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spk01: Good morning, everyone, and welcome to Capstar Financial Holdings Third Quarter 2021 Earnings Conference Call. Hosting the call today from Capstar are Tim Schultz, President and Chief Executive Officer, Dennis Duncan, Chief Financial Officer, and Christine Schultz, 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 this presentation, we may make comments which constitute forward-looking statements within the meaning of the Federal Securities Law. All forward-looking statements are subject to risks and uncertainties and are 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 any reliance on forward-looking statements. A more detailed description of this 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'd also refer you to page two of the presentation slide for disclaimers regarding forward-looking statements, non-GAAP financial measures, and other information. With that, I will now turn the presentation over to Tim Schultz, CAPSTAR's President and Chief Executive Officer.
spk06: Good morning, and thank you for participating on our call. We appreciate the opportunity to review our results with you. In the third quarter, we reported earnings per share of 59 cents and an annualized return on average tangible equity of 16.28%. our ROTCE is on top of a CET1 ratio that is now essentially 14%. I'm especially proud this quarter. As you walk down the income statement, every single aspect of the bank executed, which is evidenced by the positive trends of our four key drivers in our pre-tax, pre-provisioned asset ratio, a stabilized net interest margin excluding PPP, loan growth, strong performance in deposit service charges in each of our specialty banking businesses, expense discipline as we become a more productivity-driven company, and focus management of our tax expenses. I just can't say enough about our team. Equally exciting, we announced our expansion into Chattanooga with the addition of nine highly skilled banking professionals who are leaders in that market. As we've communicated, one of our four strategic focuses the past 24 months is putting our excess equity to work. Our preference is to invest in the following order. First, organically, such as Knoxville and now Chattanooga. Second, acquisitions, such as Athens, Manchester, and Waynesboro. Third, opportunistic buybacks. And fourth, dividends. Each play roles in our available tools, but we have terrific investment opportunities in our core business that will remain our priority. Chattanooga is a fabulous market and one of three in Tennessee whose population and household income growth are faster than national averages. Capstar is blessed to operate in one of the best states across our nation to do business and live, and now Capstar is located in the three fastest growing markets. We have included a slide to share a little bit about Chattanooga. It is a great destination if you've not visited, with one of the nation's first aquariums, Rock City, where you can see seven states on a clear day, the Chattanooga Choo Choo Hotel, and as we've illustrated, it is home to an important aspect of the southern lifestyle, the moon pie. This is a strong team led by Brian Paris and six of his former teammates. They've worked together a long time and are extremely connected in the market. They are a true team, a dream team. We provided some of what we feel the strategic and financial rationale are. While there are a lot of variables, we feel that this will have a meaningful impact on our financials over the next five years. Of course, it comes with startup costs, but the level of work and risk compared to an acquisition is uncomparable. Before turning it over to Dennis, I'll share that we have similar conversations underway in three additional markets, and the response is very positive. Highly skilled employees are looking for the next bank as their sell or become larger to the extent they feel it is harder to serve their customer or no longer as fun. Capstar's capabilities, size, responsiveness, and flexibility are proving attractive. In the case of Chattanooga, They actually reached out to us earlier this summer, as is becoming a more frequent occurrence. Dennis, I'll now turn it over to you to cover the financial results for the quarter.
spk09: Thank you, Tim, and good morning, everyone. On slide 11 of our deck, you'll see that our net interest income was $23 million for the quarter, consistent with the second quarter. The net interest margin was 3.12% for the quarter, down 14 basis points primarily due to record levels of deposits and slightly less loan PPP fees in the third quarter. Our adjusted NIM remains stable at 336 for the quarter. The adjusted NIM includes the impact of excess deposits, which adversely impacted the margin by 40 basis points, and PPP loan forgiveness fees, which favorably impacted the NIM by 16 basis points. Net interest income continued to benefit in the quarter from a shift of our earning assets into additional investments as well as continued strong loan growth. On slide 12, our average deposits of $2.7 billion for the quarter were at a record level. Average DDA and now deposits were also at record levels for the quarter and increased $88 million from the second quarter. Our core markets continued to hold large levels of deposits consistent with with the prior several quarters. Deposit costs continued to decline in the third quarter and were two basis points lower as we continued to lower deposit rates and benefit from higher non-interest bearing deposits. Our excess balances are continuing to be strategically addressed through pricing opportunities, focusing on our loan growth, including hiring new bankers, purchases within the investment portfolio, and runoff of higher priced deposits. On slide 13, total loans less PPP were at record levels at quarter end and grew 42 million or 9.4% annualized in the third quarter. We continued to build out the Knoxville market, added some additional bankers in Middle and East Tennessee, and continued to strengthen our loan pipelines. Our loan pipelines continue at record levels and remain strong across all of our markets. Total PPP loans were $64 million at the end of the quarter, down $46 million from the second quarter. Total unearned PPP fees at the end of the quarter totaled $2.2 million. Our loan yields remained strong and were 4.41% for the quarter, with loan coupons up six basis points in the quarter to 4.03%. On slide 14... Non-interest income was extremely strong in the third quarter with record levels of revenue in deposit service charges, interchange and debit transaction fees, and wealth management. Trinet had a tremendous quarter with almost $2 million in revenue. SBA had a nice quarter with $911,000 in fees. And mortgage revenues were also up for the quarter and continued to see healthy spreads offset slightly by volumes. Slide 15 shows our non-interest expenses, which were $18.4 million for the quarter, which resulted in an operating efficiency ratio of 53.06%. Our core bank, which excludes mortgage, efficiency ratio was 50.58%, which is a record. Within salaries and employee benefits, incentive expenses were increased during the quarter for mortgage and other incentive comp plans, So even with these increased incentives during the quarter, our efficiency ratio was at a record low. With that, Chris, I'll turn it over to you to discuss our credit position.
spk08: Thank you, Dennis. The good news is that I can be brief. Turning to page 17, we reaffirm and underscore our continued commitment to our community banking strategy, emphasizing growth through in-market relationship development. With this, we also remain committed to our robust risk management on a forward-looking basis and with external validation and periodic stress testing by partnering with quality external firms to assist us objectively. These commitments continue to show results, as noted on the bottom of page 17. Past dues continue to improve, and we believe that there is continued room for improvement. As expected, criticized and classified loans continue to reduce from pandemic levels having peaked a year ago. Shared national credits continue to reduce. and growth continues to be driven by in-market relationship development. At this point, let me step aside and give you a little bit more detail into our diminishing level of borrowers on pandemic deferrals. Borrowers with pandemic deferrals continue to resume making normal payments as expected. At this point, loans on deferral total $33.4 million to five borrowers. 85% of this total, that is $29 million, are with three borrowers that are well-situated, well-located, new hotel projects in Nashville, having both good capital and good sponsor support. These three are on principal-only deferrals, with the borrowers continuing to pay interest on a timely basis. Each of these is scheduled to resume full payments in January, and we have every expectation to believe that these payments will, in fact, resume as scheduled. The remaining two loans are SBA guaranteed transactions where we granted the deferral in recent months pursuant to the SBA standard operating procedures. One of these is on a principal-only deferral, and the other is a full deferral of P&I, principal and interest, but the balance sheet exposure that we have carries a 75% guarantee. Turning to page 18, please note that as we indicated in the first quarter earnings call, our past dues have continued to reduce and and we have continued to maintain them at acceptable levels for the last three quarters. As I indicated earlier, there is still room in our minds for improvement. Also on this page, note that the trend in criticized and classified loan levels continues to improve from pandemic highs attained a year ago. While not evident in this particular chart, it is important to note that our level of criticized and classified loans has nearly returned to pre-pandemic levels of approximately 2.5% and 1.4% respectively. Consistent with these low levels of criticized and classified assets, our net charge-offs remain at very low levels. Given these positive quality trends and low loss results, as you see on page 19, our assessment did not require a loan loss provision in the third quarter, and we believe that our level of reserves on multiple bases of presentation remain well situated to cover any lingering residues that we may still experience as a result of the pandemic. With that, I'll turn it back over to you, Tim.
spk07: Okay.
spk06: Thanks, Chris. I hope you can see the employees of Capstar are working very hard in producing winning results. I am very excited about the future. As I stated, we are blessed to have been born where we were, but that we are supplemented by one of the youngest and most experienced management teams in the industry. A closing comment for those of you that model and project financials, our outlook is very positive and strong. However, be mindful next year is a transition year for the industry. Us and others are working hard to pull PPP fees into this year, which will not recur. It is uncertain if the mortgage industry will continue its performance, and provision expense would be expected to recur after the release of reserves this fall deriving from the pandemic. Operator, we're now happy to answer questions. Thank you, everyone, for your time this morning.
spk01: Thank you, ladies and gentlemen. As a reminder, to ask a question, you will need to press the start and the one key on your touch-down telephone. To withdraw a question, press the pound key. Please stand by while we compile the Q&A roster. Now, first question coming from the line-up, Stephen Scott with Powerful Family. Your line is open.
spk07: Hey, good morning, everyone. Hey, Stephen. A lot going on. All of it sounds... Very encouraging, so that's good. I'm wondering if we can talk a little bit more about maybe the Chattanooga team, if you could give us an idea. I know you laid out some of the accretion expectations in year two, three, and four, and et cetera, but can you give us an idea what the related expense base will be from those hires and what you think the scale of that loan book could eventually be? I mean, is this a similar opportunity set to Knoxville? at this point in time?
spk06: I would say it would be larger. Knoxville is a super team. It was really, even to this point, was three commercial relationship managers. They began in February of 20, the month of the pandemic, and worked out of their houses through November. So the fourth commercial relationship manager, they didn't start until about April of this year. So this is five that are starting day one. They'll be in an office. You know, yes, we're still in the pandemic. I don't want to, you know, minimize that. But it's not like it was last summer where it was locked down. So I think a bigger team and not the same situation. So in total, they've got a, you know, close to $600 million portfolio today when you add them all up. You know, that doesn't all walk over day one. But, you know, we certainly expect that on average not every one and every year is different. they'll probably generally produce between $20 million to $25 million a person, and we're hopeful that we'll go towards $500 million to $600 million by the end of that year five. And there's just a lot of variables, too. I mean, they're meeting actually this morning. They're having breakfast with one of the top bankers in Chattanooga at a different bank. So we're just real excited, and we put in some of the modeling we looked at to see if it was a good use. We're trying to weigh... You can always just go, I could buy $30 million of stock back today if I wanted to, but we're trying to weigh that versus other investment alternatives, and we just thought this was a slam dunk that if you put reasonable assumptions in there, it invests in our business and a high-growth market and just one of the best teams in Chattanooga.
spk09: Steven, on page 7 there, we gave you at a high level a little bit of our thinking around... you know, from an expense standpoint in terms of how long it would take for that team to break even and those kinds of things. So happy to talk offline around that, but very, very good economics in this kind of lift out.
spk07: Sure, sure. And then, Tim, I think you noted three additional markets where you might be looking to add teams as well. Would all of those be within Tennessee, or would you guys look at other MSAs kind of in and around your existing markets?
spk06: Well, a couple things. I do not intend to take on three more and have four, but I do think that the next 18 months it would be positive with our excess equity and almost now a year past the FCB conversion and the team has rested a little bit. I do think it'd be very positive to try and take on two. And it was a trade-off because I know a lot of public investors are quarter to quarter. We're trying to build a great bank for the long term. And so it's like anything, it comes with a little more dilution year one than an acquisition, but it's much more creative and much lower risk. So I'd say I'd love to have two. And there's three other markets. Generally, we're focused on Tennessee. That's our main priority. But I've mentioned to some others that the way I'm thinking about it today, Tennessee is an odd state. I guess many states are when you think of them graphically and that it's a long rectangle. And so where we are located from a management bandwidth, if you sort of do a three-hour radius, if you just go north, that sort of starts at Louisville, would cover Lexington, would cover – Knoxville, Chattanooga, Huntsville, Birmingham, up to Memphis and back to Louisville. So I would say we're spending 99% of our time there. If an interesting one came up somewhere else, we may consider it, but we're not doing outbound calls outside that region. And on this one, this was an inbound call. This was not an outbound call from us.
spk07: Got it. That's helpful. Okay. And then I think this kind of answers the question, but would you expect the buyback to continue to be kind of I don't want to call it on hold. I mean, obviously, it's out there, usable, but it seems like you've got, in your opinion, better uses of capital to invest in future organic growth with this market.
spk06: I do, and everybody looks at that differently. I mean, obviously, there's a lot of smart people in this industry. One person I spend a lot of time with is Julian Abde at Capital Research in San Francisco, and he's taught me a lot. You can do a lot of stuff to increase EPS, but it's not really a good return on capital. And so I'm just trying to be a great steward to the shareholder. And I know there's an IRR drag the longer we hold it, but I'm going to do my best to rapidly deploy that in a low-risk, prudent way. And if you run the numbers on buying back stock, I mean, we're proud of our valuation. I think actually it could even be a little more But when you look at doing that, it's not the same return as what you could get. You're not going to get a 30% IRR buying it at this level today. So that's our focus. Great. Okay.
spk07: Well, that's great. I'll let somebody else hop in. Thanks for the color, and congrats on the quarter and the new team.
spk06: Okay. Thanks, Stephen.
spk01: Our next question coming from the line-up, Brad Brabton with Hub2Group. Your line is open.
spk05: Hey, good morning, guys.
spk06: Morning, Brett. Hi, Brett.
spk05: Congrats on the quarter and the new hires. That was great. Wanted to talk about the margin, Dennis. Could we, you know, I guess first from a PPP perspective, how much do you guys have left in fees related to that? And, you know, the core margin is held steady, but obviously it's been impacted by the liquidity. Can you maybe talk about the deployment of that, the pace of it, and maybe the expectations for the core margin there? versus the stated one over the next few quarters?
spk09: Yeah, I think, Stephen, we have... I mentioned we have 2.2 million of PPP fees remaining at the end of the quarter. We're doing our best to try to get all those forgiven by the end of the year, so we'll see how that goes. Some of it will probably... carry over into the new year. And then really this particular quarter, we had a significant increase in the average deposits that were on hand during the quarter. So that negatively impacted the margin, the pure core margin from the second quarter. But really looking out, we think it's definitely troughed out in our opinion. And we've been very, very conservative in our view of what to do with the excess liquidity and have not really loaded up and taken on risk. We want to keep the balance sheet at a more neutral level. And so we have... we have purposely not, um, you know, continue to, you know, really grow the investment portfolio. We think, uh, and feel and believe that loan growth in Nashville, loan growth in Knoxville, and now, uh, in Chattanooga and potentially, you know, other places, uh, is the better, um, is the better way to, to manage that. So I think that, um, We have Darling helping us in looking at our margin modeling, and we believe we're really, really well positioned. And if we get any help at all from the external market, from the Fed, either steepening or absolute rising in the yield curve, we'll really be in good shape.
spk05: Okay. Appreciate the cover there. And then I was also curious about fee income, which was obviously a strength in the quarter, and Trinet in particular has done really well the past year. I know mortgage is somewhat difficult to predict, but could you maybe talk about the outlook for Trinet and then maybe the SBA operation and how you see that playing out in 2022?
spk09: We'll let Chris Teets, who's been wonderful in terms of taking on the management of those specialty businesses. He is working diligently with each of the managers in those areas and just done a wonderful job. And we'll let him give you a little additional color on that, Brett.
spk08: Yeah, Brett, we avoid giving specific guidance on future expectations because there's a lot of variables. I will say particularly with TriNet, is that demand for what we produce there is very high. We are getting outsized premiums as a result of that, and I would expect it to continue at the average levels we've seen over the last two or three quarters for the next two or three quarters. Having said that, government-guaranteed and SBA lending is getting a firm footing as they've gotten past PPP, and I expect that to increase over time. I don't want to give specific guidance on that right now.
spk05: Okay. Fair enough. Appreciate all the color.
spk06: Thanks, Brett.
spk01: Our next question, coming from the line of Jennifer Demba with Securities. Your line is open.
spk10: Hey, this is Brandon King for Jenny. Good morning.
spk06: Hey, good morning, Brandon.
spk10: Hey, yes, so... Poor loan growth was pretty strong in the quarter, although a bit softer than last quarter. But I just wanted to get more color on what your customers are feeling as far as their investment decisions, how utilization rates are trending, and your outlook for loan growth in 4Q and potentially in 22.
spk06: I'd say that, I mean, loan growth is steady. Our pipeline is over 400 million. And we actually had, we do an all-employee call the night before earnings, so we did it last night, and we do sales awards, and it was really fun to reflect on what was said because so many names were cited in all of our markets, and it didn't used to be that way in Capstar. Capstar, when I came, was really built on four people, and so strong pipeline across a lot of people. Chattanooga will only add to that, and You know, I'm not really a big guidance person because you seem to me to always get hurt more than it helps you. I'd rather just perform and post numbers and be someone that is viewed that, wow, they do what he says. And so I think we're building a capable, organic team. I've got to thank some about how to roll in the impact of Chattanooga, but the core team we had, I feel good – that we're moving towards a solid 8% organic in Tennessee, no participations, no shared national credit, reasonable margins, reasonable credit risk going forward. Obviously, Chattanooga will add on top of that, so I've got to play with that math and look at it a little bit. But I'm just real excited with how we've transformed. Again, I see on the call list here some of the folks that have called in, and there's no secret that Capstar – is a bank that historically had not performed. And it was up to 32% or 33% shared national credits at one time. We're at 1.9%. And it's a new company. It's a new day. Some of the banks in town like to still talk about the old days and talk about Capstar in that light. Capstar is a new company. And we've got a lot of great stuff going on and real excited about the loan outlook.
spk10: Okay. Great color. Great color there. And then also for expenses, so it looks like expense control was pretty good in the quarter. And I wonder how confident you are in controlling the expense base, especially in 2022 with obviously the Chattanooga expansion and the hiring pipeline. I just want to get a sense of where you think expenses will shake out in the near to medium term.
spk09: Brandon, go back and pretty good. Expenses were really good. And also think about from our perspective, because we've done so well this year to date, also in the third quarter we had some catch-up across our incentive comp and our mortgage comp incentive accruals. So not only did we control that, on a bank-only efficiency ratio of 50%, but included in that 50% were some additional things. Now, if you look into the details that are in the deck of the non-interest expenses, we really believe, you know, we've got the merger of the two banks behind us, all those conversion costs that happened in the end of last year and early this year, those are behind us. And then we're really, you know, we're really focused every month on disciplined and strong expense control. And so that's, you know, I think that is paying off. If you look at that efficiency ratio, it's gone from, you know, from mid-60s down to the high 50s and now trending very favorably. So, I mean, pretty good is an example. It's kind of an understatement from my perspective.
spk06: Hey, Brandon, here's what I'd add to that. It's hard in this environment, right? We're very proud of our mortgage division. Mortgage is an inefficient business, but it doesn't use a lot of capital. So I guess the way I think about it is I'm trying to build a great company, and I want to build one of the great banks in the industry. So I would love to see our core efficiency ratio, which we define as excluding mortgage, operate in the 50 to 55% consistently. When you roll in a project like a Chattanooga, that's an investment. And so I'm sure that ratio may be altered a little bit the next 12 months because you're making a big investment. But I just, when you think about Capstar, our goal, you know, we have four key drivers. It's something Tom Garrett taught me at National Commerce. One of them is the efficiency ratio. And our goal is less than 55%. So That's my focus. And I'll also say that when I joined, I rolled out that I wanted to get our core pre-tax, pre-provisioned assets to 180. Historically, Capstar has been about 140. Many people sort of chuckled and commented that that's going to give good luck, that's going to take some time. We've made tremendous progress. And it's elevated this quarter, obviously, with PPP and others, but we're getting real close to a consistent core repeatable 180. So Those are the kind of metrics I'm looking for is a 50% to 55% efficiency in a core pre-tax, pre-provisioned assets that would be 180 or better, repeatable. Okay.
spk10: Thanks for all the color. Thank you for answering my questions.
spk09: Sure. Thanks, Brandon.
spk01: Our next question coming from the lineup, Catherine Miller with KBW. Your line is open. Thanks. Good morning.
spk06: Hey, good morning.
spk03: Why don't we circle back on the margin, and the loan yields this quarter were up, which was great to see, and I don't think I've seen that anywhere else, and so just wanted to get a little bit of color of what's driving that, where maybe new loan production is coming on, just to kind of get a sense as to how sustainable that is and where it may be going. Thanks.
spk06: Well, I mean, we're having loan production again. Dennis can talk about the actual yields, but as I said, we had our all-employee call show yesterday, and Ken Webb was giving out the awards, and it gosh, he must have mentioned 10 names. And really, I mean, we're having loan production all over the counties in Middle Tennessee and the Athens market and Knoxville and just all over. And the loan yields out of Manchester and Waynesboro are fabulous. So I'd say it's very balanced on the production and And Chris, you want to add something?
spk08: Yeah, going on, if I just look and say the last 30 to 60 days, Catherine, our going-on yield on larger transactions has been in the 370s, and in smaller transactions it's been in the 450s.
spk06: And we're being disciplined. It hadn't been a lot, Catherine, but we have a very disciplined pricing, and we pass on credits. I mean, our loan growth could have been higher. I'd say one of our bankers, Lee Hunter, is one of the best I've ever worked at where he's very disciplined, and he will say, hey, I just don't think we should go to that rate. And so our loan growth could have been a lot more. We see people doing loans at $325 or $310 or whatever, and there are certain spreads we're looking for over the matched FHLV curve that we price to. And if we don't get that spread, we'll just say, hey, you've got a great deal, customer. I'd go with it. Congratulations.
spk03: That's really helpful. Thanks. And then on expenses, I appreciate you don't want to give specific guidance, but maybe just one line item with the data processing and software line, which looks like it was down, and just wanted to see if that's a line that should kind of bounce back to where we saw it last quarter, or if that's a better run rate.
spk06: It should be more at this run rate. A lot of that was related to the processing fees related to PPP, where we used a third-party system to administer that. So it should be more to a more normalized level now. Okay.
spk03: Great. Thanks so much. Congrats on the quarter and the Chattanooga expansion.
spk06: Okay.
spk10: Thank you.
spk01: And as a reminder, ladies and gentlemen, to ask a question, please press star 1. Our next question coming from the line of Fetty Strickland with Ginny Montgomery. You want to open?
spk04: Hey, good morning. Good morning, Fetty.
spk06: Good morning.
spk04: I just wanted to ask, to stick it back to the expense line of questions here, you guys held salaries to a pretty good number. Are you experiencing any of the same wage inflation pressures that some of the bigger banks are seeing?
spk06: I would say give and take. It's a big market out there. I welcomed five to seven new employees this week. There's a lot of people We're all living in an unusual environment, right? You go to restaurants and they're still closed early and all this kind of stuff we're facing. But there's still a lot of good, hardworking folks that are wanting to come to work. And we benchmark to industry averages and market averages, and we want to pay competitive. But we have a lot of interest in working for our company. And so I would say some, but I think it can be managed.
spk04: Gotcha. And then I know you said buybacks are going to be more opportunistic, just given where the stock's trading today. But does the move into Chattanooga make any other capital deployment options less likely, whether it's a dividend increase down the road or something like that? Or is this just kind of more of a piece of the overall strategy where you kind of walk and talk at the same time?
spk06: No, I think, like I said before, they're all tools, right? And I think we've said this before, but, you know, the last 18 months have been an unusual period. So we just went through our annual strategic plan, and this time last year it was so different. You know, we were saying, gosh, it's going to be three years of – everybody was saying rates were going to stay low for five years, and we thought there was going to be three years of higher charge-offs and provision expense. The plan is – that looks so different. And so, frankly, we would have raised the dividend higher even this past spring, but want to be conservative and make sure we're out of this. I think we've communicated before, we'd like to see our payout ratio closer to 20%. So I think you'll see balanced tools. So, you know, probably should anticipate another dividend increase this coming spring, and we working at closer to 20%. And so, I just say a balanced aspect. I think we'll probably still keep that a little lower than industry averages because I think we have more growth opportunities than most. But I recognize we've got a certain amount of retail shareholders. You know, when you're running a company, you've got many constituents. Institutional shareholders largely would prefer buybacks because of tax consequences. Retail shareholders like to have a little bit of cash flow. So we see opportunities. I would say buybacks are the ones that I would like to really reserve for opportunistic because I just think we have such great investment opportunity.
spk04: Got it. Makes sense to me. Thanks for taking my questions, and congrats on a great quarter, guys. Thanks, Betty.
spk01: Our next question coming from the line of William Wallace with Raymond James. Thanks.
spk02: Good morning, guys. Hey, Wally. Good morning, Wally. Most of my questions have been asked and answered, but I did want to just circle back on Chattanooga and then some of the commentary around maybe even more teams. The financials that you lay out in the deck, in your cost assumptions, are you assuming any branch support in Chattanooga?
spk06: Absolutely. So the model we want to do, I admire a lot of banks. I just You know, I was fortunate to be trained in two of the best really ever. And I admire Pinnacle in our market. I admire Service First down the road and Art Seaver over at Southern First. So I'm always studying. And, you know, we've been very successful in Knoxville, you know, sort of mirroring some of their successes. And so in Knoxville, we've got a very nice commercial office, and it's staffed with commercial relationship managers and and then sort of an office team leader or a client service executive, and then a portfolio manager. So as we put out in our release, this team right now, as of today, they will start with seven people in the market physically, and that will be five commercial relationship managers. We really have a single point of contact model where they will bank an operating company and the owner or a real estate investor. There will be an office leader or a client service executive there that, you know, we really don't anticipate a lot of walk-in traffic like a branch. Actually, we would prefer not to have that. And so, you know, no teller line, no ATM, no drive-through, and those folks would be assisted in service by them and then a portfolio manager. Here in Nashville, we added two additional members to our loan operations team to help handle their volume. And really, I've learned a lot. Just service first has been a great success. And here in Tennessee, if you came here and stayed here a week, you would never know where they are because they don't have any branch signage, and they've been a tremendous success. They've done a great job. and they've got about a billion in loans and $700 million in deposits with no branch. So we don't expect at this time in Knoxville or Chattanooga to have a lot of offices, really to have a commercial office with the best talent in town.
spk02: Okay, that's very helpful, Tim. Thank you. And then if I look at – your loan mix and Pinnacle's loan mix, I mean, the mixes are relatively similar. Is the Chattanooga market bringing anything different, or is that portfolio kind of similar in composition as to what you see on your own balance sheet?
spk06: Similar, similar. And, again, I'm just looking at the names that are on this call right now, and – many of these have provided me great counsel since I joined. And every bank I've joined has had opportunity and challenges. And, you know, I hope he won't get mad at me mentioning, but one of the things I'm proudest of is one of the first people I met with when I got here was Jerry King at Bank Funds. And he was pretty frank and direct. And, you know, I didn't know a lot about Capstar when I joined. And he said, Tim, you know, you've got your hands full. And you've got to get this place going, or you should really think about should this place be sold. And I'm real proud. I've got to say, I'm real proud that Jerry's on the phone today. And I appreciate that, Jerry, and I hope you won't get mad at me for mentioning that. But that's what this team's trying to do. And this is a new company. And so what I'd say to answer your question is, you know, we had some people that were making their living off of doing shared national credits and getting incentives. We don't have that anymore. And so this Chattanooga team is Tennessee-based loans, not participations, not shared national credits, operating companies, investor real estate, collateral, banking the owner. So I think it's consistent with the new cap star. And we're just really couldn't be more excited to have them join.
spk09: And Wally, we're trying to take that discipline and apply it across all of our markets and across all of our So on the expense side, the pricing side, the administration side, and, of course, on the revenue side, as Tim said. But discipline and focus and really trying to provide a really high-performing bank that all of our constituents will be proud to be associated with.
spk02: Okay, thank you for that. Tim, I don't know who this Jerry King guy is, but I might have to follow up with you offline to get an introduction. Just kidding. Hi, Jerry. So my last question is, my last question, you talked about you're in discussions with three different teams and three new markets. And then during the Q&A, I thought I heard you say that You know, you're not sure you'd hire three new teams, but you might consider two. But then it sounded like you were maybe saying that you'd want to wait a year. Could you clarify? I think I misunderstood.
spk06: So there are three right now that there are different levels of discussion, and I would not take on four, right? I would not take on those three and Chattanooga. That would just be too much. It would hit earnings too much, be a lot for our team. But I do think it would be interesting to try and get a second one over the next year. And these things take time. So I don't know if the second one would materialize in a month. I don't know if it will take six more months. What you don't want to do, I work for one company, it's the only one, that the gentleman, his strategic focus was filling in a PowerPoint map. And so we would say, gosh, there's a hole in Savannah, and we are going to go to Savannah, doggone it, and it doesn't matter who we hire. I don't think that was a great strategy because you don't necessarily get the best team. So we're looking for great people. We are going to build a great company, and we are looking for great people. And you've got to wait for great people to come to you. And it's really a situation where you've got to be prepared when they are frustrated. And when they are frustrated, you have got to act. because if you don't act, they're going to go somewhere else. So I would just say that my comment on over the year, next year, is I think it would be neat to add a second one over the next year, and I just don't know if that will happen next week or in six months, because it's when they're frustrated and they're ready to pull the trigger, and it's Capstar doing its homework to make sure that they'll produce what they say they can produce.
spk02: Okay, I think I understand now. I thought you were talking about teams and new markets not building on teams and the team in Chattanooga, so gotcha. And then last question, just as it relates to the Chattanooga team, is there, in your view, is there a good fee income opportunity outside of just the lending metrics, which I'm assuming is what you're putting in the slide deck, but is there opportunity outside you know, in mortgage or Trinet or those not necessarily market-specific for you guys?
spk06: I think long-term. I think the most immediate, right, if you think about it just mathematically, the most immediate is we've got $300 million to $400 million of excess liquidity like many companies. And so if their primary focus can be loans, you know, let's just say they can put on loans at $375 million. We've got that money today. The first $300 million they do, we've got that money invested at 17 basis points. And that's the excess liquidity. So just the first 300 million academically, you could take that, and if they do it at 375, I mean, those first are going to earn 350 net, okay? And that's not normal. Usually on an FTP spread, you know, you may get 200 basis points to 250 basis points. So we've got an unusual profitability lift that with the power of this team is Now, you've got provision, right? First, you've got to set aside one and a quarter on every dollar they do, but that's sort of a one-time expense. So I'd say number one is the impact from interest to income, number one. Number two would probably be deposit service charges related to any company. And then number three, I think over time, is figuring out how to expand our mortgage. Our mortgage today is a very dominant... I don't know if we shared this, but You know, the NBA comes out with mortgage volume by metro area every month. And the last month that our gentleman shared with me was July, and we were number four in the entire Nashville metro area. And that's not where you're headquartered. I mean, that includes Bank of America. That includes Wells Fargo. So just think about every company in Nashville, every one. We have U.S. Bank, Regions. We've got Truist. We've got Bank of America. We've got whoever. And the four, number one was the Quicken Loans. Number two was Loan Depot. Number three was Pinnacle. And they do an awesome job. They are a great company. And then we were number four. So our company is very formidable, but it's historically been right here. So I think longer term, that's an opportunity. And the last comment I'll make is Knoxville has done a great job, I think Chris would agree, on referring volume to SBA. So there could be some SBA lift if this Chattanooga team could refer some volume there. But, Chris, do you want to add anything?
spk08: No, I would say we're well poised to support that market with our government-guaranteed activities based on where we have people placed, and I would expect opportunity to come out of that.
spk06: Just priority, I think the immediate is let's get the loans on the books to get that money out of the 17 basis points into the 370 to the 4%. That's step one. Let's get treasury fees, and then let's build these other product lines into their mix.
spk02: Thank you very much. Appreciate your time. I'll step up.
spk06: Thank you all.
spk01: I'm sure I know for the questions at this time. I would now like to send a call back over to Mr. Tim Schultz for closing remarks.
spk06: Yeah, I don't really have any closing remarks. I just want to really commend our team internally. I've invited five or six of them in the room today here to just hear how this works. And, you know, we have a great company, a lot of bricks laid before us, and we're taking it to a new level. Just really am thankful and grateful for my teammates. And I appreciate everybody that called on this call today. It's a growing list and some great names on here. And, We really appreciate the support. We're working hard every day for everybody. So everybody have a great weekend. Thank you.
spk01: Ladies and gentlemen, that's our conference for today. Thank you for your participation. You may now disconnect.
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