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spk01: Good morning, everyone, and welcome to Capstar Financial Holdings First Quarter 2022 Earnings Conference Call. Hosting the call today from Capstar are Tim Schools, President and Chief Executive Officer, Mike Fowler, Chief Financial Officer, and Chris Teets, Chief Credit Policy Officer. Please note that today's call is being recorded. A 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 and uncertainties and factors are contained in CAPSTAR's public filings with the Securities and Exchange Commission. Except as otherwise required by applicable law, CAPSTAR disclaims any obligation to update or revise any forward-looking statements made during this presentation. We would also refer you to page two of the presentation slides for disclaimers regarding forward-looking statements, non-GAAP financial measures, and other information. With that, I will now turn the presentation over to Tim Schools, CAPSTAR's president and chief executive officer.
spk08: Good morning, and thank you for participating on our call. We appreciate your interest in CAPSTAR. Our first quarter results reflect the focused strategic plan and disciplined execution we put in place three years ago. At that time, we established four strategic objectives, enhance profitability and earnings consistency, accelerate organic growth, maintain sound risk management, and execute disciplined capital allocation. This quarter, our loan growth, excluding PPP, exceeded $100 million for the second consecutive quarter, leading to 31% annualized growth. Our past dues were a record low 17 basis points, and we increased our dividends 67% as part of our balanced capital allocation strategy. As you know, this is a transition quarter with the industry coming off two historical outlying years. Specifically, mortgage volumes and PPP income will not recur at those levels, and in many occasions, provisions increased significantly and then have been decreasing. As we return to more normalcy, I'm excited at what I see. Our markets are healthy. We have improved organic growth engine. with additional teams inquiring about joining. Over 20 banks have sold in our state, with our state's largest bank, First Horizon, having sold this quarter. And we have significant excess liquidity in capital. Three items I'd like to point out in reviewing our first quarter results are a BOLI death benefit, expenses related to severance slash retirement, and deferred loan costs from prior periods. They net out, but particularly the deferred loan cost true-up is important to understand as it impacted the reported NIM for the quarter. Excluding this, PPP, and adjusting for excess liquidity, we estimate our NIM to be 3.32%, down eight basis points. Mike will expand in his comments, but some of that is related to some one-year specials we've offered in Chattanooga as they attract new customers. So we will not expect that to be ongoing. There are always near-term challenges when you're running a business, and they change over time. We've migrated from the potential pandemic-led credit risk to supply chain, inflation, and interest rate risk. For our core bank, We feel these risks are manageable. We remain optimistic growth will continue, and we recently updated our deposit data assumptions and asset sensitivity results, which show we are favorably positioned in both a traditional rate shock situation as well as a flattening of the curve, which might be a more likely scenario. As it relates to our tri-net and mortgage fee businesses, They are each coming off of record years and face some near-term headwinds as a result of rising rates. Trinet volumes remain strong. However, spreads are lower at the moment as we work through our inventory of loans held for sale in the recently increasing rate environment. Generally, we expect this business to return to levels slightly above the pre-pandemic 2019 level. We had a great first quarter as we worked through volume from last year, but again, with the recent rise in rates, spreads will be challenged for a quarter or two. I am hopeful TriNet can produce 750,000 to one million of fees a quarter over the long run. We have an outstanding mortgage division. I do not think it would be a long shot to say the absolute best in Nashville. It is built on purchase money transactions where in a non-refinanced market, 80% has historically been purchase money. It also is coming off of a record year and we feel can return to slightly above the pre-pandemic 2019 level. However, the industry faces several near-term challenges in that refinance volume is declining with the increase in rates, spreads have tightened as competitors fight for less volume, and there is a shortage of inventory. We feel this is temporary and that Capstar is in a position of strength. Historically, this situation causes smaller refinance-oriented competitors, who are often the ones offering lower spreads, to exit the market. And we have a long list of customers. There are just a limited supply of houses for sale at the moment. I'm hopeful mortgage can produce $2 million to $2.5 million of fees a quarter over the long run, but this business can have more variability than most with changes in rates and in different seasons of the year. Chris will expand on each of these in his comments. We are equally excited about our SBA division. It has had two light quarters. but we feel has tremendous potential as demonstrated by a few quarters close to $1 million. It is not as impacted by rates. It is more that we are working on our business development capabilities as we have in the core bank. We feel this can eventually be a $1 million a quarter revenue business, which in the near term could help as tri-net and mortgage normalize. As I turn it over to Mike, I want to take a minute to thank Dennis Duncan, who served as CFO over the past year as Mike faced a family emergency soon after taking on the CFO role at Capstar. We are grateful to Dennis for stepping out of retirement. He did a great job in advancing many of our initiatives. Sadly, Mike's situation did not work out as we hoped, but we are thankful he had time to spend with his wife and are excited to have him back. Thank you, Chris. Oh, no, sorry, to you, Mike.
spk06: All right, thank you, Tim, and good morning, everyone. So, on slide seven of the deck, net interest income was 21 million for the quarter. That was down 1.9 million from the fourth quarter. and that decline was driven by a number of factors. We had a 700,000 favorable impact of the strong loan growth that Tim described. That was more than offset by a 1.2 million decline in PPP interest and fees, the 500,000 deferred cost loan origination expenses related to prior periods, 400,000 impact of two fewer days in the quarter and a $200,000 decline in interest related to loans held for sale. The margin of 2.97 for the quarter, as Tim noted, is down 17 basis points versus Q4, excluding the deferred cost adjustment, PPP, and excess liquidity The adjusted NIM was 3.32%, which was down eight basis points versus Q4. There are a number of factors that contributed to that, none of them very large. We had about a two basis point drop in non-PPP loan fees. We had about a one basis point decline in the impact of purchase accounting. and we have about a little less than three basis point impact from the near-term specials that Tim mentioned us offering in Chattanooga to attract new customers to that new market. The improvement in the loan-to-deposit ratio driven by strong loan growth, we expect... We expect net interest income and NEM to improve going forward due to a number of factors. The strong loan pipeline and production obviously provide tremendous opportunity to continue remixing our balance sheet and redeploying excess liquidity into loans. Number two, loan pricing tailwinds. As competitors respond to the dramatic recent market rate increases we've seen, especially since year end, we remain asset sensitive and expect to benefit throughout the aggressive series of Fed rate hikes that has now started and expected to continue over the next one to two years. On page eight, I want to talk a minute about our interest rate risk sensitivity, which Tim touched on. So as Tim noted, we recently refreshed our deposit repricing beta assumptions. And the net result is a little bit lower beta assumptions. We remain asset sensitive. And as you see in the charts, Our model shows that we will have a 4.1% year one net interest income increase for an immediate 100 basis point parallel yield curve increase. Obviously, the Fed is broadly expected to aggressively raise short-term rates, though following this significant yield curve steepening in recent months, as Tim noted, we believe And I think the market believes a yield curve flattening scenario is very likely. So in a scenario where Fed funds rises 200 basis points gradually over the next year and five-year rates move up by a more modest 45 basis points, we estimate that net interest income over that year will rise by about 1.7%. On page nine, Average deposits of $2.7 billion remain near record levels, and we continue to be focused at Capstar on building core responsibly priced deposit relationships. We want relationships certainly to cover both sides of the balance sheet, loans and deposits as well as fee income, et cetera. Deposit costs have held flat for the quarter. at 19 basis points. We will be very focused on disciplined deposit pricing as the Fed raises short-term rates. We will be focused on optimizing profitability while remaining competitive to ensure that we can be effective in retaining and attracting core profitable relationships. We are committed to a deposit-first culture. which will ensure strong core funding and stronger profitability and more balanced profitability as we move forward. On slide 10, total health or investment loan growth excluding PPP of 31.1 percent on average or 21.3 percent based on end-of-period balances. And you can see we have only $6 million of remaining PPP loans. The remaining fees related to those are about $170,000. So the headwind, if you will, related to PPP loan forgiveness is essentially done. Our Q1 production of $186 million in health or investment loans annually, that equates to $755 million. And you can see from the last few years' numbers that demonstrates continued momentum in growing our loan origination in the last few years. The loan pipeline, the commercial loan pipeline exceeds $500 million with strong contributions across our markets. Our loan yield in Q1 declined significantly 50 basis points. 24 basis points of that is due to lower PPP fee recognition. 11 basis points is due to the deferred cost adjustment for prior periods. The remaining 15 basis points is due to a number of factors, loan coupon, other loan fees, purchase accounting accretion, all items I noted in the explaining the difference on adjusted NIM. We had disciplined pricing in Q1. We had match-funded spreads of about 211 basis points, though, as Tim noted, in Chattanooga and very selectively elsewhere where appropriate, we have had some originations at lower than targeted spreads given lag competitor responses to market rate increases, where we are seeing recent movement, which we're obviously very pleased to see. On slide 11, solid non-interest income for the quarter. Thanks to our unique fee businesses, our non-interest income has exceeded 30% of revenue over the past eight quarters. As Tim touched on, with large market rate increases and very sudden interest rate increases, mortgage income is normalizing, coming off record highs in prior quarters. And Trinet had a very solid quarter, though down from the record $4 million quarter in Q4. As Tim noted, we also had one-time BOLI income of $858,000. On slide 12, related to expenses, our total expenses were $17.7 million for the quarter. We continue to focus on maintaining strong expense discipline with the adoption of a productivity mindset across the organization. Excluding $385,000 of severance retirement expense in the quarter, non-interest expenses declined $1.3 million from the fourth quarter. A number of factors driving that, but primarily lower incentive accruals coming off of record revenue period and reduced recruiting expenses. On page 13, actually, I will turn it over to Chris to talk about our risk management and credit.
spk05: Great. Thank you, Mike. Turning to page 14, once again on asset quality, we are pleased to report the trends of improvement have exceeded our expectations from the cautious view we took in the early months of the pandemic. First, as it related to integrating merged banks, processes, and systems, We have achieved consistent improvement in past dues that remain well within our guidelines. We've done a pro forma look, combining the legacy Capstar results with the results of the banks we acquired in recent years, and are excited to note that 17 basis points in delinquency represents a record low, even including those new markets that we've partnered with. While we are pleased with the 17 basis points reported, we aspire towards continued improvement to even lower levels over time. Second, criticizing classified loans are now below the level we reported at December 2019 before the pandemic. We point to a number of outcomes that encourage us. First, despite substantial provisions for uncertainties early in the pandemic, as highlighted in the lower left chart, we did not see meaningful losses occur and now believe that the residual impacts of the pandemic, especially in the hospitality and tourism sectors important to our local markets, have passed. Also, With an immaterial exception, all borrowers with pandemic payment deferrals have resumed normal payments, and the criticized and classified loan levels noted on this page reflect our assessment of our borrowers in real time based on current operating results and future expectations. Turning to page 15, because of the positive asset quality trends I've already mentioned, in addition to other factors that we track in our overall asset quality oversight, we feel that a small net release of reserves is warranted this quarter. We previously noted that we experienced substantial loan growth in the quarter. Within our model, this growth has been appropriately provided for with an allocation that exceeds the overall levels noted here at 102 basis points and 116 basis points, respectively. While making appropriate allocations for growth, qualitative considerations are objectively accounted for based on the improvements in delinquencies, criticizing classified loan levels, and changes in portfolio concentrations, among other factors. It is also important to note that, while we are reporting improved asset quality results as compared to pre-pandemic levels, our allowance remains at a level higher than pre-pandemic levels to account for remaining uncertainties that exist relative to newly emerging issues in the economy and the world's geopolitical situation. With that, I'll turn it back over to Tim to discuss profitability and capital management.
spk08: Okay, thanks. I'm going to touch a little bit on slide 17, and I don't have any prepared comments for this, so I'm just going to ad lib a little bit. But on page 17, this sort of speaks to, you know, what we've been all about the last three years. We recognize we have excess capital. We've improved profitability. So that's a good problem, but, you know, causes your capital to grow even more. This illustrates our capital ratios versus a peer median, and I would argue that peers are probably overcapitalized at this point. So, you know, reasonable targets might be for leverage and tangible common, maybe 8.5, say, and maybe on common equity Tier 1 capital, perhaps 10.5, and on total risk base over time, 12.5. So we're not going to get there overnight. But long term, you know, as we work to lever this bank, those may be more reasonable targets to work towards. So how are we going to do it? As you've heard, and I hope everyone feels that we are a management team that delivers on what we say. And we've talked a lot about at the beginning of lessening the reliance on participations and increasing the organic growth rate. So I'm excited on number one. about the results of Knoxville, Chattanooga, and we don't talk as much about going into Rutherford Williamson in Nashville. The cap star had really been a Davidson County bank. Those three markets today have $500 million, and 24 months ago it was zero. And so if you think about the power of that, as well as probably $200 million of shared national credits that we let run off, that's huge operating leverage in that arena. So we're excited about that. Number two, we announced yesterday an increase in our dividend. I've met with most of our large shareholders and, you know, the capital priorities, and it's hard meeting with investors because everybody may have something a little different, but generally their capital priorities match ours. And, you know, they're open to buybacks, but I'd say two of the industry's most prominent investors have said, Tim, don't buy back shares. You have too much opportunity in your markets and hiring teams like Chattanooga. And number two, if you do it, only do it at the right price. However, they were interested in a higher dividend yield because it helps achieve their target. If they have a 10% annual target on their fund and they can get 2% off of the dividend yield, that helps get there. So we raised it. That gets us to about a 20% roughly payout of normalized earnings. And we're excited to be able to do that. So it will go from $0.06 to $0.10. Third is in the first quarter, I guess this slide doesn't have it, but the earlier entry slide had in the first quarter, I don't have it in front of me, but we, hold on one second, we repurchased 36,000 shares in the first quarter. And then since that, you know, this is not a quarter in number, but to help you in your modeling, As of yesterday end, it was 120,000 shares. I wouldn't view that as a change in view that we're buying more. We've established certain price targets in tiering, and just where the market was, we're up to 120,000 shares right now. That leaves 27.5 million. And then lastly, always keep M&A on the list. I would say I haven't received a book in two years, and not looking to do anything, but that's always an option. And we would want to make sure that it's very strategic and that it's disciplined pricing. I was looking yesterday at our Chattanooga model, and Chattanooga started the, like, middle to third week of October. And, you know, we had modeled that to be five to six cents dilutive the first year. and they've put on so many loans that they actually are, we have a very detailed model with all their costs directly to them, and they actually are pre-tax, pre-provision positive. So their interest income is overcoming their salary expenses and rent expense. Now, obviously, as fast as they're putting on loans, there's provision expense, So they're not net income positive yet, but I don't have my model in front of me. We didn't expect them to be pre-tax, pre-provision profitable until like month 8 to 12. So they're ahead of schedule. Lastly, I'm just going to end with a few prepared marks here that, you know, we're really excited by what we're building here at Capstar and the tremendous opportunity before us. We're really only in the first inning of a nine-inning game, I'd say. So it's going to be really fun to see our progress and all we accomplish over time. That concludes our call, and we'll open it up for questions. Thank you for supporting our company and dialing in.
spk01: Thank you. As a reminder, to ask a question, you'll 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.
spk00: Hey, good morning, everyone.
spk02: Hey, Stephen. I guess maybe my first question kind of would be around views on new potential markets versus deepening some of your existing markets. You guys noted, I think, either the deck or the release, you know, the opportunity from the first rising deal, obviously a reliant deal, and other deals throughout the state that you noted. So how can we think about your priorities, I guess, or desires for how you might take advantage of that from a, again, new market expansion versus just deepening your existing footprint?
spk08: Yes, that's a great question. And I think that the number one priority would always be in existing markets. But it doesn't work that way. You have to be available when talent is ready to move. So if there was an additional group in Nashville, Chattanooga, or Knoxville, we'd be very interested and add them. And sometimes it is disruption. It's usually an event that causes somebody to want to change. And we actually have a meeting today. What time is the meeting, Chris? Three o'clock? We have a meeting today in another city at three o'clock today. We have four teams we're talking to. And let me just go in the head real quick. Three of them are related to mergers they're involved in and just disruption. And, you know, the other one's another situation. So I think we're definitely interested in our current markets, and that would be priority number one, but it's really a function of where is there available talent.
spk02: Yeah, that makes sense. And if you went to a new market, I mean, just from a size perspective, I mean, something like Memphis, is that bigger than you'd want to target? Or it's like an Asheville size market? Or, you know, how do you think about where your brand fits the best? Is it? the tertiary growth or the bigger markets?
spk08: I don't really know that that matters. I don't think you'll see us go into Atlanta. I mean, I know you're in Atlanta. I know Atlanta well. I went to Emory. My wife's from Atlanta. That's just so big. But outside of Atlanta, I really think any market, I think it's about what's the quality of the team and what size book do you think you could get. And if we were to go to – Memphis, and I've met with several teams there. There's a steak restaurant there called Folk's Folly, and I've told them, let's be Folk's Folly. We don't have to be Outback Steakhouse and have 10 locations. Let's have the best, and Folk's Folly is the best steakhouse. So it's really what quality team can you get, and then what size of business do you think you can get in that market? We have a pretty elaborate model we've built that calculates an internal rate of return And the internal rate of return on these we're seeing is, you know, 32 to 40%. And, you know, if I bought back stock right now, my model says it would be about a 17% internal rate of return. So don't mind buying a little stock right now. But, you know, again, I've talked to a lot of our larger investors that actually own our stock, sophisticated folks. And I had one specifically, I think you were at the dinner, Stephen, that that said, you know, why would you buy back your stock? And so we're really focused on the model and how much would the team cost based on the size of the team, what book do they think they could get, and then what's the IRR of that. So I would really leave any market open other than, hate to say never, but I don't see us going to Atlanta. It's just so big to bite off.
spk02: Sure. Sure. That's helpful. And you guys put something really interesting in your presentation here this week. This discussion of the matched funding spreads, 211, I think it was, and I know Mike mentioned some of the maybe temporary discounts in Chattanooga and some other places, but how does that 2.11% compare to maybe historical or even last quarter? How can you frame up kind of that spread for us a little bit and where that funding match is coming from?
spk08: Sure. So we actually published that for the first time last quarter, and last quarter we published that it was 250. Okay. A lot of banks and analysts, right, we all cite loan yields. Well, that's not really a great metric because what if you put on a seven-year fixed rate loan and I put on a one-year fixed rate loan? I mean, my loan yield may be lower, but it should be lower because it's lower into the curve and it's going to prepay earlier. So, you know, Many banks or most banks use fund transfer pricing, and so you have a theoretical cost of funds that should match the duration of the loan. So it removes all interest rate risk. If you didn't have a dollar of deposits, what would the funding cost the bank if you had to borrow it to fund that and lock in that profit with no interest rate risk? Probably, and banks use different FTP funding curves. I think most knowledgeable treasurers would recommend the FHLB curve because that is the rate at which a bank can borrow. Some banks, I think, in my opinion, maybe not as knowledgeable, might use treasuries or something. That's an index you can price off of, but that's not your cost of funds because you can't borrow at treasuries. So we use the FHLB curve. and we generally target a 250 spread. So if you came and wanted to borrow, commercial building often is a five-year maturity with a 20-year amortization. It may be a 525. It may be a 720. We go out to the FHLB website, and they post rates with all those durations, and we look at that, and then based on the credit risk of the loans, You know, if the loan was super strong, been in business 15 years, stable cash flow, strong DSCR, a lot of liquidity, low loan to value, lots of guarantees, you might price down towards 200. We don't really go below 200. And if it has lesser qualities there, you might price up towards 300. But our average, fourth quarter it was 250. We generally target 250. What we're seeing right now is two things, Stephen. One is when we go into a new market, we permit markets a certain amount of money. We almost equate it to marketing dollars to go move some business. And so we'll do some one-year specials. And so that 211 would include the weighting of some one-year specials. Number two is that what we're seeing in a rising rate environment is As we're competing for loans, we're holding our discipline. So that FHLV curve went up, so we're quoting loans at 250 over that. We're seeing other banks either lagging or not having a fund transfer pricing model and not yet raising their rates. So we're having to accept some thinner spreads than we normally would. Now, we're not going to compete just to get volume. It's only on the relationships we really want. We think the industry will normalize over time. but right now they are slow on raising their rates with the increase of the base rate, if that helps.
spk02: Got it. Yeah, no, that's extremely helpful. And maybe one just last clarifying question for me. On the expense guide, $16 million for the core bank and then some variability with mortgage, how do we think about mortgage expenses? Is there a range or is it, you know, maybe it's an 80% efficiency ratio or something along those lines? How can we think about what to layer on top of that?
spk08: So real quick, Our core bank, you know, when you run a company, there's expense timing. You know, a bill may come in this quarter and, you know, it's not always linear. But our core bank is running, give or take, about 16 a quarter right now. One quarter it may be 15.8, one quarter it may be 16.2. It's just timing of bills and so forth. But we're running about 16. We're joined today by Hart Weatherford that runs our mortgage company in the event that you all had a question. So I'm going to let Hart maybe answer how he thinks about that. And Hart, maybe a way to answer it for him is if we say we're going to try and target $2 to $2.5 million of revenue, how would he think about offsetting expenses? Is it 80% of that, 70% of that? How do you think about it if it was $2 to $2.5 million a quarter? And this is Hart Weatherford here.
spk09: Well, it's been variable over time. The last couple of years, we're trying to get to a more normalized number right now as we speak, but we'd like it to be 70% to 75%. But ultimately, our goal is to make roughly 70% to 85% basis points on our production after expenses. So we're working through that with the volatility right now, working through our expense numbers, and we have a plan moving forward, and we'll execute on that plan if the market continues to be like this.
spk08: and I know I'm supposed to say this because I work for Capstar and Hart's sitting in this room, but if I was to retire today, I've worked with some great folks, and they were talented as well. I mean, South Trust had $5 billion of annual production. National Commerce had $2 billion, and that was in normal markets, not the peak last two years, and I'm telling you, Hart's a great operator, and I'm just so proud and fortunate to have him running that ship, and He doesn't just think about volume. He thinks about the spread, and we've got a very quality shop.
spk02: Fantastic. Thanks, Tim and team. Appreciate the time today. Congrats on a great quarter. All right. Thanks, Stephen. Appreciate your support.
spk01: Thank you. Our next question comes from Kevin Fitzsimmons with DA Davidson. You may proceed with your question.
spk10: Hey, good morning, everyone. Hey, good morning, sir. Hey. Hey, Tim, on your comment on the new market entries and that you're meeting with four teams, is it fair to say, because last quarter you talked about it being a pretty active environment for that, and then Stephen had brought up the First Horizon situation. Is it fair to say that these kind of conversations you're having today are ones that were kind of maybe not already out there, but they were – kind of existing potential opportunities and maybe FHN opportunities are going to be, there's going to be a lag and they're going to be further back because I would imagine they're going to lock up some people and then after a while they get freed up. So is that fair to say that this is kind of pre-existing opportunity and then maybe you get a kicker six months, a year down the road from FHN?
spk08: I would say none of these four was I talking to them at the last earnings call. And the last earnings call, I don't even remember, but I was talking to one or two. One of those, so I guess maybe there's five, but one or two of those from I was talking on the last call, I'm still talking to. It's just taken a long time. But there's four really active ones right now. I was not talking to them in January. That doesn't mean the first horizon, but they're interesting because it's a lot like dealing with a merger. I mean, you're courting, you're dating, they're understanding you, you're understanding them. They've got families, you know, they talk to their spouses about who they want to change. So it's not, it's very interesting. It's equivalent. I've probably bought more banks than hired DeNovo teams, but it's sort of fun. But it's a very similar process. But If I go down the list real quick, I mean, I don't think we contacted any of these folks. As I'm thinking about just quickly of these four, I believe they all reached out to us.
spk10: And, Tim, of those four, if you said it before, I apologize if I missed it, but do any of those four represent new markets or are they all existing markets? They would all be new. Oh, really? Okay. And how do you feel about, like I know a couple quarters ago you talked about at first you were kind of trying to find it, not to hit profitability all at once with too many new market entries, but then I think you really came to more of a realization that, hey, just, you know, when the opportunity is there, jump on it and just explain it to the investors. And how do you feel about that today?
spk08: Well, I guess I'm a function of how I was trained. And so it's a little bit like being a Marine. And Wallace Malone increased earnings for 13 consecutive years on a gap basis. If you remember, he didn't report operating earnings. I don't know how he did it. I think that's 48 consecutive quarters. He did 13 years of quarterly gap increases. That's how I was trained. that you're supposed to grow EPS every quarter. And so this is the second smallest company I've ever been in. I've never had all this excess capital that I've had to deal with. And so some peers and friends like you that I sat with that are actually buy side, very smart money, sort of said, Tim, why are you thinking that way? It's a different situation. This is not self-trust. And you're saddled at this capital. You're in great markets. You're a young company. You're entrepreneurial. And yeah, you could do a one-time dividend. You could raise the dividend. You could buy stock. But you've got this great business opportunity. Why not explain the math to us? And why not get as many as possible that you can manage and make successful and just point it out when you do it? and say, hey, this one's going to be $0.05 year one, but we think it's going to be $0.30 in year three or whatever. So I would say that opened me up some. And I just want to perform and deliver. And so I think if I was a private company, that's definitely what I would do because I've got a long horizon. But I didn't know what the broader investor spectrum, how they would receive that. But I would say we had a meeting. I don't want to say who. with what Mike Fowler was with me, with around our, I'm not gonna say, I should just say top 10, but one of our top 10 shareholders in January, and they echoed that same thing, and just said, love what you're doing, keep it up, and I'd invest that capital, I wouldn't buy stock, and just explain to us the expense and what you think's gonna come. So that's long-winded, but it's just, I'd say fundamentally in the fall, I've been trying to get my arms around Capstar, been trying to make the profitability better, been trying to get the organic growth. Chattanooga was the really first one because the other one was my team in Knoxville. They worked for me before. But I'm excited. I don't think we could probably take on all four, but it would be exciting to maybe get two of them.
spk10: Yeah. No, that's great. That's great color. And one last one from me. on the tweak in the deposit betas for the asset sensitivity. Are you guys comfortable sharing what that was and what you changed it to in your new analysis? Sure. Mike, do you want to explain?
spk06: Sure. So, Kevin, let me just give you sort of on average. So our average assumed repricing beta for non-maturity interest-bearing deposits had been 68%. And I think, as we reviewed it again, I think that was more through-the-cycle thinking. And the current beta for up 100 basis, for the first 100 basis point rate move, is 44%.
spk08: And real quick, Mike, can you explain? We use a firm called Darling, and you may have heard of it or people on the phone may have heard of it, but it's a very prominent firm out of Boston that does a lot of ALCO interest rate risk work for probably some 500 banks across the country. I'm not going to mention some of their customers, but very highly successful banks. And do you want to mention that we worked with them and they have that average of all of those banks and that number would be in line, right, Mike? Yeah, absolutely, absolutely.
spk02: Okay, great, guys.
spk08: Yeah, I'd just say, Kevin, our assumptions, I'm not sure why. I don't think we've gotten to it since I've been here, but our assumptions were Darling even felt were much more aggressive and above the average that they see of all their customers. So with their experience, and we're very fortunate to have Mike in this kind of environment, he's got a lot of balance sheet management experience. Both of them felt they adjusted them to the appropriate level.
spk10: Okay, great. Thanks very much.
spk01: Thank you. Thank you. Our next question comes from Brad Ravigan with Healthy Group. You may proceed with your questions.
spk07: Hey, guys. Good morning.
spk01: Hey, Brett.
spk07: Wanted to first just talk about fee income and trying that specifically. Last quarter, I think I asked the question, and you said it might be more like 20, and now you're talking about it being more like 19 in terms of normalcy of income, but the first quarter continued to be, I guess, stronger than what you were talking about. Can you just talk about the the environment for that business and, you know, any visibility of, you know, either a return of normalcy or what's going on, you know, that would give you the thought to continue to trim the outlook for that business for the year.
spk08: So real quick before Chris answers, the main difference from what we said before is the sharp rise in rates that occurred in first quarter that we did not anticipate on the last. We knew rates were going to go up. We didn't know it was going to be so sharp so fast. Chris can explain how the pricing works on when we set these rates and how we sell them. We're going to have some spread compression just the way we're set up right now. We may be able to work on a hedging strategy that in the future would manage that interest rate risk better, but it's really in the most immediate one or two quarters we could have some spread compression. Still great activity, great volume. But, Chris, do you want to explain how you set the pricing and then the timing to when you sell them?
spk05: Yeah, I mean, Brett, it really does come down to it's a margin business, it's premium, and the outsized spike, particularly in the 7- and 10-year treasuries, is having an impact on it. The way that that business works is we're pretty much locking rates about 45 days to 60 days before a close here. then we have a bundling and marketing period for the pools of loans that we make. So there might be a 90- to 120-day gap between when we lock a rate and when we have a transaction ready to market or a pool of loans to market. And basically, the spread has just gotten compressed, which will impact margins in the short term. You know, having said that, you know, Tim already referenced, we're looking at hedging strategies since we do anticipate some prevailing contracts increases in rates over time, and we want to protect ourselves against some of those hedges or some of those spikes, but we'll still come back to a core strength that we have in the TriNet business, which is that first we have a nationally recognized presence, and really we believe we can share, we believe we have a nationally recognizable share in the TripleNet space, and that makes them a preferred provider in transactions meeting our target profile, and there's going to be a period of lull here where buyers and sellers retrench and reconsider what they're looking for in transactions. We have seen that a number of times over the years, and we anticipate volumes that will come back, I think, ultimately in the new rate environment to 2019 levels.
spk07: Okay. That's helpful, Chris. Appreciate it. And I wanted to ask about just the balance sheet management, Jim, and just thinking about, you know, if I look at the trends in the first quarter, you're obviously using some liquidity. You're posting, you know, really strong loan growth. Going forward, it would seem like you would continue to use some of the liquidity, and so the balance sheet growth, you know, could be, depending on how aggressively you use the liquidity, you know, minimal to, you know, some... lower level than loans. Can you just talk maybe about, you know, optimization of the balance sheet versus, you know, NII and how you plan on dealing with that equation as the year progresses?
spk08: Yeah, so I'd like to maximize the balance sheet. I don't see a need to grow the balance sheet. I think that we have excess cash and actually excess securities more than we'd like to have. So I think there's a tremendous opportunity for the immediate 12 to 24 month loan growth to put that on without having to grow assets, which should improve your net interest income, should improve your net interest margin, your pre-tax pre-provision to assets, your ROA, and your ROE.
spk07: Okay, and then just lastly for me, Chris, if I heard you correctly, it sounds like we're at the end of the credit leverage so to speak, and from here, provisioning, you know, a good assumption might be 1% of originations, or can you give us any color on how you think about the environment from here from a provisioning perspective?
spk08: Well, let me take something before Chris answers because I want to make sure Chris, me, you all, we're all on the same page. I forget the number, Chris, but the summer of 20, we did a pandemic qualitative survey allowance of some seven to nine million. Do you know what the total number was?
spk05: I think that ultimately over a period of quarters, we probably had 9.1 million in special provisions relating.
spk08: So summer of 20, like many banks, we put in roughly 9 million, I think over two quarters. And, you know, allowance isn't a black and white thing. You've got your existing portfolio that we put on new loans. We've had mixed changes. So it's hard to be exactly black or white But we had about $9 million that we put in related to the pandemic. Chris, correct me, keep me honest here. We haven't had one loss from those loans. Not meaningful. Yeah. So that pandemic, in hindsight, wasn't really needed. Now there's other dynamics that have gone on in the balance sheet. Some credits have gotten better. Some credits have gotten worse. We've grown loans. So I don't want to say that it's a $9 million in and $9 million out because it gets reallocated to stuff that's But, Chris, one way to think about it maybe for Brett is how do we think about of that $9 million, is there any of that left, or how do you think about it?
spk05: Yeah, I think, Brett, what I would say is if we just get down to raw numbers, before the pandemic, Q4 of 2019, without purchase money marks or fair value adjustments, we were at 89 basis points. in our core allowance. Today, using the slide that you have in front of you, we're at 102 basis points without fair value marks. Of that 102 basis points, about 10 basis points is still a residue from the qualitative adjustments we made for the pandemic, which means that we're at a higher level of core A triple L on a pre-pandemic to current level comparison apples to apples. Does that make sense? Yeah, that's helpful. I appreciate it, Chris.
spk08: And that doesn't mean that necessarily next quarter or the quarter after we're going to take it out. That's generally what's there. Something else could happen to warrant it put in. It may warrant a qualitative factor. I think I read J.P. Morgan's, Jamie Dimon, they increased their qualitative for inflation in the Ukraine. So don't know that that will come out, but there is a little bit left that technically you could probably associate with what went in for the $9 million two summers ago.
spk05: Yeah, and, Brett, I would add a little bit more color. For instance, the allocation under our model based on our qualitative and quantitative factors for, say, a commercial loan is at a rate of about two and a half times what it would be for a commercial real estate loan. So a lot will have to do with the volume of concentrations and where we have in different areas and so on.
spk08: I do think you're thinking about it right, though, Brett, because I think what you're getting at, and we can get really mechanical and technical in this whole model, but, you know, we put on what? I don't have it right in front of me. $110 million of loan growth this quarter or something. So we used a factor of that. We used a factor of, I'm not sure what Chris used, 1, 120. We used a factor on that. So the way to think about it is based on the improvement of the overall quality, the release really would have been more. But so you are thinking about it right, that incremental growth is going to have that 1, 120, whatever. And so that's what we did on this growth this quarter, or otherwise we would have reversed even more than the 700. Okay.
spk07: That's great, Keller. Appreciate it, guys. Appreciate it, guys.
spk01: Thank you. Thank you. Our next question comes from Teddy Strickland with Jenny Montgomery Scott. You may proceed with your question.
spk04: Hey, good morning. Hey, good morning, Teddy. So, Tim, I just want to go back to your comments earlier on that slide 17 capital deployment page. It sounds like the options you list on there are more or less in order of likelihood, right, just given how things have gone in Chattanooga?
spk08: Correct. No, they're in the priorities that we prefer and how we think. On slide 17, we want to invest in ourselves, then keep a competitive and sustainable dividend. We definitely want to have a sizable buyback authorized. And, you know, I didn't have all this in place at the time. But, you know, I probably would have been encouraging my board to buy a little bit, not go crazy. But in the third quarter of 20, you know, certainly there was a lot of uncertainty. And I'm not saying I had the crystal ball. But when our stock was at $9, I don't know that it would have been bad to buy, say, maybe $5 million. So anyway, we've got that number three available for any market disruptions or very opportunistic buys. And then we'll keep our ears open for M&A, but I'm not telling bankers to go find me something or we don't have a full-time employee that's really working or looking for deals.
spk04: Got it. And then I was just curious, what sort of loan yield do you guys see on new production?
spk08: Again, it depends on the duration or the tenor. So if you did a three-year equipment loan, they're typically three years and fully amortized over three years. Or if you do a seven-year maturity with a 25-year commercial real estate, it's hard to just say yield to yield. What I would say right now, I wish I had it pulled up. We just bid. I don't want to say the banks because I want to be a good competitor, but we just bid on some. I think it was in Cleveland, Tennessee, which is in between Knoxville and Chattanooga, and I'm pretty sure it was a commercial loan of like a five-year maturity and 20 years. I think we were at 4%, which would still be – a tighter spread. I don't have the FHLB pulled up, but I think that FHLB rate may be around 240, 250. So that would only be 150 basis point spread versus that 211 we talked about. I think there was a bank that bid 275 and one bid 325. So that's back to my comments earlier that banks right now are slow to adjust their rates to the change in the base rate. Um, We're trying to stick to our discipline, but then if we want to compete and get some volume, which we're not going to fight for volume, sometimes we have to take a little thinner spread.
spk04: Got it. Nope, that makes sense. Thanks for answering my question. Guys, I'll step back in the queue.
spk01: Thank you. Thank you. Our next question goes from Catherine Neely with KBW. You may proceed with your question.
spk03: Thanks. Good morning.
spk08: Hey, good morning. We waited until 9.02 because we didn't see you on the list, so we told them to hold off and wait a minute or two.
spk03: I was late coming in. So a lot of my questions were already answered, so thank you for all that. Maybe just one super big-picture question, which I know is hard to answer, but just want to get your thoughts on it, Tim. A couple quarters ago, I remember you were talking about big-picture profitability targets, and you had like a one-eighth, PPNR target and maybe a sub-55% efficiency ratio, I think it was. So how do you think of – I think the world has totally changed since then. We've got higher rates, which is good, but you've got some fee initiatives in there as well. So just how do you kind of think about how the world is changing and if you could still get to those targets?
spk08: Well, I don't know. I'm a believer, and if you don't believe, you're not going to do it. So we actually had our all-employee call yesterday and went to our board meeting yesterday, and in both meetings I told them that number needs to be 185, and that's just a well-run bank. So we're going to keep scrapping, and we're going to find a way to do it, and it's not all expenses. It's a function of revenue, expense, and your asset level. And so right now we've got – You turn over every rock. And so in Wayne County, Tennessee, we've got a building on our books for $100,000 that came with the merger. It's not a branch. It's just a building they had. It's just sitting there. And if you don't make it a priority and get rid of it, that's a $100,000 non-earning asset. We've got a lot in Murfreesboro, Tennessee that came to that acquisition that's on our books for $1 million. We don't plan to build a branch there. And, you know, it could be out of sight, out of mind, ignore it, move on. There's other priorities. We get rid of it, there's a million-dollar non-earning asset gone. We've got four or five properties in Athens. So I think it's just bird-dogging it and working it hard. So I'm an optimistic person, and there's always going to be challenges. I can tell you in Hawaii, when I got there, our pre-tax pre-provision was $135,000. And when I left, it was 235, pre-tax, pre-provisioned assets. So I don't think we can get ours to 235. I think it's a different model. That was a 90-year-old bank, much more mature. We're a little bit more of a growth phase. One thing that could hold that number back, Catherine, is like right now we've got the investment of Chattanooga in there, right? So that's an expense. But I think a stable, normalized bank, we want to get it up towards 185. Okay, that's great.
spk03: And then more near term on the SBA piece, I feel like that you've been really excited about that, and you've been talking about the $1 million a quarter goal. Can we get there as quickly as next quarter, and what's driving the lower levels today versus the ramp to $1 million? What gets us there?
spk08: Well, I don't mind saying, since this is a public call and it's recorded and all that, there's no guarantees, but we have good – Insight that we do feel second quarter is going to be a million dollars there now could change something could happen Something a deal could fall out, but right now that's looking good I don't think like this quarter or next quarter. I want to get that bit. I think that forget the last two years That in trying that can be pretty consistent recurring quarterly fee income businesses, so I We've got to do what we did in the core bank. We've got the core bank now where it's generating 10% plus loan growth. We're lacking the business development capabilities. We've got the engine, the underwriting. We know SBA. And if you look at the last five or six quarters, we've had some wins. We've had some quarters that we did 900 or a million. But then the last two quarters, it was 250. And it's totally a function of getting the right business development engine. And that's under Chris now. That's one of the reasons why I thought it would be good to have somebody over specialty banking. I know he'll get it there, and maybe he can comment on some of the things he's doing. But once we get that, I think that can be that in Trinet, forget the last two years, can be pretty recurring things we can count on. Hart has the best mortgage shop in Nashville, but that's just a volatile business. That one's going to be volatile. Chris, do you want to add what you're doing on business development?
spk05: Yeah, and, you know, Catherine, if we go back and look, say, two, two and a half years ago to comments that Tim was making about Capstar and us remaking ourselves, he was not focused on production. He was focused on pipeline because the first stage to building production is pipeline. If we go and look specifically at our government-guaranteed group, SBA Lending in particular, SBA I can make a similar observation. In fact, in our biweekly pipeline calls, I can go and I can look at a four-fold increase in their pipeline just since the beginning of the year, in part driven by adding business development talent to the team, and we're constantly and continuing to recruit for new talent on that team. But that's how we're going to get there. So we've had more of an investment on the back end, efficient delivery. Now we're investing more substantially on the front end to get business development activity. And I underscore Tim's confidence. And, again, part of it is I share Tim's confidence that we are on the right track to get that where we want it to be sooner rather than later.
spk03: That's great. Very helpful. Thank you so much.
spk01: 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.
spk08: That's all we have. We appreciate everybody's time. I hope you have a great weekend. We appreciate your support. And, you know, we're having fun and thank you for doing good things. And we look forward to a good year. So we'll talk to you next quarter. Thank you so much. Thank you. This concludes today's conference call.
spk01: Thank you for participating. You may now disconnect.
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