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spk20: Good morning, everyone, and welcome to Capstar Financial Holdings' first quarter 2023 earnings conference call. Hosting the call today from Capstar are Tim Schools, President and Chief Executive Officer, Mike Fowler, Chief Financial Officer, and Kevin Lambert, Credit Chief Credit 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 will make comments which constitute forward-looking statements within the meaning of the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other factors that may cause the actual results, and the performance and achievements of Capstar to differ materially from those expressed or implied by such forward-looking statements. Listeners are cautioned not to place undue reliance on forward-looking statements. A more detailed description of these and other risks, uncertainties, and factors are contained in Capstar's public filings with the Securities and Exchange Commission, except as otherwise required by applicable law. Capstar disclaims any obligation to update or revise any forward-looking statements made during this presentation. We would like to also offer you, we also refer you to the page two of the presentation slides for disclaimers regarding forward-looking statements, non-GAAP financial measures, and other information. With that, I'll turn the presentation over to Tim Schools, CAPSTAR's President and Chief Executive Officer.
spk07: Okay, thank you, sir. Good morning, and thank you for participating on our call. In first quarter, we reported earnings per share of 30 cents and a return on equity of 7.41%. These results included a $2 million write-off equating to 7 cents per share of signature bank subordinated debt, which I will discuss in a minute, as well as $216,000 of loss equating to one cent per share related to our mortgage and tri-net divisions, which are valuable businesses, but whose volumes are impacted by current market rates. Additionally, our SBA division had $400,000 of fees equating to a penny and a half per share, which were deferred into early second quarter 23 due to delayed closings. I will also note we returned nearly $10 million to investors in first quarter through dividends and stock repurchases, as well as increased our dividend 10%. We have now increased Capstar's dividend 120% since early 2021. As everyone is aware, the industry has faced deposit challenges the past 12 months as market rates have risen at one of the fastest paces in history. I cited this and warned of the outlook in our second quarter 2022 earnings call when many banks were still communicating expectations of deposit growth. The fastest change in market rates in a long time has caused industry deposit outflows, migration within banks from non-interest bearing to higher yielding alternatives, and overall price competition. One of the biggest competitors the past year has been the U.S. Treasury, where customers, often in non-interest-bearing accounts, moved money to earn 4% to 5% in 6- and 12-month treasuries. In January, banks in our markets began to offer money market rates and 9- to 12-month CD rates approaching 5%. We've been disciplined trying to balance the repricing of our deposit portfolio while still trying to grow deposits by introducing brokered CDs. As a younger organization, Capstar's deposit franchise historically had a heavy emphasis on correspondent banking deposits in larger wealth management investment type accounts. Over recent years, we've worked hard to lessen their overall emphasis. While average customer deposits were down for the quarter, we are pleased our end of period customer deposits were up and stable following the Silicon Valley and signature events. Our team has worked hard to communicate with our depositors. Throughout the fall and into 2023, we've worked to reduce loan growth specifically by raising our expected spreads and curtailing commercial real estate loans which tend to have lower deposit opportunities. Despite these efforts, loan growth was up 7% annualized on an average basis and 16% annualized in the period in the first quarter of 2023. In each case, CNI and residential real estate loans led the growth with declines in non-multifamily commercial real estate. As noted, we've had a write-down this quarter or in first quarter of signature bank sub debt. I'd like to take a minute to discuss this and summarize our investments in these securities. When I joined Capstar in the summer of 2019, Capstar's balance sheet had significant wholesale type balances on each side of the balance sheet. Loan participations in HLT loans had at one point been in the 40 to 50% of loan range. and Capstar had had a loss of $10 million and $4 million on single individual credits. Outside of participations in HLT, Capstar loans had grown 3% a year the prior five years. At that time, we set out to transition Capstar to a Tennessee-based bank focused on relationships we would lead. As a bridge, we invested about $70 million into investment grade, liquid, more granular investments from $10 million plus non-secured, non-guaranteed participations that were often out of state as we developed loan capabilities. Today, we are proud that our SNICs are less than 1% of loans at $6 million. and other participations are $85 million and 4% of loans. 100% of those balances are in the state of Tennessee. Alongside this, we now also have $450 million of loans in Asheville, Chattanooga, and Knoxville, in which we lead and largely have collateralized and guaranteed positions. Unfortunately, signature resulted in a loss. As many of you are aware, Signature has had a stellar reputation for many years and was investment grade rated when we purchased it as well as at the beginning of this year. We've outlined the profile of our sub-debt portfolio in our investor slides as well as the underwriting criteria that was used to select these. We've recently performed a review of our remaining investments and feel good with our holdings at the current moment. Switching to non-interest income, we were pleased with the first full quarter of our SBA group. As I said previously, 400,000 of fees rolled into 2Q23, but they also generated another 350,000 of fees that require seasoning under the SBA before they can be sold, which will likely be in third quarter. So in total, their activity generated approximately $1.7 million in fees in the first quarter. This group has a lot of potential. Mortgage volumes increased in March and look good for April and May. The gain on sales spread also increased in the first quarter. If rates stay in the 6% to 6.5% range, we would expect similar volumes to the first quarter. Trinat closed and sold its first loan since August and early April at a premium and is working on its second. We are optimistic pricing might be settling down where we can return to some level of volume. Again, our mortgage and tri-net divisions in the first quarter had a net pre-tax loss of $216,000. Asset quality remains strong across our credit portfolio. Three relationships which had entered 90 days last quarter have entered forbearance agreements and are now current. Past dues this quarter are comprised of one significant relationship for which we are secured and have a personal guarantee. We're actively working with the customer. Later in the slides, Kevin Lambert will cover information related to our CRE portfolio, which we are actively monitoring and feel very good about. I'll now turn it over to Mike Fowler.
spk05: Good morning, and thank you everyone for joining All right on page page four a few brief comments on liquidity So we have a diverse source Sorry we have a diverse source on and off balance sheet liquidity totaling 1.6 billion dollars that represents 160% of our $1.3 billion of uninsured and uncollateralized deposits. So we have our securities portfolio remains a modest part of our balance sheet. 12% of assets. We continue to have strong capital levels. We have brokered CDs, as Tim mentioned. We have been tapping wholesale funding. We have brokered of about 370 million and 55 million of home loan borrowings. We have not yet accessed the Fed's new bank term funding program. We are certainly considering that, monitoring pricing, relative to other options, and I certainly tap that if the economics appear attractive. In terms of page five, our deposit portfolio growth, as Tim noted, we have seen stability and increase in our customer deposit balances over the course of the first quarter. Average versus Q4 was down, but as Tim noted, we've seen an increase from year end through 331. We continue to have a consistent focus on deposit growth, especially operating accounts. We continue to strive to balance being very competitive while also being disciplined on pricing on the deposit side. And as Tim said, we certainly continue to do that on the loan side. Post-SVB, We were very proactive, as Tim noted. Our bankers reached out to their largest customers and largest depositors, had discussions to ensure they were comfortable with our situation, our financial stability. We did see some movement, about $150 million in movement within our deposit portfolio into reciprocal deposits, a product that we've offered for many years that, as most of you know, will provide to the customer full FTSE insurance. We have a solid pipeline on the deposit side, and we continue to look for growth opportunities across our footprint. On the next page, I will actually skip page six on subnet. I think Tim covered all the key points there. On page eight, Regarding key financial results, EPS of 30 cents, net interest income was down modestly due to a 20 basis points decline in the margin related to deposit-related pricing pressure. Non-interest income is flat. We'll go into more detail on that in a minute. And expenses were up, and we will cover that in a minute as well. And then we have the $2.4 million provision As Tim noted, $2 million of that relates to our signature bank sub debt. I will go to page 10 and briefly comment on loan growth. Commercial loan pipeline has slowed due to a reduced market demand and to the cutback in CRE. Our current pipeline is about $220 million. We continue to focus on discipline pricing versus the match-funded home loan curve, and you can see our pricing on the chart in terms of average yields on Q1 originations, 6.8% on fixed rate loans, a higher 7.4% given the current inverted curve on variable rate loans, overall 7.1%. As Tim noted, we continue to strive to be disciplined on pricing on both sides of the balance sheet, and certainly given the increased pressure with deposit pricing, we continue to reiterate to the field the need to be achieving sufficient and attractive pricing on the loan side. Next page, 11 on the margin. Deposit costs increase 58 basis points versus Q4. If you look at the chart in the bottom left, you can see the breakdown by category. Non-correspondent customer deposits rose 32 basis points to a level of 1.1%. Correspondent and broker deposits both rose about 98 basis points. Overall, deposits rose 58. So we are pleased that on the customer side, again, we're able to grow that modestly. with discipline pricing, being competitive where we need to be, but again, trying to balance profitability and growth. We would certainly target deposit growth to keep pace with loan growth, challenging in this rate environment, but that continues to be the focus of the markets. I will turn it to Kevin for a minute on page 12 to comment on loan portfolio performance.
spk13: Thank you, Mike. We are very pleased with the continued strong performance of the bank's loan portfolio. Asset quality remains very good with annualized charge-offs of only three basis points for the first quarter, as noted in the upper left-hand graph. Past dues spiked a couple of quarters ago, as detailed in the upper right-hand graph. The increases in both the third and fourth quarters were primarily related to a couple of large relationships totaling $8.3 million. Over $3.3 million of this total has a 90% SBA guarantee, and the other relationship, which was acquired through a merger, is now performing and is actually on pace to return to accrual status by the end of the quarter. Excluding one long-term relationship that was delinquent at the end of the first quarter, past dues would have been 12 basis points at the end of Q1. As can be seen in the graph in the lower left-hand side, the banks criticized and classified loan levels increased during the quarter, primarily due to the downward migration of a single previously watch-rated credit. This credit continues to perform and is fully secure and maintains a sizable amount of deposits with the bank, so no loss is anticipated. In summary, asset quality remains very good with low levels of charge-offs and past used and near record lows for criticized and classified loans. Turning to the next slide in terms of our provisions, the bank adopted CECL effective the first of this year. Due primarily to the change in accounting methodology, the bank's allowance has increased by approximately $4 million since the end of last year and now totals approximately $25 million. Based on our low historic levels of losses and the quality of our portfolio, we feel the allowance continues to be sufficient. Mike, I will turn the floor back over to you.
spk05: All right, thank you. All right, non-interest income on page 14. Overall non-interest income for the quarter is flat. However, as Tim noted, activity in the SBA business in Q1 generated revenues that will be recognized in Q2 and Q3 of $750,000. On the mortgage side, you can see that gain on sale revenue doubled versus last quarter. As we're beginning to see a return to more normalized margins and modestly increasing originations, which as Tim noted, We expect to remain at these levels or move modestly up if mortgage rates remain at current levels. On the next page, you can see more detail on our mortgage, and you can see that our primary focus continues to be purchase money volume. We've had very consistent originations on that side. You can see the revenue increase, $650,000 from last quarter, and you can see the margin is up sharply, about 90 basis points to 240 basis points this quarter. Next page, 16, in terms of SBA, as Tim noted, a business we are very excited about. The new team that we hired in Q4 has really hit the ground running. And we feel very, very strong prospects looking out over the remainder of this year. You can see on the top left, if you take Q1 revenue annualized, we do have significant upside versus prior run rates. So $6.2 million on an annualized basis. So we feel very good about that group and its prospects. On page 17, regarding non-interest expenses, we had a number of things contributing to the increase this quarter. Number one, you might recall last quarter we recorded a $730,000 recovery of Q3 operational loss. Number two, we had salaries and benefits increasing including $180,000 in the SBA team expansion. We had increased payroll taxes of a little more than $300,000. We had loan origination deferred expenses of about $110,000. And we also had something that everyone in the industry is seeing. We had increased FDIC assessments. For us, that was about 140,000 for the quarter. In terms of page 18, I would say these continue to be the various options from a capital allocation standpoint. We continue to look to be balanced. and disciplined in terms of deploying capital. As you've heard us say in prior quarters, our first priority is supporting organic growth. We continue to increase our dividend over time, as was noted earlier. We continue to be in the market with authorized share repurchases. We did announce, as you recall, a new $10 million share buyback program in January. We have about half of that $5.4 million remaining as of March 31st. All right, I will turn it back now to Kevin to talk about credit culture in CRA.
spk13: Yes, skipping to page 20. We did want to highlight our loan portfolio. We feel very good about the composition of our loan portfolio in general and want to highlight the bank's overall portfolio mix as well as address some potential concerns related to investment CRE loans, which are obviously a hot topic in the industry as properties feel the impact of higher interest rates. As can be seen in this slide, The bank believes in a well-diversified mix with a goal of assets split into equal thirds in C&I, consumer, and investment, CRE. Our primary Tennessee markets, Nashville, Knoxville, Chattanooga, as well as our new market in Asheville, North Carolina, continue to enjoy robust growth and normally outperform other areas of the country during downturns. Over the past several years, we have virtually eliminated shared national credits. We now account for less than 1% of exposure. Our focus continues to be on organic local growth with a current emphasis on CNI and consumer lending. On the next slide, I wanted to give some details in regards to our mix of investment properties. which as can be seen here, the highest level of our concentration is in multifamily projects. We feel very good about our multifamily exposure as most projects have a minimum of 35 to 40% in equity injections. This is also true with our hotel exposure, which has performed very well. Our retail sector of CRE includes approximately $100 million in credit tenant exposure. primarily related to loans originated through TriNet. These loans generally have 10-year triple net leases and have performed well in downturns. We continue to avoid A&D loans, which constitute a nominal portion of our portfolio. Several months ago, the bank began tightening its parameters and appetite for CRE loans. We've been busy analyzing our portfolio for potential weaknesses. especially in the office sector, which is detailed in the next slide. So virtually all of the bank's office exposure is located in Tennessee, mostly in our metropolitan areas and usually not in central business districts. There is an exception in Chattanooga as it relates to central business district, as most office buildings in this city are located in its CBD which has remained very vibrant. This area, as well as others throughout the state, continue to fare well as people relocate to Tennessee, which remains one of the fastest growing and most fiscally responsible states in the country. On the next slide, we show our general underwriting guidelines. This slide details the three broad areas within our bank that originate CRE loans. Our CRE group, led by a very experienced team of high-caliber real estate specialists, handle the majority of the bank's investment real estate loans. Their portfolio is categorized by high levels of equity, as is that of TriNet. On average, the bank's CRE group has loan-to-values in the 50% neighborhood, while TriNet's portfolio has an average loan-to-value of 60%, based on a recent review. Our commercial bankers in our markets also do CRE loans, which are smaller in nature, but which, unlike the CRE group and TriNet, typically have unlimited guarantees. Loan devalues are usually 80% or less, and amortization periods are usually shorter as well in the markets. We feel very good with the standard due diligence and conservatism of our underwriting. We believe our CRE portfolio will fare well in the coming months. On the next slide, we'll show details of our maturing CRE loans with specific emphasis over the next two years as loans with fixed rates will be most impacted during this timeframe as loans are renewed. A recent review of our upcoming maturities in our CRE group show the ability of our borrowers to continue to perform well even with the higher levels of interest than those that are currently in place. Loans within the CRE group, which tend to be larger, that are maturing within the next two years have a weighted loan-to-value average of less than 50%. The group has had a debt yield floor of 9.5% or more depending on property type for several years. Its portfolio has been stellar, with no losses in the history of the bank. I'll also note that we expect $30 million in runoff and multifamily exposure during this quarter, as a few projects are scheduled to be taken to permanent financing, as is the normal course of business for these types of loans. On the next slide, Our loans are continuously reviewed. We review those both internally and externally. External exams are done at least twice a year. Rollover lease risk is mitigated with higher levels of equity on most projects. Interest rates are stressed at the time of approval and when renewed. And the bank actively manages concentration risks, which are reviewed on a monthly basis. With this, I will turn it back over to Tim.
spk07: Okay. Thank you, Kevin. The environment continues to be challenging, and I am proud of our team, which is working hard to provide great service to our customers and ensure we protect the financial soundness of the bank. That concludes our presentation, and we're happy to answer any questions.
spk20: Certainly. Ladies and gentlemen, if you have a question at this time, please press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, please press star 11 again. Our first question comes from the line of Will Jones from KBW. Your question, please.
spk22: Hey, great. Good morning, guys. Stepping in for Captain this morning. How's everybody?
spk06: Hey, good morning. How are you?
spk22: Doing well. So, Tim, I just wanted to start on the margin. Obviously, it took a step down this quarter as you guys continue to see deposit pricing pressures as well as the makeshift story play out. I'm just hoping you give us an outlook on where do you think the margin trends from here, and maybe you could comment on what the spot margin was in March. And just in terms of the makeshift narrative plan, I look back over a year ago, you know, non-interest-bearing deposits were, you know, closer to the mid-20% range of deposits, and now that gets closer to mid-teens today. Just how far along do you feel like we are in the makeshift story, and where do you feel like those non-interest-bearing deposits, you know, eventually trough out? Thanks.
spk07: Well, great questions. A couple of things on that. One is, I think if you go back a year ago, we probably had zero in brokerage CDs and now we have 370 million. So a big, you know, there's been mixed shift and there's been dilution of the percentage by adding brokerage CDs. I'd have to calculate it and see what the percentage was if we didn't have the brokerage CDs. But there certainly is migration going on, like I said, where people were getting You know, when rates, when fed funds was at a quarter or 50 basis points and there wasn't much to get, and now they can go get a six month treasury or, you know, Renaissance has been offering 4.5% money markets here in Nashville in the newspaper. It's just, there's a movement. You know, I know everybody wants the magic answer. You know, I'm, I'm a conservative person. Again, I was the one in second quarter in August or in July that said, Hey, I think deposits are going to be tough the rest of the year. I think they're going down. I know other banks were saying they were going up. And so, well, I don't have the magic answer. And I think hopefully we're near the end of the rate increases from the Fed. You know, banks were slow to raise rates as they tried to protect their deposit portfolio. And it's a real balance of trying to grow versus cannibalization. And that's why we introduced brokered CDs. I would hope that if we looked at betas, The really people that, you know, were elastic to deposit rates, I hope they were aggressive first and that those are the ones that moved or those are the ones that sought the highest price and that that would trail off. But that's about as best as information I could give you. The March margin was around 310. And so there is continued pressure as, you know, marginal deposit costs to grow a bank you're not really getting a lot of non-interest bearing. You find an operating account takes longer to move, and you do give an earnings credit rate on that, so there is an inherent cost. But the marginal cost right now of getting a money market or a CD is in the 4% to 5% range. As you see, our new loans are being priced at around 7%. But In general, the loan repricing of banks and ours has not repriced as fast the last 12 months as deposit rates have changed.
spk05: Yeah, this is Mike Fowler. I would add to that in terms of your question about DDA and the decline in our noninterest bearing DDA balance. As Tim noted, a lot of that is driven, and we see this in reports through the industry, A lot of that is driven by balance that are compensating balances for service activity. And customers obviously need to leave less with short-term rates where they are today versus where they were a year ago. We do, if rates stabilize or if we are near the peak, then I think that pressure should certainly subside. And I think we could certainly expect to see some reversal of that when the Fed starts moving rates down, whenever that is. Great.
spk22: That's all helpful. I know Matt's going to look into the crystal ball a little bit there, so I really appreciate the color. And just turning to growth, you guys obviously saw really good growth trends this quarter, both on the loan and deposit side. You know, I appreciate that pipeline just slowing a little bit. Just looking to get any commentary on, you know, your appetite to grow loans from here and, you know, maybe where you see loan growth trending as we come in the second and back half of the year here. Could we see a mid-single-digit pace?
spk07: Well, I think we have, you know, Capstar has been a transformation, right? And I don't, you know, I just focus on what I can control. I don't like to criticize. And so... The starting point, as I said, had substantial wholesale really on both sides. And we really set out in the summer of 19 to transform both sides. And we've made tremendous progress on the loan side. You know, as I said, SNCC's less than 1%, other participation's less than 4%, blah, blah, blah. And we actually had aggressive actions on deposits in the fall of 19 And then the pandemic happened and you had 400 million of deposits flow in and, you know, your phone would ring off the hook from investors. You know, what are you going to do with those deposits? They're sitting there, they're not earning thing. You know, you need to do something, you need to lend them out. And so, you know, it's hard to please, you know, we would all love it to be a perfect environment every day. And it's different when you're an operator and you're running a company. And so, You know, ideally in a stabilized market, I'd love to have a company. I was looking at Lakeland Financial slides the other day, 150-year-old bank. They've grown loans and deposits 11% each the last 30 years. I mean, wow, what a wonderful calibrated model they have. And I think we've come a long way. I think that in our markets with our team, You know, there's good CRE loans out there right now. I think it's late in the cycle, and do you really want to be doing development? And I think they don't come with deposits, so we've slowed that down. But I think with our markets and our team, you know, we could grow loans 8% to probably 14%. I don't think that's prudent in this environment. So we're really focused on the soundness of the bank, meaning asset quality, liquidity, profitability. And so... You know, in the interim, I'd like to make sure that deposits have stabilized. They are coming at a cost for all banks, which is hurting the margin. But I'd like to see that stabilize. I'd like us to see us continue to build those capabilities. I think, like we did on the loan side, that we can prove over time that we can gather deposits. It never really was a long-term emphasis of this bank. And so I would say that what I would like to see is I'd love to see where our team can bring in deposits and loans in the 8% range, and let's get that going. And then once we get that going, we could up it. But we're threading a needle through this challenging economic environment.
spk22: I understand. All fair. And I appreciate the commentary there. Thanks.
spk09: Thank you, Will.
spk20: Thank you. One moment for our next question. And our next question comes from the line of Brett Rapatins from Hovda Group. Your question, please.
spk17: Hey, good morning, gentlemen. Good morning, Brett. Good morning, Tim. I wanted to start with just looking at, you know, from a regulatory filing perspective, you've got about a third, a third, a third of assets repricing less than one year, one to five and over five. Could you maybe give us any clarity on how much you have or pricing in a loan portfolio, you know, here in the next couple quarters, and then the similar on CDs?
spk05: Sure. Yeah, good morning, Brett. This is Mike. So on the loan side, I would say, yes, about 60% of our I don't have the maturities on the loan side over the next few quarters. I can follow up with you on that offline. But we've got, as you said, we've got about 33% of our portfolio that is variable that will reprice immediately and about 6% that will reprice beyond a year. So I'll maybe come back to you in terms of the breakdown on the fixed rate that is maturing and will reprice over the next few quarters. On the deposit side, I would say we are certainly actively repricing our non-maturity deposits as market rates move. I don't have the breakdown. I'll come back to you in a few minutes in terms of breakdown on the CD side by maturities. So let me come back to you in a few minutes later on the call.
spk17: Okay. And then, Tim, you talked at length about the environment, you know, and what you do, you know, when things like this happen. You know, Nashville is obviously a highly competitive market. I wanted to hear your thoughts on what you were seeing, you know, funds transfer pricing spreads, you know, is there a widening? you know, in terms of spreads and, you know, if, if so, do you feel like that's a function of lower credit availability or just where the yield curve is? Thanks.
spk07: Yeah. Great question. And again, I've talked about this in the past and we all have different backgrounds and I understood there was some misunderstanding after a previous call, but you know, my experience here and at larger banks, is banks price their loans off of a funds transfer pricing equivalent matched wholesale curve, whether it be the swap curve or whether it be the FHLV. When I talk about spreads, it's not spreads to our deposit cost. It spreads to a theoretical match term if you had no deposits. you know, anywhere I've been, I've sort of been trained to try and seek 200 basis points or higher on the commercial side relative to match funding. If you go back to the fourth quarter of 2021, from memory, our FTP spread, match funding spread on commercial loans was 250 basis points. And that's a good target, Brett, because if you get like a sheet of paper out and do 200 basis points in Excel on a $1 million or $10 million loan, you've got to subtract out, and again, that's FTP, so that's got your funding cost. You've got to subtract out some level of operating expense, whether it be servicing or incentive. You've got to back out potential, whatever you estimate for credit, and you've got to back out a tax rate. So if you don't get about 200 basis points, you're not going to end up with a $120,000 150 ROA on that relationship. So we had 250. As you entered 2022 last year, the first half of the year, our FTP spreads were in the 150 range, 175 range. And what it was, Brett, and I'm not criticizing, all banks don't use fund transfer pricing and are not sophisticated on pricing. And you've got everybody competing for volume. So when rates started shooting up in the first half of last year, I would say both competition, people wanting to get volume as well as some lack of sophistication, they were low. It was sort of like heart in the mortgage world and our mortgage company where they've now come back. And so, and so what I would say is that happened through maybe third quarter and since third quarter spreads have started to come back. I think that is banks seeking less growth. And so some of it is banks can get more. I think some of it is banks wised up and finally raised their, their spreads because the deposit rates going. And so in, in, in March, I have my March numbers in my head. What we did is some to offset the deposit pressure, some to slow loan growth. We said in first quarter, let's target 250 basis points on three rated credits and better. let's target 275 on fours and three on five rated credits. We didn't always get that, but that's been our target. And I think our weighted average in March was much improved and our weighted average was more in the 225 range. So we didn't always hit what I just said on our goal, but we're creeping back to what it was in that fourth quarter of 2021. Okay. That's, um,
spk17: That's really helpful, Tim. And then if I can sneak one last one in. My line was breaking up a little bit when you were talking about slide 17. Mike, I just wanted to make sure I understood sort of the run rate from here on, in particular, the salary employee benefits line and then just the other line.
spk07: So, so I'll, I'll answer that real quick. We're, we're going to work hard to target expenses at the current revenue level in the 18 to 18 and a half million dollar range. And obviously if SBA does really well and trying that comes back and mortgage comes back, there are variable expenses related to those. But, um, you know, we had the 700,000 come back in fourth quarter. And then, you know, you do have FICA tax. It starts over. You know, deferred loan expense because volume's down. We didn't have as much benefit as fourth quarter. And then you have the FDIC. There were one or two bills that when you're a small company, you know, our health insurance, it tripped over. You know, it was about $150,000 from fourth quarter. But we're going to work hard through better management as well as seeking some expense reduction to try and manage these between $18 and $18.5 million per quarter. Okay.
spk16: That's helpful. Thanks for all the color gentlemen.
spk20: Thank you. One moment for our next question. And our next question comes from the line of Kevin Fitzsimmons from DA Davidson. Your question, please.
spk11: Hey, good morning. Hey, Kevin. Hey, Tim. Listen, I know it's difficult with the going back to margin and maybe also we can you know, tie in dollars of NII to it, because I think that's important. I know it's difficult to, you know, the kind of crystal ball question, but we've heard from a number of banks and whether they're right or whether they're too optimistic indicate that second quarter, there'd be additional margin pressure, but probably at a diminished pace from that we saw in first quarter and then likely to see margins start to stabilize in the back end of the year. And I think that's all assuming the Fed does one more hike in May and then pushes away. Is that, you know, and then in conjunction with that, I think there's a sense that once the Fed's done, that makeshift really starts to abate. All that said, I mean, can you kind of characterize how you're looking at that relative to that? That outlook we're hearing from a number of banks. Thanks.
spk07: I think that would be my overall thesis as well. If you ask me, you know, from a probability standpoint, what do you think is more likely to play out? I'm very conservative, so I probably would delay it one or two quarters than what you described. I mean, I think we're near the tail end of rising. I think the most aggressive people sought early and either moved or switched products. I think that as that slows down, you're going to have your loans catch up. And so I think your thesis, I would agree with that thesis. You know, when it kicks in and when it has a material effect, I'm not sure. But I think what you described, I would believe in and sounds the right direction.
spk11: Okay, great. And then maybe on, you know, you've talked, you know, a past year or two about, you know, the burden of having too much capital, and I think it's probably a good thing to have right now, but you guys were active with buying back the stock. Where the stock price is, it seems to definitely make sense. How's your appetite for that going forward? We've heard some of the bigger banks indicate that, you know, there's probably could be a regulatory pushback from getting too active in buying back stock, but how your thought is on that front?
spk07: Yeah, great question. So the first thing I'll say is the buyback firm we're using right now, I talk to them regularly. And I mean, you know this because you're in this industry. And I guess people on the phone should know this too. But our buyback, I mean, he does buybacks for banks across the country. And he just says, Tim, I have to tell you, there's no buyers for bank stocks. And so unfortunately, it is a challenging environment. And due to the environment, you know, the supply and demand on bid ask, there's just not a lot of buyers. And so You know, you've got people that are financial focused funds that their perspective says they'll only buy financials. So they've got to stay in it. But absent that, you know, our, our trader just says there's very little interest in these stocks. And so that, that makes it a buying opportunity. Um, with that said, uh, there's, there's little volume. And so there's rules around buybacks where I'm not an expert. It's the average of some amount of your prior four week volume. You can do one block a week. So we've been very active. It's actually harder to pick up shares than you would think in a stock that doesn't trade a lot. But we are buyers. We did a $10 million authorization in January. We had our board meeting Wednesday. We talked about potentially increasing it. You have different views on a board. We had a director who I can't uh, was in Washington and had meetings with certain folks. And, you know, the feedback was, um, could be a challenging economy. There was a lot of discussions around CRE and different things. And so, you know, I was a buyer of our stock in the summer of 20, when it went to $9 and I had conviction in what we were doing and our credit portfolio. And I didn't want to go buy a ton, but I, you know, what if we buy 5 million or whatever? And our board at that time was very conservative relative. We don't want to ever dilute our shareholders. So why, you know, the little bit of gain we could get, why take that risk? And so I'd say we're in the middle right now. We certainly have directors that think it's an attractively priced and we have directors that are buying director Tom Flynn. And, um, but at the same time, there's people with very deep business experience that say it is very uncertain out there. And, So I'd say we're in the middle. We are a buyer right now, and I'm happy to answer anything further.
spk19: Okay, great.
spk11: One quick last follow-on. The loan relationship you're referring to within delinquencies and then the single loan you're referring to in criticized, are those different loans? And on the one that's driving the increase in criticized, I understand that that you feel good about it and has a lot of deposits attached to it, but can you say what industry or what kind of loan it is?
spk07: So I'll talk about the first one first. The first one in past dues is, and again, we don't want to talk too specific about either one of these, but the first one is a great, well-known, strong operator in one of our markets that has a high character and high reputation and who their businesses are just having some challenges, as good businesses can do. They are collateralized. The borrowers work with us and actually given us additional collateral over the last year. We're actually meeting with them again next week, and we'll learn more. So at this point, it's not something that we feel has any significant loss to it. I don't want to get too complex with it, but its due date is... is the first of every month, and you report 30 days and over in past dues, that's probably at former banks, Kevin, we had strategic timing on when we did loans on due dates. We would have never had a due date for a loan on the first of a month, because on a 31-day month, if they wait and pay it at the end of the month, it missed 30 days. So I say that, that I think there's good operator. We'll learn more about the improvement of the operations. It's not like it's 60 or 70 days past due. I think it possibly could have been just that it was a 31-day month, and the guy sent the payment in on the 31st or the 1st, and it missed it. So we'll get more on that. On the criticized classified, I'll let Kevin talk about that one.
spk13: Yes, and just to add on to Tim's comment about the first one, probably about $4 million of that exposure is liquid secured. So we feel... feel very good about that with nominal, if any, potential risk of loss. On the other relationship, it has been a long-term customer. It's basically in the medical industry hospice, and they were formed probably about five or six years ago, I'm guessing, and they just continue to scale. They just haven't reached a break-even point yet from a cash flow perspective, but they continue to be very well capitalized and have a lot of liquidity, so we feel very good about their potential prospects. Okay.
spk10: Thanks very much, guys. Thank you, Kevin.
spk20: Thank you. One moment for our next question. And our next question comes from the line of Graham Dick from PSE, your question, please.
spk14: Hey, good afternoon, guys. Hi, Graham. So most of the stuff's been touched on, obviously, but I just kind of wanted to hear a little bit from you guys on what you're seeing on the CRE front that's worrying you or that's making you cautious about lending into that segment right now because You know, we hear a little bit from banks that say, yeah, we're pulling back, and then other ones say, actually, there's a lot of opportunities for us right now because people have pulled back to get loans at more attractive rates. So any color you can provide there on the health of that market and how you guys view it would be really helpful.
spk07: Sure. So we have Lee Hunter, who has joined us here, and he's a real talent. His whole career has been in this. grew up in First Horizon, which has been a great bank, and then has been back here about eight years or so. Keep in mind, we have CRE right now really in three buckets. Lee has had a dedicated CRE team that has guided that since he joined. And as we've transformed some, we've allowed our markets to do CRE in the smaller end. And then last year, you will remember or recall that we kept $105 million of TRINET due to market rates. So Lee, I'm going to ask Lee to speak. He can offer two things. I mean, he's just a wealth of knowledge on the general overview of the economy and our market and what we should be thinking about. But he can also speak some to our portfolio and maybe how we feel or maybe how we're different. So Lee, I'll turn it over to you. Sure, sure.
spk21: So I would say, first of all, we have pulled back on our Cree lending, as have most of our competitors. Talking to some clients over the past week or two, kind of asking for advice of where to go for commercial real estate loans right now. So there's definitely more leverage for those that are making real estate loans right now, both from a structure and a pricing standpoint. As it relates to our book of business, I would say we've done a deep dive, particularly focusing on loans maturing this year and next, and feel really good about those. Kevin kind of touched on some of those metrics, but if you stress them to a pretty worst-case scenario, we're still in good shape. feel really good about the quality of our loans and feel really good about the overall ability to renew those loans and still have good loan-to-values, good positive cash flow.
spk14: Okay, that's really helpful. You mentioned you guys stressing each of those credits. What do those stress tests entail, I guess, where you guys are seeing... that the portfolio is still healthy upon renewal, even if you do stress them? What does that mean in terms of vacancy rates and cap rates, et cetera?
spk21: Well, I think we have looked, I know we have looked at the overall debt yields of these projects, and we've kind of said, okay, at the average debt yield currently, if we ran those, you know, today the Most of our stabilized projects, most of these maturing or stabilized projects, the vast majority, we would typically do a five-year loan. And if you looked at the five-year and priced it today at some of the spreads that Tim talked about, you'd be kind of call it mid-sixes. So I would just tell you that if we stressed it at about 7% 25-year AM, we're still at a kind of a 150 debt service coverage. And then if we stress from a loan-to-value perspective, a 1% increase in cap rates would get us to kind of low 60s kind of loan-to-value. If we stressed it to a 2% increase in cap rates, would get us into the low 70s. So in talking to appraisers, most of them would tell you that in the last six to 12 months there's been a zero to 50 basis point increase in cap rates depending on the the market and the asset class so we feel like the two stresses that we did both for cash flow and loan to value would still put us in a very strong position okay great um i guess just one one more follow up there and then that'll be it for me um what is like the
spk14: I guess, what are the cap rates? What did you guys underwrite that portfolio on? Do you guys have an average underwritten cap rate for that portfolio that you could share? Just so I can kind of know where the starting point is. You mentioned that like 1% increase, 2% increase, and whatnot.
spk21: Well, it's across the board. I mean, obviously, some of the multifamily cap rates and even industrial have been extremely low. And then we've got hospitality in there as well. So it's across the board. But basically, if you take the starting if you take the starting LTV that we've got that Kevin referenced and just, you know, take the 1% increase in cap rates and the 2% increase, that's where it would get you up from kind of 50-ish percent to kind of 60-ish and 70-ish with the two increases.
spk14: Okay. All right. That's helpful. That's all for me. Thanks, guys. Okay.
spk10: Thank you, Graham.
spk20: Thank you. And one moment for our final question for today. And our final question for today comes from the line of Feddy Strickland from Janie. Your question, please.
spk15: Hey, good morning, guys. Hi, Feddy.
spk04: How are you?
spk15: Good afternoon, I guess. Good. Forgive me if I missed this, but were the expenses – what were the expenses for mortgage, or I guess what were the core bank expenses this quarter? I was looking for that in the release, but I didn't see that.
spk07: Yeah, we can get that for you right now. Hold on. We'll look it up.
spk15: And while you're looking for that, does efficiency for mortgage potentially improve over the next couple quarters just as you have more volume on seasonality?
spk07: Yeah, and that's what I was getting at earlier. I mean, it – you know – Nobody likes the environment we're in, but our mortgage company and Trinet right now lost together. If you take their revenue and their direct expense, they lost $216,000 together. I think mortgage was a loss of $40,000, and the $170,000 would be in Trinet for first quarter. And so, obviously, you know, I mean, I don't have the exact numbers in front of me, but their efficiency ratios are like 100%, right? So they're... their expenses are the same as their revenue. So, you know, if revenues return, yes, they have some variable comp from incentives, but, you know, it's a smaller proportion or percentage of the revenue. So you definitely would think that their efficiency ratios would improve. Their pre-tax income would improve. Their efficiency ratio would improve. Our corporate efficiency ratio would improve. And it obviously would improve the pre-tax, pre-provision to assets because they don't really have a lot of assets because they sell everything.
spk05: And in terms of mortgage expenses, they were right at $1.5 million for the quarter. And so the non-mortgage expenses for the quarter were about $17.6 million. Got it.
spk15: In that guide you gave earlier, the 18 to 18 and a half range for second quarter, that's the all-in expense, right?
spk07: Correct. Yes, sir. Correct. And I just, you know, every company I've been in, we've done a very good job on expenses. And, you know, we had the garnishment operational loss in fourth quarter come in and out. And You know, you've got FICA come back, and you've got the FDIC assessment, which I saw Pinnacle cited in theirs came. I mean, that's $150,000. That's going to be $600,000 for the year additional, which is $0.03 a share. But I still think there's other things we can do, both personnel as well as operating expense. And, you know, I'm hopeful that we can operate that within $18 to $18.5 million. Got it.
spk15: And just one last question from me. I just wonder if you could talk through a little bit more of your thinking. You talked about some of the different funding sources. I know you said you consider using the bank term funding program. Honestly, I'm surprised more banks haven't said they consider using it if the rate's better and the terms are better. But just wonder if you could talk through your thinking a little bit on that.
spk07: Well, I'll add some, and then Mike, because he's more of the expert. I can tell you as the operator of I went to Hawaii in the summer of 2007, and it was six months before the financial crisis happened. And when TARP came out, we were part of a public company there called Hawaiian Electric, and a lot of people wanted to get TARP from a security standpoint. I had a lot of personal pride as the CEO of that bank, wanting to run a great company. I thought I could improve it. I viewed it sort of as like a badge I would always have. And so, you know, I really studied that bank, and I didn't think I needed TARP. And we didn't take TARP. And, you know, that bank's still here. It's a great bank. And so I'm just glad I never had to rely on that. Now, was that ignorant? You know, was that a young Tim that was ignorant and you should have it for security? Perhaps. I would say right now, you know, we've asked around, would there be any stigma from regulators or investors or anybody if you used it? We're hearing no. Mike can talk about the pricing. At first, we thought there was going to be a big pricing advantage. So we were thinking about, hey, you know, maybe as some brokered CDs mature, maybe we put it in that for a year or two because we thought it would be several basis points. The last I heard is I think Mike thinks it may not be as cheap as we originally thought.
spk05: Yeah, so let me comment briefly on that. We, when they rolled out, so we contacted the Fed about the new funding program. Again, well, probably the day after SBB went down, the Monday after. And it took a few weeks for them to get us through the approval process or the setup process. And in that time, as Tim said, the price advantage increased. dwindles quite a bit. So when they rolled it out, I believe that the initial rate was 430, and you could pick your point, you could pick your duration, any point up to a year. You could prepay at any time with no penalty. And if you get to the point when the Fed starts cutting rates, you can, the Fed has told us, you can prepay and two minutes later turn around and apply for a new lower rate advance. We certainly looked at that. As Tim said, we're sensitive to if there is a stigma. The Fed assured us in their mind it certainly would be. It would be viewed as a prudent use of a liquidity tool. Today, though, the rate over the last few weeks, the rate has moved up. And as of today, there's really no pricing advantage other than you have that free option to prepay if rates start moving down. In my mind, that's a valuable option. But with rates at $4.95 today for the Fed program, that's right in line with where we could issue brokered out to a year. And it's pretty close to where we could issue if we wanted to tap home loan borrowing. I think we probably will use it. You know, one advantage of that from a liquidity standpoint, as many of you might know, is everybody's investment securities portfolios are underwater given the Fed hiking rates. Ours is no exception. And so if you were to use those securities to borrow anywhere else, your borrowing capacity is based on the market value less sum haircut. The Fed is trying to provide more liquidity here, so they would let you borrow at par with no haircut and no deduction for any unrealized loss on the portfolio. So for us, we look at that as another $60 million source of liquidity. So we do intend to be ready to tap it. I suspect we will tap it. We think it's prudent to do that, and it would be strictly based on the economics.
spk15: No, that makes a lot of sense, especially if you can turn around and repay it as soon as rates stop going up. So I appreciate the additional color. Thanks, guys.
spk20: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Tim Schools for any further remarks.
spk07: Okay, before we go, Mike, can you follow up? Do you have the CD maturity schedule? I think it was Brett Ravitan that perhaps asked for that.
spk05: Yeah, I do. And I can comment briefly. And if, Brent, if you want more detail or anyone else wants more detail, just let me know. But you had asked about both loan and deposit and CD maturities. So what I will give you, let me rattle these off quickly. And if you want, I'll shoot it to you afterward, Brett. But so in terms of CDs, Over the next three months 53 million over the second three months out 73 million over six to nine months 63 million and Yeah, so over the remainder of 2023 I'm calculating about 190 million on CDs now if you look on the loan side and I don't have maturity split, but what I've got is kind of a liquidity, is a repricing gap on the loan side. And so the sum of balances that will reprice or are scheduled to pay down or pay off are about, they're pretty smooth. They average about $160 million a quarter for the next year.
spk08: And he's probably muted now. Okay.
spk07: So, sir, thank you, and that concludes our call. We appreciate everybody calling in. If anybody has any follow-up questions, please don't hesitate to call Mike, and I hope everyone has a great day and weekend. Thank you.
spk20: Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.
spk00: Thank you. Thank you. Thank you. Thank you.
spk20: Good morning, everyone, and welcome to Capstar Financial Holdings' first quarter 2023 earnings conference call. Hosting the call today from Capstar are Tim Schools, President and Chief Executive Officer, Mike Fowler, Chief Financial Officer, and Kevin Lambert, Chief Credit 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 will make comments which constitute forward-looking statements within the meaning of the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other factors that may cause the actual results, and the performance and achievements of Capstar to differ materially from those expressed or implied by such forward-looking statements. Listeners are cautioned not to place undue reliance on forward-looking statements. A more detailed description of these and other risks, uncertainties, and factors are contained in Capstar's public filings with the Securities and Exchange Commission, except as otherwise required by applicable law. CAPSTAR disclaims any obligation to update or revise any forward-looking statements made during this presentation. We would like to also offer you, we also refer you to the page two of the presentation slides for disclaimers regarding forward-looking statements, non-GAAP financial measures, and other information. With that, I'll turn the presentation over to Tim Schools, CAPSTAR's President and Chief Executive Officer.
spk07: Okay, thank you, sir. Good morning, and thank you for participating on our call. In first quarter, we reported earnings per share of 30 cents and a return on equity of 7.41%. These results included a $2 million write-off equating to 7 cents per share of signature bank subordinated debt, which I will discuss in a minute, as well as $216,000 of loss equating to one cent per share related to our mortgage and tri-net divisions, which are valuable businesses, but whose volumes are impacted by current market rates. Additionally, our SBA division had $400,000 of fees equating to a penny and a half per share, which were deferred into early second quarter 23 due to delayed closings. I will also note we returned nearly $10 million to investors in first quarter through dividends and stock repurchases, as well as increased our dividend 10%. We have now increased Capstar's dividend 120% since early 2021. As everyone is aware, the industry has faced deposit challenges the past 12 months as market rates have risen at one of the fastest paces in history. I cited this and warned of the outlook in our second quarter 2022 earnings call when many banks were still communicating expectations of deposit growth. The fastest change in market rates in a long time has caused industry deposit outflows, migration within banks from non-interest bearing to higher yielding alternatives, and overall price competition. One of the biggest competitors the past year has been the U.S. Treasury, where customers, often in non-interest-bearing accounts, moved money to earn 4% to 5% in 6- and 12-month treasuries. In January, banks in our markets began to offer money market rates and 9- to 12-month CD rates approaching 5%. We've been disciplined trying to balance the repricing of our deposit portfolio while still trying to grow deposits by introducing brokered CDs. As a younger organization, Capstar's deposit franchise historically had a heavy emphasis on correspondent banking deposits in larger wealth management investment type accounts. Over recent years, we've worked hard to lessen their overall emphasis. While average customer deposits were down for the quarter, we are pleased our end of period customer deposits were up and stable following the Silicon Valley and signature events. Our team has worked hard to communicate with our depositors. Throughout the fall and into 2023, we've worked to reduce loan growth specifically by raising our expected spreads and curtailing commercial real estate loans which tend to have lower deposit opportunities. Despite these efforts, loan growth was up 7% annualized on an average basis and 16% annualized into period in the first quarter of 2023. In each case, C&I and residential real estate loans led the growth with declines in non-multifamily commercial real estate. As noted, we've had a write-down this quarter or in first quarter of signature bank sub debt. I'd like to take a minute to discuss this and summarize our investments in these securities. When I joined Capstar in the summer of 2019, Capstar's balance sheet had significant wholesale type balances on each side of the balance sheet. Loan participations in HLT loans had at one point been in the 40 to 50% of loan range. and Capstar had had a loss of $10 million and $4 million on single individual credits. Outside of participations in HLT, Capstar loans had grown 3% a year the prior five years. At that time, we set out to transition Capstar to a Tennessee-based bank focused on relationships we would lead. As a bridge, we invested about $70 million into investment-grade, liquid, more granular investments from $10 million-plus non-secured, non-guaranteed participations that were often out of state as we developed loan capabilities. Today, we are proud that our SNICs are less than 1% of loans at $6 million. and other participations are $85 million and 4% of loans. 100% of those balances are in the state of Tennessee. Alongside this, we now also have $450 million of loans in Asheville, Chattanooga, and Knoxville, in which we lead and largely have collateralized and guaranteed positions. Unfortunately, signature resulted in a loss. As many of you are aware, Signature has had a stellar reputation for many years and was investment grade rated when we purchased it as well as at the beginning of this year. We've outlined the profile of our sub-debt portfolio in our investor slides as well as the underwriting criteria that was used to select these. We've recently performed a review of our remaining investments and feel good with our holdings at the current moment. Switching to non-interest income, we were pleased with the first full quarter of our SBA group. As I said previously, 400,000 of fees rolled into 2Q23, but they also generated another 350,000 of fees that require seasoning under the SBA before they can be sold, which will likely be in third quarter. So in total, their activity generated approximately $1.7 million in fees in the first quarter. This group has a lot of potential. Mortgage volumes increased in March and looked good for April and May. The gain on sales spread also increased in the first quarter. If rates stay in the 6% to 6.5% range, we would expect similar volumes to the first quarter. Trinat closed and sold its first loan since August and early April at a premium and is working on its second. We are optimistic pricing might be settling down where we can return to some level of volume. Again, our mortgage and tri-net divisions in the first quarter had a net pre-tax loss of $216,000. Asset quality remains strong across our credit portfolio. Three relationships which had entered 90 days last quarter have entered forbearance agreements and are now current. Past dues this quarter are comprised of one significant relationship for which we are secured and have a personal guarantee. We're actively working with the customer. Later in the slides, Kevin Lambert will cover information related to our CRE portfolio, which we are actively monitoring and feel very good about. I'll now turn it over to Mike Fowler.
spk05: Good morning, and thank you everyone for joining All right on page page four a few brief comments on liquidity So we have a diverse source Sorry we have a diverse source on and off balance sheet liquidity totaling 1.6 billion dollars that represents 160% of our $1.3 billion of uninsured and uncollateralized deposits. So we have our securities portfolio remains a modest part of our balance sheet. 12% of assets. We continue to have strong capital levels. We have brokered CDs, as Tim mentioned. We have been tapping wholesale funding. We have brokered about $370 million and $55 million of home loan borrowings. We have not yet accessed the Fed's new bank term funding program. We are certainly considering that, monitoring pricing, relative to other options, and I certainly tap that if the economics appear attractive. In terms of page five, our deposit portfolio growth, as Tim noted, we have seen stability and increase in our customer deposit balances over the course of the first quarter. Average versus Q4 was down, but as Tim noted, we've seen an increase from year end through 331. We continue to have a consistent focus on deposit growth, especially operating accounts. We continue to strive to balance being very competitive while also being disciplined on pricing on the deposit side. And as Tim said, we certainly continue to do that on the loan side. Post-SVB, We were very proactive, as Tim noted. Our bankers reached out to their largest customers and largest depositors, had discussions to ensure they were comfortable with our situation, our financial stability. We did see some movement, about $150 million in movement, within our deposit portfolio into reciprocal deposits, a product that we've offered for many years that, as most of you know, will provide to the customer full FDIC insurance. We have a solid pipeline on the deposit side, and we continue to look for growth opportunities across our footprint. On the next page, I will actually skip page six on subnet. I think Tim covered all the key points there. On page eight, Regarding key financial results, EPS of 30 cents, net interest income was down modestly due to a 20 basis points decline in the margin related to deposit-related pricing pressure. Non-interest income is flat. We'll go into more detail on that in a minute. And expenses were up, and we will cover that in a minute as well. And then we have the $2.4 million provision As Tim noted, $2 million of that relates to our signature bank sub debt. I will go to page 10 and briefly comment on loan growth. Commercial loan pipeline has slowed due to a reduced market demand and to the cutback in CRE. Our current pipeline is about $220 million. We continue to focus on discipline pricing versus the match-funded home loan curve, and you can see our pricing on the chart in terms of average yields on Q1 originations, 6.8% on fixed rate loans, a higher 7.4% given the current inverted curve on variable rate loans, overall 7.1%. As Tim noted, we continue to strive to be disciplined on pricing on both sides of the balance sheet, and certainly given the increased pressure with deposit pricing, we continue to reiterate to the field the need to be achieving sufficient and attractive pricing on the loan side. Next page, 11 on the margin. Deposit costs increase 58 basis points versus Q4. If you look at the chart in the bottom left, you can see the breakdown by category. Non-correspondent customer deposits rose 32 basis points to a level of 1.1%. Correspondent and broker deposits both rose about 98 basis points. Overall deposits rose 58. So we are pleased that on the customer side, again, we're able to grow that modestly. with discipline pricing, being competitive where we need to be, but again, trying to balance profitability and growth. We would certainly target deposit growth to keep pace with loan growth, challenging in this rate environment, but that continues to be the focus of the markets. I will turn it to Kevin for a minute on page 12 to comment on loan portfolio performance.
spk13: Thank you, Mike. We are very pleased with the continued strong performance of the bank's loan portfolio. Asset quality remains very good with annualized charge-offs of only three basis points for the first quarter, as noted in the upper left-hand graph. Past dues spiked a couple of quarters ago, as detailed in the upper right-hand graph. The increases in both the third and fourth quarters were primarily related to a couple of large relationships totaling $8.3 million. Over $3.3 million of this total has a 90% SBA guarantee, and the other relationship, which was acquired through a merger, is now performing and is actually on pace to return to accrual status by the end of the quarter. Excluding one long-term relationship that was delinquent at the end of the first quarter, past dues would have been 12 basis points at the end of Q1. As can be seen in the graph in the lower left-hand side, the banks criticized and classified loan levels increased during the quarter, primarily due to the downward migration of a single previously watch-rated credit. This credit continues to perform and is fully secure and maintains a sizable amount of deposits with the bank, so no loss is anticipated. In summary, asset quality remains very good with low levels of charge-offs and past used and near record lows for criticized and classified loans. Turning to the next slide in terms of our provisions, the bank adopted CECL effective the first of this year. Due primarily to the change in accounting methodology, the bank's allowance has increased by approximately $4 million since the end of last year and now totals approximately $25 million. Based on our low historic levels of losses and the quality of our portfolio, we feel the allowance continues to be sufficient. Mike, I will turn the floor back over to you.
spk05: All right, thank you. All right, non-interest income on page 14. Overall non-interest income for the quarter is flat. However, as Tim noted, activity in the SBA business in Q1 generated revenues that will be recognized in Q2 and Q3 of $750,000. On the mortgage side, you can see that gain on sale revenue doubled versus last quarter. As we're beginning to see a return to more normalized margins and modestly increasing originations, which as Tim noted, we expect to remain at these levels or move modestly up if mortgage rates remain at current levels. On the next page, you can see more detail on our mortgage, and you can see that our primary focus continues to be purchase money volume. We've had very consistent originations on that side. You can see the revenue increased $650,000 from last quarter, and you can see the margin is up sharply, about 90 basis points to 240 basis points this quarter. Next page, 16, in terms of SBA, as Tim noted, a business we are very excited about. The new team that we hired in Q4 has really hit the ground running. And we feel very, very strong prospects looking out over the remainder of this year. You can see on the top left, if you take Q1 revenue annualized, we do have significant upside versus prior run rate. So $6.2 million on an annualized basis. So we feel very good about that group and its prospects. On page 17, regarding non-interest expenses, we had a number of things contributing to the increase this quarter. Number one, you might recall last quarter we recorded a $730,000 recovery of Q3 operational loss. Number two, we had salaries and benefits increasing including $180,000 in the SBA team expansion. We had increased payroll taxes of a little more than $300,000. We had loan origination deferred expenses of about $110,000. And we also had something that everyone in the industry is seeing. We had increased FDIC assessments. For us, that was about 140,000 for the quarter. In terms of page 18, I would say these continue to be the various options from a capital allocation standpoint. We continue to look to be balanced. and disciplined in terms of deploying capital. As you've heard us say in prior quarters, our first priority is supporting organic growth. We continue to increase our dividend over time, as was noted earlier. We continue to be in the market with authorized share repurchases. We did announce, as you recall, a new $10 million share buyback program in January. We have about half of that $5.4 million remaining as of March 31st. All right, I will turn it back now to Kevin to talk about credit culture in CRA.
spk13: Yes, skipping to page 20. We did want to highlight our loan portfolio. We feel very good about the composition of our loan portfolio in general and want to highlight the bank's overall portfolio mix as well as address some potential concerns related to investment CRE loans, which are obviously a hot topic in the industry as properties feel the impact of higher interest rates. As can be seen in this slide, The bank believes in a well-diversified mix with the goal of assets split into equal thirds in C&I, consumer, and investment, CRE. Our primary Tennessee markets, Nashville, Knoxville, Chattanooga, as well as our new market in Asheville, North Carolina, continue to enjoy robust growth and normally outperform other areas of the country during downturns. Over the past several years, we have virtually eliminated shared national credits. We now account for less than 1% of exposure. Our focus continues to be on organic local growth with a current emphasis on C&I and consumer lending. On the next slide, I wanted to give some details in regards to our mix of investment properties which as can be seen here, the highest level of our concentration is in multifamily projects. We feel very good about our multifamily exposure as most projects have a minimum of 35 to 40% in equity injections. This is also true with our hotel exposure, which has performed very well. Our retail sector of CRE includes approximately $100 million in credit tenant exposure. primarily related to loans originated through TriNet. These loans generally have 10-year triple net leases and have performed well in downturns. We continue to avoid A&D loans, which constitute a nominal portion of our portfolio. Several months ago, the bank began tightening its parameters and appetite for CRE loans. We've been busy analyzing our portfolio for potential weaknesses. especially in the office sector, which is detailed in the next slide. So virtually all of the bank's office exposure is located in Tennessee, mostly in our metropolitan areas, and usually not in central business districts. There is an exception in Chattanooga as it relates to central business district, as most office buildings in this city are located in its CBD, which has remained very vibrant. This area, as well as others throughout the state, continue to fare well as people relocate to Tennessee, which remains one of the fastest growing and most fiscally responsible states in the country. On the next slide, we show our general underwriting guidelines. This slide details the three broad areas within our bank that originate CRE loans. Our CRE group, led by a very experienced team of high-caliber real estate specialists, handle the majority of the bank's investment real estate loans. Their portfolio is categorized by high levels of equity, as is that of Trinet. On average, the bank's CRE group has loan-to-values in the 50% neighborhood, while Trinet's portfolio has an average loan-to-value of 60%, based on a recent review. Our commercial bankers in our markets also do CRE loans, which are smaller in nature, but which, unlike the CRE group and TriNet, typically have unlimited guarantees. Loan-to-values are usually 80% or less, and amortization periods are usually shorter as well in the markets. We feel very good with the standard due diligence and conservatism of our underwriting. We believe our CRE portfolio will fare well in the coming months. On the next slide, we'll show details of our maturing CRE loans with specific emphasis over the next two years as loans with fixed rates will be most impacted during this timeframe as loans are renewed. A recent review of our upcoming maturities in our CRE group showed the ability of our borrowers to continue to perform well, even with the higher levels of interest than those that are currently in place. Loans within the CRE group, which tend to be larger, that are maturing within the next two years, have a weighted loan-to-value average of less than 50%. The group has had a debt yield floor of 9.5% or more, depending on property type, for several years. Its portfolio has been stellar, with no losses in the history of the bank. I'll also note that we expect $30 million in runoff and multifamily exposure during this quarter, as a few projects are scheduled to be taken to permanent financing, as is the normal course of business for these types of loans. On the next slide, Our loans are continuously reviewed. We review those both internally and externally. External exams are done at least twice a year. Rollover lease risk is mitigated with higher levels of equity on most projects. Interest rates are stressed at the time of approval and when renewed. And the bank actively manages concentration risks, which are reviewed on a monthly basis. With this, I will turn it back over to Tim.
spk07: Okay. Thank you, Kevin. The environment continues to be challenging, and I am proud of our team, which is working hard to provide great service to our customers and ensure we protect the financial soundness of the bank. That concludes our presentation, and we're happy to answer any questions.
spk20: Certainly. Ladies and gentlemen, if you have a question at this time, please press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, please press star 11 again. Our first question comes from the line of Will Jones from KBW. Your question, please.
spk22: Hey, great. Good morning, guys. Stepping in for Captain this morning. How's everybody?
spk06: Hey, good morning. How are you?
spk22: Doing well. So, Tim, I just wanted to start on the margin. Obviously, it took a step down this quarter as you guys continue to see deposit pricing pressures as well as the makeshift story play out. I'm just hoping you give us an outlook on where do you think the margin trends from here, and maybe you could comment on what the spot margin was in March. And just in terms of the makeshift narrative plan, as I look back over a year ago, you know, noninterest-sparing deposits were, you know, closer to the mid-20% range of deposits, and now that gets closer to mid-teens today. Just how far along do you feel like we are in the makeshift story, and where do you feel like those noninterest-sparing deposits, you know, eventually drop out? Thanks.
spk07: Well, great questions. A couple things on that. One is, I think if you go back a year ago, we probably had zero in brokerage CDs, and now we have 370 million. So a big, you know, there's been mixed shift, and there's been dilution of the percentage by adding brokerage CDs. I'd have to calculate it and see what the percentage was if we didn't have the brokerage CDs. But there certainly is migration going on, like I said, where people were getting You know, when rates, when fed funds was at a quarter or 50 basis points and there wasn't much to get, and now they can go get a six month treasury or, you know, Renaissance has been offering 4.5% money markets here in Nashville in the newspaper. It's just, there's a movement. You know, I know everybody wants the magic answer. You know, I'm, I'm a conservative person. Again, I was the one in second quarter in August or in July that said, Hey, I think deposits are going to be tough the rest of the year. I think they're going down. I know other banks were saying they were going up. And so, well, I don't have the magic answer. And I think hopefully we're near the end of the rate increases from the Fed. You know, banks were slow to raise rates as they tried to protect their deposit portfolio. And it's a real balance of trying to grow versus cannibalization. And that's why we introduced brokered CDs. I would hope that if we looked at betas, The really people that, you know, were elastic to deposit rates, I hope they were aggressive first and that those are the ones that moved or those are the ones that sought the highest price and that that would trail off. But that's about as best as information I could give you. The March margin was around 310. And so there is continued pressure as, you know, marginal deposit costs to grow a bank you're not really getting a lot of non-interest bearing. You find an operating account takes longer to move, and you do give an earnings credit rate on that, so there is an inherent cost. But the marginal cost right now of getting a money market or a CD is in the 4% to 5% range. As you see, our new loans are being priced at around 7%. But In general, the loan repricing of banks and ours has not repriced as fast the last 12 months as deposit rates have changed.
spk05: Yeah, this is Mike Fowler. I would add to that in terms of your question about DDA and the decline in our noninterest bearing DDA balance. As Tim noted, a lot of that is driven, and we see this in reports through the industry, A lot of that is driven by balance that are compensating balances for service activity. And customers obviously need to leave less with short-term rates where they are today versus where they were a year ago. We do, if rates stabilize or if we are near the peak, then I think that pressure should certainly subside. And I think we could certainly expect to see some reversal of that when the Fed starts moving rates down, whenever that is. Great.
spk22: That's all helpful. I know Matt's going to look into the crystal ball a little bit there, so I really appreciate the color. And just kind of the growth, you guys obviously saw really good growth trends this quarter, both on the loan and deposit side. You know, I appreciate that pipeline just slowing a little bit. Just looking to get any commentary on, you know, your appetite to grow loans from here and, you know, maybe where you see loan growth trending as we come in the second and back half of the year here. Could we see a mid-single-digit pace?
spk07: Well, I think we have, you know, Capstar has been a transformation, right? And I don't, you know, I just focus on what I can control. I don't like to criticize. And so... The starting point, as I said, had substantial wholesale really on both sides. And we really set out in the summer of 19 to transform both sides. And we've made tremendous progress on the loan side. You know, as I said, SNCC's less than 1%, other participation's less than 4%, blah, blah, blah. And we actually had aggressive actions on deposits in the fall of 19 And then the pandemic happened and you had 400 million of deposits flow in and, you know, your phone would ring off the hook from investors. You know, what are you going to do with those deposits? They're sitting there, they're not earning thing. You know, you need to do something, you need to lend them out. And so, you know, it's hard to please, you know, we would all love it to be a perfect environment every day. And it's different when you're an operator and you're running a company. And so, You know, ideally, in a stabilized market, I'd love to have a company. I was looking at Lakeland Financial slides the other day, 150-year-old bank. They've grown loans and deposits 11% each the last 30 years. I mean, wow, what a wonderful calibrated model they have. And I think we've come a long way. I think that in our markets with our team, You know, there's good CRE loans out there right now. I think it's late in the cycle, and do you really want to be doing development? And I think they don't come with deposits, so we've slowed that down. But I think with our markets and our team, you know, we could grow loans 8% to probably 14%. I don't think that's prudent in this environment. So we're really focused on the soundness of the bank, meaning asset quality, liquidity, profitability. And so... you know, in the interim, I'd like to make sure that deposits have stabilized. They are coming at a cost for all banks, which is hurting the margin. But I'd like to see that stabilize. I'd like us to see us continue to build those capabilities. I think, like we did on the loan side, that we can prove over time that we can gather deposits. It never really was a long-term emphasis of this bank. And so I would say that what I would like to see is I'd love to see where our team can bring in deposits and loans in the 8% range, and let's get that going. And then once we get that going, we could up it. But we're threading a needle through this challenging economic environment.
spk22: Understood. All fair. And I appreciate the commentary there. Thanks.
spk09: Thank you, Will.
spk20: Thank you. One moment for our next question. And our next question comes from the line of Brett Rapatins from Hovda Group. Your question, please.
spk17: Hey, good morning, gentlemen. Good morning, Brett. Good morning, Tim. I wanted to start with just looking at, you know, from a regulatory filing perspective, you've got about a third, a third, a third of assets repricing less than one year, one to five and over five. Could you maybe give us any clarity on how much you have or pricing in a loan portfolio, you know, here in the next couple quarters, and then the similar on CDs?
spk05: Sure. Yeah, good morning, Brett. This is Mike. So on the loan side, I would say, yes, about 60% of our I don't have the maturities on the loan side over the next few quarters. I can follow up with you on that offline. But we've got, as you said, we've got about 33% of our portfolio that is variable that will reprice immediately and about 6% that will reprice beyond a year. So I'll maybe come back to you in terms of the breakdown on the fixed rate that is maturing and will reprice over the next few quarters. On the deposit side, I would say we are certainly actively repricing our non-maturity deposits as market rates move. I don't have the breakdown. I'll come back to you in a few minutes in terms of breakdown on the CD side by maturities. So let me come back to you in a few minutes later on the call.
spk17: Okay. And then, Tim, you talked at length about the environment, you know, and what you do, you know, when things like this happen. You know, Nashville is obviously a highly competitive market. I wanted to hear your thoughts on what you were seeing, you know, funds transfer pricing spreads, you know, is there a widening? you know, in terms of spreads and you know, if, if so, do you feel like that's a function of lower credit availability or just where the yield curve is? Thanks.
spk07: Yeah. Great question. And again, I've talked about this in the past and we all have different backgrounds and I understood there was some misunderstanding after a previous call, but you know, my experience here and at larger banks, is banks price their loans off of a funds transfer pricing equivalent matched wholesale curve, whether it be the swap curve or whether it be the FHLB. When I talk about spreads, it's not spreads to our deposit cost. It's spreads to a theoretical match term if you had no deposits. you know, anywhere I've been, I've sort of been trained to try and seek 200 basis points or higher on the commercial side relative to match funding. If you go back to the fourth quarter of 2021, from memory, our FTP spread, match funding spread on commercial loans was 250 basis points. And that's a good target, Brett, because if you get like a sheet of paper out and do 200 basis points in Excel on a $1 million or $10 million loan, you've got to subtract out, and again, that's FTP, so that's got your funding cost. You've got to subtract out some level of operating expense, whether it be servicing or incentive. You've got to back out potential, whatever you estimate for credit, and you've got to back out a tax rate. So if you don't get about 200 basis points, you're not going to end up with a $120,000 150 ROA on that relationship. So we had 250. As you entered 2022 last year, the first half of the year, our FTP spreads were in the 150 range, 175 range. And what it was, Brett, and I'm not criticizing, all banks don't use fund transfer pricing and are not sophisticated on pricing. And you've got everybody competing for volume. So when rates started shooting up in the first half of last year, I would say both competition, people wanting to get volume as well as some lack of sophistication, they were low. It was sort of like heart in the mortgage world and our mortgage company where they've now come back. And so, and so what I would say is that happened through maybe third quarter and since third quarter spreads have started to come back. I think that is banks seeking less growth. And so some of it is banks can get more. I think some of it is banks wised up and finally raised their spreads because the deposit rate's going up. And so in March, I have my March numbers in my head. What we did is some to offset the deposit pressure, some to slow loan growth. We said in first quarter, let's target 250 basis points on three rated credits and better. let's target 275 on fours and three on five rated credits. We didn't always get that, but that's been our target. And I think our weighted average in March was much improved and our weighted average was more in the 225 range. So we didn't always hit what I just said on our goal, but we're creeping back to what it was in that fourth quarter of 2021. Okay. That's, um,
spk17: That's really helpful, Tim. And then if I can sneak one last one in. My line was breaking up a little bit when you were talking about slide 17. Mike, I just wanted to make sure I understood sort of the run rate from here on, in particular, the salary employee benefits line and then just the other line.
spk07: So I'll answer that real quick. We're going to work hard to target expenses at the current revenue level in the 18 to 18 and a half million dollar range. And obviously, if SBA does really well and Trinet comes back and mortgage comes back, there are variable expenses related to those. But, you know, we had the 700,000 come back in fourth quarter. And then, you know, you do have FICA tax that starts over. You know, deferred loan expense because volume's down. We didn't have as much benefit as fourth quarter. And then you have the FDIC. There were one or two bills that when you're a small company, you know, our health insurance, it tripped over. You know, it was about $150,000 from fourth quarter. But we're going to work hard through better management as well as seeking some expense reduction to try and manage these between $18 and $18.5 million per quarter. Okay.
spk16: That's helpful. Thanks for all the callers, gentlemen.
spk20: Thank you. One moment for our next question. And our next question comes from the line of Kevin Fitzsimmons from DA Davidson. Your question, please.
spk11: Hey, good morning. Hey, Kevin. Hey, Tim. Listen, I know it's difficult with the going back to margin and maybe also we can you know, tie in dollars of NII to it, because I think that's important. I know it's difficult to, you know, the kind of crystal ball question, but we've heard from a number of banks and whether they're right or whether they're too optimistic indicate that second quarter, there'd be additional margin pressure, but probably at a diminished pace from that we saw in first quarter and then likely to see margins start to stabilize in the back end of the year. And I think that's all assuming the Fed does one more hike in May and then pushes away. Is that, you know, and then in conjunction with that, I think there's a sense that once the Fed's done, that mix shift really starts to abate. All that said, I mean, can you kind of characterize how you're looking at that relative to that trend? That outlook we're hearing from a number of banks. Thanks.
spk07: I think that would be my overall thesis as well. If you ask me, you know, from a probability standpoint, what do you think is more likely to play out? I'm very conservative, so I probably would delay it one or two quarters than what you described. I mean, I think we're near the tail end of rising. I think the most aggressive people salt early and either moved or switched products. I think that as that slows down, you're going to have your loans catch up. And so I think your thesis, I would agree with that thesis. You know, when it kicks in and when it has a material effect, I'm not sure. But I think what you described, I would believe in and sounds the right direction.
spk11: Okay, great. And then maybe on, you know, you've talked, you know, a past year or two about, you know, the burden of having too much capital. And I think it's probably a good thing to have right now. But you guys were active with buying back the stock where the stock price is. It seems to definitely make sense. How's your appetite for that going forward? We've heard some of the bigger banks indicate that, you know, there's probably could be a regulatory pushback from getting too active in buying back stock. But I was how your thought is on that front.
spk07: Yeah, great question. So the first thing I'll say is the buyback firm we're using right now, I talk to them regularly. And I mean, you know this because you're in this industry. And I guess people on the phone should know this too. But our buyback, I mean, he does buybacks for banks across the country. And he just says, Tim, I have to tell you, there's no buyers for bank stocks. And so unfortunately, it is a challenging environment. And due to the environment, you know, the supply and demand on bid ask, there's just not a lot of buyers. And so You know, you've got people that are financial focused funds that their perspective says they'll only buy financials. So they've got to stay in it. But absent that, you know, our, our trader just says there's very little interest in these stocks. And so that, that makes it a buying opportunity. Um, with that said, uh, there's, there's little volume. And so there's rules around buybacks where I'm not an expert. It's the average of some amount of your prior four week volume. You can do one block a week. So we've been very active. It's actually harder to pick up shares than you would think in a stock that doesn't trade a lot. But we are buyers. We did a $10 million authorization in January. We had our board meeting Wednesday. We talked about potentially increasing it. You have different views on a board. We had a director who I can't uh, was in Washington and had meetings with certain folks. And, you know, the feedback was, um, could be a challenging economy. There was a lot of discussions around CRE and different things. And so, you know, I was a buyer of our stock in the summer of 20, when it went to $9 and I had conviction in what we were doing and our credit portfolio. And I didn't want to go buy a ton, but I, you know, what if we buy 5 million or whatever? And our board at that time was very conservative relative. We don't want to ever dilute our shareholders. So why, you know, the little bit of game we could get, why take that risk? And so I'd say we're in the middle right now. We certainly have directors that think it's an attractively priced and we have directors that are buying director Tom Flynn. And, um, but at the same time, there's people with very deep business experience that say it is very uncertain out there. And, So I'd say we're in the middle. We are a buyer right now, and I'm happy to answer anything further. Okay, great.
spk11: One quick last follow-on. The loan relationship you're referring to within delinquencies and then the single loan you're referring to in criticized, are those different loans and different And on the one that's driving the increase and criticized, I understand that you feel good about it and has a lot of deposits attached to it. But can you say what industry or what kind of loan it is?
spk07: So I'll talk about the first one first. The first one in past dues is – and, again, we don't want to talk too specific about either one of these. But the first one is – great well-known strong operator in one of our markets that has a high character and high reputation who you know their businesses are just having some challenges as good businesses can do they are collateralized the borrowers work with us and actually given us additional collateral over the last year we're actually meeting with them again next week and we'll learn more so at this point it's not something that we feel has any significant loss to it I don't want to get too complex with it, but its due date is the first of every month, and you report 30 days and over in past dues. That's probably at former banks, Kevin, we had strategic timing on when we did loans on due dates. We would have never had a due date for a loan on the first of a month, because on a 31-day month, if they wait and pay it at the end of the month, it missed 30 days. So I say that, that I think there's Good operator will learn more about the improvement of the operations. It's not like it's 60 or 70 days past due. I think it possibly could have been just that it was a 31-day month, and the guy sent the payment in on the 31st or the 1st, and it missed it. So we'll get more on that. On the criticized classified, I'll let Kevin talk about that one.
spk13: Yes, and just to add on to Tim's comment about the first one, probably about $4 million of that exposure is liquid secured. So we feel very good about that with nominal of any potential risk of loss. On the other relationship, it has been a long-term customer. It's basically in the medical industry, hospice. And they were formed probably about five or six years ago, I'm guessing, and they just continue to scale. They just haven't reached, you know, a break-even point yet from a cash flow perspective. But they continue to be very well capitalized and have a lot of liquidity, so we feel very good about their potential prospects. Okay.
spk10: Thanks very much, guys. Thank you, Kevin.
spk20: Thank you. One moment for our next question. And our next question comes from the line of Graham Dick from PSE. Your question, please.
spk14: Hey, good afternoon, guys. Hi, Graham. So most of the stuff's been touched on, obviously, but I just kind of wanted to hear a little bit from you guys on what you're seeing on the CRE front that's worrying you or that's making you cautious about lending into that segment right now because, you know, we hear a little bit from banks that say, yeah, we're pulling back, and then other ones say, actually, there's a lot of opportunities for us right now because people have pulled back to get loans at more attractive rates. So any color you can provide there on the health of that market and how you guys view it would be really helpful.
spk07: Sure. So we have Lee Hunter, who has joined us here, and he's a real talent. His whole career has been in this. grew up in First Horizon, which has been a great bank and then has been back here about eight years or so. Keep in mind, we have CRE right now really in three buckets. Lee has had a dedicated CRE team that has guided that since he joined. And as we've transformed some, we've allowed our markets to do CRE in the smaller end. And then last year, you will remember or recall that we kept $105 million of TRINET due to market rates. So Lee, I'm going to ask Lee to speak. He can offer two things. I mean, he's just a wealth of knowledge on the general overview of the economy and our market and what we should be thinking about. But he can also speak some to our portfolio and maybe how we feel or maybe how we're different. So Lee, I'll turn it over to you.
spk21: Sure, sure. So I would say, first of all, we have pulled back on our Cree lending, as have most of our competitors. Talking to some clients over the past week or two, kind of asking for advice of where to go for commercial real estate loans right now. So there's definitely more leverage for those that are making real estate loans right now, both from a structure and a pricing standpoint. As it relates to our book of business, I would say we've done a deep dive, particularly focusing on loans maturing this year and next, and feel really good about those. Kevin kind of touched on some of those metrics, but if you stress them, you know, to a pretty worst-case scenario, we're still in good shape. And so... feel really good about the quality of our loans and feel really good about the overall ability to renew those loans and still have good loan-to-values, good positive cash flow.
spk14: Okay, that's really helpful. You mentioned you guys stressing each of those credits. What do those stress tests entail, I guess, where you guys are seeing that the portfolio is still healthy upon renewal, even if you do stress them? What does that mean in terms of vacancy rates and cap rates, et cetera?
spk21: Well, I think we have looked, I know we have looked at the overall debt yields of these projects, and we've kind of said, okay, at the average debt yield currently, if we ran those, you know, today the Most of our stabilized projects, most of these maturing or stabilized projects, the vast majority, we would typically do a five-year loan. And if you looked at the five-year and priced it today at some of the spreads that Tim talked about, you'd be kind of call it mid-sixes. So I would just tell you that if we stressed it at about 7%, 25-year AM, we're still at a kind of a 150 debt service coverage. And then if we stress from a loan-to-value perspective, a 1% increase in cap rates would get us to kind of low 60s kind of loan-to-value. If we stressed it to a 2% increase in cap rates, would get us into the low 70s. So in talking to appraisers, most of them would tell you that in the last six to 12 months there's been a zero to 50 basis point increase in cap rates depending on the the market and the asset class so we feel like the two stresses that we did both for cash flow and loan to value would still put us in a very strong position okay great um i guess just one one more follow up there and then that'll be it for me um what is like the
spk14: I guess, what are the cap rates? What did you guys underwrite that portfolio on? Do you guys think of an average underwritten cap rate for that portfolio that you could share? Just so I can kind of know where the starting point is. You mentioned that like 1% increase, 2% increase, and whatnot.
spk21: Well, it's across the board. I mean, obviously, some of the multifamily cap rates and even industrial have been extremely low. And then we've got hospitality in there as well. So it's across the board. But basically, if you take the starting... if you take the starting LTV that we've got that Kevin referenced and just, you know, take the 1% increase in cap rates and the 2% increase, that's where it would get you up from kind of 50-ish percent to kind of 60-ish and 70-ish with the two increases.
spk14: Okay. All right. That's helpful. That's all for me. Thanks, guys.
spk10: Okay. Thank you, Graham.
spk20: Thank you. And one moment for our final question for today. And our final question for today comes from the line of Feddy Strickland from Janie. Your question, please.
spk15: Hey, good morning, guys. Hi, Feddy. How are you? Good afternoon, I guess. Good. Forgive me if I missed this, but what were the expenses for mortgage, or I guess what were the core bank expenses this quarter? I was looking for that in the release, but I didn't see that.
spk07: Yeah, we can get that for you right now. Hold on. We'll look it up.
spk15: And while you're looking for that, does efficiency for mortgage potentially improve over the next couple quarters just as you have more volume on seasonality?
spk07: Yeah, and that's what I was getting at earlier. I mean, it – you know – Nobody likes the environment we're in, but our mortgage company and Trinet right now lost together. If you take their revenue and their direct expense, they lost $216,000 together. I think mortgage was a loss of $40,000, and the $170,000 would be in Trinet for first quarter. And so, obviously, you know, I mean, I don't have the exact numbers in front of me, but their efficiency ratios are like 100%, right? So they're... their expenses are the same as their revenue. So, you know, if revenues return, yes, they have some variable comp from incentives, but, you know, it's a smaller proportion or percentage of the revenue. So you definitely would think that their efficiency ratios would improve. Their pre-tax income would improve. Their efficiency ratio would improve. Our corporate efficiency ratio would improve. And it obviously would improve the pre-tax, pre-provision to assets because they don't really have a lot of assets because they sell everything.
spk05: And in terms of mortgage expenses, they were right at $1.5 million for the quarter. And so the non-mortgage expenses for the quarter were about $17.6 million. Got it.
spk15: In that guide you gave earlier, the 18 to 18 and a half range for second quarter, that's the all-in expense, right?
spk07: Correct. Yes, sir. Correct. And I just, you know, every company I've been in, we've done a very good job on expenses. And, you know, we had the garnishment operational loss in fourth quarter come in and out. And You know, you've got FICA come back, and you've got the FDIC assessment, which I saw Pinnacle cited in theirs came. I mean, that's $150,000. That's going to be $600,000 for the year additional, which is $0.03 a share. But I still think there's other things we can do, both personnel as well as operating expense. And, you know, I'm hopeful that we can operate that within $18 to $18.5 million. Got it.
spk15: And just one last question from me. I just wonder if you could talk through a little bit more of your thinking. You talked about some of the different funding sources. I know you said you consider using the bank term funding program. Honestly, I'm surprised more banks haven't said they consider using it if the rate's better and the terms are better. But just wonder if you could talk through your thinking a little bit on that.
spk07: Well, I'll add some, and then Mike, because he's more of the expert. I can tell you as the operator of I went to Hawaii in the summer of 2007, and it was six months before the financial crisis happened. And when TARP came out, we were part of a public company there called Hawaiian Electric, and a lot of people wanted to get TARP from a security standpoint. I had a lot of personal pride as the CEO of that bank, wanting to run a great company. I thought I could improve it. I viewed it sort of as like a badge I would always have. And so, you know, I really studied that bank, and I didn't think I needed TARP. And we didn't take TARP. And, you know, that bank's still here. It's a great bank. And so I'm just glad I never had to rely on that. Now, was that ignorant? You know, was that a young Tim that was ignorant and you should have it for security? Perhaps. I would say right now, you know, we've asked around, would there be any stigma from regulators or investors or anybody if you used it? We're hearing no. Mike can talk about the pricing. At first, we thought there was going to be a big pricing advantage. So we were thinking about, hey, you know, maybe as some brokered CDs mature, maybe we put it in that for a year or two because we thought it would be several basis points. The last I heard is I think Mike thinks it may not be as cheap as we originally thought.
spk05: Yeah, so let me comment briefly on that. we when they rolled out uh so we contacted the fed about the new funding program again well probably the day after sdb went down the monday after and it took a few weeks for them to get us through the approval process or the setup process and in that time as tim said the price advantage dwindled quite a bit. So when they rolled it out, I believe that the initial rate was 430, and you could pick your point, you could pick your duration, any point up to a year. You could prepay at any time with no penalty, and if you get to the point when the Fed starts cutting rates, you can, the Fed has told us, you can prepay and two minutes later turn around and apply for a new lower rate advance. So We certainly looked at that. As Tim said, we're sensitive to if there is a stigma. The Fed assured us in their mind it certainly would be. It would be viewed as a prudent use of a liquidity tool. Today, though, the rate over the last few weeks, the rate has moved up. And as of today, there's really no pricing advantage other than you have that free option to prepay if rates start moving down. In my mind, that's a valuable option. But with rates at $4.95 today for the Fed program, that's right in line with where we could issue broker it out to a year. And it's pretty close to where we could issue if we wanted to tap home loan borrowing. So I think we probably will use it. One advantage of that from a liquidity standpoint, as many of you might know, is everybody's investment securities portfolios are underwater given the Fed hiking rates. Ours is no exception. And so if you were to use those securities to borrow anywhere else, your borrowing capacity is based on the market value less sum haircut. The Fed is trying to provide more liquidity here, so they would let you borrow at par with no haircut and no deduction for any unrealized loss on the portfolio. So for us, we look at that as another $60 million source of liquidity. So we do intend to be ready to tap it. I suspect we will tap it. We think it's prudent to do that, and it would be strictly based on the economics.
spk15: No, that makes a lot of sense, especially if you can turn around and repay it as soon as rates stop going up. So I appreciate the additional color. Thanks, guys.
spk20: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Tim Schools for any further remarks.
spk07: Okay, before we go, Mike, can you follow up? Do you have the CD maturity schedule? I think it was Brett Ravitan that perhaps asked for that.
spk05: Yeah, I do. And I can comment briefly. And if, Brent, if you want more detail or anyone else wants more detail, just let me know. But you had asked about both loan and deposit and CD maturities. So what I will give you, I'll let me rattle these off quickly. And if you want, I'll shoot it to you afterward, Brett. But so in terms of CDs, Over the next three months 53 million over the second three months out 73 million over six to nine months 63 million and Yeah, so over the remainder of 2023 I'm calculating about 190 million on CDs now if you look on the loan side and I don't have maturity split, but what I've got is kind of a liquidity, is a repricing gap on the loan side. And so the sum of balances that will reprice or are scheduled to pay down or pay off are about, they're pretty smooth. They average about $160 million a quarter for the next year.
spk08: And he's probably muted now. Okay.
spk07: So, sir, thank you, and that concludes our call. We appreciate everybody calling in. If anybody has any follow-up questions, please don't hesitate to call Mike, and I hope everyone has a great day and weekend. Thank you.
spk20: Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.
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