Q3 2019 Earnings Call
Ladies and gentlemen, please standby your conference call will be getting more materially once again, ladies and gentlemen, Thank you for calling <unk> conference call will begin momentarily. Thank you.
Sure Holdings third quarter 2019 earnings conference call hosting the call today from Capstar jumped schools, President and Chief Executive Officer, Robert Anderson, Chief Financial Officer, and Chief Administrative Officer, Chris teach Chief Credit Officer Capstar right.
Please note today's call is being recorded and will be made available for replay on cap Staars website.
Please note that gap stores any relief presentation materials will be referred to in this call and form 8-K, either capstone filed would be asking C are available on the Fccs website at Www Dot you see dot Gov, any investor relations page of cap Staars website at www.
Our GAAP Star Bank Dot com.
Also during this presentation.
Let me make certain comments that constitute forward looking statements within the meaning the federal security laws forward looking statements reflect capstone current views with respect to among other things future events and its financial performance for.
Forward looking statements are not historical facts that are based upon got stars expectations estimates and projections as of today.
Accordingly forward looking statements are not guarantees of future performance and are subject to risks assumptions and uncertainties, many of which are difficult to predict and beyond costars control actual results may prove to be materially different from the results expressed or implied by the forward looking statements you.
You are cautioned not to place undue reliance on forward looking statements speak only as of today.
Except as otherwise required by law Gastar disclaims any obligation to update or revise any forward looking statements contained in this presentation. What trends are result of new information future events or otherwise.
In addition, this presentation may include certain non-GAAP financial measures the risks assumptions and uncertainties impacting forward looking statements and the presentation of non-GAAP financial measures.
<unk> non-GAAP measures to the most directly comparable GAAP measures are included in the earnings release and a presentation materials referred to in this call.
Finally got stars not responsible for and does not.
Girthy.
Accuracy obvious earnings teleconference transcripts provided by third parties.
We authorized live and archived webcast and transcript are located on cap Staars website.
With that I'm not going to turn the presentation over to Mr., Tim schools got stars President and Chief Executive Officer.
Good morning, thinking each of you, they're investing time to listen to our call. This morning and follow our company.
Joining in late May I've spent a great deal of time getting to know our team the underpinnings of our operational and financial performance and if not with most of our large customers in both east and Middle Tennessee.
We have an outstanding company led by well respected anchors and support staff positioned in two of the most vibrant and growing regions in the southeast and each of these regions. We're blessed to have many of the leading operating companies in real estate investors as our customers.
Meeting individually with these customers the feedback is consistent.
Capstar differentiates itself in our markets through four factors.
Its ease of doing business flexibility responsiveness and customer service.
Many customer, stating we are the best bank in town and that they have ever had.
I've also had an opportunity to meet with many of our current investors potential investors.
We appreciate your support.
With your support a great Foundation has been built which I feel has as much potential as any bank in the southeast.
However, we recognize our historical returns to shareholders to date have not kept pace with market averages or expectations that will be a key focus of mine and our team as we move forward.
This fall as we work to put our 2020 in outer year plans together some of my keep focuses will be.
Number one to improve the profitability earnings consistency in growth and number two to rebuild confidence in our credit quality, which has been outstanding since inception outside of two sizable individual losses.
I would like to see us develop a leading sales culture operating with disciplined pricing credit inefficiency.
Our goal will be to build on the Great Foundation before us and continue to operate a company we can all be proud out.
To support this will be instituting shareholder ownership guidelines for my executive team and I will be working with our board to ensure executive incentives are tied to metrics that are aligned with shareholder value creation.
Turning to our results this quarter on page four we had a solid quarter with earnings of 36 cents and a return on assets.
1.31%.
Performance was led by continued strength in mortgage and our try not business.
Our credit metrics remain outstanding and we're pleased with our deposit growth is that is one of the single biggest opportunities in our company.
We recognize these businesses and credit can be cyclical. So we will be working to strengthen the potential for balance sheet growth and work to improve our net interest margin, which like many others in the industry faces some challenges in the near term.
We're also very pleased with our east, Tennessee operation, which is concluding its first year.
Where it is often calm and have run off of some business in the first year.
We actually are up in deposits and flat in loans. Additionally, we have had nominal voluntary turnover, we're very proud of all of our capstar teammates across the company for making this a success and look forward to their impact on our company.
Another exciting accomplishment this quarter was assisting a founding and our largest shareholder exit their investment due to the conclusion of their fund.
We work diligently where we could support them and a key focus was also the support of all of our other remaining shareholders by all measures. It was a success for all shareholders essentially over a couple of day period, nearly 9% of our company traded hands with the resulting stock price and on.
Going liquidity increasing.
We are very grateful for their long time support as an investor into our new investors, who helped make this happen.
I'll now turn it over to Robbie Anderson for more detail review of our financial performance in the quarter.
Thank you Tim and good morning, everyone. Let me pick up on the deposit slot as Tim is covered many of our highlights and you can see our operating metrics on page six.
Average deposit balances grew 6.3% on an annualized basis from the second quarter and more importantly, we grew the right type of deposits DTA balances were up 25.1% in interest bearing checking accounts or now accounts were up 51.3%.
Our correspondent banking group is driving the bulk of this increase as you may recall, our correspondent banking group.
Thanks around 50 financial institutions, and typically has a mix of both DTA and now accounts to support their business needs as a data point. Our correspondent group has approximately 265 million in deposits and roughly 61 million as in D.A. and over 200 million isn't now for money.
Market accounts in total the correspondent banking deposits are up approximately 100 million from a year ago.
You'll also notice that time deposits are down sharply. This is a conscientious effort to move our balance sheet to a more neutral position.
As Cds have matured were being very careful on pricing to reduce the length of our deposit book.
We have 88 million of Cds that we will reprice over the next six months at a weighted average rate of two or three.
Another 83 million at an average rate of 210 will reprice over the next six to 12 months.
This is 56% of our CD book that we will have an 80 to reprice within the next year.
As you can see on the chart on the lower left the overall cost at a bar deposits did not move down significantly this quarter with federal reserve rate cuts pricing peaked in July and then came down further by September .
We do expect a more meaningful decrease in our deposit rates in Q4 as rates were reset later in the quarter. So let's move on to loan growth.
Average loan balances decreased 6.3% on an annualized basis and is predominantly attributed to payoffs and pay downs late in the quarter, we discuss the possibility of muted loan growth on our last call. So this should not be a surprise we are seeing payoffs in commercial real estate with some large projects getting.
Refinance into the permanent market at very low long term rates.
Valuations remain high in Nashville, So, we're also seeing projects sell to buy or sooner than anticipated in both.
Commercial real estate and some in our core cnine that are predominantly backed by private equity firms.
Although our loans declined the number of opportunities that we considered but passed on has increased as our bankers maintain discipline in terms of pricing and requested deal structure. We intend to continue this tactic as we focus on those opportunities that are more consistent with our principles of sound profitable growth.
We have been talking for some time about the type of client relationship we want on our balance sheet in short we want full relationships with operating companies and the owners and operators of those companies. We also want end market relationships, where we can fully support our clients banking needs. This means we have passed on some opportunities that are not full relationship.
Our out of market or do not fit within our stated strategy as renewals have come around we are being more selective a data point demonstrating to selectively is our end market loans versus out of market loans. As you can see on the chart on the lower left or out of market loans are down from the prior year and relatively flat to the prior quarter.
At this stage of the business cycle. We believe this flu activity will help us maintain credit quality going forward, so with that let's move on the loan yields.
Overall loan yield was 5.48% and a four basis points from the prior quarter with the two FOMC rate cuts and the change in LIBOR or our variable rate loans repriced and cost us nine basis points from the second quarter. However, we received an additional 12 basis points of lumpy.
He is with the immediate recognition of the amortizing loan fees with those early payoffs I just discussed.
The yields on new loan production had been above our portfolio averaged for the last four quarters, which should help offset declines in our variable rate loans should we have further rate cuts from the federal reserve and to further mitigate the impact of falling rates were continuing to work with our salesforce emphasize fixed rate loans and to implement floors on our variable.
Great loan production whenever possible.
So, let's see how all this impacted our margin.
Net interest margin decreased two basis points to 3.66% adult and although there are some moving parts. It can be summarized as follows we brought in a number of quality deposits in the quarter and while we would've liked to put those deposits to good use on the loan side, we experienced loan payoffs late.
In the quarter, resulting in more cash on the balance sheet.
We also had slightly lower investments than prior quarter with a lower yield.
As prepayments pick up on our security book the yield on our security portfolio dropped slightly Additionally, 6% our first securities purport portfolio is variable rate nature.
More importantly is what are we doing to protect our margin in the face of declining rates first we will be more aggressive in our deposit pricing, especially with rate sensitive clients when the fed cuts rates with our loan to deposit ratio at 84%. We believe we have ample opportunity to do to push the ERP.
Pause at rates lower in Q4.
Additionally, we'll be looking to shorten the duration of our CD book, We mentioned the amount and rates paid on maturing Cds on the previous slide as a reminder, will have an opportunity to reprice, 56% of our CD book within the next year. We're also encouraging more fixed rate lending, what the salesforce and requiring floors on variable.
Eight loans whenever possible, having said all this we do feel we are susceptible at least in the short term two more margin compression, we have 55% of our loan book that is variable rate in nature and predominantly index to one month LIBOR or prime.
One of the major contributors of keeping our margin relatively stable. This quarter was the loan fees associated with the loan pay offs and those can be lumpy and episodic in nature. So until we can move the balance sheet to a more neutral position, we do expect further rate compression.
With that let's talk about credit quality.
The reserve up 12.8 million is 91 basis points to our period end loans and that is up from 85 basis points. When we close the deal with Athens in the fourth quarter of last year.
We have $4 million fair value Mark remaining on the Athens book and when combined with our reserve would equate to a 1.19% reserve to loans.
As it really as it relates to Cecil we've chosen to delay implementation until 2023 since we are eligible to be a smaller reporting company.
Although not on the chart, we had a small recovery this quarter and our npis to assets remain at a low level.
We did have an uptick in our special mentioned bucket, but this is attributed to a real estate secured credit with no loss expectation.
Although we have a number of other asset quality metrics in our press release I can say that the team is working hard to demonstrate income improved credit profile and we're pleased with asset quality. This year, so let's move on to noninterest income.
Noninterest income to average assets was 1.34% for the quarter Treasury management and other deposit service charges were down slightly from the prior quarter, but we saw clients choosing to pay their treasury management fees with deposit balances versus fees in the quarter. This also reckon reconciles back to our growth into <unk>.
Positives for the quarter.
Try and that continues to do well in this rate environment and is squarely within the guidance. We provided you on our last call.
With the drop in interest rates mortgage is another business that continues to do well purchase origination volume versus refinance volume split moved down from 80 20 last quarter to 50 50. This quarter. Additionally, we originated 179 million.
During the quarter, which is up $43 million from the prior quarter and 52 million from the prior year.
Other fee businesses were up as well for the quarter and with a pretty straight forward story on our feline lets move onto expenses.
The efficiency ratio for the quarter was just over 64% in a bit elevated from our previous guidance, we booked a higher incentive accrual for the quarter, which is predominantly centered around our mortgage and try not businesses. In addition, we eliminated a few positions, which triggered 172000 of severances.
Expense.
This resulted just under $1 million of personnel expense reduction on an annual ongoing basis. This will either translate into ongoing expense savings or be reinvested into new revenue producers our preference will be to reinvest these dollars into stronger front line revenue producers.
We did receive a small bank assessment credit from the FDIC, which helped us by approximately $200000 and we expect to have an additional credit in the fourth quarter. Additionally, we will still.
Well, we're still working through the conversion of a key I T provider, which is causing us to run $100000 worth a double I T expenses as we bring on one vendor and drop off the other but that color, let's move on the capital.
As Tim mentioned Corsair capital, which was in one of our founding shareholders exited the stock in September I personally I'd like to thank Corsair for the trust and partnership through the years as there are great shareholders and partners in summary, Corsair capital sold approximately 1.5 million shares in September and this included the conversion of the preferred.
Chairs and non voting common into voting common shares as Tim mentioned, Capstar purchased 129000 shares or $2 million of the stock and we have $9 million remaining under our current share repurchase authorization as a reminder, select members of management and board purchased approximately 3.5.
$5 million from Corsair as well as you can see by the chart all of our capital ratios increased for the quarter and are above well capitalized guidelines with that let me turn it back to Tim for some closing comments.
Thanks, Rob.
We're optimistic about our future we're focused on making progress and are excited about the opportunities we have to improve our revenue and processes to make us more efficient.
Our markets are exhibiting strong underlying economic activity and Capstar is well positioned with a great team to build upon our foundation.
This concludes our prepared remarks, and I'd now like to turn it over to the operator to open it for questions.
Ladies and gentlemen, as a reminder to ask a question you any depressed stock even one or your telephone toward draw. Your question. Please press the pound Keith.
Please standby we've compiled it can win a roster.
Our first question or comment comes from the line Stephen Scouten from Sandler O'neill. Your line is open.
Hey, good morning, everyone.
Morning, Steven.
I'm curious on the the loan yields the new loan yields in particular, which you've kept.
Above your average which is really impressive I just wanted to see if you could give any more color about how you've been able to do that I mean, I think a lot of the company's I've heard from this quarter, just talked about huge competitive pressures and.
Moved as much as 50 basis points quarter over quarter, a new loan yields with the move in the five year. So can you talk a little bit about that and maybe the composition of fixed versus floating within that as well.
Yeah first of all I would say, we're being much more selective with some of our clients certainly on the structure. We are seeing things that I would characterize as being a late in the cycle behavior, whether its loosening of guarantees loosening of covenants.
But pricing we're also being careful on what we put on the balance sheet I would say, it's probably about 70 30, 70% variable still 30% fixed.
With a good mix across the board of C and I and on a little bit on C. Ari. We did have payoffs in both of those buckets. So it kind of mass the production, but both of those engines are working fine.
Steven also think that Athens has contributed where.
I don't want to say less competitive market, but.
We may be more rational competitors and so they've been a nice addition.
On pricing discipline.
Okay, Yes that makes sense, Tim and what did they contribute.
Market I think you said loans that state.
Typically flat.
Since the acquisition what did they contribute in the quarter to the loan originations maybe your production.
I do not I don't know, Chris if you had its single digit millions yeah. Okay.
So they obviously have they obviously have normal principal amortization in paydowns and payoffs or they have no replacement as well, but they I think Dave.
It's a good market in that there's certainly as competition, but not as hyper competitive and just historically they've got very good pricing discipline.
Okay, Great and then if I'm thinking about loan growth from here moving forward and maybe even average earning asset growth more specifically if I'm hearing you guys correctly. It feels like you're going to continue to focus more on kind of relationship production, probably smaller loan sizes to some degree than what had been seen in the past I'm wondering one how that impacts your.
Your health care book, the size of that moving forward and again, how that impacts the average earning asset balances kind of from here over the next maybe two three quarters in particular.
Yes, good question and I don't think at smaller loans I think that there's a little bit of misnomer here I think that this bank. Unfortunately had to losses that happened to be larger loans and unsecured but.
We're going after all the similar size loans, we would prefer for them to be in the state of Tennessee or close to Tennessee, we prefer for the majority of them to be collateralized with guarantees that's not going to always happen. So I think the only real mix shift would be in the healthcare book, where a lot of that was I hate to say a lot but.
Hey, you know a material portion of that would be outside of Tennessee material portion would be large and a good portion of that would the unsecured without guarantees I think thats the major change but.
We want to target what a lot of other people do we want to target great operating companies that have long histories and stable businesses with good operators.
And get their working line of credit their equipment, they're operating building bank the owners and if they expand to other regions follow them to those regions secondarily, you know investor Real estate, we've got one of the best people on our team in the state leaner and into really well at that so I would say similar sizes.
I think on the gross.
Really studied that because you know I think when you start a company.
And this is companies only about 11 years old it goes through phases, and I think it stalled the last two or three years. If you look at the sorta organic loan growth and.
And I don't think it's any one factor I think sums the economy with pay offs I think some we need to look at our producers in production.
I think some as we had been shrinking the health care.
So I don't think it's anyone's dr., but I'd like to get it where it's the what I described and let's target to try and get back to at least a sort of 6% to 8% balance sheet growth.
Appropriately priced with good credit and then manage our expenses.
Okay, but in the nearest term I guess, you would see especially with the move down we saw in end of period loan through this most recent quarter, we should see probably some pressure on average earning assets.
And the industry, Yeah, I'm talking Holistically, yes, I agree with you I agree with you and what we're seeing I mean, I said it last call. It's happened again this call this too.
I don't want to say, it's unique to the industry, but I think it is a little bit unique to most banks that I've seen here.
On what's happening right now one and all the markets had been in one of the neat things about Nashville is it has a lively private equity community and it's a really neat thing about our community and what it does I think it provides you good loan opportunities that have good credit risk because you know.
The equity Investor that's going in there.
The trade off on that Steven what I'm learning the average life of that relationship is a lot shorter so when a t. from goes and that companies can have a liquidity event and four to five years.
Whereas every other bank I'd been that when you're getting operating company, that's owned by family or group of investors that things and business for 100 years, so that loan they mature and that will renew with you. So it's a little bit of a faster relationship turnover when you've got exposure to private equity firms number two our our.
Commercial real estate is very high quality extremely high quality in some of those borrowers have access to the institutional markets. The only bank I've been at that really had that was South trust, which was a $50 billion bank, where we would do alone and at some point it would go to protective life or to torchmark.
So those are two unique aspects. In addition to finding production I think that presents maybe versus some other banks some shorter average life's on relationships that we need to overcome.
Okay. That's very helpful. Maybe one last little clarifying question on the new CD rates I think you get you talked about maybe two or three and stuff was running off in the next six months, then to 10, where a new CD rates coming on relative to those that runoff book.
What we're going to do and is we.
In our monthly pricing committee, where we're putting heightened disciplined around all deposit pricing and really monitoring market rates tracking about 10 competitors and middle, Tennessee, and East, Tennessee, and we're going to target to price RCD is 25 to 40 basis points below.
The match borrowing rate from the FHLB. So each month, we'll look at the you know six month, one year to year three year bullet borrowing rate at FHLB and price that accordingly to make sure we're making a profit on Cds.
Historically, that's what that's what banks do historically and Thats generally a range that you can raise Cds that.
So I don't I don't have those rates right in front of me I apologize, but you could look that up Fisher hi, guys. Thanks.
Yeah. Thanks, Yeah.
Thank you our next question or comment comes from the liner Catherine Mealor from KBW. Your line is open.
Thanks, Good morning.
Yeah.
Well.
Well back to the loan yield real for chart that you have on slide nine.
Rob you talked about how the repricing as Gary Laurie.
Packet linear by Dot nine basis point.
This quarter is down a fair and measure I mean, I guess, you think about this past quarter. We can move in live or are you kind of got the impacted so since July and September cut there was that if their assessment of what.
Sure you kind of her to cut.
Is there or will it be more than that meeting for for any reason.
Yeah.
Yes. They the loans are certainly contractual you know we have a number of them that are reprice monthly some reprice quarterly.
But why bore moves down typically in in advance of anticipated rate cuts from the fed. So you have that going throughout but I think that's indicative of what we could see with with rate cuts and live more movement. So as I said Catherine.
You know 55% of our book is variable rate work, we've been talking about moving to a more neutral position from an interest rate risk position.
But I think near term given libors moving down that you can expect those variable rate to move down as well.
And I do think Catherine on that chart on page nine is important you know we're pleased to our margin was basically flat this quarter, but we're also.
You know.
Aware that that some of that was due to the prepayment in loans in the expiration of the fees. So it was a loan yield would've been lower in our margin would would have also been lower in line with some of the other banks.
Yes, the outage to nine Thats repricing would actually I'd love to me just given the amount of able to Atlanta that you haven't isn't library that we had that did that that will you haven't for my question from yeah, but you also have a number that's on tied to Prime and then you got the.
September one which was mid so we'll probably see a little bit more impact.
To that late for September rate cut on our Prime book.
In the fourth quarter and I have to go back and look.
I'd have to go back and look at June 30 numbers, but my suspicion is that lie bore probably people been calling for rate cuts earlier. This year. My suspicion is that LIBOR had come down a great deal by June 30, So a lot of our loans probably had price down during second quarter as well.
Yes, good points could point, that's definitely helpful.
Then on expenses.
I appreciate all the color on the puts and takes there.
Speaking more broadly about the efficiency ratio.
Target that you have there and maybe are there any other extends levers that you have that you can pull to get that efficiency ratio lower.
In the face of a lower margin.
Yeah, I think theres, a lot and but that's one I think I may have commented that on the call. It into second quarter, that's something that you need precision you can't come in and just.
And just go acts things, but I'll give you. One example, and this has happened. It every company I've done that and you don't know where you're going to find it. So health insurance. Your health insurance is a fast rising costs. We were fortunate this year that that our insurance agent, we use bluecross blueshield as the underwriter, but our age.
Agent came back with shocked me a proposal to only go up 3%, that's a pretty low increase.
Nevertheless, I said, let's put it out to bid to others and we came back.
In bidding it out Blue Cross heard we were bidding it out and they came back and said Hey tell them will actually go down 5%. So we went just but just by simply taking an extra month and not signing that contract. We went and got from a 3% increase to 5% decrease the 200000, that's going to be a penny.
For share next year, so that was a simple month I mean, we easily could you just said lets say, 3% sounds great led sign on and move on so.
You just have to have the discipline and that's why I want to get stock ownership guidelines not that not that our team wasn't always thinking like that but the more stock. We all own will think like owners and like it's our home and ask those tough questions.
We also as Rob mentioned.
We lower salary expense a million dollars.
Several great outstanding free teammates and friends, but but that.
Strategically the roles were not as strategic in our operation today. So we released those funds and we'll be looking too, though either go permanently into cost savings, which would be about four to five cents a share or would be reinvested into revenue producers.
Got it.
We see duck ownership guidelines will you put out financial targets, maybe on the next call. It 2020, and just show what specific profitability targets or growth or whatever those metrics are that that you're targeting.
Absolutely I think I think they need to evolve a little bit because I think this is my fifth month, but.
You know in general I want to run a great bank like city hold and this is a great bank I'm, saying financially. It's financially we've got to get our financial performance to say city holding in West Virginia, South State Bank in South Carolina, Southern first in South Carolina, and and I think we're a long way there, but there are areas, we could improve need to strengthen our pre tax pre.
Revision.
So that.
When we so that we're not hitting our ROI.
By having no credit you know, we need to essentially get to where we hit our ROI and can absorb some credit and so.
Yes, I'll continue to lay that out and.
Timelines next question will be once you do that's what's your timeline and that's hard to determine its when you're running the company. It takes time, but I think we have an outstanding Foundation I think we have more growth prospects than most most banks.
And just excited to get started.
Great that's really helpful. Thanks, great quarter.
Thank you thanks Catherine.
Thank you. Our next question or comment comes from a line of Jennifer Demba from Suntrust. Your line is open.
Thank you.
Hey, good morning, Jennifer and thanks for thank you for initiating coverage on us this quarter, we appreciate that.
Great. Two questions. You said you may be reinvesting those personnel costs in two new hires what kind of capacity would you have how many people would you be thinking about hiring if that was the case and then secondly, youve credits great King can you just give us some.
You talked about a special mention loans.
The loss on are you seeing any cracks in any sectors.
In your portfolio at all we've seen credit card cost start to sort of normalize.
For the industry.
Sure sure I'll take the first one then I'll, let Chris Teets handle the second one on the revenue producers you know specifically you know related to those funds that probably would be.
Four to five people.
However, I don't want to be a copycat I'm learning more about pinnacle since I'm here in Nashville, they're not standing company I've always her great. Thanks.
I'm not trying to copycat, but I love their mantra that you hire athletes when they're available so specific to those funds.
I think that we'd be fortify people that would would make that expense neutral that you get revenue.
But we want to become offensive minded a sales organization and we want to look for great producers when they're out there.
Yes, Jennifer this is Chris relating to your second question on credit first of all.
What Rob what Rob reference was that the change quarter to quarter and special mention was related to a commercial real estate credits that we don't anticipate Lawson and again I'll highlight that in the commercial real estate sector of the last analysis I did and in our large credits, we generally have about 33% cash equity.
Are you on a weighted average basis across our CRM portfolio and Thats, a credit that falls in that bucket and that's why we don't anticipate loss and we anticipate getting refinanced in general we're not seeing pervasive trends such as all in one sector versus another.
When something gets on to special mentioned, we've shown truck revenue propensity over the last two to three years to work out about 40% to 55% over the next 12 to 18 months and we don't see anything different occurring in the portfolio that we have right now.
Thank you.
Thank you. Our next question or comment comes from a line of Tyler Stafford from Stephens. Your line is open.
Hey, good morning, guys.
Morning, Tyler.
Hey, I wanted to go back to the margin and the loan fees that you mentioned earlier, so obviously that was a.
Boost to the overall margin this quarter, if that reverses back and then the kind of the full impact from the September cut just can you size up.
The margin expectations for the fourth quarter, just given your earlier comments about some fairly sizable reductions on the on the deposit cost side as well.
Yes, what I would say is.
We probably would have been in line with some of the other companies that you're seeing and the relative drop in the margin.
It would probably be anywhere from five to 10 basis points with the recent rate cuts would probably be more normalized without those prepayments and the fees and there. We certainly anticipate the margin to come down in fourth quarter sort of hard to precisely get the exact right now as it comes through the system Tyler.
You a good portion of the loan piece has been in on the deposit side a lot of the deposit changes actually weren't made until effective October one so I. Thank all in all it should be down.
But we hope we do have some relief on the deposit side and we're going to be working diligently to.
Two to improve our deposit mix as well.
Okay.
Understood. Thanks, and then either maybe for for Tim or Chris just expectations for try not fees at this point here in the near term.
Actually I I'll comment and Chris no specifics, but I tell you what trying that that's an interesting one.
You know it I guess it somewhat cyclical like a mortgage company, but Chris does such a great job Chris Farm does a fantastic job and you just wonder could that not be expanded and.
They've worked great on volume they've really work rate on improving the yields we get on each sale theres great demands from banks all over the country. He has a great. Following so my understanding is we Chris has the numbers, but we had good pipeline already at the end of 930 that was really close to closing so we have all that <expletive> .
Come through as well as stuff he'll do this quarter. So Chris would you like we don't want to raise expectations over the last quarter Tyler.
It's a different rate environment than it was.
So expect to have we still have good demand for the product all but we're not going to guide you to a higher level at this point.
Okay.
All right I understood [laughter], I guess than a year maybe longer now since you guys front over the SP 18, I'm just curious if you kind of how that teams tracking at this point and kind of a I don't I don't think we see the numbers on our side. So just update on on kind of profitability in and revenue from Tonight SBH.
Yeah.
Yes, Tyler it's Rob we've been very pleased with the team you know the.
Fees that we originate and then sell the government guaranteed portion is buried within other if you look on that line item from from last year. You know, it's been picking up fairly steadily theres a number of things in there, but the SBA fees are within that line. So from all measures that team has.
A good pipeline of deals they have balances on.
The books right now they and we had some loans that were sold in the second or third quarter and second quarter, and we anticipate some in the fourth quarter as well.
So the teams met expectations are doing well and we're looking to continue to grow on that line item.
And we're really excited about then Tom I think it's a very professional group they've really know what they're doing I think our core I want to see US return our focus to our core middle, Tennessee, and East, Tennessee markets. We're we're best in class in those markets and I think.
We have a number of these initiatives.
And they're all outstanding, but but it takes time, you've got the trying that you've got to Sta, you've got the healthcare banking and I think at times. It. It then brings lack of focus on your core hometown Middle Tennessee East, Tennessee, So we've got to get that growing and I'd love to see those grow 6% to 8% and then I think all.
All these businesses can just be additive on top of that.
Got it Okay and then just just for Tim on the insider ownership guidelines that you mentioned earlier, so perhaps they actually says that you guys have specific insider ownership guidelines for executive officers and the board, but but the details provided or I guess or you just saying what's in place today.
As is.
To lower insufficient then you you want to take those hurdles up.
<unk> or.
Is it.
For the wrong and it's actually a there's nothing in place now.
Yeah, I've sort of rearrange the executive team. So it's making sure that the executive team I've put in place that that we're all aware, we're going to own stock re look at the levels.
You know I'm actually in the middle of a project now we're reviewing all of the incentive plans.
To see what we want to edit and change for next year, but it's really related to a new sort of leadership structure I put in place.
Tyler I would just say, it's a small difference but to your point the proxy would be specific to named executive officers, which are typically three I think Tim is talking about a little bit broader subset on.
Okay, David just in terms of the leadership.
Structure that you just mentioned is it can you can you comment on what changes you've made so far.
In terms of kind of putting a new team together.
Yeah, it's really hard to sort of describe changes because there was you know the unfortunate accompanies been through a lot in the last 12 months with the passing of Dan and then you know myself working with Claire. So you know when someone passes away that was sort of re juggling of just letting things settle for a year, but I can't really speak to the change.
But what we have in places a very traditional and I don't have it right in front of me. So I have may have the number wrong, but.
I've created a market president for Middle, Tennessee that job did not exist because I really.
No. This is probably our biggest opportunity we are in one of the top two or three metro areas in America. So we need to kill it and so we have a.
Executive reporting to me that's over the Middle Tennessee market President, we already had the east, Tennessee market, President, which is the incumbent from Athens.
These businesses healthcare banking try that.
Correspondent banking.
Put them under a specialty banking unit.
And then we have mortgage so we have for revenue executives very focused.
Two and our core markets and specialty banking in the mortgage and then we have.
No the.
Required.
Sort of administration personnel CFO Chief Credit Officer.
Operations I T.
Just a normal so there's about six or seven of us.
Okay, Great I appreciate all the details that's great. Thanks.
Thanks, Thanks Tyler.
Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.
Our next question or comment comes from a line Laurie Hunsicker from Compass point Your line is open.
Hi, Thanks, Tim and Rob Good morning.
Hey, good morning, Good morning lore I wanted to go back to your your comments to Tyler around the five to 10 basis point margin reduction.
I was hoping maybe you could give us some actual numbers as far as what was the prepaid income that within next quarter.
And last quarter and then also if you have the dollars on actual accretion income.
Yeah. The dollars on the actual accretion income it's on.
Page nine it's about 13 basis points my guess is that.
Looking at my controller right now is probably a little over $500000 would probably be.
My guess, but we can do the math for you.
And then on the five to 10 basis points I mean, again I just want to emphasize.
The prepayments that we had on the loan side triggered acceleration of loan fees without that I think we would've been down five to 10 basis points.
I can do the math for you can get that back to you but.
Okay. Thank you probably had you probably had.
You probably had around 250000 or sandler prepay fees.
Right.
It's I don't think we have that yeah, we don't have in front me.
Let me get back.
Hi. This is okay. That's helpful. And then also you mentioned that effective October 1st.
You had some deposit pricing reset can you help us think about how much that was and then what what they've got to pick up 10 basis point.
I don't want to give any forecast on that but basically we've got.
Almost a quarter of our of our deposits are.
And sorta individually priced individually negotiated arrangements with customers and so it takes time to go in call them and work there write down and so that effort into twice in the third quarter. One on the first production one on the second.
Production and so.
A lot of those were not input or agreed to or administered until October one. So I don't I don't have away the size that for you I just want to point out that there is a good piece that.
I'd be conservative and probably say that the margin without those loan fees would have gone down 10, and then the question as you know any changes in lie bore or.
Additional repricing that wasn't in that weighted average and then what from the deposits can offset that and I think there will be a good amount of offset but.
I don't think were unusual than any other banks that I'm seeing on on margin decline right now.
Okay, and then how should we be thinking about correspondent deposits going forward how are you.
That groups doing great that group, Rob I don't know did you hear back from Karen or.
We had a number of new customers are we typically have three to five new what I'd call settlement customers, where we actively get their operating account, sometimes we do start the relationship with.
The now account and work into a D.A. settlement type accounts, but we typically we'll have three to five new banks per year.
The corresponding group has been meeting expectations that those balances in there are sort of a function of also all those 50 banks that we bank and how their book is doing so sometimes those balances today I would say our elevated and could be a seasonal.
Certainly just on annual basis, we typically see cash build up in the first quarter and then with tax season, usually goes down in the second and third and they start picking up in the fourth so I think where we end ended in the third quarter is certainly a high watermark for that for that group, but certainly the group has been doing well and continue.
As to pick up new clients that every year, yes, and talking to the team. They had a great third quarter and they mentioned they have a couple that are going to come in line in fourth quarter and it's it's neat they bring in.
Basically the set account, which.
I would say if you map that to FHLB match funding, you're not making a lot of money on that when it comes with their DTA and so when you look at the blended value of the relationship you know it is value added to what you could borrow at.
With all that said, we need a deposit strategy I would say most banks, it's a lot easier to find loans or at least it's I wouldn't say, it's easier but its quicker.
It's probably more interesting.
But we really can improve our deposit side is probably a lot of banks can and what I point to is there was a bank here that that reliant acquired.
It's a contiguous county to downtown Nashville.
And that bank was just acquired or announced 45 days ago. So they had a cost of deposits I believe a 0.77. It was founded 20 years ago were 11 years old ours is say 140, so there's a real opportunity out there there are deposits out there so core spot.
And it's great Theres a lot of other vehicles, we shouldn't need to go find.
Okay. That's helpful. Great and then if we can just jump over to credit your credit.
Great.
Backing off of page 11, it looks like your substandard loans.
Our 9.9 million, our south down from 12.6 million last quarter can you share with us which categories improved and then I'll tell you know can you share with that's just what are the balances there.
Sure. So in the substandard loans, which is really the non impaired loans is about 9.7 million in total.
About 3.6 is in commercial real estate.
1.8 about consumer real estate.
And 4.2 and Cnine Laurie.
That's great.
And then.
Last last question here generally can you help us think about.
How you're approaching shared national credits going forward, how that plays into your business strategy. I know you you mentioned weapon in market focus, but can you help us think about where you want to see that portfolio as a percentage of allowance and how you're thinking about growing does that and.
And health care and certainly I realize it's one of your snacks, our health care, but if you can just share with us more broadly how you're approaching that strategy.
Yeah, I'm going to give you an answer and in the next question is gonna be what's the timing and and I'm I'm a marathon not a sprint person.
I personally don't see why a bank and two of the best markets in the southeast needs a single shared national credit.
I think we should have more opportunities and we can even put on our balance sheet and we should have great selectivity.
We're not there yet so.
So to me, it's it's Oh, describing to somebody who today. If you all are watching the world series and if you're a baseball fan you know pickle is when you leave for space in your caught between first and second I'd like to get us to where we have the luxury that we can select between so many credits across Tennessee that we don't need that but were.
Not there yet and so it's a bridge to get there in the second thing I'll say is all shared national credits the majority.
I've shared national credits or what you envision of shared national credits its varieties and its Simon malls, it's whatever huge things you can go by piece. There also are very local credits that are defined as shared national credits just because it meets the number of banks that are in it and so I don't know that it.
Ever be zero, but.
And so.
Hope that answers your question I'd love to get to where we are so filled up that its local relationship stuff. A few of them may be defined as shared national credits, but that's simply because they are in Tennessee, and they've got five or six banks or whatever and it qualifies for that.
Great. That's helpful. Thank you.
Real quick on that the reason is one you get deposits you get fee income you get collateral you get personal guarantees and they tend to be sicker margins 'cause shared national credits are very efficient.
You know very thinly priced variable rate low to no collateral no guarantees no deposits for the most part.
Great. Thank you for taking my question.
Sure. Thank you thanks Laurie.
You I'm showing no additional questions in the queue at this time I'd like to turn the conference back over to management for any closing remarks.
That covers it. Thank you so much whereby the calls and we appreciate your support we're going to work hard there you know a few small near term challenges, but there's a lot of great things going on here and everybody's working hard. So we'll talk to you I guess in January .
Thank you.
Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everyone have a wonderful day.