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spk01: Good morning, everyone, and welcome to Capstar Financial Holdings' second quarter 2021 earnings conference call. Hosts on the call today from Capstar are Tim Schools, President and Chief Executive Officer, Dennis Duncan, Chief Financial Officer, and Chris Teets, Chief Credit Policy Officer. Please note that today's call is being recorded. Replay of the call and the earnings release and presentation materials will be available on the investor relations page of the company's website at capstarbank.com. During the presentation, we may make comments which constitute forward-looking statements within the meanings of the federal security laws. All forward-looking statements are subject to risks and uncertainties and other factors that may cause the actual results and the performance or achievements of Capstar to differ materially from those expressed or implied by such forward-looking statements. Listeners are cautioned not to place undue reliance on forward-looking statements. A more detailed description of these and other risks, uncertainties, and factors are contained in CAPSTAR's public filings with the Securities and Exchange Commission. Except as otherwise required by applicable law, CAPSTAR disclaims any obligation to update or revise any forward-looking statements made during this presentation. We would also refer you to page two of the presentation slides for disclaimers regarding forward-looking statements, non-GAAP financial measures, and other information. With that, I will now turn the presentation over to Tim Schools, CAPSAR's President and Chief Executive Officer. Please go ahead, sir.
spk07: Tim Schools Okay, thank you. Good morning and thank you for participating on our call. We appreciate the opportunity to review our results with you. In the second quarter, we saw the beginning of positive economic trends and continued favorable developments from the hard work of our associates. We reported earnings per share of 54 cents and annualized return on average equity of 13.5%. Year-to-date, we've earned $1.04 per share, and our return on average equity was 13.13%. We continue to benefit from PPP and mortgage-related revenues, which will not continue at the level they have, and this quarter benefited from a release of our reserves related to potential credit losses due to improved credit trends. I'm very proud of our team and the results they are producing in this highly unusual environment. While some of this year's earnings are not sustainable, Capstar's competitiveness and performance is strengthening. As a company, we are focused on four strategic initiatives, enhancing profitability and earnings consistency, accelerating organic growth, maintaining sound risk management practices, and executing disciplined capital allocation. As we illustrate on slide three, we achieved many new milestones across our company that support the above-mentioned initiatives, and our risk management during this cycle has been strong. It is hard to highlight one achievement over the other as everyone is chipping in and doing a great job. With that, I'll turn it over to Dennis to cover our financial results for the quarter.
spk06: Thank you, Tim, and good morning. On slide eight, net interest income was $23 million for the quarter, up $800,000 from the first quarter due to the increase in the net interest margin and an additional day in the quarter. Our net interest margin was 3.26 for the quarter, up about 13 basis points. Our adjusted NIM for the quarter was up one basis point for the first quarter. Our adjusted NEM includes the impact of excess deposits, which adversely impacted the net interest margin by 28 basis points for the quarter, and PPP loan forgiveness favorably impacted our NEM by seven basis points. Net interest income benefited in the second quarter from a shift of our earning assets into additional investments as well as very strong loan growth as you saw. On slide 9, deposits of $2.8 billion at the quarter end were at a record level. DDA deposits also were at record levels for the quarter and increased $45 million from the first quarter. Our core markets continue to hold large levels of deposits consistent with the prior several quarters. Our deposit costs continued to decline, and we were five basis points lower in the first quarter as we continued to lower deposit rates during this quarter. We have excess balances continuing to be strategically addressed through pricing opportunities, focusing on loan growth, including hiring new bankers, purchases of the investment additional investments in the investment portfolio and then just trying to run off additional higher priced deposits. Slide 10, total loans less PPP were at record levels at the quarter end. We grew total loans at the end of the period by 67.6 million or 15.7% annualized growth. We've continued to build out our Knoxville markets, adding additional bankers in Middle and East Tennessee, strengthening and growing our loan pipelines. Our loan pipelines were at record levels at the end of the quarter and remain strong across all of our markets. Total PPP loans at the end of the year were $110 million. down $100 million from the first quarter, and total unearned PPP fees remained at about $3.8 million. Our loan yields for the quarter were at 4.41%, and our loan coupons were stable at about 3.95%. On slide 11, our non-interest income was strong in the second quarter with record levels of revenue in deposit service charges, interchange and debit card fees, TRINET, wealth management. Our mortgage revenues were down just a little bit for the quarter due to lower volumes and decreasing spreads. But otherwise, our non-interest income increase for the quarter primarily due to additional purchases of bank-owned life insurance late in the first quarter. And we're very, very proud of our overall levels of non-interest income. Slide 13 shows our non-interest expenses were up to $19.1 million for the quarter. We had an operating efficiency ratio of about 57.19%. And within salaries and benefits, our incentive expenses were increased during the quarter related to mortgage and our overall additional corporate incentive compensation plans. With that, I'll turn it over to Chris, who will discuss our credit position.
spk04: Great. Thank you, Dennis. Turning to page 14, let me start by saying that the good news is that a year ago, in the midst of the pandemic, my prepared notes were several pages long, and today they are only two. Some points of emphasis. we continue to believe that the interests of our shareholders, customers, employees, and communities are best served with a continued portfolio emphasis in our community markets and with efficient capital generation coming from our specialty fee businesses. To that objective, relating to portfolio composition, first, shared national credits, also known as SNICs, are now less than 2% of our portfolio outstandings. We have steadily reduced our SNIC exposure from a high of $208 million in the first quarter of 2017. We do not seek to reduce SNICs to zero, but rather to align our exposures with businesses in our local markets where we know management and are able to provide profitable non-credit services. With that profile, SNICs will remain a small portion of our portfolio. Second, 96% of our portfolio remains in-market. We have steadily increased our in-market share of portfolio from a low of approximately 70% about three to four years ago. This is a reduction from a peak in 2017 of about $220 million in out-of-market exposures. With improvements in our strategic portfolio composition, we continue to maintain high levels of diligence on asset quality with an emphasis on early problem identification through monthly internal asset quality reviews, robust external reviews from quality firms, and an emphasis on not just rating the historical performance of our borrower under stress, but also an insightful review of drivers to future performance and assessment of collateral in the event of potential deterioration. As a result of these areas of focus, turning to page 15, you will note delinquencies remain within an acceptable range, criticized and classified loan levels are improving from elevated levels experienced as a result of the pandemic, and net charge-offs remain low. With all these factors, turning to page 16, we believe a small release of reserves is warranted, reflecting our optimism as we continue to monitor the diminishing effects of the pandemic on our borrowers and on the economy in general. With that, I'll turn it over to Tim.
spk07: Thank you, Chris. As you can see, our employees are improving our operational and financial results, and we see many growth opportunities among our current team from Tennessee as a state and from industry consolidation, where in the last 12 months, four Tennessee-based banks over $1 billion in assets have been acquired. Operator, we're now happy to answer questions.
spk01: Thank you. To ask a question, you will need to press star, then 1 on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Graham Dick with Piper Sandler. Your line is now open.
spk03: Hey, good morning, guys. Good morning. Good morning. So, Tim, I was wondering if there are any other markets that you're maybe looking to expand your lending operations in, kind of similar to what we saw you guys do in Nashville and the success you've had there, and then particularly if there's anything out of state that you might be looking at.
spk07: Nothing in particular. I mean, I guess I would respond that something that would make logical to manage to Nashville and really not focusing on markets, but rather the quality of bankers. And so it's more opportunistic. We were fortunate that a group in Knoxville was looking to make a change and was excited about us. And so we just were keeping our ears open. And we did hire one of the top We're also looking in market, by the way, but we hired one of the top mortgage originators by volume in the metro Nashville area this quarter. So I would put it more around looking for talent, and you're not sure when that will pop up.
spk03: Okay, great. And then I guess just moving more generally to loan growth, obviously another good quarter for you guys. Great production, and the pipeline looks good as well. Has your outlook changed maybe since we talked last? I think it was, I think we had coined like a 6% to 8% range longer term. Do you think it might be maybe get closer to 10% over the next few quarters as this pinup demand continues to, I guess, come through to you guys?
spk07: Well, it seemed every bank, you know, that I saw had pretty good loan growth. So I'm, you know, I'm real happy what we had. But, you know, it seems like everybody's doing a great job out there. And it seems like the economy is coming back, I guess, on our side is I don't, you know, I don't want to hype or mislead people, you know, we, to me, we're, we're transforming our company. And, you know, we, we did a fair amount of participations and shared credits before. And, you know, we have some new bankers, so just don't want to everybody to get ahead of it. But Our pipeline does look great. It's largely in Tennessee, so knock on wood, maybe the last two quarters we've had good growth. I hope that will continue, but we'd really like to see three or four quarters of that to know that it's sustainable. But I certainly think we have the right activities and we're heading in the right direction.
spk03: Okay. And then I guess the last question for me is kind of on the buyback issue. At the current valuation, it's not as much of a no-brainer as it might have been a year ago or several months ago, but probably still somewhat appealing given how much capital you guys have at your disposal. How are you thinking about utilizing this going forward while also making sure you've got enough capital set aside for organic needs that would actually build franchise value more so than buying back the stock would?
spk07: While Dennis pitching also, I guess my thought is we're still solving that. We talk about it a lot. We're still trying to crack it. And people think about buybacks in different ways. We try and think about it as an internal rate of return, which you need to have a pretty good forecast you can discount back. And it's uncertain times right now. So I'd say we're trying to balance that with some of the exciting growth opportunities. We feel our pipeline's looking pretty good. And We're having some conversations in other markets. So it's not a real black-and-white thing. And, Dennis, I don't know if you have anything you want to add to that on your thoughts.
spk06: No, Graham. Graham, I would say if you look at our capital ratios in general, I mean, we've got roughly, in terms of excess capital, we've got probably $40-odd million of capital excess capital that we could put to use. We would like to put it to the highest and best use, obviously. Buying the stock back is obviously something that we now have in place and we're ready to go on that. Bank stocks in general have rallied pretty well over the last uh, three, three, four kinds of months. So, uh, it's, it's difficult to, like you said, uh, justify, um, using that to buy your own stock back. If you have, if you have the, uh, organic, uh, in your market type of opportunities to, to deploy that capital. So, uh, Uh, we're continuing to look, to look at it. Uh, you know, there's a, there, we look at the levels of, uh, kind of internal returns we could get on buying the stock back versus, uh, you know, versus using it in, in, in, in, in, within our businesses. And so, you know, great for us to be able to have that flexibility to, uh, be nimble and use that excess capital to the highest of best use.
spk03: Okay, great. And if I could just sneak one more in here just quickly. It looks like the loan coupon held pretty steady, but loan fees were up a little bit quarter of a quarter. Do you think those loan fees were normalized back to more historical levels going forward here?
spk07: I think it bounces up and down. It's hard to predict, hard to predict. But the loan yields, surprisingly, have been pretty good. And so it's been fairly stable.
spk03: Okay, great.
spk07: Thanks, guys.
spk06: Thank you.
spk01: Thank you. Our next question comes from a line of Jennifer Dumba with Truist Securities. Your line is now open.
spk05: Hey, this is Brandon King going for Jennifer. How are you doing today?
spk07: Hey, good morning, Brandon.
spk05: Good morning. Good morning. So I would like just to update on the hires you made in the quarter and if there are any plans to get more aggressive in hiring, especially in Nashville with the acquisition that was announced most recently from a competitive bank.
spk07: I don't want to comment too much on that. Reliant is an outstanding bank, and United Community Bank is an outstanding bank. That's an exciting transaction. But I would just say for us, I don't know. I'm trying to think back. I don't know. We hired one of the top mortgage originators this quarter. In first quarter, near the end of first quarter, we hired a banker in Knoxville, who had had a $100 million plus portfolio. So I would say those are our two recent hires. There had been some that were hired earlier in the first quarter also, but it's exciting when we look at our pipeline. You know, they've got growing pipelines, and this week, or maybe it was last Monday, you know, they now have several million dollars of balances. So I don't think there was really substantial hires this quarter, really looking for the ones in first quarter to see their exciting contribution. We're always looking and always talking and always having discussions, both in market and in other markets. And I would say there's good activity. Capstar has a good reputation. And I would say that the four acquisitions you know, get people thinking. So whether it be those banks or other banks, you know, it has led to good conversations, and I'll leave it at that.
spk03: Okay.
spk05: And the positive growth in DBA balances is pretty good, and I know that's the focus for the bank going forward. I wanted to know where is that growth coming from? Is it coming from more existing customers just increasing their own liquidity, or are you seeing market share gains?
spk07: I'd say more existing customers. I mean, it's a good problem and a bad problem, right? I mean, 18 months ago, Capstar is a bank that's young and had more ease in finding loans and deposits. So, you know, at times, you know, was scratching and clawing for deposits. And now we have more deposits like everybody that we can use. So we had started, you know, a higher emphasis on deposits across our bankers. before the crisis, and there was actually good traction the first quarter or two, and then the crisis came. So you sort of hate to tell everybody, hey, wait a minute, we tricked you, stop. So, you know, we want it to still be an emphasis, and it's a dilemma because it's hard to put it to work. But to be honest, I would say the vast majority is just existing customers and all the excess liquidity and stimulus money that's in the economy, to be honest.
spk06: Okay.
spk05: And just lastly, I know last quarter you mentioned that the company was reviewing the technology investments for more efficiency opportunities, and I wanted to get an update on that and see if there's anything to note from the review so far.
spk07: No, there's not. I think I mentioned that each of the banks I've been at, interestingly, it's ended up being a pretty sizable opportunity from at least two frames or two angles. One is It's just interesting. Software sales folks are very good, and banks tend to get software that either doesn't do all maybe it was marketed to do or maybe it was not a good fit. And so there's opportunity to sort of evaluate, do you have what you need, number one, and automate more processes. So that's all one big project. And then number two is, just getting the contracts coterminous and negotiating and bidding pricing. And so that's a longer-term project that doesn't happen quickly, but I suspect there'll be some level of opportunity there. And then outside of that, I think we noted in our slides, in second quarter, from memory, about $250,000 is in our run rate related to PPP software processing that should go away at some point. But... We're just at the infancy of really studying our whole IT and software strategy.
spk00: Okay.
spk07: Thanks for the answers. Sure.
spk01: Thank you. As a reminder, to ask a question, you will need to press star, then one on your telephone. Our next question comes from the line of Catherine Miller with KBW. Your line is now open.
spk02: Thanks. Good morning.
spk07: Hey, good morning, Catherine.
spk02: Good morning, Catherine. Good morning. I wanted to see if you could give us your thoughts on updated view of the core margin. I know there's a lot of moving parts. It seems like you put a lot of excess liquidity to work this quarter, which is great. And so just how are you kind of thinking about what the core margin, moving pieces of the core margin over the next couple of quarters? Thanks.
spk07: Would you like to address that, Dennis?
spk06: Sure, Tim. Catherine, we've been diligently working on that with our new partner called Darling, who's a specialist in this business. But we've got several initiatives going on with the margin. One, obviously, that you've seen that has paid off substantially is really just in the overall deposit pricing strategy that we've been deploying. So we're down to 21 basis points of deposit costs. We can take that down a little bit more, and we will be doing that very shortly. And then longer term, deploying investments deploying investments in the shorter term that we've been doing, you know, very, very conservative mortgage backs, sub-debt kinds of investments. So we've got some investment capacity that we'll be deploying. And then just generally, you know, positioning ourselves for as interest rates rise, being able to take advantage of within our loan portfolio, just the rising rates and repricing within our own loan portfolio. I would say at 336, you know, our goal is to get it back up over, 350, closer to 360. If you look at our goals and our strategies, we want the net interest margin to be back up into the, you know, north of 350 and close to 360 kind of range. And, you know, it'll take several things to be able to do that, but we are definitely, Catherine, moving in the right direction on that as you saw this quarter.
spk02: You would say that goal still requires higher rates, though, right? Or do you think you can get there in this rate environment?
spk07: No, no, totally, totally. And what I'd say, again, I just want to commend, you know, really it's been managed great across. You know, I think that the community banks we partnered with brought stronger funding. I think that... Dennis and the finance team has done a great job on really instilling deposit pricing discipline. There was not a monthly pricing committee at Capstar, which is something we've started over a year ago, and that's just gone well on learning and talking and discipline. So that's done great. We talk a lot about the spreads. We've walked from loans. I think I shared, didn't share the customer name, but I think it was two quarters ago that You know, we really talk a lot on the spreads we want, and let's be disciplined and walk if we have to. So I think we're doing a great job to stabilize it and get it as strong as we can. But obviously, not just the steepness of the curve, but the level of the curve. You know, your DDA is worth very little today. If the whole curve shifts up, you know, your DDA doesn't go up in price, and so that DDA becomes more valuable. So We're trying to take a lot of the interest rate sensitivity out, but we would benefit from an absolute rise of the curve, which is what it will take to get it towards our goal.
spk02: Right. And how about loan pricing, too? That seems to be holding in. Where would you say kind of average new productions coming on versus your current yields, about $2 or $4.20-ish?
spk07: Well, I'll tell you how we think about it, and it's hard because we have a different product mix now, right? We've got three community banks that have more business banking and consumer products, so they tend to come at higher yields. They also have higher delinquencies and a little bit higher charge-offs. On the commercial side, we target a spread of to the matched FHLB theoretical funding rate. So on each loan, we go out to the FHLB website and look at what our theoretical cost of funds would be. That's sort of our cost of goods sold. And then we put a spread over that based on sort of the commercial risk rating of the loan. And so, you know, Chris, I don't know if you want to comment what you're seeing coming through.
spk04: Generally speaking, Catherine, on a the new and renewed yields are really coupons, I should say, and they have been holding out on the commercial. This addresses the largest transactions in the portfolio, and generally they're holding out in the high threes, low four kind of range right now.
spk02: Great.
spk04: And that's on a weighted average basis.
spk02: Okay. Makes sense. Great. Thank you very much.
spk01: Thank you. There are no further questions. I will now turn the call back to Tim Schools for closing remarks.
spk07: Okay, that's it. That concludes the call. We appreciate everybody taking the time to call in, and we appreciate you following Capstar. Thank you so much.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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