Capital Bank Financial's (CBF) CEO Eugene Taylor on Q2 2014 Results - Earnings Call Transcript

| About: Capital Bank (CBF)

Capital Bank Financial Corp. (NASDAQ:CBF)

Q2 2014 Earnings Conference Call

July 24, 2014 10:00 AM ET

Executives

Ken Posner – Chief of Strategic Planning and Investor Relations

Eugene Taylor – Chairman and Chief Executive Officer

Chris Marshall – Chief Financial Officer

Bruce Singletary – Chief Credit Officer

Analysts

Erika Najarian – Bank of America Merrill Lynch

Paul Miller – FBR Capital Markets

Brady Gailey – Keefe, Bruyette & Woods

Blair Brantley – BB&T Capital Markets

Ken Posner

Thanks, Lauren. Good morning, everyone. I'm Ken Posner, Chief of Strategic Planning and Investor Relations for Capital Bank Financial Corp. I'd like to welcome you to our Second Quarter 2014 Conference Call. Today's call is being recorded. Please see the press release for instructions on accessing the replay.

During the call, we will refer to a slide deck which you can find on the Investors page of our website, www.capitalbank-us.com. The slide deck and the press release contain a reconciliation of certain non-GAAP financial measures to the GAAP results. This call contains forward-looking statements regarding expected operating and financial performance. Statements that are not of historical fact may be deemed to be forward-looking, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. We caution that forward-looking statements may be affected by risk factors, including those set forth in Capital Bank's SEC filings, and actual operations and results may differ materially. The Company undertakes no obligation to publicly update any forward-looking statements.

At this time, I'll turn the conference over to the company's Chairman and Chief Executive Officer, Gene Taylor.

Eugene Taylor

Good morning. Thanks for being with us today for our second quarter 2014 conference call. In addition to Ken Posner, I'm here this morning with our Chief Financial Officer, Chris Marshall; our Chief Credit Officer, Bruce Singletary; and our Chief Accounting Officer, Jack Partagas. We'll make some remarks about second quarter results and then we'll take your questions.

Slide 3 lays out some of the goals we've articulated in our progress against NOW. Our execution improved in the second quarter with a record $442 million in new loans, which puts new loans booked up 26% on a year-to-date basis and back in line with our guidance. As a result of stronger production, loan growth accelerated to a 16% annualized rate after flattening out in the first quarter.

We're seeing good momentum in the consumer bank, where net checking account growth hit record levels for the second quarter in a row with strong contributions coming from each market, including Tennessee, where you may recall we appointed a new retail leader last year. As a result, noninterest checking balances are up 10% year-over-year.

The sales activity is indicative of the highly experienced leadership team running our Consumer Bank and the enormous work they have put into improving the culture and capabilities of our retail network, as well as the top grading of branch teams. The core efficiency ratio continues to improve and dropped below 70% for the first time as we enjoyed a break in REO related cost.

That's a nice milestone to pass, but we're not stopping to celebrate as we still have a lot of work to do to get this metric down to 60% or lower. Core ROA is up significantly year-over-year to 0.8%. We remain focused on our goal of 1% and expect to make further progress towards this goal in 2014 and 2015. Before moving on to the rest of the presentation, I would like to place this quarter's loan growth in historical context.

Turning to Slide 4, you can see that over the last three years, we've been very selective. Payoffs and amortizations peaked at $414 million in the third quarter of 2013, reflecting not only resolutions relating to problem loans contained in our special asset portfolio, but also decisions made to exit certain relationships even if the loans were pass rated. At the same time, we were running off marginal business, we were slowly but steadily building production capability in middle market, corporate and consumer lending, by calling on and winning the business of high-quality clients.

We did not expect progress to be even quarter-to-quarter and it hasn't been, but with this quarter's record new loans, you should be able to see the long-term trend emerging. When you reduce run-off and strengthen production, the result is net growth. Looking ahead, you should expect us to continue working on production capacity in every aspect of our business. You should expect us to capitalize on the footprint that includes places like Miami, Raleigh-Durham, Nashville, and other attractive Southeastern markets that offer some of the best growth prospects in the United States. You should also expect us to continue developing a high-performance sales culture among our commercial and consumer associates who are focused on accountability and continuous top-grading.

We are committed to growth that is disciplined and sustainable. The credit quality of our originated loans is stellar with a classified and criticized ratio of only 1.1%, as Bruce will discuss momentarily. This reflects the high quality of clients we are bringing into our bank. Our portfolio is diversified with respect to geography and borrower industry, and we pass on business that does not meet our risk and return parameters.

For a company that is just passing its fourth anniversary, I'm very encouraged with this progress. The change in our capabilities from the troubled institutions we acquire to where we are today is night and day. And we're not done yet, we are just starting to show you what we believe we can do.

I'm now going to turn the call over to Chris for more on the financial results, and I'll be back later with some concluding comments.

Chris Marshall

Thanks, Gene, and good morning, everyone. I'm going to start by reviewing our second quarter highlights, which are summarized on Slide 5. And I'd start by saying, I think our second quarter earnings were solid by virtually every metric.

We reported net income of $12.4 million, or $0.25 a share, which was up 47% year-over-year. And on a core basis, our net income was $13.1 million, or $0.26 a share, which was up 30% year-over-year. And we feel our business plan and our strategies are working very well and we are pleased to see that our consistent execution is leading to consistently stronger results, which is right in line with our expectations.

In addition to the strong loan and checking account growth that Gene just mentioned, another positive in the quarter was the continued reduction in legacy credit expenses, which were down 67% year-over-year, thanks in part to very strong REO sales. Our tangible book value was $18.85 per share at quarter end, which is up $0.16, and we ended the quarter with Tier 1 leverage of 14.6%.

Now, turning to Slide 6, let me take a minute and point out the major items from our first quarter income statement. First, net interest income declined sequentially due to lower loan yields. Consistent with our guidance, the NIM compressed by 15 basis points sequentially. Now, 6 basis points of this resulted from a combination of lower collections of previously charge-off loans and a one-time accounting adjustment related to deferred labor costs. The remaining 9 basis points of core compression is the result of the lower yields of which we book the loans versus the existing portfolio.

Second, core noninterest income increased by $700,000 sequentially due to slightly better results from deposit service charges and debit fees. Third, you will notice that the provision in the quarter was $1.4 million, which reflects $2.3 million in provision for newly originated loans, partially offset by a $900,000 reversal of impairment on the legacy PCI portfolio.

And finally, our core noninterest expense declined by about $3.5 million sequentially due to favorable results in the REO expense. Our core income excludes non-core items that sum to approximately $700,000 after-tax, or about $0.01 a share. To summarize, these non-core adjustments include $300,000 of non-cash equity compensation related to our original founder equity grants, and they were about $300,000 in contingent value right accruals and a small loss on the sale of securities. Excuse me, you'll find details on these adjustments, including both pre-and after-tax amounts in the appendix.

So given this overview, let me go into a little bit more detail starting with Slide 7, which covers new loan production. As you will recall, we had very strong production growth in 2013, which was up more than 40% year-over-year. And at the beginning of 2014, we guided you to expect a more moderate 20% growth rate and we also pointed out that we didn't expect that growth to be even quarter to quarter.

Our first quarter was soft and production was flat year-over- year. However, new loans were up 75% sequentially to $442 million in the second quarter with strong trends in all geographies and all product types. As Gene mentioned, this leaves us up 26% on a year-to-date basis, which is just slightly ahead of our guidance.

Of the $442 million, $46 million consisted of high-quality Florida residential mortgages, which we selectively purchased on a privately negotiated basis. Now, we re-underwrote each loan, all of which are squarely in our footprint. And just to give you an idea of the quality of the portfolio, the weighted average FICO scores of these loans was 764 and the weighted average LTV was only 63%. This is the first portfolio we've purchased since forming the Bank, but we intend to continue looking at additional opportunities whenever they meet our credit and return departments.

Now, even without the portfolio purchase, Florida's production increased nicely from the first quarter. And as you may recall, we announced a leadership change in Florida earlier this year when we appointed a veteran banker as our Florida market president, and we've been very pleased with how he has helped the Florida team take its game to the next level in a very short period of time.

Overall, our commercial production was very strong, it more than doubled sequentially. As you know, we're continuously top-grading the commercial sales force in order to improve productivity and to create a real culture of performance and accountability. If you look at the chart in the lower right-hand corner, you can see how we have carefully and selectively recruited experienced lenders to supplement the efforts of our core team of highly productive legacy employees. On a year- over-year basis, the size of the sales force was actually down slightly, but average production per salesperson is up by almost 50% over this period.

Now, I'll ask you to turn to Slide 8, which shows changes in the loan portfolio quarter to quarter. And as Gene mentioned, portfolio grew in a 16% annualized basis in the second quarter and this was in spite of a very strong performance by our special asset teams with problem loan resolutions totaling $70 million. Now, this chart doesn't show it, but I'd point out that our special assets, which include both problem loans and OREO have been reduced by 45% in the last 18 months.

Now, aside from problem loans, our customer retention efforts continue to pay dividends and overall paydowns and collections were a smaller drag on our results than they have been in past quarters. We also experienced a modest benefit from increased line utilization, which contributed $12 million to net loan growth this quarter, as compared to the $20 million contraction we experienced in the prior quarter.

Now, as you know, we operate in some of the most attractive growth markets in the country, including South Florida, Raleigh-Durham, Nashville, and other Southeastern metropolitan areas. And over time, due to the clearly strengthening economies and the strong demographic growth trends in our markets, we expect to see strong organic growth from our customers going forward.

Over the last few years, we've significantly transformed and diversified our portfolio, and it's now comprised of 42% commercial, 33% consumer, and 25% CRE. And as Gene mentioned, our growth is disciplined and sustainable. Our originated loans now total 57% of the portfolio and include some of the strongest companies in our footprint, or in the country for that matter. And as Bruce will discuss in a minute, the credit quality of our originated portfolio is excellent.

Now, turning to deposits on Slide 9, you can see the consumer bank enjoyed a second consecutive quarter of record net checking account growth. This growth is the result of the enormous work that has gone into training and coaching the retail staff in basic, consistent sales practices. And also we continuously top-grade the retail sales force just like we do on the commercial side.

Strong net checking account growth is translated into good growth in non-interest-bearing balances, which were up 10% year-over-year, equivalent to an incremental $91 million in interest rate funding. Going forward, our consumer bank is focused on driving consistent growth in core deposit balances, so that we can fund the bank's loan growth with the best possible spread.

Now, turning to Slide 10, let's take a look at the NIM, which compressed by 15 basis points from 4.41% in Q1 to 4.26% in Q2. As you'll recall, we've consistently guided you to expect pressure on the NIM of 10 to 15 basis points per quarter, and that's just because new loans are being booked at lower rates than average yields on the portfolio.

Now, the compression was at the higher end of the range this quarter, because we booked a higher proportion of variable rate loans, which helped drive the yield on new loans back to 3.5%. And also as I said, about 6 basis points of the compression was attributable to a combination of lower collections on loans charged off prior to acquisition, and a one-time accounting adjustment related to deferred labor costs.

Last year, we didn't see the NIM compression we expected because of one-time collections and improvements in yield for our portfolio of acquired impaired loans. And since then, we've been very pleased with how the NIM has held up. In fact, it's only down 6 basis points year-over-year and on a contractual basis, the NIM is only down 3 basis points year-over-year.

Having said that, in the current low rate environment, we will continue to expect 10 to 15 basis points in compression in the GAAP NIM per quarter. Separately, as we book more variable rate loans and our fundings remain concentrated in core deposits, we are mindful that our asset sensitivity could increase to levels that we would regard as excessively conservative. And as such, you may see us in coming quarters start to layer on interest rate swaps or make other adjustments to keep the balance sheet appropriately positioned. To that point, our variable rate loans as a percentage of new loans in the quarter was 65%, which is far higher than our overall mix, which is roughly 50-50.

Slide 11, addresses core noninterest income. And if you look past the FDIC indemnification line, which we think of as part of legacy credit expenses, core fee revenues were up by about $600,000 sequentially, although they are down year-over- year. We'd like to see stronger service charge revenues, but the reality is that, as we've grown our checking balances, we've shifted to a stronger customer demographic, which just doesn't overdraft as frequently. We still think we can drive stronger deposit service charges over time as we grow accounts, but we also think that a stronger customer base will lead to better retention and more stable long-term funding.

And finally, on fees, as you know, conditions in the mortgage market remain difficult. And as a result, we saw continued softness this quarter. But we still have room to expand our sales force to fully serve our branch network and we continue to work at that as the key strategy to offset the environmental weakness that all banks are feeling.

Slide 12 shows you the trend in noninterest expense. In total, expenses are down 14% year-over-year and almost $4 million sequentially. The biggest single driver is lower REO expense. Additionally, we had fewer noncore adjustments than we have in recent quarters. But even before REO and non-core adjustments, you can see that expenses were flat sequentially and down 3% year-over-year.

On a core basis, the efficiency ratio was 69%, down from 73% a year ago. And we have been and we continue to be extremely vigilant about expenses. We've readily spent money on new sales team members and leadership to drive revenues, and we've invested heavily in highly experienced personnel for our compliance and back-office functions. But at the same time, we've been very careful with discretionary noncritical spending and going forward, you should expect us to maintain that discipline.

Slide 13, summarizes our capital and liquidity positions, which remain very strong. Our liquidity remains concentrated in highly liquid, low risk instruments, 80% of which consists of agency guaranteed MBS, CMOs, and cash. At quarter end, the modified duration of our securities portfolio was 4.1 years, which was up very slightly from the prior quarter. Now, we are extremely focused on interest-rate risk management and we intend to maintain the balance sheet in an asset sensitive position.

During the quarter, we repurchased $43 million worth of our stock at a weighted average price of $24.04, leaving us with average diluted shares for the quarter of 50,261,000 shares. And finally, at the end of the quarter, our consolidated Tier 1 leverage ratio was 14.6%. So, at this point, let me turn the call over to Bruce to discuss credit trends.

Bruce Singletary

Thanks, Chris. At Capital Bank, credit is organized as an independent function. We have staffed this function with highly experienced credit execs in each of our geographic markets. Line offices work closely with our credit partners to originate high-quality loans consistent with Capital Bank's credit culture. You can see how this model is working by turning to Slide 14, and looking at the credit statistics by originated portfolio.

At quarter end, past dues were only 12 basis points. Non-performing loans were 21 basis points. Only 0.92% of the originated portfolio was criticized or classified performing, which is down from 1.24% in the prior quarter. Certainly, all of these metrics are representative of a high-quality loan portfolio. The bank did record a $2.3 million provision in the quarter for new loans, and this reserve ratio was 0.78% of the originated portfolio. As Chris mentioned earlier, this provision was partially offset by a $900,000 reversal of impairment on the legacy PCI portfolio.

Turning to Slide 15, I'll give you an update on the special assets activities. Special asset reductions totaled $88 million for the quarter. Since year end 2012, we have reduced this portfolio by $441 million, or 45%, which I consider to be very strong performance. Nonperforming loans fell to 4.5% of total loans from 5.2% at the end of the first quarter and 5.8% at the end of last year.

Bear in mind these non-performings consist almost entirely of legacy acquired loans, which have been conservatively marked and are accreting interest. Inflows into non-performing status continued to decline, totaling $21 million in the quarter, down from $34 million in the year-ago period. We are very pleased to see REO decline below the $100 million threshold for the first time, thanks to record sales this quarter of $29 million, which was roughly double the level last quarter, which brings REO down 33% year-over-year. While REO sales probably won't be as strong in the third quarter, we do expect the REO portfolio to continue to decline as we currently have approximately 20% of the REO under contract.

Turning to Slide 16, legacy credit expenses declined by $2.1 million sequentially and they are down 67% year-over-year. We guided you to expect declines in legacy credit expenses, but this was an unusually favorable quarter thanks to $3.2 million in gains on the disposition of REO. We would not necessarily expect similar gains in future quarters.

In total, legacy credit expense was $4.4 million, which is still a noticeable drag on the company's overall profitability. As I've said in the past, as we continue to resolve problem assets and benefit from stabilizing real estate values, we expect these costs to climb.

I'll now turn the call back over to Gene for concluding remarks.

Eugene Taylor

Thanks, Bruce. During the second quarter, we got back on track with regard to loan growth. And as I' mentioned, not only did we post a good growth rate, but I'm also very pleased with the diversification and quality of credits we are booking. The continued momentum in net checking account sales was very encouraging, a reflection of the quality the retail franchise that we are building.

And as Bruce just mentioned, we enjoyed a nice quarter in terms of reduced legacy credit expenses and record REO sales, but we still have a lot of work to do to. We need to sustain our loan growth and then translate that loan growth into revenue growth. We need to do a better job of growing core deposit balances, so we can fund loan growth at the widest possible spread and we need to continue to grow fee revenues. And also we need to keep driving down our costs.

In the meantime, you have a company with an experienced management team positioned in attractive growth markets focused on deploying capital, driving revenue growth, and improving profitability. With our stock trading at only slightly above tangible book value, we think we have an opportunity to create significant shareholder value for investors and ourselves.

Ken Posner

Thanks, Gene. This completes our prepared remarks, and now I'll ask Lauren to open the floor for your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Erika Najarian of Bank of America. Please go ahead.

Erika Najarian – Bank of America Merrill Lynch

Yes, hi. Thank you for taking my call. My first question is on the commercial loan production outlook. If you look at the quarter-to-quarter trend clearly the level of commercial loan production doubled. However, most of the commentary that we are hearing from regional banks for this earning season is a slowdown in commercial loan production from the levels experienced in second quarter.

And I was wondering if you could give us our outlook – or your outlook for commercial loan production relative to what you produced in second quarter?

Chris Marshall

All right. Thank you, Erika. Good morning. This is Chris. I wouldn't give you specific guidance quarter-to-quarter. I would tell you our third quarter has been weaker historically and that's just because of some more seasonality, not because of any underlying concern about commercial growth.

Overall, we had a 20% expectation in the year. And as I said, we didn’t expect it to be consistent 20% each quarter. But, we're comfortable with that guidance. We're a little bit ahead of that and we're not going to change the guidance at this point. But I would say we're very, very pleased with the teams we've built and the momentum they're building. And we just feel good overall about our commercial production.

Erika Najarian – Bank of America Merrill Lynch

Thank you. And my second question is, there was a recent conference call this morning, speaking very positively about a turn in the M&A environment, in that there will be more willing sellers or perhaps less stringent regulatory requirements.

And given what you're seeing in your footprint would you agree with that comment or perhaps share with us how you're viewing the M&A landscape?

Chris Marshall

I think our view is consistent. We are very focused on M&A as a primary strategy of the company, so we spend a lot time on it. But, we remain very focused on banks $1 billion to $2 billion in size and primarily banks within our geographic triangle. But we see the same comments and we rather not comment on those comments or really add anything more on M&A at this point. So we're just going to tell you that our strategy has not changed and while there may be others commenting on environmental changes, our views remain consistent.

Erika Najarian – Bank of America Merrill Lynch

And just one last question, and Chris, I'm sorry if you already mentioned this in your prepared remarks. But the level of order OREO expense for the second quarter, is that a sustainable level over there – recoveries that drove that down or really the question is how should we think about the OREO expense for the rest of the year?

Chris Marshall

Yes. Thank you for the question, Erika, because I didn't address that. We did have a gain and the gains were slightly larger than they have been. The OREO write-downs in gains have been moving around quite a bit quarter-to-quarter. Overall, we expect OREO expenses to trend down over the next four to six quarters. I hesitate to try to give guidance quarter-to-quarter because of the timing of sales, but overall, write-downs valuation changes, we definitely see that trending down as asset classes values have stabilized and in some cases improved.

So again, I wouldn't give you quarter-to-quarter guidance. This quarter might have been a little bit lower due to gains, but going forward we do expect a downward trend.

Erika Najarian – Bank of America Merrill Lynch

Okay. Thank you for taking my question.

Chris Marshall

Thank you, Erika.

Operator

Our next question is from Paul Miller at FBR Capital Markets. Please go ahead.

Paul Miller – FBR Capital Markets

Yes, thank you very much. In the end, can you talk about – I mean, I love the commercial growth but were you stealing market share or is it just the teams now coming on line, been there for a while, bringing the customers into the banks? Is that the main driver of the commercial loan growth?

Gene Taylor

Paul, Gene. I couldn't have said it better. This is just – what we do is not rocket science work. It's attracting people who have skill sets in commercial banking, consumer banking and they calling on people, and the more they call, isn't it amazing, the more often you actually get the people that meet your criteria.

And our criteria are fairly stringent. We are – we believe that the – we talk about quality. We reflect it, because I think it all begins with client selection and consistent calling, predictable delivery and this didn't just happen overnight. This is four years of really hard work of getting in front of the best companies and trying to convince them that we'd be a good alternative for them and that's – I couldn't have said it better than you said.

Paul Miller – FBR Capital Markets

And then on the checking accounts that had some pretty good growth in there too. Can you just add more color around that? I mean, is that just you've been out there, like same is on the commercial side, just starting to really penetrate those neighborhoods.

Gene Taylor

Paul, again, I couldn't tell. I mean, it is that Chris kind of talked about it a little bit, but we put in place the sales process and it's like the companies you work at. You try to do good things and make it be better and in our case we have – we struggled at times to get to right – the right mix of people who have the right ability to sell and service. And I think the outcomes are showing that. We're in good market so you should expect us to perform well.

But, getting the right mix of people to deliver that on a consistent, predictable, sustainable basis is what we've been working towards and we're seeing that happen now. And can't say enough good things about our consumer team, it is truly remarkable what they've done.

Paul Miller – FBR Capital Markets

And then when we are modeling this out, do you think you can replicate maybe not the growth rate but at least the net units of checking accounts? You think that's something sustainable throughout the year or even in the next couple of years?

Chris Marshall

This is Chris, Paul. And we're pretty disciplined about not giving specific guidance on specific line items. But the trend, yes, we expect the trend to continue both because of what Gene just said, we have established a consistent sales process that we measure in every store, and that's not that different from a lot of other banks, but the banks we bought did not have it. So, it's a clear skill and capability improvement over what existed in the past.

And so we expect that to continue. It's a high priority for us. But in terms of modeling specific units we would leave that to your better judgment.

Paul Miller – FBR Capital Markets

Okay, guys. Thank you very much.

Operator

And we'll go to Brady Gailey at KBW. Please go ahead.

Brady Gailey – Keefe, Bruyette & Woods

Hey, good morning, guys.

Chris Marshall

Hey, good morning, Brady.

Brady Gailey – Keefe, Bruyette & Woods

So, if you look at the trend in buybacks, in the last three quarters, it's gone from $7 million up to $23 million up to almost $45 million this quarter. And would you say you're becoming increasingly more focused on buybacks kind of every quarter that goes by and you don't have an M&A deal?

Chris Marshall

No, I think we've been consistent, I mean, we are in the market and when there are opportunities to buy shares that we think make sense we'll capitalize on them. But I don't think our philosophy has changed at all.

Brady Gailey – Keefe, Bruyette & Woods

And how much was left in the authorization from like $65 million, if my math is right?

Chris Marshall

We ended the quarter at $14 million, so it's somewhere in the $60 million range including the new $50 million authorization.

Brady Gailey – Keefe, Bruyette & Woods

Okay. And the small bucket of mortgages that you purchased out in Florida. Is that something that you expect to continue going forward? And if so would you expect those purchases to ramp or just some color there?

Chris Marshall

Those purchases were unique. And do I expect them to reoccur in the future? Yes. But I wouldn't give you any guidance on the amounts or the timing of them. In this case, we bought mortgages from – that were extremely high quality and things that we would have originated ourselves, from a bank that was looking to shrink their balance sheet a little bit. There are a lot of companies in that position in the southeast, so yes, we'll look for those opportunities. But again, I couldn't give you specific guidance on a quarter-to-quarter basis.

Brady Gailey – Keefe, Bruyette & Woods

All right, thank you.

Operator

(Operator Instructions) And we'll go to Blair Brantley at BB&T Capital Markets.

Blair Brantley – BB&T Capital Markets

Good morning.

Chris Marshall

Good morning.

Blair Brantley – BB&T Capital Markets

I had a question regarding the C&I growth, how much of that were floors with those loans, or is that just purely variable at this point?

Chris Marshall

They're purely variable.

Blair Brantley – BB&T Capital Markets

Okay. And then with that asset sensitivity what are your thoughts around increasing commercial real estate production?

Chris Marshall

Where we view commercial real estate is part of our product mix. We're selective about it. Bruce, you want to add anything to that?

Bruce Singletary

Yeah, we've identified one person that we have added for this activity. And so I would expect it to be more of the growth going forward but not materially different from where we've been.

Blair Brantley – BB&T Capital Markets

Okay. And then, Chris, with the core NIM, what are your expectations kind of there? Are we near a bottom now after the pullback this quarter or what are your thoughts around that?

Chris Marshall

I think the core NIM will continue to contract but just the same way everybody's core NIM will, I think everybody has the same situation that rates are very low and I don’t think anybody is originating new loans at the level of their existing portfolio.

So that's more of a question around expectation for interest rates going forward and I wouldn't be the right person to give you good guidance on that. We do expect to see some reduction, but overall long term, I think the core NIM is actually lower than where we would expect it to normalize. And I think I have said in the past, a core NIM at 3.50% to 3.75% on a long term basis is probably a reasonable target for us to expect, just looking at historical performances of banks our size.

But there are so many factors that go into that, I wouldn't try to comment them all here.

Blair Brantley – BB&T Capital Markets

Okay. And then, well, just one last question on M&A, what are your thoughts around fee income M&A versus traditional bank M&A?

Chris Marshall

Fee income M&A? Yeah, I'm not sure what…

Blair Brantley – BB&T Capital Markets

In terms – for fee income type?

Chris Marshall

I'd say, we look at virtually every property and every asset that comes to market. I mean we spend a lot of time on that. I'd say our primary focus is on whole bank M&A.

Blair Brantley – BB&T Capital Markets

Okay.

Chris Marshall

And at the risk of complicating the previous answer. I just want to go back and make one point on the NIM and I made a quick comment in my prepared remarks, but Blair, I'm not sure I could cite every bank in your coverage, but we're probably – we may be, I should say, the only bank in your coverage that doesn't have a single interest rate swap and so managing the core NIM there are lot of ingredients there but we have been extremely conservative about our approach to that. And as time goes by and our bank matures a little bit more we will take the steps necessary to make sure we are actively managing that NIM as opposed to passively managing it.

And that's probably not the right to say it. But getting our core NIM from the 3.30s% to the 3.50% to 3.75% is probably a reasonable expectation for us.

Blair Brantley – BB&T Capital Markets

Okay, thank you.

Operator

And it appears there are no further questions at this time. I'd like to turn the call back to Mr. Taylor for any additional or closing remarks.

Eugene Taylor

Thank you for being with us today. We appreciate your participation, and we look forward to talking with you again next quarter. And if any of you have questions, obviously Ken Posner, Chris, I, and Bruce are always accessible and available. So thank you for making the time to be with us today.

Operator

And that does conclude today's conference. We thank you for your participation.

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