This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: Good morning, ladies and gentlemen, and welcome to Capstar Financial Holdings' first quarter 2021 earnings conference call. Hosting the call today from Capstar are Tim Schools, President and Chief Executive Officer, Dennis Duncan, Chief Financial Officer, and Chris Teets, Chief Credit Officer. Please note that today's call is being recorded and will be made available for replay on Capstar's website. Please note that Capstar's earnings release, the presentation material that will be referred to in this call, and from Form 8K that Capstar filed with the SEC are available on SEC's website at www.sec.gov and the investor relation page at Capstar's website at www.ir.capstarbank.com. Also during this presentation, CAPSTAR may make certain comments that constitute forward-leaking statements within the meaning of the Federal Security Law. Forward-leaking statements reflect CAPSTAR's current views with respect to, among other things, the future events and its financial performance. Forward-leaking statements are not historical facts and are based on CAPSTAR's expectations,
spk02: Ma'am, I don't know if it's on your end, but we're having a hard time hearing you.
spk08: Accordingly, forward-looking statements are not guaranteed of future performance and are subject to risks, assumptions, and uncertainties... Where's our IT guy? ...of which may be difficult to predict and be uncaptured control. Actual votes may provide... ...to be materially different from the results... or implied by forward-licking statements. You are cautioned not to place undue reliance on forward-licking statements, which speaks only as of today. Except as otherwise required by law, Capstar disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise. In addition, this presentation may include certain non-GAAP financial measures, the risks, assumptions, and uncertainties impacting forward-looking statements, and the presentation of non-GAAP financial measures, and the reconciliation of non-GAAP measures to the most directly comparable GAAP measures are included in the earnings release and the presentation material referred to in this call. Finally, Capstar is not responsible for and does not edit nor guarantee the accuracy of any earnings teleconference transcript provided by third parties. The only authorized live and archived webcasts and transcripts are located on Capstar's webcast. With that, I would now like to turn the conference over to Tim Scholes, CapSTAR's President and Chief Executive Officer.
spk02: TIM SCHOOLS, Okay. Is there a way we can do some kind of sound check? We're having a hard time hearing here. Are we able to get confirmation that somebody can hear us? I guess not. I don't know. All right. I'm sorry if you all are having difficulties. We were having difficulties hearing the operator. But good morning and thank you for participating on our call. We began the year with a strong quarter and appreciate the opportunity to review our results with you. We reported earnings per share of 50 cents, annualized pre-tax pre-provision to assets of 195, and annualized return on average tangible common equity of 14.85% on a very strong capital base, whereby our total risk-based capital ratio was 16.29% at the end of the quarter. We do not provide guidance, but I'm cautiously optimistic about the remainder of the year. In addition to our strong profitability, our focus remains sound risk management. While first quarter showed signs of an improving economy, it is still early and there are many unknowns. We feel very good about our credit and our customers continue to perform very well. This quarter we experienced improvements in our criticized and classified loan levels as well as past dues. If you remember, past dues were elevated at year end due to loans that have matured but had not yet been renewed. So this positive progress was anticipated. We continue to experience low loan losses, but unlike many banks that are releasing reserves in first quarter, we believe it is prudent to be disciplined for qualitative reasons while credit metrics remain elevated due to the pandemic. Importantly, we experienced strong loan growth and provided additional reserves for this growth, resulting in our allowance for loan losses excluding PPP loans and accounting for fair value marks to increase two basis points to 1.59%. We've spoken over the past year about four strategic initiatives. Number one, enhancing profitability and earnings consistency. number two, accelerating organic growth, number three, maintaining sound risk management practices, and four, developing disciplined capital allocation. This quarter and last, you began to see the initial benefits from the execution of our dedicated and hardworking associates. I cannot tell you how proud I am of each of them and our team as a whole. They are improving our performance, have integrated two banks, were a leader across our state in PPP and endured a pandemic at work and with their families. I'd like to take a second to walk through how we're doing in each of these four strategic initiatives. Number one, related to profitability, we are focused on being a better manager of our net interest margin, short-term and long-term. We are doing our best to invest excess cash, proactively look at deposit pricing, and be disciplined on loan pricing. This quarter, we passed on a multi-million dollar renewal for an existing customer that was offered a 10-year fixed rate loan with a 120 basis point pre-tax spread before expenses, credit risk, and taxes. We are just not going to do that kind of business to grow volume. We also demonstrated prudent expense management We do not want to be cheap, but we do want to be frugal. Profitability is best when you're growing revenue efficiently, not just cutting costs. We have so much opportunity as a company to continue improving in this area. Number two, on growth, our loans grew 11.5% on average from the prior quarter, the strongest quarter in several years. That is on top of shared national credits continuing to decline this quarter to 2.8% of loans from a high of 20% to 25% of loans just about four years ago. Had we chosen to buy additional shared national credits this quarter to keep them flat, our loan growth would have probably been 13% to 15%. This growth is not only driven by our outstanding markets, but by our new investment in Knoxville, where we added an additional commercial relationship manager in first quarter with a $100 million loan portfolio, and additional and a stronger core of bankers in Middle Tennessee. Historically, Capstar Middle Tennessee had heavy reliance on three strong producers. Today, we have 14 with each of their pipelines approaching or exceeding $10 million, our minimum expectation going forward. I'm really excited about our East Tennessee and Middle Tennessee bankers, and I'm optimistic we will see continued strong results. Number three, I cannot say enough about our portfolio management over the past year. Our frontline and credit team know our customers. well and did a fantastic job of communicating and working with them. This is another reason to de-emphasize participations. While we have many great partner banks, some partners do not always manage challenge credits to the level you would and you are not in control. We feel this is one of our strong suits and do not see that changing. We have a strong balance sheet with our improved credit profile, strong reserves, and strong capital levels. Lastly, one of the things our board has continued to evaluate the past two years is the equity level necessary to run our business and how it relates to peers. In support of the prior point, we are a strong manager of risk, so we believe in having strong capital. However, we also recognize it weighs on returns. In hindsight, more capital was raised in the IPO several years ago than the company has been able to deploy. You might recall we elected to do a partial cash transaction of our last acquisition with the goal on further investing in our business. With the onset of COVID, we reversed course and chose to do a sub-debt offering in the second quarter of last year to be conservative and raise capital at a very attractive rate, further increasing our capital levels. In first quarter of this year, we announced a substantial share repurchase program with the goal of returning excess capital to shareholders when and if the price is right. This will serve as an additional lever as we go forward. It was approved late in the quarter, so we did not execute much. We will be weighing it versus our organic growth and acquisition opportunities to try and provide the best return to our shareholders. Our primary focus will be to invest in our business, but there are times when our stock is our best investment. Yesterday, we also announced a 20% increase in our quarterly dividend. We hope these two positive capital actions speak further to the commitment of management and our board to run a safe but profitable bank. With that, I'll turn it over to Dennis to cover our financial performance for the quarter.
spk03: Thank you, Tim, and good morning, everyone. In the earnings release deck on slide 7, Net interest income of $22.2 million for the quarter was consistent with the fourth quarter despite fewer days in the first quarter. Our net interest margin was 3.13 for the quarter and was down slightly to 3.35 on an adjusted basis from the fourth quarter. Adjusted NIM includes the impact of excess deposits on the balance sheet, which adversely impacted our margin by 36 basis points. and PPP loans contributed about $1.8 million in fees for the quarter, up $117,000 versus the fourth quarter, and impacted the NIM favorably on an adjusted basis by 14 basis points. Net interest income benefited in the first quarter from a shift of earning assets from cash into investments in our continued loan growth. Investments on average were up $88 million over the fourth quarter, and loans on average were up $48 million over the fourth quarter. On slide eight, deposits continued to increase. They increased $50.5 million from the fourth quarter, largely driven by now account growth, and our core markets continued to hold large levels of deposits consistent with the prior few quarters. Our deposit costs continued to decline and were four basis points lower in the quarter as compared to the fourth quarter deposit rates, as we continue to aggressively lower our deposit rates. Our excess balances are continuing to be strategically addressed through deposit pricing opportunities, our focus on loan growth, including hiring new bankers, purchases within the investment portfolio, and strategic runoff of higher-priced deposits. On slide nine, average loans less PPP increased $48 million or about 11.5% annualized over the fourth quarter as we continued to build out the Knoxville market, add additional bankers in Middle and East Tennessee, and strengthen and grow our loan pipelines across our company. Total PPP loans were $211 million at the end of the quarter, with round three of PPP loans adding an additional $70 million at quarter end. The loan yield for the quarter was 4.34%, with coupons declining slightly at 10 basis points from the fourth quarter due to a growth in fixed rate loans at slightly lower yields. Slide 10, non-interest income was strong in the first quarter with record levels of revenue in our interchange and debit card transaction fees of $1.1 million. and ongoing strength in our fee businesses, including the mortgage business, Trinet, and SBA. We also purchased $31 million of additional bank-owned life insurance in the first quarter, which will further enhance non-interest income going forward. On slide 11, additional information is provided regarding the strength in our mortgage business. While volumes were down slightly in the quarter, refinance activity continued to be strong with 64%, of the origination volume for the quarter being in refinances. Slide 12 shows our non-interest expenses, which were $17.4 million for the quarter, which resulted in a record operating efficiency ratio of 53.88, driven principally by cost savings from FCB, lower salaries and benefits, focused expense discipline, and FAS 91 deferrals due to our successful loan volumes and loan growth. With that, I'll turn it over to Chris Teets, who will discuss our credit position.
spk04: Great. Thank you, Dennis. On page 14, I'll reinforce some points that we have emphasized in the past. First, we remain focused on growing our bank with direct customer relationships in our target markets. This is demonstrated with two key indicators continuing to show that that greater than 95% of our portfolio is in our target markets, and now that shared national credits are less than 3% of our portfolio. We believe this continued focus best serves the interest of our shareholders, our customers, our communities, and our teammates, and will deliver consistent performance results over time. Also, I want to emphasize that we remain committed to robust ongoing internal risk reviews. This includes reviews of borrowers experiencing pandemic impact, and borrowers that are criticized or classified. We evaluate each against four criteria. First, we make a forward-looking assessment of the direction of risk in their operating performance. Second, we evaluate the adequacy and sustainability of their cash flow. Third, we evaluate the quality and coverage provided by pledged collateral and liquidity. And finally, we look at the capacity and willingness of their owners and guarantors to support the borrower if needed. Also on page 14, I note that our payment deferrals are down to 3% of the portfolio, representing nine borrowers. These borrowers are all paying interest regularly, and some are expected to return to an amortizing basis in coming weeks. These borrowers are in predictable sectors impacted by the pandemic. 60% of the deferred balances are in lodging, 35% are tied directly to other forms of tourism and tourism support, and the remaining 5% are businesses in support of live entertainment. These balances on deferral have reduced consistently since the pandemic began. While I believe that the overall trend will be down over the next few quarters, it would not surprise me to see some borrowers emerge with new requests for deferrals. While I have nothing specific to base this on, we recognize that federal stimulus has provided an important elixir to many businesses during this period. As stimulus programs expire, it is entirely possible that some who have not needed deferral assistance in the last year may step forward and request it. And if they do, we will seek to work constructively with them to understand and prudently meet their needs where possible. Through this, we remain committed to accurately risk rating our borrowers based on their creditworthiness and capacity to withstand any economic stress remaining for them in the aftermath of the pandemic. As to the pandemic's effects, we continue to believe that the direction of risk in our portfolio is acceptable and consistent with the improving economic environment. Consistent with these observations that we have made in prior quarters, we are continuing to see stability or improvement in the direction of risk in the vast majority of impacted credits and believe that those with lingering impact from the pandemic are generally well secured, adequately capitalized, and in many cases have access to external capital if needed. In addition, we all know that tourism and entertainment-oriented sectors of Nashville were particularly hard hit last year. Just looking out the window and walking down the street, it is clear that the activity is picking up in Nashville. Anecdotally, we are hearing of restaurant owners speaking of volumes returning to pre-pandemic levels, of hotels that are nearly booked full on the weekends, and this is confirmed as we ourselves struggle to even get restaurant reservations without planning days in advance sometimes. If you turn to page 15, you will see these observations manifesting themselves with improvement in key leading indicators. First, delinquencies at March 31st are back in line with our expectations and we believe we will be able to maintain these at good levels going forward. Second, our criticized and classified loans are showing incremental improvement and loss rates remain low. With these improvements, we remain cautiously optimistic about the future but remain vigilant in observation and assessment of our operating environment. I remind you of two things. That once credits are criticized and classified, it is not unusual for them to take 12 to 36 months to resolve, and that different industries will shake off the effects of the pandemic at different rates. With these two things in mind, we believe that these objective realities temper the optimism we feel when we look out our window and see the first signs of of increased tourism and discretionary spending activities returning to our markets. With that, turning to page 16, and all of this in mind, and despite our optimism, we believe that prudence in maintaining our reserves at similar levels is warranted as we monitor how the last sectors of the economy emerged from the recession and reestablished themselves in the post-pandemic economy. With that, I'll turn it back to Dennis or Tim.
spk02: Okay, actually, thank you, Chris. So that completes our presentation for today. So operator, we'll turn it over for questions.
spk08: Certainly. If you would like to ask an audio question, please press star 1 on your telephone keypad. Your first question comes from the line of Jennifer Denba of Truist Securities.
spk07: Thank you. Good afternoon.
spk02: Hi, Jennifer.
spk07: Question on your loan growth, Tim, 11.5% annualized, very strong. Can you give us a sense of geographically where that came from or by asset class? And, Ken, I guess I could look back at all your press releases in recent months, but how many revenue producers have you hired in what's called the last three to six months?
spk02: So let me – that's a lot of questions, but the first one – I would say it's equal balance right now. I would say Knoxville is holding its own with Nashville. So Knoxville has now hit, and keep in mind, they didn't start until February 1 last year, started in a pandemic and worked in their houses until October. They didn't even get an office space until October. So that actually helped with the break-even because we didn't have rent the first year. Anyway, they've hit $100 million now in loans and commitments. It's about $90 million in loans and $10 million in unfunded commitments. So I would say they're coming on strong. So I'd say almost equal weighted generally. And I would say a broad mix. Remember, keep in mind right now we still are heavily a commercial professional bank. So I'd say a mix of owner-occupied and CNI kind of stuff and commercial real estate. Less growth in our community banks. Our community banks are very established and profitable, but less growth in those markets at this time. On the bankers, let me just count in my head. We added an additional banker in Knoxville in first quarter who had a $120 million loan portfolio at his bank. He had worked there for 12 years. He's worked with three of our bankers previously. And they shared with him how much they love it here and everything. And so he came over. We added one in Sumner County who had a $70 million portfolio. And then we added, I guess in November, we added a gentleman here in Davidson County that had a $65 million portfolio. And then we've added two in Rutherford-Williamson County. and we added one other in Davidson County. So whatever that adds up to, about six that we've added since November.
spk07: Thanks so much.
spk02: Yep, thank you.
spk08: Your next question comes from the line of Brett Rabitin with Hovde Group.
spk01: Hey, guys, good morning. Hey, good morning, Brett. Good morning, Brett. I wanted to talk about expenses for a minute, and I know there's a lot of noise, and I know with the FAS 91 and the two newer institutions, it might be a complicated question, but you got down the expenses pretty strongly in the first quarter to a level I think you were trying to achieve. Can you talk maybe about what might be a growth driver for expenses from here and then what you might else be able to achieve to keep that number from going higher?
spk02: So, I don't want to dodge that, but it really, I don't know about you, you've done modeling a long time. Between trying to model your net interest margin, your excess cash and how that weighs on the margin, your PPP, you've got two mergers. This is the hardest environment I've been in to model, even internally. And so, We're focused on efficiency. I wouldn't say we're really focused on expenses. We're focused on efficiency. And so I think there's opportunity. With that said, you know, loan growth, when you do 11.5%, that does help FAS91. And, you know, we've got a couple positions we need to fill. So I don't see it going up materially. You know, hopefully we're near a run rate or it's up modestly, but I don't really want to put out a number at this point.
spk01: Okay. Fair enough. And then just wanted to talk about additional M&A potential and just, Tim, how you view the environment at this point and if you might be optimistic about the prospects for you guys to do additional transactions and maybe any of the things that you view as sort of impediments to getting one done.
spk02: Well, the first thing I'd say is our employees are tired. And so Again, if you listen to what I said, I mean, all of us, you, yourself, all of us endured a pandemic in our lives and our family last year. Not many people bought and converted two banks and led the state in PPP. So our employees are phenomenal and they're tired. So we have nothing on the horizon. I'm real excited about the prospects of Capstar and M&A. I think we've learned a lot in our three transactions. We're not perfect, but we're cutting our teeth. I think we've done a fairly good job. We're getting better on each one. We want to improve this company so that we trade at a higher multiple. Right now, we have the luxury that we've got a lot of cash and capital that we feel we've got dry powder to either use some towards a deal that will help earnings and profitability and lower capital ratios or buy back stock. I think it's a huge prospect for us. We want to be looking, but we certainly are not going to do anything this year and Um, you know, I can't say that we'll announce anything in the fall, but if we did anything, it would be, you know, it would close next year.
spk01: Okay. That's good color. And then maybe just one, uh, last one, if I could just around mortgage banking and, you know, your outlook for that and how you kind of view that as a piece of the commercial, uh, business, so to speak, you know, do you want to emphasize or de-emphasize mortgage banking, you know, over the next year or so?
spk03: Brett, this is Dennis. Uh, uh, happy to, uh, take a crack at that one. We are just excited that mortgages has continued through the first quarter at very, very strong levels and seems to be continuing on. We're going to take our good mortgage results as long as the market will give them to us. We have a phenomenal mortgage division, Farmington Mortgage, and we've got great people out there. They did almost a billion dollars of originations in 2020, and they just had another strong first quarter. Surprisingly, in connection with the first quarter results, the refinancings that we're seeing are continuing to be a strong piece of our mortgage group. Now, that said, we have seen some softening. A little bit of what I think you asked about our expenses were our fourth quarter in mortgage last year was a record quarter. And so the first quarter was a little off of that. And so some of the salaries and benefits that you see there are less mortgage incentive in the first quarter compared to compared to the fourth. But we're optimistic that mortgage will continue to do well. It all depends on rates and the like. But we're in a great position here. Lots of folks moving to Nashville because of just desirability and no state tax and lots of reasons. And so our mortgage guys are very, very busy. They're the best in the southeast, maybe the best little mortgage company in the country, and we're going to keep riding their good results as long as we can.
spk02: So, Brett, as far as strategically, we're really committed to mortgage and our team. I concur with what Dennis said. At SouthTrust, we have $5 billion of annual mortgage production. At National Commerce, we have $2.5 billion, and I would put our program up against theirs. You know, we've got a small shop that's phenomenal. They did a billion dollars. And so it's integrated into our bank, but it is somewhat a separate business entity. They've got a very dominant operation here in Nashville. You know, they were here before we had the community banks. So we have an opportunity to integrate that some into our community banks. Our community banks are somewhat of portfolio mortgage markets. So we're going to be working on developing a portfolio mortgage for them. And so in speaking to our leader, he even understands that probably we want to cap it as a percent of revenue in our company. So we don't want it to become a dominant force. It's just my goal, you've heard me say this before, I'm committed and I'm going to do my best to get Capstar's bank-only pre-tax, pre-provisioned assets to 180 to 185, that's without mortgage, so that when we have great mortgage years, it takes us to two. What has happened at Capstar is we historically have been a 145 pre-tax, pre-provisioned assets, and when mortgage has a great year, it takes us to 180. So I want to raise the bar on the core bank so that in great times, mortgage takes us even higher.
spk00: Great.
spk02: I appreciate all the support. Thanks, Tim. Thanks, Brett.
spk08: Your next question comes from a line of Steven Skouten with Piper Sandler.
spk06: Hey, good afternoon, everyone.
spk02: Hey, it's sort of a funny time to have the call because it's afternoon for you and it's morning for us.
spk06: Yeah, good point. I guess, Tim and Dennis, just to follow up maybe on the loan growth, which, again, was very impressive but a little lower on an end-to-period basis because of the SNIC reductions. Now that you've got the SNICs down to such a low level, will much of that kind of be left to its own devices to run off, or is there any more specific runoff that you'd like to take out of that portfolio? Go ahead, Chris.
spk04: Yeah, it's a good question, Stephen. You know, right now at 3% of our portfolio, I want to point out a couple of things. Nearly all of it is in market. We do have good non-credit and non-SNCC relationships with these folks. We have some meaningful treasury management fees. We have some meaningful deposits. and we have some lending activities that we do with some of those borrowers outside of the SNCC transaction. So I would just say, you know, this is a manageable level for us, but we have to be strategic about what we do there. We're not going to try and just kind of make volume happen for the sake of volume, but use that as a resource that can help us with our other strategic objectives.
spk02: Yeah, and I just say, Stephen, I'm not anti-SNCC, but, you know, I want to have a quality balance sheet. And I saw numbers the other day I had not seen that at one point, Chris, I don't know if it was into 17 or whatever, but SNCCs and other participations were 32% of loans. That's a staggering number to me. And, you know, what are your bankers really doing if you've got 32% of your loans? And why are you paying incentives on that? I mean, I can give my phone number to... you know, Brian Jordan or somebody and just have them call me. I don't need to pay a commercial banker for that. So, you know, our participations are down. We're not against them, but we certainly, they're not strategic. I think 5% or less is fine. We're not going to get hyper-focused on it. Frankly, I wasn't paying attention. I mean, they were down like 20 million. Like I said, had I just gone and bought 20 million, our loans would have been 15% growth and we would not have grown SNICs. So we feel really good where we're at. Knoxville is $100 million in 11 months, and they don't have one participation. They know how to go find customers where they're the lead, and that's our goal.
spk06: That's great. Okay. And then if I could ask, just follow up around the repurchase authorization. I know you mentioned, obviously, you want to continue to allocate capital to organic growth and maybe M&A, but – It would appear that in the near term, the buyback would be the best use of capital given where you trade on tangible book versus any sort of M&A. Am I missing anything there, or is that the way you guys think about it today? And maybe what's the floor on capital in terms of how low you'd take TCE or whatever your constraining ratio is?
spk02: Well, a couple things. That's a lot of questions. But number one, I'm just excited that the board gave us that lever. You know, running a company, I want to have a lot of levers. And just being here 18 months or so, I really didn't have that lever in place last summer, nor was it probably prudent with the environment. But number one, I'm happy to have that lever now. Hold on one second. I set my glasses over here. So... I'm glad to have that lever, and there's a slide in our deck, if you go to the deck, Steven, that we've been studying, and we've got other slides. Let me go back. My mouse is slow. Right here. So on slide 19, there's a slide that sort of shows, and this is presented as of 12-31 because I didn't have the peer data. And so on 1231, you can see our CET1 and our total risk base. And generally, we're about 200 basis points over. And we're not trying to match penny to penny. I mean, there's outstanding well-run banks like Service First that's even lower than this. But I feel we've got $40 to $50 million of excess capital. And so it's hard when you're running a company. I hear you on the price to book. So We'll be looking at it hard, but if it's close, we'll probably use it for investing our business. That's what we're here for. If we feel it's a wide margin towards the buyback, we'll switch and do more during that period for the buyback. So don't want to really hand out our pricing targets or what we're thinking, but I'm just excited to have it as another lever.
spk06: Got it. Yeah, that's very helpful detail there. Thanks, Tim. And then maybe just one more for me. you know, kind of moving back to the SNCC conversation, you've worked much of that out of the portfolio, which is, is impressive. And now you've got all these new lenders and the team in Knoxville. So is this kind of low double digit loan growth? Is that a pace you think is sustainable here in New York term? And, and maybe even that there could be some upside to it.
spk02: I do. I mean, I don't, again, I'm not a guidance person because I just, I was always promised. I was always taught to under promise and over deliver. So, um, I'm excited. And I think, you know, I don't want to get ahead of myself, but you know, we've got inbound conversations from bankers and other markets that know these bankers and are like, Hey, I'd like to talk. We're talking to one right now. I can't say what town, but a hundred million dollar banker in a new town. And so we'll see, but I'm hoping, I don't see why our markets and our bankers cannot grow loans six to 10%. And again, you know, you can't count on that every quarter, but for the year, I sure hope our year loans are up on average six to 10%. And at this point in time, I can't tell you what end of that range it'll be. I'll tell you what, let me tell you one thing. When I came in, one of the comments I heard from you all and other people was why doesn't Capstar grow its loans more? You're in Nashville. You know, why was the large charge off in California? We're changing that. You know, we're not lending in California. And And as far as the loan growth, what I did, I took total loans and I subtracted the Athens acquisition. I subtracted our outstanding CRE group that joined about seven years ago. And then I backed out all shared national credits and participations. In the five years before I joined, our loan growth averaged about 3% per year in Nashville, Tennessee. So we're working to change that. And we think we've got the team that that doesn't need to rely on participations and that we think we can do six to 10% with keeping the same credit quality.
spk06: Yep, yep, understood. Okay, great, thanks for the call. I appreciate the time, Tim, Dennis. Yep. Thank you, Bruce, sorry.
spk08: Your next question comes from the line of Amar Samah with Raymond James.
spk05: Hey, Amar. Hey, good morning, or good afternoon, whichever it may be. Maybe just a question on credit. You know, you've got the allowance plus marks coming in at 1.6%, obviously very robust coverage. I hear your commentary on conservatism, and you'll be growing organically as well. So how should we think about that reserve level trending here in 2021?
spk02: It's hard to say. Remember, number one, we haven't adopted CECL. So we're running parallel on CECL, and we're trying to think that through. You have to adopt that at the beginning of the year. So our next adoption could be the beginning of next year. So that's one thing going on. And then two, You know, while we're excited about the direction and optimistic, if you look at our criticized and classified, and I would think most other banks, they're still higher than this quarter last year. So we just think it's a little premature in the first, I mean, this is the first, go back to fourth quarter. In fourth quarter, I was trying to get everybody back in the office in October, and all of a sudden COVID took off. So, you know, December wasn't necessarily rosy for COVID. and all of a sudden we're the first quarter in and everybody's releasing. We just think it's a little preliminary in our minds. So we're a conservative bank, and I think there is a situation where you could see, you know, one of two things. There is a situation where that could probably partially fund loan growth some the rest of the year if this continued, or if we didn't get the loan growth that it would come in like other banks. We just didn't want to do it in the first quarter. We didn't think that was... the right thing to do.
spk05: Okay. Thank you, Tim. Maybe switching gears, a bigger picture question. A lot has been made of the changing role of technology, especially FinTech in the banking industry. Can you give us your updates, just your thoughts around the changing landscape here and how you can be a player in the space, especially as you look to drive more efficiencies and profitability?
spk02: Well, you've got to remember our model. I mean, technology plays a part in our model. We're a great commercial bank, so we've got very competitive cash management on the commercial side. We're a growing retail bank with the community banks, and that's probably where we need to focus the most. In the commercial space, our customers, that space is a space that needs a banker and wants a banker. They don't need a lot of brick and mortar, but they want to come into an office and talk to a banker a couple times a year. Technology is important, but not really driving their business. The consumer, obviously it is, and so we need to continue to invest there. I think for our model, where we could benefit the most from technology, I feel we have a big opportunity to review our internal technology. We just did a strategic plan last summer, and I just finished three weeks where I physically met with every employee in their location across the state. And I'm off a little bit, but I think the numbers I saw, we spend something like $12 million a year. Our expenses are 60. We spend like $12 million a year on software, routers, circuits, technology. And, you know, from my experience at other banks, we often have overbought We're not maximizing vendor contracts, or we're not using it correctly. So I think there's a big opportunity in that $12 million to lower that cost, as well as to bring better technology internally to perform our work, whether it be manual processes or something like that.
spk05: Okay, thank you. That should be it for me. Thanks for taking my questions, and congrats on a good quarter. Thanks, Amar. Thanks, Amar.
spk08: Our final question comes from the line of Catherine Miller with KBW.
spk09: Hey, good morning or afternoon.
spk02: Hey, how are you?
spk09: Good. Final question, just I appreciate margin guidance is really challenging right now, but I thought we could maybe talk about some of the components of it. And question one within that is just on loan yield, which are the coupon looks like this quarter was 395. How does that compare to where new loans are coming on?
spk02: That's pretty much where they're coming in. I mean, it's plus or minus. Like I said, we've seen some. I mean, we saw one this week we walked away on that was 320. And so the example I gave you was like a 255 loan yield, 10-year fixed, the one I gave you in my talking points. But the ones we're choosing to book, I'd say 375 to 4. And if you do a variable, obviously, they may be 375.
spk04: Yeah, Catherine, it's Chris. If I just look at the last month, it was about a 50-50 variable fixed split for new production and new originations, and it came in right at the high 390s. Great.
spk02: Hey, just real quick, in this environment, honestly, we're focused on net interest income because, I mean, somebody – I had one of our best customers – you can tell this is a good customer – But he called me a month or two ago, and he said, hey, I wish I had this problem. But he said, I just ran into $50 million. And he said, I have nowhere to invest it, so I'm going to put it in my account. And I said, please, don't do it. I don't want it. I have nowhere to invest it. So from a NIM standpoint, so much cash is coming in that it's hurting a ratio. But it doesn't really hurt the income that much. I mean, we may be paying 5, 10 basis points on it or something, or we may be investing it at the Fed. So it hurts the ratio, but in the short term, long term, we want that ratio to be, say, 350 to 375. But in the short term, our goal is how do we maintain our net interest income or grow it in this environment? Got it.
spk09: And then on the deposit side, your deposits are at 26 pips, and you think there's still room for that to move down? We do.
spk02: We do. You know, some of them, I just get, I mean, just number one, even just administratively, some of them are just CDs that just mature in time. So you've got CDs that will reprice as well as there's customers we can continue to go to.
spk09: Okay. And then what's your outlook for SBA and Trinet fees?
spk02: I think the outlook for SBA is tremendous. And so I would, I'm not, again, I'm not a guidance person. but I would encourage you to look at fourth quarter. And so they've had three consecutive quarters of fees, about $500,000, a million, and then $500,000. And I feel relatively confident that they can get to, say, $800,000 to a million a quarter. And if they do that, like let's just take this quarter. This quarter they were $500,000 in fees. If they get to a million, that's $0.02 more a quarter or $0.08 more a year. About $250,000 pre-tax for us is a penny. So just in first quarter, if they take their $500,000 and go to a million, they're going to add $0.02 per quarter or $0.08 per year. And so if I was a betting person, our gentleman that runs that, Mark Neatenhammer, is just a pro. He's a superstar. And I really think his team's off to a great start the last three quarters. Trynet's a little tougher one. Chris Barham, the gentleman that runs it, is just fantastic. He's been at his peak business last year and this year. It's hard to ask somebody that's in a peak business to go double that. But we have talked about are there ways to do, you know, other. He does a lot of Dollar Generals and CVSs and DaVita dialysis centers. Are there other storefronts he could try? But that's a little harder one. Got it.
spk09: And then just the clarity on PPP, how much PPP on AmeriDex fees do you have left to pull through this year?
spk02: We might not have that right in front of us. We could get back with you.
spk03: I can tell you... On the new fees, Catherine, it's roughly a couple of million, and I think on the total fees on the books is close to... I think 8 to 10 million, something like that, of fees yet to be brought into the net interest margin. The issue on that NIM is the PPP fees have come in slower than what we thought. There was a period in February where they didn't do any forgiveness, so You know, we've got $211 million of PPP loans and then the fees associated with those loans. And so we know they'll be forgiven, probably be forgiven within the next year. But it's just very hard to predict when those loans are going to be forgiven. They don't seem to be coming in the forgiveness side in any predictable manner.
spk02: So real quick, we just got an email. So real quick, Jeff Dennis, you may be able to read this email faster. But Catherine, we did on this slide number nine, it cites $70 million with $3 million in fees. I guess when we produced this earlier, that's just for round three. Jeff, can you check your email? Eric just sent an email. So that's round three. That's actually stale. We just got an update. That number now is $85 million, and the fees associated with that is $4 million. So our PPP-3 is $85 with $4 million. I don't know the remaining amount from last year.
spk09: Okay. But I think originally it was about... $7 million or so. So I'm assuming the 8 to 10, Dennis, that you quoted, maybe that was all in, not what's remaining.
spk03: That was all in, not what's remaining. It kind of looks like, Catherine, that remaining might be somewhere in the 5 to 6 range. Got it. Is that with number 3?
spk06: Yeah.
spk02: So with PPP3, so our PPP3 is about $85 million. and about $4 million of fees, and they're thinking there may be another $2 million from the old fees.
spk03: Because don't forget, Catherine, when we had the rounds one and two, we're beginning, you know, we amortized some of those fees in and have been amortizing some of those fees in, and those basis points that those forgivenesses are affecting the NIM, we've been pointing those out to you. But then when those loans are forgiven, we get a little windfall in the NIM because any unamortized fees hit the NIM immediately. So, you know, pretty good shape. But, you know, we reported this time that PPP loan forgiveness favorably impacted the uh, NIM by 14 basis points. So we'll continue to tell you what that is as we move through the year. But, um, you know, we know that we know that number's going away. And then the, uh, um, the, the best thing we can do is manage the rest of the margin and try to, uh, do something with, uh, all of the excess cash, which is what we're doing on pricing deposits and growing, uh, growing our loan portfolio and, uh, and the like. So I hope that answered your question. Happy to, if you need a follow-up or anything, just give me a call.
spk09: Yeah, no, all understood. This is really helpful. Just trying to make sure we're not overestimating what's coming in the next couple of quarters. But that's a good, the $6 million left I think is a good guide and that makes sense.
spk02: Right.
spk09: All right, that's all I got. Thank you and a great quarter. Thanks so much.
spk02: Okay, thank you. Go Generals.
spk08: We do have a follow-up question from the line of Steven Scouten with Piper Sandler.
spk06: Hey, guys. Thanks. I did just have one follow-up question. Tim, I know you said you don't want to get too deep into guidance, but just trying to figure out what happened this quarter maybe on the expense side. If I look at slide 12, I'm just trying to figure out what's a good actual starting point for kind of run rate expenses when we think about the SAS 91 decrease in salaries and benefits and this pandemic and recruiting bonus. Just kind of what you think is the true kind of, again, run rate number maybe coming off this quarter.
spk02: All right, hold on. Go ahead, Dennis.
spk03: I'm trying to get this slide together. I think, Stephen, the number that's there isn't a bad starting point. The first quarter of FAS91 impact, You know, we grew loans a good bit, but the impact of FAS 91 over the fourth quarter was less than a couple of cents. But as we have loan growth, we will continue to benefit from, you know, FAS 91. And then the mortgage incentives in the fourth quarter were elevated, and so, you know, we had a, you know, pretty significant drop in salaries and benefits that were related in the first quarter that were related to, you know, less mortgage incentives compared to the fourth quarter. But, you know, if you think that mortgage in the first quarter is, you know, an approximate level of mortgage, you know, then you've got a good starting point. But we're hopeful mortgage continues at the pace that it is, but it certainly might not.
spk02: Stephen, the way I think about it, and we don't have it on this slide, but I don't think it's material in any way as far as a number, is I think about bank-only expenses, and we probably ought to think of a way to disclose that. But from memory, our bank-only expenses, I think, are like $15, $15.5 million or And so the difference would be the mortgage. And so just look at that. I'm on page 12. Look at that top green line that says operating non-interest expense. You know, it's so hard to follow because our mortgage has done so great. So, you know, I know that that's commission-based and that's going to go accordance to revenue. So I really don't focus on that as much because that's largely the commission related to mortgages. So I try and focus on What is our core recurring expense rate for the bank? And I've actually got a bank only efficiency target that we're going after. And so I think that's 15 to 15 and a half. And I'd like to keep it in that range. And, you know, like we said here, there was roughly 500,000. We did a pandemic bonus in first quarter. We gave every employee. I don't remember the cutoff. We didn't get it. We gave every employee, definitely under the executive committee, $1,000 just thank you for their contribution last year for working the tail off. And so we had that, and then we had some recruiting expense. We wouldn't expect that to recur. We don't think there's really any one-time benefits in there. So we think that that's a number. So I would say core bank in the 15.5 range maybe for now with mortgage going up and down based on success.
spk06: Got it. Yeah, no, that's helpful, yeah. And if that becomes something you guys end up being able to disclose, I think that would help kind of diminish the noise that comes from that. Yeah, that's great.
spk02: Yeah, I want to do that even for us internally because we've not really done that internally. We've sort of looked at total, and it's sort of hard to understand. I know the team's doing a great job, but it's hard for that to shine when that's going up and down. So we're going to look at that.
spk06: Yep, yep, great. All right, thanks so much.
spk02: All right, well, we appreciate everybody calling in, and that concludes our call. And, again, we're really excited about what's going on at Capstar, and we've got a great company, and it was a sure challenging year. But, man, we made a lot of progress in the last year, and we're beginning this year with more levers than ever. We've got the legacy original Capstar Bank, which is a tremendous commercial bank. We've bolted onto that Knoxville, which has an equivalent commercial-capable team. We have three of the state's highest performing community banks. There were about 150 and all three ranked in the top 15% in performance. And then we have unbelievable specialty businesses with our CRE group, our mortgage, Trinet, SBA. We've got a title agency you're going to hear more about soon. We're going to try and crank that up. So we just have a lot of levers that we've never had before. And it's just, we're excited about the year. So appreciate you following. I know I just looked at the list. We've got two of our new shareholders on the call that are in the top ten. We appreciate you all being shareholders and listening, and we'll talk to you later in the quarter.
spk08: Thank you for participating in today's conference call. You may now disconnect your lines at this time.
Disclaimer