we're very focused on executing the near-term and really concentrating on the various ratios and how they impact. We've been working on, I guess, what we viewed 2020 goals internally. And as Richard says, we work to the transition to kind of Phase 2 from the growth trajectory that we've had to more balanced growth and profitability. We're working through those, it's meaningful. We'll be setting NIM targets and EPS, ROA, those types of things. I don't think we're in a position where we want to put that out to you all right now. I understand your need for it. But we're very confident that these measures are the first couple of steps to work toward that goal. And then the work, we're going to walk and chew gum at the same time, but the work continues on building and strengthening the core deposit franchise and continuEe to be more and more focused on the right side of the balance sheet. And doing those in concert, that takes time, it takes elbow grease, but we're confident as we work toward that. And as we get more clarity of what we think those trajectories look like, I think we'll be willing to share more details. But right now, I think the turn in momentum is the most important part.

Joe Fenech -- Hovde Group -- Analyst

Sure, I appreciate that. But how about from a 40,000-foot view on the same topic, Chris? Do you think you all longer-term might have to sacrifice a bit of profitability from where you were before to better align the risk profile to where you think it should be? Or do you think you can kind of have your cake and eat it too, where you think you can improve your risk profile and improve the profitability at the same time? Are you still kind of determining how exactly that's all going to shake out?

Chris Black -- Chief Financial Officer

Having cake and eating it too is a bold thing. But I do think there's a lot of optimization. I think if you look at what this team in 11 years has built, if you look at the credit processes, the CRE portfolio, all that we've done, that's a talent pool that we're going to continue to replicate and continue to push as we grow and evolve. So I think the net interest margin is our biggest opportunity. We don't -- our yields are outstanding. If you look at -- we've broken out the average balance in yield tables for you guys. The decomposition of our total loan yield, strong loan fees. The last five quarters, we've been averaging 22 to 25 basis points of loan fees. We've picked up, what I think, 16 basis points quarter-on-quarter on the contractual loan yield. And so our folks are really good at getting paid for the service they provide. And so we're going to take that same expertise and that same mentality and continue to work more on the funding side. And we're going to seek to drive a lot of this increase in -- or the balance in profitability through the right side of the balance sheet, which some of the things, right, are more short term in nature. That's the things we're talking about doing, these levers we're pulling. And then the other things will take more time.

Joe Fenech -- Hovde Group -- Analyst

And how much would you -- I'm sorry Richard, go ahead.

Richard E. Herrington -- Chairman & Chief Executive Officer

From a longer term perspective, we're in one of the best banking markets in the country. We've got a proven team that has -- we're only 11 years old but many of us have worked together for 20, 25 years. We've proven in the past to be [able to be] a profitable bank. We've got good processes. So we feel really good about the long term future. We can't control the shape of the yield curve. We can't control -- the flat yield doesn't hide things. We know there will be a bump in the road from growth, growth doesn't go on forever you have a bumpy road. But looking beyond all of those, we have to feel very good about where we are, who we are and the future for our shareholders.

Joe Fenech -- Hovde Group -- Analyst

Okay. And then on the new share repurchase authorization, we've seen this from a number of companies. Some either have been signaling they'll be really aggressive, others are saying they just want to have something in place, probably not going to be as aggressive. Where would you say you all fall in that spectrum?

Richard E. Herrington -- Chairman & Chief Executive Officer

We see this is a powerful tool. We do not have a specific plan at this point in time. Basically, from a big perspective, we feel like our -- that the stock is undervalued. If it's undervalued, we ought to buy. And basically, our attitude, and that's oversimplifying it, but as we go down the next couple months, quarters, we'll look at this as an opportunity if the opportunity presents itself. If we execute none, we'll execute none, or we will execute as much as $30 million. So it's a tool. We feel good about it. It gives us the flexibility. We don't have an execution plan at this point.

Chris Black -- Chief Financial Officer

And Joe to amplify -- and I'm being a little bit repetitive but I think it's important, we've got plenty of capital, we're blessed with a strong capital base and we've got three buckets, three avenues, pathways to deploy that. The organic growth, M&A and return to shareholders and so we're -- every opportunity that we're looking at, we're evaluating on the same lens, right. So how do we maximize our return to shareholders in a risk adjusted manner and when the stocks are trading this low particularly close our tangible book value, you guys can do the math just like we can. But we're going to be responsible and at different stock prices those hurdle rates mean different things. So we're keenly aware of where we are and where we stand but we're also keenly aware that we are really well capitalized as Richard said in some of the best markets in the country and we're very much looking forward to the pathway because it's a bright one.

Joe Fenech -- Hovde Group -- Analyst

Okay. And then last one for me. Does the M&A strategy change along with these accelerated changes and with Chris coming aboard and maybe with the stock lowering, your comments around that capital management piece, you maybe look for a smaller transaction than you otherwise would or just looking for an update as to whether anything's changed on the M&A front?

Richard E. Herrington -- Chairman & Chief Executive Officer

We're continuing to look, our priorities with M&A, number one, access to lower cost deposits and number two, an institution that does not have significant asset quality issues and number three, one in which we think we can take our culture and make the bank stronger, we're still looking there. We have a list of prospects, the recent gyration in the stock prices has made this a little more challenging but we continue to look as well as we continue to look at ways to strengthen organic growth, again we want to have the tools available to take advantage of what the best opportunities are.

Joe Fenech -- Hovde Group -- Analyst

Thank you.

Richard E. Herrington -- Chairman & Chief Executive Officer

Thank you Joe.

Operator

(Operator Instructions) And the next question comes from Laurie Hunsicker with Compass Point. Please go ahead with your question.

Laurie Hunsicker -- Compass Point -- Analyst

Yes. Thanks. Good morning. I wondered if we could go back to the funding side for a minute. If you could help us understand just on the brokered deposits, which is set at $800 million, they were almost $900 million last quarter. The $200 million that comes off is not going to be replaced. Is that correct? In brokered deposits.

Chris Black -- Chief Financial Officer

Yes, absolutely. So that is the near-term, right? And so as I said earlier, we're going to evaluate and we're going to seek to optimize the balance sheet. And the key here, again, is that the local government reciprocation is what enables this. So if you think about that, part of those brokered deposits were being held to ensure that we had appropriate liquidity. Short-term securities qualify for that liquidity. We no longer have that requirement. So unless -- again, thinking about the hurdle rates, right, and things that are accretive to our net interest margin, we don't have a need for those brokered deposits. If the situation changes and we have opportunities that come along that meet all of our credit quality standards that we can employ brokered deposits in a way that is accretive to our net interest margin, then those could come back. Our goal in the longer -- and that's more of a short term to intermediate term, our longer-term goal, as we said, we're focused on bringing the right side of the balance sheet more into focus. And the way that you ultimately do that in the long term is focusing on core deposit enhancement and enhancing our core deposit franchise, whether it's through mergers and acquisitions, organic, other measures. There are lots of ways to do that, none of them are the snap of a finger. So we have to manage our way through that intermediate period. But everything we do is going to be focused on where the net interest margin is, how we can enhance it and how we protect the balance sheet through high credit standards.

Richard E. Herrington -- Chairman & Chief Executive Officer

Laurie, also from a pragmatic perspective, we do have strong seasonal factors both on the sources of funds and on the uses of funds. So this rotation may not be a straight line because of the seasonal factors, but you know a year from now we think this is where we'll be.

Chris Black -- Chief Financial Officer

That's right.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, thanks. And then just a shift over to government deposits for a moment, if I'm looking at the government deposit plus the reciprocal, which is mainly government, those came in to total at December $1.184 billion, up from $1.041 billion last quarter and typically the March quarter is the peak there. Where are those balances going? How should we be thinking about that from March and then maybe if you can just also give us a little bit of a guide in terms of the June quarter? Thanks.

Chris Black -- Chief Financial Officer

Yes, I think you're right and that's the way to look at it. If you look at the total exposure, as we identified roughly, I think in the $313 million, $315 million range that have been reciprocated, plus as we say what we call out in our release of where the government deposits are peaking sure in the March timeframe, I think you'll expect to see the typical seasonality as we come into June, right, and so those deposits are very -- they are very core to our franchise in more ways than just financially. In our positioning in the community, in our markets, they provide all types of intangible franchise value to us that may not be the same for others. And so those deposits are always going to be a key part of our core franchise. And so I think you have to just accept that, we all have to accept that and understand that there's a lot positives to them, we understand the funding cost. We understand the betas on those and we will work on strategies to contain those betas. But I think that's how I would guide, understand that there's high seasonality and we're happy with where they are.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And then just to follow up on that. So as we think about heading into March, we could see those particular deposits potentially rise on balance another $200 million. Does that sound about right, just based on history or is there something different in terms of your approach there?

Richard E. Herrington -- Chairman & Chief Executive Officer

It might be a little less than $200 million but it's somewhere in that range, that's a reasonable area I would say.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And then the cost on those running about the three months plus $30 million, so round numbers, the cost on those is running about $270 million, maybe $265 million, $270 million?

Chris Black -- Chief Financial Officer

Not on the whole, yes they are not on the whole bucket because they're not all indexed, they are operating accounts in there, but arguably they are clearly higher costs, they're more interest rate sensitive but that is the picture that we haven't focused as we holistically manage the interest rate risk on the balance sheet going forward and seek to optimize that. It's a part of the picture that we're focused on but these are all incremental steps that we have to take, one or two steps at a time and in the future, I think the way I would think about public funds is having them right sized on the balance sheet. I think in these first couple phases of the company's growth, absolutely critical -- provided a critical funding foundation and that's always going to be core. But the key is to keep those right sized as we continue to work on developing additional core deposits on the balance sheet.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And then Chris, when in the quarter was the $246 million fall?

Chris Black -- Chief Financial Officer

So it was right toward the end of December maybe the last couple of weeks of December.

Richard E. Herrington -- Chairman & Chief Executive Officer

There were two situations. A lot of it was sold during the first part of December and then as the yield curve flattened further, the second part was in the latter part of December.

Chris Black -- Chief Financial Officer

That's right. And there was also -- so that wasn't all sales, part of it was cash flows from mortgage-backed securities, CMO type instruments and so when you think about -- we've targeted the $300 million number and so the remainder, call it $54 million, will be in the first half, most of that will occur and it's always an estimate, most of that will occur in the first quarter with a little bit trickling into the second quarter. But we understand that it's going to take us a while to deploy. We felt like we didn't need to take anymore GAAP securities losses to get the liquidity profile that we needed for the redeployment.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And I guess just putting that all together. If you were to quantify with the funding held constant, what you potentially see just on the asset side pick up into margin? How should we be thinking about that? In other words, as we look to first quarter excluding the fact that, that we're going to see a rise in the government deposits.

Chris Black -- Chief Financial Officer

Yes, right. So the way that I would think about that, if you're just trying to isolate the $300 million and what the pickup is? In the first quarter again -- the reality of the situation is underwriting and closing loans is a process, it takes time, there are securities that are going to be into this rotation, higher yielding, very high credit quality securities and that takes time. So we're going to work through all of that and so I would focus more on the run rate, which toward the last quarter of 2019, the run rate is a very significant pickup. I would say, our loan yield this quarter was $549 million, because we're balancing between loans and securities, I don't think the ultimate run rate on this bucket will be that high. I think it's going to be lower than that, not substantially lower, but it's going to be lower than that. But its impact on the margin is very significant, particularly because in the flat yield curve environment. So it's all about the incremental pickup. So while our overall yield might, if you just looked at the asset side from the loan side, it might marginally come down, the impact to the net interest margin is very strong. But it's going to be -- I would think about our run rates instead of -- I know first quarter and second quarter are important to all of us, but it's a little bit of a moving target of how we manage through that and so I would think about the run rate.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And I guess again, just putting this all together. So directionally as I'm thinking about the first quarter run rate relative to where we sit here with December. The first quarter is going to be slightly under pressure, the June quarter we're going to see a little bit of a widening, all else being equal does that sound like a fair statement?

Chris Black -- Chief Financial Officer

And I think Laurie that's fair. Yes, sitting where we are right now. And look our goal I hope everybody sees our goal is transparency. We're trying to communicate what we know, when we know it and more will come from us but as we get more fidelity on the reality of the situation, we're going to be communicative to all of you.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, great. And then, Richard, I just want to go back to Joe's question on buy back, because we've seen companies announce buy backs and be aggressive and then we've seen them announce buy backs just to kind of have it sitting there just in case. As we look today, given that your stock is here it's up this morning, just shy of $30. I mean, if we look at it and say, hey, your stock is trading in these levels, could we potentially then expect to see you repurchase 0.25 million shares per quarter? Are we thinking about that the right way or how should we be thinking about that?

Richard E. Herrington -- Chairman & Chief Executive Officer

I think, Laurie it's probably too early to give an estimate there, you know as Chris just talked about, we probably don't want to do a buy back at the same time do an acquisition. We will have to wait, what makes the most sense in the short run. We're continuing to look at acquisitions, with the stock price where it is, obviously, cash becomes -- could be a bigger part of acquisitions as opposed to all the stock. So there's just a lot of different ways to do it, the good news is we have access to all of these ways. As we get through them, we just have to make the best decision at that point in time. Again, focusing on what's best for the long run for the shareholders. So, I didn't answer your question, I gave you the famous Tennessee two-step.

Laurie Hunsicker -- Compass Point -- Analyst

Yes, you did. Okay. Well, last question is for you Richard, obviously, you just opened your 15th branch here. Can you just remind us where you are on de novos as we look out for this year? Are there more on deck? Thanks.

Richard E. Herrington -- Chairman & Chief Executive Officer

De novos in our market, yes, there's one de novo in Nashville, I'm not aware of any other de novos at this point. Are you talking about de novo banks?

Laurie Hunsicker -- Compass Point -- Analyst

Oh, I'm sorry I'm talking about your de novo branches, right? You all just opened a 15th branch, are there any more de novo branches that you all have planned for this year? Thanks.

Richard E. Herrington -- Chairman & Chief Executive Officer

We've got a couple that we're looking at, Laurie. We think -- go back to our plan, from an organic perspective, one to two branches a year is what we want to do. You know that's not something that we got to do. We're going to look. We see a couple places in the middle of Tennessee for it, it makes sense to put a branch or do a lift out of teams. So we're looking at that, but big picture, one to two branches a year seems like a pretty good number for us.

Laurie Hunsicker -- Compass Point -- Analyst

Great. Thank you.

Richard E. Herrington -- Chairman & Chief Executive Officer

And branches are changing, we're not building the big branches, we are seeing most of our branches tend to be more compact, customers are banking more and more online. So the branch is just more of a place to get to know the customer than it is to do transactions.

Laurie Hunsicker -- Compass Point -- Analyst

Great. Thanks for taking my question.

Richard E. Herrington -- Chairman & Chief Executive Officer

Thanks, Laurie.

Operator

And this concludes our question and answer session. I'd like to turn the conference back over to Mr. Richard Herrington for any closing remarks.

Richard E. Herrington -- Chairman & Chief Executive Officer

We just want to close by saying thank you. We appreciate your interest in our organization. We are excited about the future and we hope that you can pick up on our enthusiasm and our confidence that the best is yet to come. Thank you very much.

Operator

The conference has now concluded. Thank you for attending today's presentation, you may now disconnect.

Duration: 61 minutes

Call participants:

Richard E. Herrington -- Chairman & Chief Executive Officer

Chris Black -- Chief Financial Officer

J. Myers Jones -- Executive Vice President & Chief Credit Officer

Tyler Stafford -- Stephens Inc -- Analyst

Stephen Scouten -- Sandler O'Neill -- Analyst

Joe Fenech -- Hovde Group -- Analyst

Laurie Hunsicker -- Compass Point -- Analyst

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