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spk04: Good morning, everyone, and welcome to Capstar Financial Holdings 4th Quarter 2021 Earnings Conference Call. Hosting the call today are from Capstar, Tim Schools, President and Chief Executive Officer, Dennis Duncan, Chief Financial Officer, and Chris Peets, 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 laws. All forward-looking statements are subject to risk 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. I will now turn the presentation over to Tim Schools, Capstar's president and chief executive officer.
spk10: Good morning, and thank you for participating on our call. We appreciate your interest in Capstar. We had a terrific quarter and year, and when we look back, it is rewarding and exciting to see how far our team has come. I saw an early note on today's earnings that said we finished 2021 strong. I understand what was meant, but I can promise you we're just getting started. In the fourth quarter, we reported earnings per share of 56 cents and on an annualized return on average tangible common equity of 15.02%. For the year, we earned $2.19 per share and the annualized return on tangible common equity was 15.45%. I will go into this later in the call, but our underlying profitability and capital generation is somewhat stronger. as we currently have nearly 200 basis points of tangible equity than the industry average. There is a lot of value in the excess capital as it can be invested for additional earnings or return to shareholders in the form of dividends or buybacks, where we would essentially maintain the same earnings as today as the excess capital resides in non-earning or low-earning cash. Internally, we focused on four strategic objectives. First, enhance profitability and earnings consistency. Second, accelerate organic growth. Third, maintain sound risk management. And fourth, execute disciplined capital allocation. As well as four key drivers, revenue growth, net interest margin, efficiency ratio, and net charge-offs. I'd like to highlight a few of the achievements within each of the four strategic objectives. On profitability, we are very disciplined on pricing. Anyone can put on growth. Not everyone puts on profitable growth. Our fourth quarter match funded spreads were 2.5%. That is a lot of profitable growth. We also have a higher discipline on expenses. We speak internally of being frugal but not cheap. We are also working to be productivity-minded and have productivity work metrics. Second, as it relates to organic growth, our annualized loan production was $1 billion in fourth quarter. Not one penny was a participation. This is an increase from $674 million for the full year and $445 and $296 million the prior two years. Our Nashville market has increased production, and we have added Chattanooga, Knoxville, and three fantastic community markets. In total, our commercial pipeline currently stands at $500 million. Excitingly, we have two offers extended for two additional bankers with over $100 million loan portfolios in existing markets and are in discussions with a team that has $500 million to $1 billion in loan balances. As noted later in our deck, we are also aided by leading market demographics. Third, we are strong risk managers. We have done a stellar job overseeing the health and care of our employees during the pandemic been proactive in managing credit risk to both assist our customers and protect our shareholders. And while work has been done to tame interest rate sensitivity, we remain modestly asset sensitive. Lastly, we are laser focused on putting our excess capital to work, and we will cover that in more detail later. With that, I'm going to turn it over to Dennis, who will provide you details related to the quarter.
spk09: Thank you, Tim, and good morning, everyone. I'm starting on slide 7 of the earnings release deck. Net interest income was $23 million for the quarter, which was consistent with the third quarter. The net interest margin was 3.14% for the quarter, up two basis points due to loan growth, increasing rates, and continued PPP loan forgiveness fees. The adjusted NIM for the quarter was 3.40%. Adjusted NIM, meaning we look at the impact of excess deposits, which adversely impacted the NIM by 44 basis points, and take out PPP loan forgiveness fees, which favorably impacted the NIM by 18 basis points. Net interest income in total continued to benefit from a shift of our earning assets into loan growth, and our investment portfolio was down slightly from the third quarter, both on an average and EOP basis. On slide eight, average deposits of $2.7 billion remain near record levels. Average DDA deposits also remain near record levels for the quarter. And we remain focused at Capstar on building core deposit relationships across our markets. Deposit costs held flat for the quarter at 19 basis points as we continued to lower higher rate time deposits, partially offset by an increase in our correspondent banking deposits. Our excess cash balances are continuing to be strategically deployed into loan growth and purchases within the investment portfolio where we see opportunities. And again, we're committed at Capstar to a deposit-first culture, which will ensure strong core funding as we move forward. On slide nine, total loans less PPP were at record levels at quarter end and grew $109 million or 23.7% annualized between the third and the fourth quarter. Total PPP loans were $26.5 million at the end of the quarter, down $38 million from the third quarter. And total unearned PPP fees at the end of the year totaled $630,000. In regards to production, as Tim said, Our relationship managers have done a great job in improving pipelines, which provided momentum for the fourth quarter and for 2022, and we are pleased that production for the quarter came from across our entire footprint, which includes our newest team in Chattanooga and our recent Knoxville market. The loan yield increased six basis points to 4.47% for the quarter, with loan coupons increasing by four basis points to 4.07%. PPP fees in total were relatively flat for the quarter, which contributed to some of the increase, approximately five basis points with lower average balances. Most importantly, we remained disciplined in our pricing on new loan production with matched spreads, as Tim said, of approximately 2.50%. In addition to solid loan growth, record pipeline levels and pricing We continued in 2021 to reduce our shared national credits and loan participations. On slide 10, non-interest income was strong in the fourth quarter. Our unique fee businesses have contributed over 30 percent of our revenue over the past seven quarters, highlighted this quarter by our strong tri-net business, which generated almost $4 million in fees. We also produced record levels of debit card and interchange fees, and SBA continues to be a positive contributor with strong growth prospects. Mortgage revenues were down some for the quarter due to seasonality after experiencing a record run of results in previous quarters. We are continuing to see a strong mix of purchase volume in our mortgage business, which reflects the economic health of our markets and the strength of our Capstar mortgage team. Slide 11. shows our non-interest expenses were $18.7 million for the quarter, which resulted in an operating efficiency ratio of 54.74%. Our core bank, which is our core bank excluding our mortgage efficiency ratio, was 52.38% for the quarter. Excluding about $408,000 of expenses related to our fourth quarter investment in Chattanooga, expenses declined slightly from the third quarter. Within salaries and benefits, incentive expenses continue to run at higher levels due to our strong operating performance for the year. So even with increased incentives and expenses related to Chattanooga during the quarter, our efficiency ratios remain at record low levels. With that, I'll turn it over to Chris Teets, who will discuss our credit position.
spk08: Great. Thank you, Dennis. Once again, it's good to be able to say that because asset quality is so good, our comments can be brief. First, turning to page 13, we are pleased to report that we continue to maintain low levels of delinquency. While we are proud of the improvements that our team has achieved, we believe that our focus on improving processes and oversight will, all else equal, allow for continued improvement over time. Second, the trend of improvement in our criticized and classified asset levels continues in the fourth quarter, now at 2.64% of gross loans. We believe that this represents a very low level, particularly given the economic challenges presented by the pandemic. I also should note that at current levels, our ratio of criticized and classified loans is below our five-year averages in the respective components and is now at near pre-pandemic levels. In our ongoing reviews of criticized and classified loans, we assess individual borrowers on the direction of risk, the magnitude of exposure, if any, relative to bona fide collateral values, and our expectation for the future direction of the borrower's performance. The good news is that, based on the future-looking focus of this review process and the secured nature of many of these credits, we continue to maintain a positive assessment and outlook for credit risk in coming quarters. As noted in the lower left graph, with improvements in asset quality, we continue to experience very low levels of charge-offs, with an average quarterly loss experience over the last eight quarters of less than $165,000 per quarter. While we are proud of our measurable asset quality results, I also want to highlight that we are proud of our continued focus and disciplined adherence to our community-based banking strategy. Qualitatively, we have achieved these results and our growth, remaining focused on lending to relationships in our local markets and without reliance on concentrations of risk to a small number of large individual borrowers or projects. We remain committed to this and believe it will yield consistent results over time. Finally, turning to page 14, we note that improvements in asset quality and the general economic environment enabled us to reduce our overall level of reserves to a level that, given the positive factors that I've previously noted, is appropriate to our current assessment of risk and expectations in this environment. With that, I'll hand it back to Tim to discuss profitability and capital management. Thank you, Chris.
spk10: I'd like to spend a moment on slide 16 of today's presentation. I know everyone thinks about this differently. I referenced earlier on our profitability and capital generation. This page takes our reported numbers and adjusts our profitability if we were to operate at industry capital levels. As you can see, on an equivalent basis, we have a very profitable business model. This excess capital, which in this example is 66 million, is earning close to zero. Therefore, it could theoretically be dividended out and the shareholder would have the same earnings with $2 to $3 per share in their pocket that they do not have today. If we maintained our 23 consensus, which by the way we feel is reasonable at this point, P.E. of 10.5 times, that is value that is not in our current stock price. If you take the position the excess capital is in our current stock price and valued at one times book, then the remaining bank is trading at 8.5 to 9.5 times 23 consensus. On page 17, we lay out our capital management priorities. We're actively focused on putting our excess capital to work in the high capital generation of our core business. This week, we reauthorized our $30 million share repurchase authorization and envision that dividend increases will be part of our capital plan. We see these as valuable and important secondary tools we will use depending on our growth and equity market conditions. On slides 19 through 21, We share some of the hard work that is occurring that does not show up in the financial statements. We appreciate the support of all the constituencies that we interact with. We have a larger number of people paying attention to Capstar today, and we value the time you put into understanding our business, vision, and results. Particularly, I would like to thank Wellington, Private Capital, DePrince, Kennedy, Ranger, Covington, Menden, and Bank Funds, and all of the others that have supported us during our transformation. Your support and guidance has been invaluable. On slide 22, we present a scorecard of the highest valued banks our size in our region at this point, based on a price to earnings. Of note, our profitability, growth, and soundness are favorable to this group. However, our valuation on an earnings basis has 20% upside. We believe we have a high-performing and scarce franchise deserving of a similar, if not higher, earnings multiple. Our price-to-book multiple is hard to compare, again, due to the excess capital we have even to this group. On slide 23, we are excited about the upside in the valuation of our company. Whether it is multiple expansion, multiple expansion and a return of excess capital in some form, or multiple expansion and investment of the excess capital at our core return on tangible capital level, there is a strong case for 30 to 40% upside in the valuation of Capstar in the reasonable future. As I said, we're just getting started. Once again, thank you for the time you invest in following and understanding our company. We appreciate your support. This concludes our comments for today's call and welcome the opportunity to answer any questions.
spk04: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Our first question comes from Steven Scotton with Piper Sandler. You may proceed with your question.
spk03: Hey, good morning, everyone. I guess maybe if I could start just around the capital plans, the share repurchase. I mean, I know you said you want to be opportunistic there, but obviously it's been outstanding for some time and hasn't been utilized. So just want to think about that in the context of where you feel like, you know, You're illustrating this potential upside in the shares and how aggressive you might be with that today.
spk10: I would say medium. We are more focused on growth. We reported here that Chattanooga was $53 million in about 40 days. As of today, they're at $75 million. They anticipate that they could book another $75 million this quarter Like I said, we've got two offers out to two other people, and we're talking to a team that has $500 to a billion. So when you look at an IRR of that kind of model, we've got two now, Knoxville and Chattanooga. The IRR on that is closer to 30% to 35%. And if you built an IRR model of buying back a share today at $21, and even though I think the price is worth $25 to $27, if you do the IRR of of buying it today at $22 or whatever, and the dividends you would save, those IRRs come out to be about 20%. So still a fantastic IRR. There's economic value added to your cost of capital, but we believe the franchise value and the absolute IRR of a core investment is higher. So as long as we think those are realistic and in the near term, we understand there's a time value of money, and I think this money's been sitting in Capstar too long, So as long as we think there are reasonable ones, we'll do that. I will tell you in Hawaii, I did a one-time dividend of $65 million to a shareholder because they were sitting all this equity they weren't using, and it wasn't growing. And so I've done it before, and we will consider all levers, but we're very focused on putting this capital to work.
spk03: Got it. So it sounds like, I mean, obviously organic is the focus, which, again, I agree. I think that's right. But maybe it could be both at the same time, share repurchase and organic. It seems like there's plenty of capital for both.
spk10: Yes, and what I would say is it's been an evolution at Capstar. When I came in, and I don't want to criticize anybody's view because there's a lot of smart people in the world, and Tim Schools does not have all the answers. But when I came in, we talked when Corsair was exiting three years ago about buyback. Should we buy all their shares? Should we not? There was a lot of different views. There's a lot of people that have more of a regulator view that you can't have enough capital, but you're never going to grow your book value at the same rate. I just believe that capital management, if you read the book The Outsiders, it's a big contributor to returns. I would say we've gotten aboard there. I don't want to say we've educated them, but they're further along on the role of that in managing returns. I would say that last year when we put in the $30 million, we thought that it was still an uncertain economy, didn't want to be too aggressive, and our price was a pretty low price at that point. And I would say we'll take a more balanced approach right now going forward.
spk03: Okay, that's helpful. And then maybe the other question for me is just around these new teams you're looking at. Can you give us a feel for if these are in-market teams, if you're looking at, additional expansion markets like Chattanooga and Knoxville or kind of what the focus is in 22 as it pertains to new hires and then what that could look like from an expense standpoint and kind of how we could best model expenses. Is it a 2% of average earning assets or how do you think about that in budget expenses for 22?
spk10: So I don't really want to comment on markets. I would say just so we're all on the same page, you know, if I had to draw a loose fence I imagine your focus, I would say, I don't see us at this point, there's no need for us to go, say, really further east of a Charlotte or an Asheville. And I don't know if we'll go west from here. So I would just, I mean, you can sort of ring fence the markets we're interested in. And I would say principally Middle Tennessee, East Tennessee, maybe Western North Carolina to Charlotte, upstate South Carolina, maybe Northern Alabama. But nothing outside that. You know, while there could be teams available, I just don't know. It's hard to manage. It's far away. So that would be our focus at this time. Okay.
spk03: And then just how to think about the expense build of teams like that. I mean... Yeah, I don't have my numbers right in front of me.
spk10: Yeah, I think if everyone reflects back to our last quarter slides, we tried to put more than other banks. We tried to treat it more like a merger, and I think we put the expected earn-back period and dilution as well as growth. And I don't have it right in front of me, but from memory, like the Chattanooga, they're starting at the beginning of the year, which is rare because sometimes they're middle of the year. And I think we were anticipating that that may be a cost of like five cents or something the first year. And then the second year, the full year, it's basically break even. And then the third year, I can't remember, you may get five or ten cents. But man, when you get to year three and four, it gets to be like 20, 30, 40 cents. And so, you know, you're not handing out shares. They're easier than acquisitions to roll in. And so... If we do another one, we'll lay that out again, and we're trying to get better each time to give as much information as we can. But from memory, the Chattanooga expectation on our number this year was about a five-cent cost.
spk09: Yeah, there's a slide in one of our previous decks, Stephen, that laid out the economics of it. Sure. And we're just being fairly conservative in terms of the loan growth and the buildup on the revenue side. And in being conservative like that, Tim's right. It would have been about a 5% dilutive impact on our EPS in the 12 months following the lift out. Then it turns, depending on your assumptions for loan growth, then it turns to neutral to slightly accretive in the second full calendar year and then gets gets a lot better as you move forward. So if we were able to do another one and had an announcement of another similar Chattanooga lift-out, in accordance with announcing that, we'd probably show you how the economics ought to work or get you that information.
spk10: And I can't promise because, you know, you're dealing with people in different situations and families and other opportunities. But it's my hope and my expectation that we'll announce another Chattanooga this year.
spk03: Yeah. Okay. And I guess maybe just to follow up on that, though, like I still don't really have a good feel for you guys for where expenses are going, right? I mean, it's 18.7 million run rate. Say you don't do any new team acquisitions. I mean, is that 18.7 a good run rate? Are we talking 10% growth in expenses next year? Are we talking five? Just kind of any color on how you think about that or ring-fencing those numbers a little bit.
spk09: Well, we think we've done a really, really good job of managing expenses. But then within that 18.5 million, there are certain things that – you know, are beyond our control would depend on what you, how you model your stuff out. But mortgage is very compensation reliant in terms of how much mortgage volume you have would drive mortgage incentives. There's, but on the core bank, on the core bank expenses and the core bank estimates, we don't see, we don't see Right now, unless we did another lift out, our expenses are in pretty good shape. We're working hard to try to keep that efficiency ratio down under 55 for the total company, but hopefully get the core bank efficiency ratio down closer sustainably to somewhere around 52 or even maybe just a little bit better. This year, in these numbers that you are looking at, we maxed out, just because we had such a great year, we maxed out on all of our corporate incentive plans. And so as we move forward into 2022, as we've reset budgets and reset expectations and the like, we have really in our budget more opportunities kind of more normal levels of corporate incentives. So, I mean, there's some benefit that we'll get there depending on whether mortgage goes up or down would drive compensation levels in mortgage. But in general, you know, we feel pretty good about our expense levels.
spk03: Okay. Very helpful, Dennis. Thank you guys for the talk. I appreciate it.
spk09: Yep. Yep.
spk04: Thank you. Our next question comes from Brett Rabattin with LV Group. You may proceed with your question.
spk07: Hey, guys. Good morning. Hey, Brett. I wanted to talk about the fee income guidance for a minute and just particularly the TRINET. You know, they had a really good 21, and the results kind of built throughout the year. And I guess I'm not sure when I look at the guidance for... fee income this year? I guess I understand the mortgage piece, but maybe you can talk about Trinet, you know, their fourth quarter performance and then kind of why the reset on a quarterly basis for 22.
spk10: Yeah, sure. I'll start and let Chris pitch in on the, you know, one of the challenges of a year like 2021 is we all get excited, right? And I think we lose sight of, you know, the PPP, the mortgage, the Trinet, the unusualness that's not sustainable. If you go back and you chart Trinet as a business, and Chris will be able to quote the exact numbers, but I think 19 may have been about 3 million for the year, and 20 may have been about 4 million for the year, and then all of a sudden 21 was this crazy year. And I think what he's going to tell you is two things led to just unbelievable performance in 21. One is everyone in the country has a ton of liquidity, and does not have the asset generation of Capstar. And so banks need investments. And so there was a lot of volume that we produced that went into that. And because of the bidding, the spreads got wider. And so I think what we're doing as reasonable business people is doing more of a linear line and trying to look at a regression maybe taken out to abnormally of 21. And even if this year was 5 million or whatever, it's a continued steady growth. It's just there was a huge blip last year. But I'll let Chris expand. But that's the challenge. It's really, as hard as it is for you all to forecast, we'd love all of these to stay at the 21 level. We hope they do. But even as when we do our 21 budgets, we're trying to not fool ourselves and just say, okay, Let's look at the prior year, too. Where were they? Hopefully, we're doing better than those years, but let's do something reasonable so we're not putting a hockey stick out there. But, Chris, what would you add?
spk08: Yeah, I would say, you know, Brett, in the big scheme of things, like mortgage, we will make more money in Trinet when rates are going down, and we will have a little bit of a squeeze as rates transition to higher levels until they plateau. As I said last quarter, we avoid giving specific guidance on Trinet. I went ahead and did go out and say that we would have expected it to achieve levels of performance similar to the earlier quarters in 2021. The fourth quarter clearly exceeded that by a long shot. We are still holding to the guidance that I gave you last time. If you were to look at it on the full year basis, our expectation would be somewhere between the roughly $3.7 million we made in 2020 and and the $8.6 million we made in 2021.
spk09: Hey, Brett, this is Dennis. You have seen page 25 of your earnings release deck, right?
spk10: Yes.
spk09: Okay, got it.
spk10: You know, so even if we do $1.3 million to $1.5 million, I mean, that's $5.5 to $6 million a year, which would be a nice increase over where we were in 20. Okay.
spk07: Fair enough. And then can you guys talk maybe about the variability of the loan portfolio and how much is added below floors and just thinking about the potential margin upside. I know in your filings you've got a 1% increase in NII for 100 basis points, which would seem like your asset sensitivity would be a little bit higher given the cash you have on the balance sheet. Talk about the margin and the asset sensitivity and the variables.
spk10: Well, that's a very complex topic and we could have a whole hour on that. And so it's hard to just talk about one component of like loans and floors. I mean, you know, we've got betas. While you have all the cash, you also have betas on your deposits that will go up as well. So I would just say, you know, what we've done as a young company, what I saw when I came in and studied, I think our margin went down more than the bank was modeling. And when you ask why did that happen, I think that we were not managing deposit betas and we had a lot of risk in our deposit side. Capstar had a lot of individual negotiated rates with wealthy people. And when rates went up, say in 15-16, I think the overall increase in the margin was what was expected. I think they got there a different way. I think that All of the beta went to sort of the most vocal people that called in and wanted all the beta. And a lot of people got no beta. And so when rates went down, those people that got 100% of the beta didn't want to give it up. But you didn't have any relief you could give to the others. So I would just say on interest rate risk, you know, we've been working the last 24 months to manage closer to neutral. And we want to grow our bank by putting on profitable balances. We're still asset sensitive. we've really reduced that deposit risk, both through the acquisition of three community banks, but also getting away from all that hot money. So we can talk offline about, if you'd like more detail about individual categories, but I think that's a complex conversation for the phone.
spk09: I would just add on that. One thought is we feel, given our loan portfolio and the pricing on it, as well as the expected things that the Fed are going to do in the near term, we feel like, Brett, we will be able to add net interest. We will, as rates go up, we will be able to add net interest income. It's just a matter of how much. So we're well positioned on our balance sheet to be able to, and I wouldn't call it take advantage, but to maximize our ability to drive net interest income higher.
spk07: Okay, great. Appreciate the caller.
spk04: Thank you. Our next question comes from Catherine Mueller with KBW. You may proceed with your question.
spk05: Thanks. Good morning.
spk09: Hey, good morning, Catherine.
spk05: A follow-up on the interest rate sensitivity conversation, do you have, or can you remind us what percentage of loans are floating and will reprice immediately when we start to see rate hikes?
spk10: I don't have it exactly on us, no.
spk05: Okay. So, and then, so another, okay, so moving back another way is, would you expect interest I mean, as I look at the, I kind of agree that the 1% up in a 100 basis points scenario feels really low, just kind of given the structure of your balance sheet. And particularly, you know, I remember last cycle, I feel like the loan book was very highly floating. So maybe just not without asking for a specific number. Is that still the case, or has that changed because you've kind of gotten rid of SNICs and you've done so much change within your loan portfolio? Maybe are you not as variable rate as you possibly were last cycle? Maybe that's the way to think about it.
spk10: Probably not because a lot of the SNICs were LIBOR-based and overnight, number one, and we're doing more traditional regional bank lending, so that would be one. And number two, we're continuing to learn and evolve. I just learned in our latest ALCOVE, I think some of the betas we're using in our modeling are too aggressive. And I'm not quite sure why we were using them then. But if the betas on the deposits were too aggressive, that's going to lessen your reported asset sensitivity because it's showing that your deposits are going to go up faster. So anyway, we've been managing closer to neutral. We think we'll be modestly asset sensitive, but we were not one sitting here giving up earnings betting on a big rate increase. We really focused on growing the balance sheet profitably.
spk05: And then for loan coupons here at 407 this quarter, where is new production coming on?
spk10: I'd say it varies across the footprint. Obviously, in Chattanooga, the organization they came from is offering some very low rates to to maintain some customers. So as part of a new investment, we're having to match or do some of those. But I would say generally in the market, again, back to a 250 spread. So it depends on the tenor. And I'd say it's anywhere from 375 to 425. What we do is on any commercial loan, we use the FHLB website. And we go find the matched tenor. And we ask our bankers to see 200 350 basis points on top of the match, what it would cost us to borrow.
spk05: Okay. And then on the securities book, the securities balances declined this quarter. So what's your appetite for adding to the bond book as we move through this year?
spk09: We're beginning to take a look at that, Catherine. You know, with the rates improving in the last couple of three weeks, we've got some really good – strategic things that we'll be implementing that'll probably fill back up some of that decline in the investment portfolio. We really want to limit it, though, but we'll replenish a good bit of that, and there's opportunities to do that. So I think you'd see investment balances go back up. We've had a lot of other good opportunities to do things in kind of alternative investments like corporate-owned life insurance that's done real well and making investments in Chattanooga and the like.
spk10: Yeah, so, Catherine, I would leave this call today with one message, and that's that we're going to put this capital to work or we're going to give it back. And so... I view the securities portfolio as a liquidity tool. If you do a funds transfer pricing ROE on a security, it's very low because you don't typically take a lot of credit risk in the investment portfolio. We're going to hold that around $500 million. Yes, in fourth quarter it ran off some. We're going to reinvest cash flows. We're going to put another $25 million on, but we want to stay short. because we want to take this excess liquidity that's sitting in cash or securities and put it in loans or give it back to the shareholder in some form.
spk09: Catherine, I'm not sure. It's Dennis. I'm not sure what you were looking at and trying to do, but we just confirmed that relative to the variable rate loans in our portfolio are somewhere between $40,000 2% or 3% up to 47% or 8% is the variable versus fixed. And if you look at the up 100 or the down 100 basis point moves in the market, we know, not just believe, we know that we can be able to make money in net interest income in a rising rate environment. So I don't know what statistics that you're looking at there, You know, we've had very conservative deposit-based betas that we've been assuming, and we feel pretty good that we'll be able to. Now, it's all market. You know, it all depends on what the market does out there too, right? I mean, some banks will aggressively try to get some of those deposits that we have. But I think in general, my sense is banks will be very competitive. There's plenty of liquidity out there. There are plenty of deposits. and the ability of a bank to bring those changes in interest rates to the bottom line will be in their ability to hold off on the deposit betas and keep some of that as much as and for as long as possible. I'd say it that way.
spk05: Got it. Okay. Yeah, that 42 is super helpful. Thanks for grabbing that. In fact, if I could squeeze in one more question just on the expenses. So you've guided to $16.5 million of expenses ex-mortgage. Can you give us the maybe mortgage expenses this quarter just so we can kind of get a base for what that looks like and maybe what kind of mortgage efficiency ratio would be appropriate to model next year?
spk10: Yeah, we can look that up. I don't know if we have that right at our fingertips. Lynn's here is looking. But we probably can do a better job because Trinet and – You know, especially coming off the last year, because TriNet and mortgage are a pretty big piece of our company now, and they're so variable, it is interesting internally and for you all to understand what is the core expenses and what is it for them. So if you can pause just a minute.
spk09: I don't know. There's a slide on page 11 in the deck. I think it's page 11. Maybe it's not in your deck, but we have a slide that somewhere breaks down all the non-interest expense. Mortgage banking expense has been running and did run in the fourth quarter somewhere in the $2.5 million range was the mortgage expenses. That would take you from the $18.5 million you guys were talking about, about being total expenses, down to the $16 to $16.5 million would be the core bank pre-tax, pre-provision expenses, the core bank expenses. And again, we had, again, Catherine, I mean, I don't know the exact amount of difference, but included in our 2021 expenses for Capstar were record levels of corporate incentives that we'll pay out to all of our folks. Now, they deserve it because they've done a great job, but you know, we just had, you know, we really didn't have any idea that in 2021 all of our businesses and everything would kind of come together for a record net income year. So next year, as we've set our 2022 incentive plans and budgets, obviously our budgets will be higher and it'll be, you know, probably more likely that we would be back to, you know, normal levels of corporate incentives. So we feel like we probably have some room there that you wouldn't put into your next year's expenses.
spk05: Got it. Makes sense. All right. Thank you very much.
spk09: Thank you.
spk04: Thank you. Our next question comes from Kevin Fitzsimmons with DA Davidson. You may proceed with your question.
spk10: Hey, good morning, everyone. Hey, Kevin, we appreciate you being a new partner this quarter and initiating coverage.
spk02: Yeah, no, I'm very happy to join the folks covering Capstar. And most of my questions have been asked and answered, but one I wanted to ask about, Tim, the, you know, your reference to talking to a team. And I totally understand about not wanting to get into the specific markets of it. It's all very fluid. But I think last quarter you might have been, if I remember right, you were talking about that you had kind of wrestled with and were getting more comfortable with the thought of, well, we might be able to do more than one. And I got the sense from your tone that you guys were getting multiple inbounds and it was, you know, potentially more than one team and new markets that you might be willing to shoulder and do at one time. The fact that you're just referencing the one team, have things slowed down or are you just keeping the bar kind of low because of everything being so fluid and not wanting to overpromise?
spk10: Just not wanting to overpromise. I'm sort of, like the Hulk, you know, I've got the Wallace in me where he went up 13 straight years with consecutive gap quarterly EPS increases. And so I've got that beating in my head. And then I've got the Tom Garrett in me, which is the entrepreneur. And, you know, I went down to the Sandler conference and I hosted a dinner and it was neat because I met with about eight people at dinner for two hours. Um, there was one sell side. I mean, obviously Steven, it was his conference. And there probably was six to eight investors at the table. And one of the investors, I don't want to say who, but a prominent investor spoke up and said, hey, let me ask you a question. Why would you even buy back one share? The investor said, you know, y'all have a great company. You're in great markets. You're getting inbound calls. As a company, why wouldn't you want it like a private company? And if Chattanooga cost you five cents, why wouldn't you go do three more? Why wouldn't you take on as many as you can that you can handle and just explain to us, explain to us that, hey, this is going to hit 22, 10 cents. But look at what 23 and 24 does. So I was really happy. That's why I really put those comments in my commentary about thanking people. Because, you know, this is a smaller company that I've been in, not used to having all this excess equity. And, you know, we're not self-trust. We're not a $40 billion steady machine. And so I do think we need to be a little entrepreneurial. So that was very welcomed input, and it opened my eyes. That's more how I think. I didn't know how investors would react. But if you were a private company and you were in my chair and you had this extra money, you would be doing IRRs, and you wouldn't be worried about, am I going to increase one penny next quarter? So I'd say we're all over it, and... You know, so I would be, you know, with that support, I would be open to doing multiple as long as my company internally can handle the volume. And at this time, as of January 28th, we've got two offer letters out for two bankers in market that each have more than $100 million portfolios. And then, you know, we're in pretty good discussions with a team that would depend on the team members that joined. But depending on the team members, sort of 500 million to a billion is what they have.
spk09: And, Kevin, don't forget, I mean, in the time frame when Tim was talking about multiple ones, I mean, we've now done Chattanooga. Right.
spk02: No, I understand that. I thought it was on top of that one. But that's fine. I appreciate just getting that insight into your thought process and can't disagree with it at all. One other question just on that because it sort of relates to, you know, this how the investors think. And so I'm wondering in your earlier commentary when you were talking about, listen, we want to ideally invest and get this growth opportunity and you have great markets and so you can see the growth out there. But you also referenced if it doesn't come, if things change or it doesn't come in a reasonable time that you would look at giving it back. And I'm just curious, like, how you weigh or how you define that reasonable time and what you think. Because it seems like, Tim, you listen a lot to these investors that you think highly of. And so when you talk to them about that optionality, if you see that loan growth come in two or three years, you know, is that enough time? Or do you feel maybe not pressured isn't the right word, but do you feel this decision has to be made within the year?
spk10: No, I don't think within a year, but that's where I view the buyback. I view that there's at least, again, I'm not a big acquisition person, but I view we have at least three levers. Put acquisitions off the table. You've got dividend increase, and I know maybe retail shareholders value that more than institutional shareholders, but you've got dividend increases. You've got share buybacks. And as I said previously, I think we will change our posture from last year to being sort of a bottom fisher to maybe a mixed strategy. And then I think you always have the opportunity to do a one-time dividend. I mean, you've worked with me now 25 years. What I'm not going to do, and I'm not criticizing the past, but I would not have sat on this capital since the IPO like this. I would have already done it. Just to let you know, and I'm not saying I could have been wrong, but I was encouraging us buying stock in third quarter of 20, and it was at $9 a share, and I would not have gone in and bought 20 or 30 million, but I was for us doing let's tow in and do 4 or 5 million. And so I think there's going to be a balanced approach going forward, and it's a little bit like a pickle in baseball where someone's caught between first and second, and we're going to get the player on base.
spk02: Okay, appreciate that, Tim. Thanks.
spk04: Yep. Thank you. Our next question goes from Jennifer Dembo with True Securities. You may proceed with your question.
spk06: Thank you. Question for you about wage inflation and what you're seeing there as it relates to new hires or even your current employee base.
spk10: I mean, everybody wants to make more money. That's just part of life, right? But I would say in Nashville, there's a lot of workers. There's a lot of people wanting to move here. So I would say it's not been extreme. And we've got to manage that as a company. We value our employees, and we want to pay people as fairly as possible. But there's also a market out there. And so we hope our employees are reasonable. We want to be reasonable. We love our employees. But we've not seen that as much. I'll tell you what we see more. is just people that want to work from home. And that's more of a challenge of what I see. I was talking to one of our board members yesterday, and they run a substantial company, and their CFO retired. And it's a huge manufacturing organization. And they offered a CFO job to a new person who accepted. It was going to start like this week. And the person called this week and said, I'm sorry, I can't take the job. my company matched your compensation and said I can work from home. And, I mean, this person's running a substantial manufacturing place. They want their CFO there at the office. And, you know, we have a little bit of that, and I respect my employees that feel that way. And if they find an opportunity, you know, we will hate that, but, you know, we'll work with that and find a replacement because I just think in our business, whether you're in loan ops or deposit ops or the accounting department, You can't build hustle and you can't build culture. I mean, Jennifer, it drives me nuts. You don't know how many times that you need a meeting and it's like, okay, hold on, let me get this person on the phone. Okay, we need the second person. Let me get them. Oh, crap, they didn't answer their phone and I come back to the first person. Oh, shit, that person's calling in now. Let me hung up and call them back. I mean, it's a nonstop, it's maddening. And so I would say that's the biggest issue we're facing is the lack of productivity and inefficiency of people wanting to be out of the office. It's a big issue.
spk09: To your point, Jennifer, I was watching and listening this morning. I think there was a really good article somewhere about that in general it's costing employers something in the neighborhood of $7 7% or so is this wage inflation thing that you mentioned. And to Tim's point, I don't think we have that. I don't think we've experienced that in Nashville. But it is something that we're, you know, I mean, the whole dynamic, it is something that we're watching and the like. But we've been very successful. I mean, we had an all-employee call yesterday afternoon, and we must have had three or four of new hires that had started in our last 60 to 90 days and really haven't, you know, haven't had significant turnover either. So, I mean, we are making our case for employees with good jobs and opportunities. And so far, you know, it hasn't run out from under us yet. But, you know, we're definitely keeping an eye on it.
spk10: And your best recruiter is your best employees. And I got an email yesterday from one of our highest thought of employees, and they've got a friend that I won't mention but works at one of the really big banks. And I looked at the LinkedIn, and I think it had been there 16 or 17 years. And our highest employee said that that employee reached out to him and said anything at Capstar, and they've had enough of that really big bank. So people like being on winners, and we've created a winning culture here. So I think we can you know, there may be some increase. I'm not saying there won't be any, but I think we can balance it.
spk06: Okay. Just a follow up question. You've had a lot of questions on operating expenses during the call and let me take it from another angle. Um, I know it's hard to know what they're going to be this year depending on your hiring and et cetera, but is it fair to say if you look at your bank only expenses, and you're successful with the recruiting that you have in your pipeline today, the ones you've mentioned on the call, would those new hires essentially offset the hiring centers you had in 21?
spk10: I think it depends on the size of the team you hire, right? So if the team we're hiring comes with five people, that's one thing. If it comes with 10, it's another. So I appreciate the angle you're coming from, but to give you an honest answer, I think that's hard to do. One thing I'd say about our expenses I don't think we've talked about today, I think there's a lot of leverage in our current expenses. The model when I got here is there really was four bankers that were truly producing when I got here. One of them did about 100% shared national credits. One of them did about 40% out of Nashville participations. Those two are no longer with us. And we've got now probably, I'm guessing, 10 bankers in Nashville that are part of that $500 million pipeline. And they've got anywhere from $25 million to $100 million portfolios. all of them should be able to achieve $100 million higher. So in addition to what is the expense base, I think there's a lot of revenue that can come out of the existing expense base because several of the bankers we've gotten, we've got this pipeline, and I think we have the ability to grow books and loans without having to add a lot of new expense.
spk06: Great. Thank you. Sure.
spk04: Dave, your next question comes from Freddie Strickland with JMS. You may proceed with your question.
spk12: Hey, good morning, guys.
spk04: Hi, Freddie.
spk12: Good morning. Just wondering what the incremental sentiment is just on economic outlook among your customers. You know, do they seem a little more positive, especially, I would guess so, given your guidance on loan growth, but just You know, are they running up against issues of Omicron supply chain issues, or are things largely looking brighter?
spk10: You know, we're in interesting markets. I mean, I go back to, you know, if everybody will reflect on page 22 of our slides, and, you know, you look towards the bottom where it says growth, just take a second and look at our projected population growth. And these are pretty good banks on this page. I mean, these are the banks that are trading at the highest PER size. I mean, you've got Greenville. I mean, Art Siever has an outstanding bank. And think about the great markets he's in. And, you know, you've got some good, I mean, Dana has great markets at HomeTrust. Look at the population growth for our markets and look at the household income growth and what ours is versus these great banks. So I would just say we've had a lot of resiliency through the pandemic that, you know, we unfortunately have had health issues and sickness and death in our communities, but our communities have remained robust. And I think some of that's the leadership of Tennessee. We're a very fiscally well-run state. I think that Knoxville, Chattanooga, and Nashville are very fiscally well-run, so that You know, I don't want to say we didn't have a blip, but I think our credit and our deferrals and all that speaks to that, that our customers held up very well and were positive through it, and I think they're just as positive today. Have not heard any major supply issues. Chris, anything you're hearing from customers?
spk08: You know, what I would say is everybody has some sort of constraint that's a result of the pandemic, but they're finding ways to shuffle things around to make it work. You know, we also have, you know, a strong construction market that continues to drive demand. We have a good supply of new workers coming into the marketplace and so on. Yeah, there's positives and minuses because of the pandemic and supply chain, but it's better to be managing those in a growth market than in a stagnant market.
spk12: Got it. So they're just kind of managing through it and continuing to move forward, then, is kind of the way we should think about it.
spk10: I'd say I have a little stronger, I mean, I would express it a little stronger than that. I think they've managed through it. I mean, you just have to come over here. I mean, it's been probably 12 or 18 months, but, I mean, Nashville had more cranes per capital other than Dubai. We were number two, and that also can be a scary sign, but... You know, my daughter just started Girl Scouts. We had a late child. She's seven. And my wife went, and we were like the resident Nashvillian, and we've been here two years. And there was a lady from Australia, one from Switzerland, two from New York, and one from Wilmington, North Carolina. So, I mean, it's unbelievable the companies that are moving offices. And then even individuals that just, I heard yesterday, I think, I can't remember what firm it was, but One of the people that run the technology investment banking practice at one of the bulge bracket firms, I don't remember if it was Morgan Stanley or Goldman or JP Morgan, but they're moving from California to here and they're just going to run the whole practice from here. So a lot of great things happening across these three metro areas. And frankly, our community markets tell us it blends into there. There's a lot of people that don't mind driving 45 minutes to an hour to work, especially if you're coming from California. And so they want a little bit more land or not urban. So I think it's pretty strong, Fetty. I think you're over that way. I would put it very similar to Charleston, Greenville, and Charlotte. I mean, it's very similar, our three markets, I'd say, to those three markets.
spk11: Gotcha. That makes a lot of sense. Appreciate the color, and thanks for taking my question.
spk04: Thank you. Thank you. Our next question comes from William Wallace with Raymond James. He may proceed with your question.
spk01: Hi. Morning, guys. Morning. All right. I'm probably beating a dead horse here a little bit, but frankly, I'm just a little bit confused. In the deck, in the prepared remarks, you spent – decent amount of time talking about capital deployment and suggesting that you were going to be more aggressive, suggesting that a special dividend was a very realistic potential. And then during the Q&A, Tim, it sounded like you were saying, well, we're not really interested in those forms of capital deployment because it's a higher return on capital to hold it and invest in teams. So I'm trying to figure out what is the tipping point for you to decide one method versus another as you're thinking about the kind of optimizing the capital base at the bank. So any color you can help to, I don't know, more specifically kind of help us think about when you might do a special dividend versus sitting on the capital to opportunistically hire someone. might help.
spk09: Hey, Fetty, this is Dennis. I'm going to give Tim time to think and tell you as best as I see it that we will be, number one, we will be more interested in the buyback based on our renewed repurchase authorization that we just announced in connection with the release. So that's number one. We will we will utilize that lever. We will also be looking very closely at making sure that our dividend payout ratio gets up closer in line with some of our peers. So we will be taking a look at that and utilizing it. We will be evaluating good organic growth opportunities, whether that's in individual bankers or teams of bankers and the like. And then on top of all of that Those are three pretty good things we've got in front of us. We are going to deploy some level of this excess capital that we have here. We are going to return that capital, utilize that capital, deploy that capital. You pick the adjective that you want to frame it around, but It is affecting our ratios and how we get compared to other peer banks, just as Tim mentioned on that slide that's in the deck with all those peers across the top of it. For whatever reason, we are not getting the same multiple, and we think our shareholders deserve some of that excess capital back in one way or the other, and we have three or three or four good ways to do it. I don't know if Tim wants to put a time frame on things, but we're going to have to go into an interest rate environment that's going to be a rising rate environment here. We're going to have just a ton of opportunities. We would like the investment community to really look at the upside of Capstar in light of these opportunities and see the franchise from our perspective. I think that's what Tim was trying to do.
spk10: Yeah, so William, what I'd say, I guess my message is, you know, the company I PO'd, I was not here, I believe it was in 2016. And, you know, there's no criticism, but in hindsight, looking back, which is easy, too much equity was raised for the growth that was delivered. And so my main message is, you know, I think, and I think because of that, I think there's a hidden asset on our balance sheet that if you do my math, I mean I'm a shareholder too, I don't think that's in our value. And I could in theory, and I use the word theoretically in here, I could in theory dividend that out today and I'd have the same net income. So I think we have a hidden asset that everyone's sort of gotten comatose or immune to because it's just been there. And the company's just, it's just almost like part of our company. And so my main message is we are not going to operate that way going forward. That's number one. You know, and so I would just say back to that slide, I don't know the number, there's an order, right? And the first order is organic growth. And if we had no organic growth possibilities or reasonableness, I would be looking at the economics of buyback, increasing the dividend, or one-time share repurchase. Fortunately, I think we've demonstrated with Knoxville and with Chattanooga that those don't need to be high priorities. Somewhere in my comments, I mentioned that the return of capital will be secondary. Messages are really, number one, we have sat on capital too long. We're going to put it to use. We believe that we have demonstrated in the activity we have We've got plenty of reasons and ways to put this to use. So I think that's going to be the outcome. And in the interim, we will probably use our buyback and increasing the dividend as secondary, more lightly used to work around the edges of when this growth comes in. So I don't foresee a special dividend. My message is that we are not going to hold onto this capital It is an underappreciated asset on our books. And if you adjust for it, you know, our ROTCE last year would have been nearly 19%. That's really what we want our investors to know is this is a much more, I mean, go to page 22 and look at all these great banks that are trading higher. You know, they've got 180 basis points less TCE. If we adjust, ours would be 19%. On this page, you know, their estimate is they're going to be 11.6 in y'all's models. So that's really what we're trying to get out is just, you know, y'all have 5,000 banks to follow, and if I was an institutional investor, there's 5,000 I can pick from. We're just trying to do some of this and put some points in front of people that are maybe not popping out as much.
spk09: And also don't forget that each year that goes by, we're adding 48 million. $48 or $50 million of additional capital into our franchise if we don't do anything, just from the net income of the company. So each and every year, each and every quarter, we are generating additional excess capital that adds to the excess that we already have. So tremendous opportunity.
spk01: Thanks, guys. I appreciate you taking the time to provide some clarification. I'll step back. Thanks.
spk10: All right. Go RVA.
spk04: Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Tim Schools for any further remarks.
spk10: I don't have any further remarks. I'm really sincere that we really appreciate everybody's guidance and help. This has been a great team effort, and our employees are working hard, our board's working hard, the management team. Appreciate all the institutional investors that have come along and given us guidance, and appreciate the sell-side analysts that are following us. So I think collectively we're all doing a great job, and we look forward to a really exciting 2022. So everybody have a healthy year, and we look forward to seeing you soon.
spk04: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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