Franklin Financial Network, Inc. (NYSE:FSB) Q3 2018 Earnings Conference Call October 25, 2018 9:00 AM ET
Executives
Richard Herrington – Founder, Chairman, President & CEO
Sarah Meyerrose – EVP & CFO
Myers Jones – EVP & Chief Credit Officer of Franklin Synergy Bank
Analysts
Stephen Scouten – Sandler O’Neill + Partners
Tyler Stafford – Stephens Inc.
Laurie Hunsicker – Compass Point Research & Trading
Operator
Good morning, and welcome to the Franklin Financial Network, Incorporated Third Quarter 2018 Earnings Conference Call. Hosting the call today from Franklin Financial Network is Mr. Richard Herrington, Chairman, President and CEO of Franklin Financial Network, Incorporated. Please note the Franklin Financial Network earnings release and this morning’s presentation are available on the Investor Relations page of the bank’s website at www.franklinsynergybank.com.
Today’s call is being recorded and will be available for replay on Franklin Synergy Bank’s website. Before we begin, Franklin Financial Network does not provide earnings guidance or forecasts. During this presentation, we may make comments that may constitute forward-looking statements. All forward-looking statements are subject to risks and uncertainties and other facts that may cause 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 is contained in the Franklin Financial Network’s most recent annual report on Form 10-K. Franklin Financial Network claims — 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’m now going to turn the call over to Mr. Richard Herrington, Franklin Financial Network’s Chairman and CEO. Sir, you may begin.
Richard Herrington
Good morning, everyone, and thank you for joining our third quarter call. I’m here this morning with Sarah Meyerrose, our Chief Financial Officer; and Myers Jones, our Chief Credit Officer. I’d like to give a brief overview of the quarter, and then Sarah will review the detailed financial results. Let me start by saying that while we built a lot of positive momentum in the quarter, it was a tough operating environment. We’re excited about our foundation and results of our labors that we will see in the coming quarters. This quarter reflects fierce composition — competition on both sides of the balance sheet, and some of the pricing that we see has become unnatural.
My team and I have been — have seen this before. We have been in this great market for many, many years, and we have seen competitors come and go. Some panic when environment changes, and they try to buy market share or stretch credit standards. We are seeing banks from out-of-state, trying to get a toehold here by providing lending terms that are very aggressive. These are short-term aberrations, and I feel our pipeline — I feel great about our pipeline and our prospects.
We have assembled an incredible experienced team, and we will maintain our focus on creating long-term shareholder value. During these changing environments, we will remain disciplined as we always have. Most importantly, our corporate pillar of soundness remain strong, and we have retained superb credit quality, capital and liquidity metrics.
Even in this incredibly competitive operating environment, we drove modest growth in our loans and retail deposits. Our total deposit balance is contracted slightly, but that was expected because of seasonality of the deposits from local governments.
Deposit in our loan pricing was basically flat from the previous quarter. In fact, we saw a record level of earnings, loans and tangible book value per share.
Additionally, we have built tremendous operating leverage within our system. We continue to invest in our franchise and our scalability. In the third quarter, we have hired new employees, further invested in technology and systems, and have fully integrated the Civic acquisition. As we discussed with you 90 days ago, our balance sheet rotation has begun. The impact of this was minimal in the third quarter. We are now rotating $80-plus million securities into higher-yielding, mostly floating rate assets. We expect to continue this measured pace when we see the opportunity to be more efficient with our balance sheet and not sacrificing our soundness.
The improved yields and asset sensitivity will become evident beginning in the fourth quarter and continue to ramp up during 2019.
The third quarter had record earnings and solid growth but did not reflect our long-term potential.
Page 6 of our presentation highlights several key growth factors: net income was up 18.7% versus third quarter 2017; loans up 20.5%; and nominal net loan recoveries for the quarter. Another pattern not shown on Page 6 is the year-to-date third quarter net income has risen from $20.9 million in 2016 to $25.7 million in 2017 to $30.8 million in 2018. This is an average growth in net income of 23.6%.
We expect much more and are focused on continuous improvement to create long-term shareholder value. Our 1% return on assets is good, but we had an assist from state tax credit that Sarah will cover shortly. Our total growth was moderated by competitive and seasonal pressures, but I feel very good about our current pipeline and position. We are not completely satisfied with this quarter’s performance, but we are not dissatisfied either. I think it reflects a disciplined and measured response to our environment, and I I’m excited of what we can continue to build.
Now I’ll turn this over to Sarah to discuss the quarter’s financial results in more detail.
Sarah Meyerrose
Thank you, Richard, and good morning, everybody. I want to start if you look at, I believe it’s Page 6 or maybe Page 7 in your deck, where the slide that’s talking about solid credit and low risk balance sheet. These are the metrics we use to evaluate our pillars of soundness. Asset quality, credit liquidity and capital, all compared favorably to peers and well within the ranges we like to see. As previously mentioned, third quarter earnings benefited from a loan loss provision that was lower than the first two quarters of 2018. If you turn to Page 7, you’ll note that the reduction in provision expense is a direct reflection of our commitment to maintaining excellent credit quality, which is one of the core pillars of our franchise.
A 10-year record of near zero credit losses and strong credit fundamentals of our loan portfolio provided us with the empirical evidence we needed to slowly reduce the ALLL as a percentage of loans from 0.94% in the first quarter ’17 to 0.88% in the most recent quarter and still hold a reserve balance that is nearly 5x to the level of nonperforming assets compared to the same ratio for our UVP, our peer group, of just under 2x.
Page 8 reflects relatively modest linked quarter loan growth compared to what you have come to expect from Franklin Synergy, but more than 20% growth compared to third quarter 2017 and 13% since year-end, despite continued competitive pressure, as Richard mentioned.
The portfolio top $2.5 billion and reflects stability and credit discipline in the types of lending the team is doing. Consistent with prior quarters, we maintained a well-balanced portfolio and diversified real estate lender. We continue to focus on the lower-risk areas of real estate lending, where our team has a deep and differentiated experience. Our real estate portfolio has complemented by our commercial and health care lending team.
Turning to Page 9, you’ll note the growth detail for the loan portfolio. Up more than 20% from a year ago, we saw a double-digit growth from nearly every component in the portfolio. The largest portion of our portfolio is and what has historically been a less risky loan types: residential mortgage, warehouse, owner-occupied commercial real estate and traditional commercial loans.
Our team has a deep experience and local knowledge of the real estate market, and you see that reflected in our portfolio, compensation and asset quality.
On Slide 10, you’ll see the growth and mix of our deposit funds since 2014. Notably, there has been some pretty strong growth throughout the year in our retail deposits. The growth, overall, is somewhat modest in the third quarter at 2.5%, yet more than 10% annualized during a period with a lot of competition for deposits in our market.
As discussed previously, legislative changes have positively impacted the way banks report reciprocal deposits, allowing us to reflect the reality that these are core deposits from the Franklin Synergy customers, who elect to utilize programs available to obtain the security of FDIC insurance on their total deposit balances. This change in classification should have a positive effect on our net interest margin and the duration of our assets. We are now able to secure a portion of our local government deposits through the reciprocal program instead of carrying lower-yielding investment securities solely for the purpose of meeting peak pledging requirements. This regulatory change offers us the opportunity to reduce the securities portfolio via normal cash flows and maturities as well as through targeted sales and then rotating those funds into higher-yielding loans and investments. As noted earlier, we have already begun to take steps that will increase earnings, improve our balance sheet mix and strengthen our franchise.
I’ll talk in just a moment about the actions we’ve taken thus far, but I’d like to remind you up-front that this will be an ongoing process, as Richard said, that will take several more quarters to accomplish the right way.
So late in the most recent quarter, in the third quarter, we utilized approximately $40 million of cash flow from the securities portfolio to purchase investments and fund loan growth with more attractive risk-adjusted yields. The net effect is a pickup of about 200 to 225 basis points on the $40 million. We continued the rotation strategy early in the fourth quarter, repositioning from securities into loans and investments, including about 70% that float with market rates. These actions are consistent with our message to you last quarter when the legislative changes had just been signed into law. We took the time to analyze changes to regulations, update our policies and strategy with executive management and the board. We are pleased with the initial steps and plan to continue similar actions in the coming quarters.
As mentioned earlier, our executive team has identified approximately $300 million of assets that we would like to reposition over time. The amount that we do in any given quarter will depend on market conditions. We are taking a methodical approach to ensure each new asset is reviewed and underwritten closely to meet our high credit quality standards.
Turning to Slide 11 and 12. You’ll see continued growth in our earnings and tangible book value per share. As previously mentioned, third quarter earnings benefited from both the reduced loan loss contribution and lower-than-normal effective tax rate of 9.2% when an $11.6 million loan to constructive affordable housing was extended into 2019 due to construction delays. This made the loan eligible for a $580,000 tax credit under Tennessee’s community reinvestment tax program. The tax credit was not included in our 2018 tax calculation for prior periods based upon this borrower’s stated intention of obtaining permanent financing at a market rate in the fourth quarter. That would have fully disqualified the loan for any tax credit. However, the decision to extend the loan was made late in December — in September, excuse me, resulting in the recognition of $460,000 or 9 months’ worth of tax credit during the third quarter.
While we expect our effective tax rate to remain below the corporate rate of 21%, it should normalize in future periods to between 17% and 18%. Net interest margin, as we noted, also remains under pressure due to the high beta on our funding cost and increased local rate competition, resulting in an increase in funding cost of 23 basis points compared to second quarter of ’18 and an increase in earning assets of 15 basis points.
It is interesting to note that if the tax benefit provided by the company’s CITC eligible investments in which the company accepts a less than market yield in return for tax credit is added to loan yield, net interest margin for the quarter and year improves by three basis points. We expect margin to stabilize as we begin to implement the balance sheet rotation strategy that is expected to improve our yield on earning assets via both duration and the mix of loans versus investment securities. And I’ll note while I’m — while I talk about that investment tax credit to make sure there’s no confusion that the tax credit will never be included in the net interest margin. It will always show up in the tax line, but we take those loans on the balance sheet at lower rate to be able to qualify for the tax credit.
Lastly, noninterest income declined from the second quarter primarily due to lower mortgage banking volumes as a result of rising rates. Our efficiency ratio edged up to 60.8%, as we hired for our front and back office and continued to invest in our systems and our franchise. We expect that to improve over time as investments and infrastructure slow, and we realize additional economies at scale.
Now I’ll turn it back to Richard for some closing remarks.
Richard Herrington
Thank you, Sarah. We have an incredibly experienced team of bankers, navigating this current environment of aggressive competition and flat yield curve. We are going to remain disciplined and continue to build our franchise the right way to create long-term shareholder value. Despite the headwinds in the quarter, our franchise has a lot of great things going forward. We maintained pristine soundness as measured by credit, capital and liquidity metrics. We also have a lot of momentum that will come from our operating leverage and the balance sheet rotation. The ability to sell lower yielding, mostly fixed-rate securities and build higher-yielding floating rate assets will improve our interest sensitivity and our earnings. Franklin Financial Network has a leading position in one of the best markets in the country, with a tremendous customer and employee base. I have every confidence that our team will continue to execute our strategy and build long-term shareholder value.
We will now open this call up for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. The first question will be from Stephen Scouten with Sandler O’Neill.
Stephen Scouten
I wanted to dig into the NIM a little bit more, maybe even kind of x talking about the balance sheet rotation strategy. Just as a fundamental basis as you go throughout the year, I’ve thought about your NIM as trending upward throughout the year as public funds move back out of the bank from their 1Q highs. So can you talk a little bit about why we didn’t really see that phenomenon? And if you think there’s kind of more kind of — more core NIM compression to come through 1Q ’19 as a result of what we saw this quarter? Again, x the rotation strategies.
Richard Herrington
Stephen, there is a couple of things. One is seasonality. As the government deposits go down, et cetera, so we do have some seasonal trends, but there’s a bigger issue that the industry as a whole is facing, and that is the old term, disintermediation. We see customers beginning to look at higher-yield deposit instruments. They’re not leaving the bank, they’re just moving up. A good example of that, I’m on board of a local charity who has lots of cash at this point in time, and they had a meeting this past week. They opted to move $1 million out of their checking account, putting the 1/4 of in into a CD, and the other 3/4s, they were going to be put into a bond fund managed by our wealth management group. So we’re seeing disintermediation, and we think that’s something that may be the banking industry as a whole is not fully anticipated. The other factor is we’re still seeing a significant amount of competition.
We see some very strange terms on loans, lower rates, and we see a lot of high rates on deposits accounts, the bank is trying to secure more market share in this area. Again, we’ve seen this before. It’s — it’ll happen for a while and then it’ll quiet down. We’re not going to get caught up in trying to compete on the basis of price for either loans or deposits. We would rather compete on the basis of service and availability. There are a lot of factors realistically. If you properly — if we could properly move the tax credit into the net interest margin, as Sarah says, if we did that, the net interest margin would be relatively flat in the second quarter to the third quarter. Again, the primary cause there, I think, if you go through all of it, is the continued strong competition in this market. Sarah, if you want to add anything?
Sarah Meyerrose
No, I think the — Stephen, you say x the rotation strategy, that’s going to be excellently critical for us. Even to some extent, we have — as we have securities mature, we just take them back out to a year, we’re picking up yield on those. So that’s a very active part of what we’re doing is moving out of loans and out of securities and into loans. We have also approved officially with our investment committee the ability to do some higher-yielding investments in there that are very high-quality commercial loan obligations, for example, or collateralized loan obligations, for example. And so I think we’ve got a lot of strategies in place to help try to mitigate that. I’m not sure I would say this, the margin is going to widen considerably going into next year, but at a minimum, I think it should stabilize.
Stephen Scouten
Okay. And just to make sure I heard, Sarah, maybe your comments earlier about the rotation strategy. Did you say you’d completed $40 million of that in the third quarter? And if so, was that done late in the quarter? It didn’t seem like there was much benefit. It seemed like the reduction in securities was really more that seasonal decline you normally see as public funds go down.
Sarah Meyerrose
Yes, it was very late in the third quarter we — the cash flows coming off of our mortgage-backed securities to reinvest. So it didn’t have much effect at all in the third quarter.
Stephen Scouten
Okay. And the numbers like $80 million a quarter is kind of the way you’re thinking about it moving forward?
Richard Herrington
$80 million in third quarter — I’m sorry, Stephan, $80 million in the fourth quarter looks like a good target. And then, I’ll — we’ll see it continue to move forward in the next year. The key part of this is we need to make — we’re making sure that we have the right type of loans to replace the securities because we don’t want a hike in credit risk, we want to continue to improve the yield without taking more credit risk.
Stephen Scouten
Okay. And that probably takes me to my follow-up question. How much of that 12.5% kind of loan growth was local and how much came from kind of the institutional sources you mentioned last quarter? Or has that — that’s not quite begun in full as you haven’t gotten deep into the rotation strategy as of yet?
Myers Jones
Virtually, certainly the majority of that growth was all local. That segment has really not kicked in yet.
Stephen Scouten
Okay. And one last kind of follow-up, maybe, is just on the construction growth. June, I think, is normally a pretty strong construction month. Was there any slowdown here? It looks like year-over-year growth was a little weaker than last year. I’m just kind of wondering what the — if the CLD to risk-based capital ratio has been a constraint on that growth at all.
Myers Jones
No. Really, we had some fairly sizable paydowns, but if you look at the projects that we were serving from 1 to 4 family as of June 30, we were managing 1,284 as of 9/30 that has grown to 1,358. So we are continuing to add construction projects towards later — we’re adding projects. We haven’t seen the fund up in that yet. But we are adding more projects, we had more projects going on in the third quarter than we did in the second quarter.
Operator
[Operator Instructions]. The next question comes from Tyler Stafford with Stephens.
Tyler Stafford
Just to follow up on Steve’s last question there, just around the loan growth this quarter and so far this year, I guess, you’re tracking around kind of that midteens level as we think about next year 2019. Is that midteens pace a reasonable assumption at this point?
Richard Herrington
Tyler, this is Richard. We’ll see a pickup a little bit in the fourth quarter from our rotation strategy. That’ll be a onetime pick up, and it may kick up loan growth a little bit in the fourth quarter, but then as we begin to look into next the year, the midteens is a good target for us and the vast majority of that will be driven by local and health care lending.
Tyler Stafford
Okay. Perfect. And then, just going back to the margin, just making sure I’m thinking about that, I guess, the starting point for the trajectory for the margin next year. Will the repositioning that’s currently underway within the securities book, will that will be enough to offset the seasonal peak of the public funds in the fourth quarter from just a total margin perspective? Or would you still expect some slight pressure to the next quarter’s margin as the public funds peak?
Richard Herrington
We should see the margin begin to move up in the fourth quarter. There are competing factors of — the margin will improve as we shift from the bond portfolio to the loan portfolio, just a change in mix will have a positive influence. Secondly, the type of securities that we are buying will enhance our yield. The unknown is the impact of deposit cost, again, disintermediation is becoming a big issue, and we’ve got banks in the market offering 3% on checking accounts. And that really is a tough competition. We feel very positive about the yield on the asset side that — again, the unknowns, the struggle is the cost of funds.
Sarah Meyerrose
And Tyler, say again what you were asking about the public funds. The public funds are not necessarily low cost. And what we replace them with are not — is not necessarily low cost.
Tyler Stafford
Yes, I know. If I said that, I did not mean to say that. I was just asking about the peak balances of the public funds in the fourth quarter and what that means for the margin?
Richard Herrington
Actually, the public funds will peak in the first quarter. They hit a trough right now. And as tax payments begin to come in, in mid-December, they will build and they will hit their peak in about middle March.
Tyler Stafford
Okay. Do you have what the cost of the brokerage and the public funds were this quarter?
Sarah Meyerrose
Not at the top of my head, but I will get that for you.
Tyler Stafford
Okay. And then just last question. Sarah, you mentioned in your prepared remarks just about the reserve release this quarter, just given the strong credit dynamics you see. Would you expect further credit reserve releases going forward, assuming no big change?
Sarah Meyerrose
Yes, we’ll take a look at it. I think we’re probably pretty comfortable in the mid- to high 80s on that ratio for now. It’s based, all else equal, on credit quality.
Operator
The next question will be from Laurie Hunsicker with Compass Point.
Laurie Hunsicker
Yes, just to go back to margin on the government deposits, I know that you disclosed here you were — total government deposits of $768 million. How much of those were the higher costing? And I guess, the comparable number from last quarter, you had total government deposits of $890 million, of which is $670 million were higher costing. So I just want to make sure I’m thinking about that the right way.
Sarah Meyerrose
I would say it’ll be about the same ratio as prior quarter. A mix of those doesn’t change that much.
Laurie Hunsicker
Okay. And so, I guess — so then as we think about what that looks like in fourth quarter, you’re going to see the higher-costing deposits are going to rise by maybe $300 million, $350 million into the first — fourth quarter and then continue to grow a little bit more in the first quarter, but in terms of the average balance, that’s majority of the impact. Is that correct?
Richard Herrington
Yes, they’ve been trending down since March, April this year. Again, they are at the low point today. Now there are some other complicating factors, the county just issued or is in the process of issuing over $100 million in revenue — I’m sorry, in general obligation bonds. Those funds will flow in with us, stay with us for a couple of weeks and then flow out. So it’s not really easy to forecast exactly what accounting funds will be. We stay in constant contact with them so we know what’s going to happen, but usually we can forecast with accuracy for about 2 or 3 weeks ahead of time because of changes like that. So we do think that those funds will pick up this quarter, but they’re not our highest cost of funds. They are tied to the 90-day treasury rate plus about 25 basis points, 30 basis points somewhere in that range. They are not the highest cost of funds we have, but there’s — there will be significant fluctuation more than normal this quarter because of the big bond issue that is going to the market.
Laurie Hunsicker
Got it. Okay. And then, I mean, I guess, again, as we’re looking here, we have had such a move in the three month treasury. Right? So I’m looking at it and saying, okay, fine. So by the time that we get into the March quarter, your round numbers $300 million, $350 million higher for the whole duration, and that’s costing close to $260 million. Am I thinking about that the right way?
Richard Herrington
Yes. Again, I guess…
Laurie Hunsicker
Just given, I mean, the three month treasury right now is $234 million. I just look at for comparison, right? For the duration of the June quarter, the three month treasury was $185 million. So we’ve had a continuing move, right? And for the September was $205 million, but to your point, we’re lower in balances. I mean, I’m just trying to think, and I guess, this goes to sort of what — where Steven and Tyler were going in terms of the offset. In other words, we have got a $300 million positioning in the balance sheet that’s obviously going to be a positive, but the offset to that is we look to — at least, in the first quarter, it seems like the deposit number could actually skew the margin lower.
Richard Herrington
One of the complicating matter is the rate is based on the 90-day average of the treasury. So there is a delay basis on the rate going up. But, yes, of course, what we’re doing is we’re replacing the securities at a significantly higher rate than the current — the security is currently, and we’re replacing those primarily with floating-rate instruments. So as rates continue to go up, both our cost of funds will go up, but our earning asset yield would also go up.
Laurie Hunsicker
Okay. That’s helpful. And then just as we look out to next year, any plans to do any sort of follow on sub debt raise as we are also sort of thinking about margin and growth? Is there any plans in the works to potentially consider that? Or how are you approaching that?
Sarah Meyerrose
There are no plans currently to do that.
Laurie Hunsicker
Okay. And then one last question on margin. So you were $270 million reported. Do you have the dollar amount of accretion income that was a net interest income this quarter with the comparable amount from last quarter being $360,000?
Richard Herrington
I don’t have to pick here. I think it probably will be down slightly. But let us dig into that, Laurie, and get back to you specifically on that.
Sarah Meyerrose
Laurie, I’m not following what you’re asking on the accretion piece. Are you looking at the…
Laurie Hunsicker
So the accretion income that shows up in your net interest income line. So for last quarter, you had $360,000 that showed up in the $26.9 million net interest income, right? So some of that was obviously from Civic. In other words, how much was it — so what I’m trying to get at is, what is your core margin? So your $270 million reported, what is your accretion income looking like? Because that’s another jumpy piece into margin. I’m just trying to understand that. I can follow up with you separately.
Sarah Meyerrose
That would be great.
Laurie Hunsicker
Okay. And then just going over to health care, just so that I have apples to apples and I have a hole balance sheet from last quarter. So I apologize if this number is out there. But just what are your total health care loans, including the C&I for June and for September? And then what is the health care C&I piece only? Just so that we can think about that growth.
Myers Jones
Laurie, at the end of Q3, the actual health care numbers were $285 million and the health care team was responsible for approximately $389 million.
Laurie Hunsicker
$389 million. Okay. And then do you have comparable numbers for June? I guess, for June, I have the C&I only piece was $257 million?
Myers Jones
And the overall health care was probably closer to $350 million, $360 million. I don’t have the number in front of me, but there has been growth in both of those sectors.
Laurie Hunsicker
Okay. So that’s really strong growth. And how should we be thinking about that next year?
Myers Jones
Well, I have found that the health care side is kind of difficult to predict. We’ve got about 45 customers, but there is a great deal of M&A activity out of that sector. We operate with about — out of 19 states, we’ve got 38 different NAICS codes, but there’s a lot of M&A activity that we’ve had deals that we’ve gained because our customers were acquiring, we’ve had loans that we’ve lost because our customers got acquired. But I would say that, overall, it was probably going to track to the overall growth rate of the portfolio. I can’t see it, Laurie, leading or lagging the overall growth rate.
Laurie Hunsicker
Okay. And the health care growth this quarter, was that in market?
Myers Jones
Well, that footprint is much broader than what our real estate sector would look at. We are looking at companies that are — they’re based in approximately 19 states from the health care sector, but — and again, we try to track that based on NAICS code so that we don’t see a lot of concentration in any particular industry. But that is a broader footprint, obviously, than the real estate side.
Laurie Hunsicker
Okay, great. And then just last question here. Sarah, as we’re thinking about loan loss provision, and obviously, I understand your credit is pristine. You’re comfortable running in the mid-80s in terms of reserves to loans. But how should we think about, as we’re approaching next year, I mean, a loan loss provision run rate in the $1 million or so per quarter if we’re thinking about the fact that your growth goes midteens. Is that a right number? Or is that too high? How are you thinking about that?
Sarah Meyerrose
I don’t think that’s too high. I would say, we probably be around in that same level.
Richard Herrington
Laurie, let me just add. What we are today we feel like we’re more than adequately reserved, we feel like we may well be slightly over reserved. The impact of [indiscernible] is something that we are studying, and we don’t think that will be significant. Our key idea would be the key — the reserves somewhere between 0.85% and 0.9% of loans, which — and we’re at 0.88% today. So that’s the range that we would be shooting for.
Myers Jones
As long as our credit metrics remain where they are.
Richard Herrington
Yes. If we see some deterioration or some adjustments, then we will move that percentage back up.
Operator
Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Richard Herrington for any closing remarks.
Richard Herrington
We very much appreciate you being with us today. Thank you for interest in our organization. And if you do have any additional questions, please contact either Sarah Meyerrose or myself, and we’ll be glad to answer those questions. Again, thank you for dialing in with us this morning.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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