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spk01: good morning everyone and welcome to capstar financial holdings third 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 teats 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 that 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. Sir, please go ahead.
spk08: Okay, good morning, and thank you for participating on our call. We appreciate everybody's interest in Capstar, and I'm going to apologize ahead of time. I'm coming off of COVID-2 from about two weeks ago, so I'm congested a little bit, so I apologize for that. In the third quarter, we reported 37 cents per share. Our earnings included first a $2.1 million pre-tax loss related to the sale or markdown of our remaining tri-net balances. Trinet production was ceased in early July, and there's no further risk of loss on anything that has been produced to date. 900,000 of 2.3 million in losses incurred since second quarter are unrealized, and there's a high probability that that will be accreted back into earnings over time. It is uncertain at the moment as to if or when we will restart Trinet. Second, a $1.5 million pre-tax loss for wire fraud. We filed an insurance claim and are seeking a recovery. The FBI and our core system provider have tracked the IP address of the individual that is trying to perpetrate many banks, and our core system provider is seeing it showing up across their banks. We have and are reevaluating all processes and procedures to do everything in our power to prevent a similar situation in the future. Lastly, a $732,000 pre-tax operating loss on a depository account. I cannot get into the details at this time, but we and our council believe Capstar is in the right and we are pursuing a recovery. I take personal responsibility for these incidents. I inquired about stopping trying that production in May when I was made aware of the $200,000 unrealized loss we were going to take. At that time, I was informed everything going forward would be at par or better. With the volatility of the markets, I should have used better judgment and paused production until we had total clarity. While the other two involve fraud and questionable legal advice, we can and need to do better to prevent such incidents. To establish a culture of accountability, I voluntarily forfeited my 2022 bonus and in doing so, my executive team followed. This will total about $1 million for the year. We are a shareholder-oriented company and we recognize our shareholders deserve better. Additionally, we are performing at a high level and our employees deserve to earn as much incentive as possible. With our corporate incentive based on EPS, pre-tax, pre-provision to assets, and ROA, Lowering our incentive will assist them in getting more for the great results they are achieving. With that having been said, I'm excited at the high level our team is performing. Adjusted for these incidents, we earned 50 cents per share and a 139 ROA. Importantly, that is with our mortgage division contributing a third quarter net loss of $663,000. which equates to two cents per share loss and no contribution from Trinet. The pre-tax pre-provision to assets was 1.84% and the bank only excluding mortgage was 1.93%. As an aside, our mortgage division reduced annual operating expenses about $400,000 toward the end of the quarter. We have an outstanding mortgage division and believe it is a valuable piece of our franchise and will continue to be a positive contributor over the long term. When I joined three years ago, the pre-tax pre-provision to assets was about 1.45%, and I set a target of 1.8 to 2%. That was questioned at the time, and several people said it would be hard to do. We're proud of our improved profitability as well as the improved growth prospects we've created for Capstar. It is important for our pre-tax pre-provisioned assets to perform at a higher level, to generate competitive capital returns in good times, but also to have more earnings power for more challenging times, which bring higher credit costs. Before turning it over to Mike, I'll comment a little on current trends. First, we've added a second commercial relationship manager in Asheville, a fifth commercial relationship manager in Knoxville, and we added an additional correspondent banker all this quarter. Second, with the fast pace of rising rates and the level they are at now, loan demand is beginning to slow, and like most banks, we've tempered our interest in CRE and construction. During the quarter, adjusted for the tri-net loans that we transferred over, our average loan growth was 9.2%. With the quality of our sales team and the strength of our markets, it could have been much higher. However, with competitors not raising loan rates at the pace of market rates, an extremely challenging deposit environment, and the current economic uncertainty, I believe it is best to be patient and cautious at this time. Third, deposits are extremely competitive. You might recall last quarter, While other banks were commenting on anticipated deposit growth the remainder of the year, I expressed more caution. With rates having risen sharply, customers are aggressively shopping for the first time in years. Brokerage firms and U.S. Treasury rates offer a higher rate at the moment, which brings additional challenges. We have refined most metrics at Capstar, and deposits are really the last step we need to address. As a younger bank, Capstar was built on lending with less of a focus on funding. We've been working on balancing our culture, and I believe over time we have tremendous opportunity. Fourth, credit metrics remain very strong. Our criticized and classified loans improved again, with our largest substandard loan being upgraded to pass. Pass dues ticked up a little bit, and that is essentially due to two relationships of which one has been troubled for about two years. We feel we're in a strong position on both. The remainder of the increase included an unusual level of matured loans that were not renewed timely at quarter end and about $500,000 for three PPP loans for which we are fully secured. Mike, if you'd now please cover the financial highlights for the quarter.
spk09: Thank you, Tim, and good morning, everyone. So on page six, a few key performance highlights in terms of profitability. The net interest margin was 3.5% in the quarter, up nine basis points from last quarter, up 38 basis points from a year ago. Efficiency ratio, as reported, 61.5%. As Tim touched on earlier, adjusted for the three unusual items, the efficiency ratio for the quarter was 52.8%. Return on assets, as reported, 1.03%. Adjusting for the three unusual items, 1.39%. In terms of growth, we continue to have very solid loan growth, 9.2%. adjusted for the transfer of tri-net loans from held for sale into held for investment. Earnings per share, 0.37 cents a share. Adjusted for the unusual items, 50 cents a share. And tangible book value per share, excluding the impact of after-tax losses on the available for sale investment portfolio, was 16.5%. and 22 cents as of 9.30, up from 15.86 as of the last quarter, and up versus $14.59 as of a year ago. In terms of soundness, credit metrics, as Tim noted, remain solid for the quarter. We had two basis points of annualized charge-offs. We had 30 basis points of non-performing assets to loans. and we continue to run with very strong capital levels. On page seven, the net interest income of $25.6 million was an increase of $1.1 million versus last quarter. The margin of $3.50, up nine basis points, was driven by a combination of us redeploying cash into loans, and number two, modestly benefiting from the Fed's continued rate hikes. Based on our assumptions at this time, we don't see the margin being materially impacted by further Fed rate moves. We continue to see loan pricing headwinds as competitors catch up, to recent market rate increases. And we also, not surprisingly, at this point in the cycle, we have seen the last few months some increase in deposit pricing pressure. As Tim alluded to, early in the Fed, early Fed moves, we, like the industry, did not move deposit rates materially. But as the Fed moves deeper into the hiking cycle, as expected, our betas have increased as we've seen in our markets. We do continue to have very strong loan pipeline and production, which provide good opportunities for continued net interest income growth. On page eight, total deposits were roughly flat, down $5 million for the quarter. There was some movement within that. Correspondent balances declined $69 million on average, as many of our correspondent customers deployed their excess liquidity. We look forward to turning that around as we expand our correspondent business into new markets, leveraging the recent addition Tim mentioned of a seasoned correspondent banker. Our deposit costs for the quarter of 62 basis points was an increase of 39 basis points versus Q2. We continue to focus on discipline deposit pricing, trying to balance remaining competitive, retaining customers, attracting customers while also optimizing profitability. And we continue to actively target deposit growth, especially operating balances. On page nine, we continue to have strong production. The pipeline, the commercial pipeline remains above 500 million. We did have Average loan growth of $50 million for the quarter, adjusting for the movement of TriNet into health for investment. As Tim noted, we are limiting commercial real estate due to the economic outlook and to better align our loan and deposit growth. Our average loan yield increased 37 basis points versus the prior quarter. with an average spread versus match-funded home loan rates of 1.9% near our 2% or better target spread. On page 10, terms of non-interest income, we continue to see stable deposit and interchange revenue. In terms of mortgage, as you're seeing through the industry, with mortgage rates continuing to rise, hitting 7% for 30-year fixed rate mortgages or up 300 basis points versus a year ago. Mortgage revenue has been impacted by combination of higher market rates as well as limited supply of homes for sale in our markets. TRINET loss, Tim discussed. The $2.1 million loss related to sale and transfer of remaining TRINET loans into HELP for Investments. And contention consistent with their outlook on the last call. Our SBA team demonstrated solid progress this quarter. With fees in Q3 exceeding the sum from the first and the second quarters. And as Tim mentioned, we are very excited about the future with recent SBA hires. On page 11. Total expenses were up versus Q2 due to the $2.2 million operational losses Tim discussed for which we are pursuing potential recoveries. Adjusted for the operational losses and for management's voluntary bonus waiver, expenses are down $800,000 versus the prior quarter. strong expense discipline with adoption of a productivity mindset throughout the organization, and we continue to have an ongoing focus on efficiency opportunities. On page 12, actually, I will turn it over to Chris to discuss risk management.
spk04: Great. Thank you, Mike. Turning to page 13, let's discuss asset quality. As noted in the upper left-hand graph, overall asset quality is improving with continued reductions in criticized and classified loan levels. Even with that improvement, there is migration reflected by increased past due and impaired loan levels. Since these two outcomes have some overlap in what drives them, let me give you some additional insight. Of the $14.3 million in past dues noted in Q3, there is not a pervasive or systematic issue emerging. While we believe we could have improved this result with better administration of a few delinquent borrowers, more than half of the $14.3 million total relates to two separate borrowing relationships totaling $8.3 million. Of this, $3.3 million is an SBA transaction with a 90% SBA guarantee. While delinquent and rated substandard, this borrower is not impaired. Five million dollars is represented by a single borrowing relationship that came with an acquired institution. This loan is delinquent and accounts for the increase in impaired and doubtful loans component of the trend. This borrower has filed bankruptcy. Since the loan is secured by real estate with a low loan to value ratio enhanced by guarantor support, we believe there will not be loss as we work towards resolution. Of note, Each of these relationships has been classified as substandard since last year and subjected to our quarterly review of rated loans. As we've noted in the past, substandard loans require more time and attention to work out. While our level of criticized and classified loans is low, we anticipate that these two relationships will continue to influence our reported delinquencies in coming months while we endeavor to bring them to successful resolution. Even with this migration within substandard grades, we still achieved an overall 15% reduction in our criticized and classified loans. We are glad to have such good levels of criticized and classified loans as we enter a new period of uncertainty in the economy. Moving on to losses, in the lower left-hand graph, as a result of our evolution in recent years to a traditional community banking strategy, including pursuit of smaller and better secured borrower profiles, our annualized loss rates remain exceptionally low at two basis points. Turning to page 14, while drivers of overall asset quality are improved, we believe a provision to maintain the same level of allowance is prudent. As noted in the slide, despite improvements in the pandemic supplement and historical loss factors, the net provision is driven by loan growth and adjustment for qualitative factors relating to the current economic environment. With this, I'll turn it back over to Tim.
spk08: Okay, thanks, Chris. Thanks, Chris. I'm really proud of the strengthening of our core bank. We are well positioned and are excited by the prospects of our team and the markets. The current environment brings certain challenges. We're working through those and are optimistic there will also be some things that our improved position will allow us to capitalize on. That concludes our presentation, and we're happy to answer any questions. Once again, thank you for your time. and we appreciate your support.
spk01: Thank you. To ask a question, you'll need to press star 11 on your phone. Please stand by as we compile the Q&A roster. One moment for our first question. Our first question will come from Kevin Fitzsimmons of D.A. Davidson. Your line is open.
spk06: Hey, good morning, guys. Hope everyone's well. Hey, Kevin. Good morning. Morning, Tim. So it sounds like you're kind of signaling the margin's probably going to be more stable. The loan growth is going to soften somewhat. Deposits remain a challenge and the betas are accelerating. But I just wanted to take a step back and, you know, how does all that net out with the ability to grow NII in your mind? Because I mean, I don't disagree with that. It's probably prudent to be more careful and cautious on the loan growth front. But, you know, a lot of banks are putting up big percentage margin expansion. But I just want to get your view on actual dollars of NII and how we should view that trajectory going forward. Thanks.
spk08: Yeah, sure. Thanks, Kevin. And And look, I'm just one perspective, and I don't want to challenge or second guess what other banks or CEOs say. But as you know, we've known each other a long time. I'm a conservative, cautious person. And, you know, deposits went down for many banks in the second quarter. And I know on the second quarter calls, many CEOs said, well, ours will go up the second half of the year. And my comments were much more cautious. And I've also been cautious on the margin. You know, when you look in 10Qs and 10Ks, there are a lot of assumptions that go into interest rate risk shocks. And you're assuming that's on a static balance sheet. So you're not really assuming what growth might do. But on a static balance sheet, right, you're assuming what you think your betas are going to be. They may be better than that. They may be worse than that. You're thinking about how customers might behave that have existing loans with you, and that's a little easier because you know contractually the fixed will stay and variable will go up. You don't know that if those people have extra cash that they won't pay some of those loans off, and you don't get the upside in that yield. On new production, when we're doing our budgets, we assume certain spreads. And one of the things we've been saying at Capstar for the last three quarters is is competitors have not raised loan rates to the pace of market rates. So new production is coming on at thinner spreads. Forget the absolute yield. If you use a base rate of the FHLB curve, again, third quarter last year, we got 250 basis points. That's sort of what we target. And year to date, it's been more 160 to 180. That's not because what we wanted. Other banks are not raising their prices. And so So it's very complex, and it's not as easy. I mean, we'd all love it to work out exactly like IRR tables, but it's complex. So I don't have an exact answer for you, but you've got the macro challenges. I don't think Capstar's challenges are any different than I'm seeing in the market and other banks, and I think it's going to be a period. I think industry margins are While they have expanded the last two quarters, I think continued expansion is going to be tough. I mean, we have depositors that call us that love the bank and say, hey, I can get a six-month treasury at 4%. You know, I hate to do this, but I need to take the money out for six months. I'm going to buy a six-month treasury. I mean, it's hard to raise a deposit account to 4% when competitors are doing loans at 5%. So I know that's not the answer you want, but I do think that at a macro level industry margin expansion, I would think would, would taper and, and not be as much or maybe be flat. And so then it's going to come down. Can you grow your balance sheet? I really think today we could grow quality loans today in this environment, probably 12 to 15%. And that's what cutting back on being a little more conservative. The challenge is, are you going to find the funding to fund that? In a healthy environment, I think we've got the teams and markets, we could grow loans 20%. So if you remember on the last call, in the back of our investor deck, we had sort of changed our outlook to, hey, right now, maybe high single digits for loan growth, because we just think with the economic outlook and some of the funding challenges. So that's very long-winded, but I think you're on track on the macro issues, and we're Right now, at this point, I would still probably maintain the higher single-digit loan growth and deposit growth would be the outlook, with a more stabilized margin, not expanding more.
spk06: Okay, great. That's very helpful, Tim. And maybe just looking at credit, you know, I know we're in a situation now where you I appreciated all the detail on the past due non-performers, and charge-offs remain historically low. But you mentioned how it's prudent to provide for the loan growth to keep the reserve where it is. But given the economic forecast, are we heading into a period where you may have to think about building that ratio versus just keeping it the same? Or Do you feel your markets are vibrant enough and healthy enough that that's not being called for at this time? Thanks.
spk08: Well, that's not a clear answer either, right? I mean, being conservative, I think you would – if – Allowances are interesting. You don't have a lot of leeway. There are qualitative factors that allow you to do some of that, but they're so model-driven now today, Kevin, and we'll be migrating on January 1 to CECL, and that will change even a little bit more. I'm not the expert on it. We've got Jeff Moody, our controller here, and Mike, but that's going to be driven more on unemployment rates. And so even that is not really prospective, right? That's actually something has to happen for unemployment rates to go up. So there's room for qualitative factors. But I do think it's a period, just if you're cautious, that you probably want to set a little bit more aside. We don't see any indicators right now other than common sense. You know, rates are higher. So people with variable rate loans, their payments are higher. Fossil fuel prices are higher. So people are spending less. That's just going to hurt basic operating companies. And, you know, what, what could that lead to? So we're just trying to be really cautious. We've got a great bank. We're good underwriters. And, you know, we're beginning to focus on, um, not that we don't always do that, but, you know, really strong, almost like the pandemic portfolio management. What are those sectors or customers that could be more stressed, work with them early and, um, get it before that happens. I will say on Cecil, just in case someone doesn't ask the question, that we're finalizing that and we're prepared for adoption on January 1. We've not disclosed any adjustment amounts. I don't want to do that publicly on a call, but I will say that our analysis looks like our adjustment will be in line with industry averages for what the one-time hit-to-book value has been. It looks like it's very reasonable within industry averages.
spk06: Okay. Thank you, Tim. Appreciate it.
spk08: Thank you, Kevin.
spk01: Thank you. And one more, please, for the next question.
spk02: Our next question will come from Graham Dick of PSC.
spk01: Your line is open.
spk05: Hey, good morning, guys. Morning, Graham. So I just wanted to touch back on the loan pricing you guys were talking about and just get a little more color on that. I'm just wondering what your longer-term outlook is for this. Like, do you think these competitors will ever be compelled to lift their pricing? I mean, I don't know if it's excess liquidity or what that's allowing them to be so aggressive, but you'd have to think that, I guess, risk-adjusted returns start to look pretty bad relative to what you can get even in the bond market. I'm just wondering what your longer term outlook is here. And then also, you know, if they do adjust, you know, say a few quarters down the line, um, if there could be any, any upside, I guess, to net interest margin from there versus the current, I guess, range you guys were talking about.
spk08: Yeah. So good question. I think some of that's already changing. I mean, it was worse in the first half of the year and you know, there's whatever 5,000 banks or something. There's probably 60 that operate in Nashville and, Not that they're not all great banks, but some use more discipline than others. Some have more sophistication than others. Not every bank has funds transfer pricing, and not every bank benchmarks it against a base rate. Some just sort of use gut feel. And so you always run into a competitor that's pretty low. But I think it's starting to come up some. But we're using discipline of which loans do we really want to do for those reasons. for profitability as well as for credit risk. Down the road, there's so many aspects, Graham, that go into calculating a net interest margin that certainly would benefit the margin that if we were getting 250 spreads on all commercial loans, that would be an additive. But there's also gives and puts. There's other things that could go against that. So I would hate for you to take that and model just that one factor would lead to that. Margins generally should be higher with higher rates, right? DDA are worth more. They were worth very little when rates are lower. So all things being equal, I think it would benefit. I was reading just a little bit this morning that I guess stocks were up early with short-term rates coming down some. I think if the curve had stayed higher and had some steepness, that probably would benefit margins. But That's my thought right now.
spk05: Okay, that's helpful. And I just wanted to get a little more color on deposit costs. Can you give me any idea of what you guys have been seeing, I guess, on the recent rate hikes in terms of beta? Maybe just like, I don't know, what you're kind of expecting through the end of the year as we head into 1Q on that.
spk08: Yeah, so I'll make a quick comment and then Mike can give you the details because he manages that process. But Just to explain what we do and what I have seen at most banks is we subscribe to a service called RateWatch, and they go shop our bank as well as a lot of banks. You give them the competitors you want. You give them the markets you want. So we get a Nashville report, a Knoxville report, a Chattanooga report, and so forth. We pick the competitors we want on there, and we get a weekly report of what those branches report they're paying. And so we have a very disciplined process that meets every week. Our goal is to be sort of top third in our markets. We don't want to be number one. We don't want to be below average. And we actively monitor it the best we can. And we look at base rates. And then we also have a sheet that shows all the specials. And so I'll let Mike talk about maybe what he's seeing. But I just want to make sure everybody understood. And that's a pretty standard process that any bank I've been in has done. But Mike, do you want to comment on what you're seeing sort of on the ground?
spk09: Sure. So we are seeing, I guess I would say, money markets, which are about 20% of our portfolio, deposit portfolio, is where we're seeing the most aggressive movement. Our assumptions there, on average, are about 50% betas. Our interest checking, which is about a third of our portfolio, we assume 25% betas roughly, and savings, small balance, we assume around 15% to 20%. So we have seen those come up, but I think those are levels that we feel we can certainly manage through this part of the cycle.
spk05: Okay, great. That's helpful. And I've just got One more quick one here on SBA. I saw that you guys are looking it out in another team here. Just wondering what the revenue potential is there in terms of, you know, how it might be added to the 4Q range of, I think you said 750 to a million. Trying to gauge the size of that there to potentially offset some of the softness in mortgage.
spk04: Yeah, this is Chris. I don't want to get too specific in guidance on that. Again, I believe last quarter indicated that we saw Q3 and Q4 of this year exceeding the aggregate we had for the first half of the year. We need to settle into our staffing before we start making predictions. I will say, though, that our expectation over time, our goal over time, I should say, is that we will be successful in our recruiting efforts and we'll build solidly on where we are right now with growth going forward. I want to be more cautious than that because I can't predict what I can't control right now, you know?
spk05: Yep, I understand. All right. Well, thank you, guys.
spk01: Thank you. And one moment for our next question.
spk02: Our next question will come from Catherine Miller of KBW.
spk01: Your line is open.
spk03: Thanks. Good morning.
spk08: Hey, Catherine.
spk03: Just back to the earlier question just on kind of big picture profitability that Kevin was talking about. As I look at – and you made some really important expense adjustments this quarter to kind of offset some of the headwinds. You know, I think those are great and really appreciated. But, you know, and as we look at kind of the expense growth rate or maybe the operating leverage up to next year, you know, so much I think of what was part of the thesis of your story was, you know, we had kind of this expense build with some of the hires that you brought on and entering a new market, and that was going to bring on, higher revenue growth just because those teams were going to build so much, you know, in loans and that was going to be on a higher margin. So I guess as you think about now a flatter margin and slower growth, are there, how do you kind of balance what the expenses look like over the next year? And is there anything you can do to that $16.5 million bank-only expense guidance rate that you highlighted in your presentation?
spk08: I think there's always opportunity. I've mentioned before our core contract ends in the spring of 2024. Everywhere I've been, there's been material savings there. So to me, there's always room on that. I think we've done a good job. I think when I came, the efficiency ratio was maybe 67%, and now it's 52%. So, I mean, this is one of these, right, that, you know, you wish in every environment you could grow loans 20%, you could grow DDA 20%, you could have an efficiency ratio of 50%, and the world would be perfect. And that's just not reality. So I don't think that we're any different than we thought. I think that over the next year, if we could grow in this environment loans 8% to 10% and hold that at, you know, a margin close to where we're at, and grow expenses at say two and a half, 3%. I think, you know, we're, we're already a company that right now is earning 50 cents this quarter with mortgage costing two cents. If they just broke even, we'd be at 52 cents. So we're really excited where we're at. I don't think we view that our thesis has changed at all. We've got much more diversified revenue. We've got more people that can contribute. All their expenses are already in our run rate. Um, and so again, you know, we're being cautious in this environment and not being overly aggressive, that if we can grow, you know, eight to 10%, and we've already got our expenses down, so let's make sure we manage that and moderate the growth of it, we think we'll have a great year.
spk03: Got it. Yep, that's super helpful. And then on kind of levels of profitability is there, I know you had put out some pre-tax provision profitability targets earlier in this kind of new environment? Is there a target that you think is more reasonable to look for this year?
spk08: You know, there's, you know, companies are complex because you don't, I don't know everything. I'm not aware of any large one-time other items this quarter, plus or minus. I'm sure there's 50,000 here or there that we got this quarter or this bill, but I don't, I don't see why our current run rate on pre-tax pre-provision should change that much. Um, I don't, I don't think we're going to have a lot more margin expansion from here. Um, I don't think it's going to go down right now from here. I do think that banks that were asset sensitive do need to start thinking about an 18 to 24 months. If rates came down, everybody was all excited about the asset sensitivity. but that means they'll go down also. So, but in the, in the current environment, I would hope Catherine that now that we've gotten it in that, you know, I don't have my sheet right in front of me, but now that we've gotten it back to that one 85 range or one 95 excluding mortgage, I would hope we could hold it in that range and run a company like that. And, you know, charge offs have been really low for a long time. It's not realistic that they'll stay this low. And that's, again, why we want that at 185 to 195 so that we can cover more charge-offs. And, you know, maybe our ROA isn't 139. Maybe in that environment, it's 115 or 120. So we're just, we're very pleased where we're at. And, again, I think if you were back to the year before COVID or two years before COVID, We've now got the markets and bankers in that environment that I think things would grow 15%. But in a high-rate environment and the Fed going up another 75 and depositors looking all over the place, I think it's just time for a little more patience and cautious, and it would probably be high single digits.
spk03: Great. Yeah, I appreciate all that all makes sense. And maybe we'll follow up just on the buyback. Any thoughts? your tone is more cautious, which I totally appreciate and makes sense, but you still do have a lot of capital and your stock is cheap. So how do you kind of think about the buyback as a supplement in this environment?
spk08: Yeah, I mean, I'm a buyer, so I think it's a price I definitely would buy at. There's so many uses for cash, right? So one is deposits aren't strong. So, I mean, we, it's not into the world and we could go take five, 10, $15 million and buy stock. I think it would be a good economic decision right now. That's five, 10, $15 million more wholesale funding you'd have to get. So, um, part of it is, again, I'm personally kicking myself. I've got $130 million of trying that on my books that I kept that not only, you know, where there's some realized losses and unrealized losses that caused reserve and it took up 125 million of funding. Well, had I not done that, I'd have $125 million more per core and market loan growth. Also could take 15 or 20 million of that and buy back stock. So just working through that, I'm definitely a buyer of the stock here and we're just weighing our different priorities on utilizing the cash.
spk03: Great. All right. Thank you so much. That's all I got.
spk08: Hey, before you go, I just let you know that I actually got COVID at your college, so that was my present for visiting Parents Weekend.
spk03: I bet it was worth it there.
spk08: Yeah, it was.
spk09: All right.
spk03: Thank you. Thank you. Thank you.
spk01: Thank you. One moment for our next question. And our next question will come from Brett Babitin of Havdi Group. Your line is open.
spk07: Hey, guys. Good morning. Good morning, Brett. I wanted to first ask on the assumption that the margin kind of flattens out from here. What does that assume? I know that the deposit beta is running around 40% at this point, and you've got some aggressive – peers in Middle Tennessee that have been growing at a rapid clip with their deposit rates that I see posted as well as some of their other non-maturity rates as well. What does kind of the flattening of the margin assume for deposit betas going forward? Does that assume a continued acceleration or a flattening? What can you point to on that?
spk09: Yeah. So, Brad, this is Mike. I would say on that, We're not assuming an acceleration of betas. I think we did see betas accelerate from early in the Fed's rate moves, but we're assuming and optimistic that we can hold the betas that we have been seeing recently. So that would be probably overall for our liquid deposits about a 35% beta. I don't have a blended beta factoring in CD rates, but on the liquid deposits, around 35%. And we're optimistic that we can manage with that. There certainly are some banks in our markets that have been more aggressive. There are others that are not. So as we see opportunities for deposits, We are seeing instances where we are being more flexible to be competitive, to retain relationships or attract new relationships. But we're also seeing situations where pricing is much less aggressive. So it's more mixed than it was earlier this year. But again, we think we can hold the betas that we've seen recently going forward near term.
spk07: Okay. And then this is obviously Chris is getting to talk on the calls again, you know, as we prepare for whatever storm, as Jamie Diamond says, is coming. Is there anything that you guys are either seeing or looking at in terms of loan categories or things that you want to avoid going forward? You know, some people were concerned about office, hotels, et cetera. Any loan classes that you would think could be more impacted?
spk08: Well, I'll let Chris get into that because I presume, Chris, it's a lot like we did the pandemic analysis. I would assume it would be the same categories. But a couple of things I'd say, first of all, we're a bank. We're not perfect. And I'm sure in a declining environment, we would have increased losses. I think we're generally a strong credit culture and good underwriters. We had our loan review firm, which was the former BKD. Now four of us here on site at our board meeting Wednesday, they just completed two loan reviews. They've looked at 35% of the portfolio. They target 50% in the year. And generally their view is positive on our portfolio and our underwriting. The profile of the portfolio has changed a lot the last three years. And, um, you know, As everyone knows, Capstar was more of a national lender, and our shared national credits this quarter, they're now less than 1%. I know we haven't done a shared national credit. There was a lot of participations on top of that that weren't even shared national credits with Pinnacle, First Bank, Enterprise in St. Louis, Cadence in Houston. I don't think we've done one of those in two years. Our profile is so different that we're more granular, we're in more markets, they're more secure, they're more guaranteed. That doesn't mean that good customers won't go bad, but the last comment I'll make on our profile is Capstar has been a bank, even before myself, that's never really done any material A&D or a large level of builder finance. Chris is more of an expert than I, but, you know, A&D and builder finance are two areas that tend to get hit hard in bad economies. We really aren't exposed to that sector. And then, Chris, maybe talk about the sectors we have, like from the pandemic.
spk04: Sure.
spk08: What are those sectors that are on your mind that you highlight?
spk04: Yeah, Brett, it's a good question and a little bit forward looking. So it's really one guy's opinion rather than something that I can empirically show. So, first of all, stepping back to the big market. We have interestingly seen for the first time new projects that are failing to raise the equity requirements that we would have to underwrite them. So these are projects that creates a normal break on construction and development activities. And I'm not talking in the residential space. I'm talking about in the commercial space. But if you go into our response to that is we stay disciplined and we get more disciplined. As we've talked about for many quarters, going back even before the pandemic, our commercial real estate model is a high cash equity model, period. We've stuck to that. If you go back to specific categories that would be deemed risk through, well, let me also step back. Of our commercial portfolio, commercial real estate portfolio, we only have 60 basis points of criticized or classified loans within that portfolio. It has been high performing for a very long time. Areas of concern. Hotels, going back through the pandemic, have performed exceptionally well for us, even during the pandemic. But we have not grown that category. If anything, we've shrunk it just a little bit. Multifamily continues to be a resilient component of our portfolio and of the economies and the markets that we deal in. And we do have a concentration there. We also have some retail, but again, we're sticking to more of the triple net lease profile. A good portion of what we have in retail exposure comes through the TriNet program, which is a weighted average cash equity of 35% with long-term credit tenant national leases in place. So we don't, you know, yeah, there is concern over office, but that is mitigated, again, primarily by the high cash equity that we have going into those transactions. And we believe that we can be resilient managing that over time. I don't know if that answers your question, but I'll give any more color that you might want in there.
spk07: No, that's very helpful, Chris. Appreciate it.
spk04: You know, and Tim, I'm sorry, I didn't address the one issue. We continue to be exceptionally conservative with acquisition and development activities. It's just not something that we see as being long-term, the kind of risk that we can manage, particularly in this kind of environment. So we'll continue to be conservative there and with residential construction activities.
spk08: And, Brett, let me give you one example, and I don't even remember all the details, but in the last two weeks, two opportunities came before us, and one was what I hope and suspect is would be a great long-term project. It was some kind of, I don't want to say what market, but it was some kind of newer, Kevin Lambertson here, Kevin, I don't remember if it was a hotel or what, but it was some kind of resort development, spec, construction, pretty large cost to it. Do you remember generally the range, Kevin, of the cost? So it was a large spec, construction, resort kind of thing. Kevin and I looked at it and said, I don't really think we should be doing that right now in this environment. Then somebody called in and we've got a customer who moved two large operating companies to us where we've got cash management, deposits, loans, and that customer owns a warehouse that they lease out to a large grocery store chain. Number one, it's a Proven customer we know, two existing operating companies, and then he's got a warehouse that he leases out that has had a proven tenant for a long time. So we did that one. So that's an example of where we're being very selective and very choosy. Even though the first one sounds like a great project and long-term probably has great prospects, we didn't think it was great for this environment.
spk07: Okay. That's very helpful. I appreciate all the color on that. Just one last one. You know, I think, Tim, when you got to TaxStar, I think the first thing that was obvious is you needed to change the lending culture. And so I think that was kind of the first and foremost thing that you focused on. You know, as I think, you know, in the past few quarters, you probably realized that deposits were also something that, you know, needed to be focused on as well. And, you know, I don't know if you feel like you – you caught up to that from a culture perspective, but just wanted to hear, you know, maybe any thoughts around the deposit building culture at Capstar, and if you think you've gotten that to where it needs to be, or if maybe you still got some work to do with how the relationship folks, you know, bring in deposits.
spk08: Yeah, ironically, you know, I joined in May of 19, and so the first six months, I can see Jerry King's on this call here and listening. And he's really one of the people that informed me the most and woke me up. And he was been a great, I'm so glad he spoke up. And so the first six months I took, you know, he challenged me to analyze the company and what would it take to make it better? That, that came from Jerry King. And so actually Brett in the fall of 19, I started a whole deposit project. I, got peer incentive plans. You know, we clearly were a national wholesale participant bank is what we were. And so we laid out that we needed to change that. And we laid out funding actually at the same exact time. And we changed incentive plans. We started talking about it. And actually, I think we started to make some good initial progress. And then within three months, the pandemic started and you turn to, you know, employee safety, your own, your own personal safety. How do you run a bank remotely? I mean, just the next 18 months was total. How do you run a good company in that environment? And 300 million of excess deposits came in. So I would say it's not like we're, I mean, I don't want to, I'm not trying to say that to say I found it, but we started talking about it probably in October. of of 19 and i would say that both the disruption of the pandemic as well as you get comfortable with the 300 million i mean that really turned to internally and from investors what can you do to lend that out well you know that 300 million at all banks basically left right and so um We've achieved everything we've set our mind out to do, and I would just say that it was not part of the original culture. Certainly they got deposits. I don't want to say that. But it wasn't a balanced approach. Like, you know, Art Seaver has grown his bank and done a great job at Southern First for 30 years, and he hasn't bought banks, and he's found a way to fund his bank. You know, I don't think he's been growing loans 20%. You know, he's found a way to grow loans to deposits 8% or 9% a year for a long time. And they're a model just like us. They're in urban markets. They've limited branches. So we're really doing a lot of self-reflecting and getting back to that. So I would say it's very early. You know, if it was a baseball game, it's in the first three innings. And I'm very excited about what we can do. And I think we need to adapt incentive plans. You know, one example I'll give you for everybody on the phone is there's a customer down on the Tennessee side above Florence, Alabama. And we bought Bank of Waynesboro down there. And we've got, say, five branches. And one of our bankers went to high school with the person that owns this company. So that company had $10 to $12 million of loans, depository needs, cash management. And we were just confident that we would get that. I mean, we've got five locations. The small bank we bought wasn't big enough to serve it. But we've got five locations. One of our bankers went to high school with their owner. We thought it was a slam dunk service. First flew their jet in there from Birmingham and service first got the relationship. They don't have an office within two hours of there. And so I think Brett, we need to change incentive plans. We need to change our mindset that we don't have to have a branch right next to the customer. And we've got to get proactive and offensive about how can we go to those markets and set up a company? You know, Capstar just wasn't built that way. Capstar was – so we have a little bit of work to do there. But it shows it can be done. Okay.
spk07: Great. That's the color. Thanks. Thanks, Brett.
spk01: Thank you. And that will end the Q&A session. I would now like to turn the conference back to Tim Schools for closing remarks.
spk08: Yeah, again, that's all we have, and we appreciate your support, and we're really pleased with our progress, and we look forward to talking to you. I guess the next call will actually be 2023. So everybody have a good fall and a good holiday, and we'll talk to you then. Thank you.
spk01: This concludes today's conference call. Thank you. Have a pleasant day and enjoy your weekend.
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