Q4 2019 Earnings Call
Hosting the call today from Capstar, or Tim School, President and Chief Executive Officer.
Robert Anderson, Chief Financial Officer, and She's Administration officer.
Chris Pete's Chief Credit Officer cap starving.
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And transcripts our lives you don't cap Staars website with that I'm not going to turn the presentation over to Mr., Tim schools kept starts president and Chief Executive Officer.
Okay. Thank you good morning, I appreciated by calling and we're excited to be doing this call. This morning from Manchester, Tennessee, We're actually being hosted at first National Bank of Manchester, We have CEO Tim's brought here and we also have a CEO Bill Bryant of bank of Waynesboro. So welcome guys and we're talking.
What we're really excited about or announcement last night as I know they are.
Huh.
Well I'll start off could just sort of I've been here two quarters now so a couple of things I want to cover before we get into the releases want I think we had a great year and we're going to review that in a minute.
Two I can't say enough just after two quarters that we have a great team and I think a great bank. So much has been accomplished last 12 years to create a bank from scratch coming out of that the the recession and I think we've got something really special here and the customer feedback is a strong are stronger than anywhere I've worked at and actually.
It was nice and I'm sure, we put anything out yet, but just this month, we were notified bride Greenwich that last year, we were up a customer service leader a winner in business banking. This year, we actually wanted and retail business banking and middle market. So we wanted in three categories. So I think it's just that.
Very strong foundation here.
With that said also want to point out that our performance is really not to our expectations and I'd like to go through.
Some profitability growth credit in deposit topics profitability, I'd really like to see our pretax pre provision to assets with a normalized mortgage and trying to get to 1.8%. That's really the number it needs to be to pose to sustainable 125 or away and right now.
We estimate that on normalized try not in mortgage were about 140. So I think we have some work to do there and I think we can do it I think there's good opportunity there.
Number two growth you know as many of you know our growth has slowed the last couple of years and some of that I think after being here two quarters is little bit I don't want to call. It distraction, but focus on sort of national and participations. We also versus my other banks have a heavier influence a private equity.
Individuals that we bank and customers that have access to institutional markets. The last six to nine months those two things have tempered our growth we've had some good underlying production and so forth, but a lot of our customers. The companies have sold and or some of our customers are so high quality, they've got access to institutional markets.
So we're going to work really hard on growth.
What we've done today is we produced a million until a million the half of non sales positions, where we felt it was overlap and we have hired in the last 30 to 40 days two additional commercial relationship managers and the Nashville Metro area, We've announced our Knoxville expansion with five employees there.
And we're excited to announce the partnership with first National Bank and bank of Waynesboro. So I think we have a lot of initiatives that we can reignite our growth.
Number three on credit we've had a tremendous credit history led by our bankers on our credit team. However, those have followed US you know, we're sort of still earmarked from having to sort out sized losses and I would say much progress has been made on reducing our shared national credit and participation portfolio.
And we are focusing much more on banking or local communities.
Lastly deposits Capstar has been principally in asset driven strategy and therefore, we've not had a strong deposit program and going forward that will receive equal or more emphasis not just the hot topic for the year to really become unbalanced bankers. So.
So with that I'd like to jump in and highlight the first slide which is a summary of some fourth quarter and in 2019 highlights as you can see the quarter was.
30 cents, we did have a almost $300000 of an early retirement charge related to three or four individuals which will reduce ongoing recurring noninterest expense about $600000 that equated to without that that would've been 31 cents had we not.
Perform that.
Our or away and Ari is listed some of the items I'd like to highlight as far as successes for the year.
Capstar had done one previous acquisition, a small acquisition, maybe six or seven years ago. So it was the first one in a while I think it was outstanding Athens is a wonderful organization has been around a very long time and does a stellar job and both sides did a great job of integrating and when you look at year over year. It's.
Real Testament, when you've had a very little to no customer attrition and very little to no voluntary turnover on employees. So it's gone very well Great addition to capstar.
Our mortgage and try not teams had record years and I'm not going to just recite the numbers for you there right there, but you can see how wonderful they were and they really contributed to our year.
Credit quality was outstanding and almost too good to be true because we know at some point there will be some credit expense. So that's back to my comment of wanting to get the pretax pre provision to 1.8%.
You can pose to 125 hour away with no credit expense, but I think you want to be able to post a 125 or away with 20 or 30 basis points of credit expense you want to be able to have that quality of earnings to be able to cover that.
The next slide talks about Knoxville, we announced that earlier, but we haven't really had any prepared remarks. So.
We announced Knoxville on January six we've hired five Oh really talented bankers, there, each whom I've had the pleasure working with before.
They all have very backgrounds from really strong banks, they've all banked in those markets roughly probably 20 years each sets 100 years of local banking experience.
We were very fortunate to also be able to partner with King per now I'm, a big fan of advisory boards and getting really strong local leaders, who can help with business development and King recently retired after a stellar career and is one of the most recognized bankers and the Knoxville, and frankly East Tennessee.
And.
He is excited he actually reached out to us. So he reached out to us when he heard the momentum and we were comment and new our teammates and asked if he could be supportive so he's going to be the head of IR advisory.
The board and is very plugged in he's actually having lunch with the team today to out to strategize and get started so we welcome him.
Those of you that don't follow Knoxville, Inox has a tremendous market it get decided as to a lot of cities, but it gets cited for its stability economically has a lot going on with University and a lot of a lot of a diverse industries there and when you look at the the larger Metro area, It's about 23 billion in deposits.
It's a significant market area and it's very very attractive to us.
Being contiguous to the Athens franchise that that we partnered with last year.
Our goal and this is our first one we've done so be patient with us but in looking at other very successful stories my good friends at Southern first who do a wonderful job and then studying service first we've established in internal goal of trying to achieve 300 million and balances after four years and we think.
The market can provide that as well as we think if you look at the a reasonable production levels for our employees. That's our goal and when you model that out it comes to you know in between five to six cents that it would cost in year, one because you're you're getting a salaries are coming in and some office space.
And obviously, you're getting revenue through the year that that will offset that some it breaks even in about 18 months and then you know it's profitable in the full year too. So we're really excited.
We're going to work hard to make this work and then we think Theres a lot of other wonderful bankers out there either that we've worked with before that we haven't an attractive cities like a huntsville or a chattanooga or an asheville those kind of markets. We're hopefully we can do something similar and it would be very accretive to our earnings without issuing shares.
[noise] page six gives a little bit further background on king and Amy we have that I'm sure you can read through that on your own so I won't read through that but both extremely talented.
I've had the fortune to work with both of them and I know both of them and they're just going to do a fantastic job for us and representing our back so with that I'm going to turn it over to Rob you get into the details of the quarter and then after that we will discuss some slides where we're really excited about our partnerships with bank of Waynesboro in first National Bank.
Okay. Thank you Tim and good morning, everyone I'll start on the deposit slide.
Average deposit balances grew 8.3% on an annualized basis from the third quarter and importantly, DTA balances were up almost 5%.
And interest bearing checking accounts are now accounts were up almost 30% over prior year.
Our correspondent banking group continues to drive the bulk of this increase as you may recall, our correspondent Bank group.
Banks around 50 financial institution, and typically has a mix about DTA and now accounts to support their business needs.
As a data point correspondent banking has approximately 300 million a deposits and roughly 60 million in D.A., and 240 million and now or money market accounts.
We have a 100 million of Cds that will reprice over the next six months at a weighted average rate of 211, and another 82 million at a weighted average rate of two five that will reprice over the next six to 12 months. This is 70% of our CD book that will have an opportunity repriced within the next year.
As you can see on the chart on the lower left our overall cost of deposit has started to move down with the cumulative impact of the FOMC rate cuts in the second half of 2019, so let's move on the loan growth.
Excluding our snacks and the period loan balances grew 27 million or 8.3% on an annualized basis from the third quarter of 19, overcoming additional payoffs during the quarter that Tim referenced.
As you can see by the chart on the lower left we have actively work to reduce our snack book throughout 2019, the Snake book declined 36 million or 28% from the fourth quarter of 2018.
Including in the reduction of snacks average balances for the quarter were down 4% as we kick off 2020, our pipeline looks strong further reductions in the snake portfolio will be opportunistic and we anticipate growth in our core loan book, So lets move onto the loan yields.
Overall loan yield was 5.24% and down 24 basis points from the prior quarter with the October FOMC rate cut in change and prime and LIBOR or our variable rate loans reprice downwards and cost was 12 basis points from the prior quarter.
Our loan fees were down an additional 15 basis points, but driven by accelerated payoffs that we saw in the third quarter of 2019.
The yield on our new loan production continues to fall to yield curve down so let's see how all this impacted our margin.
Our net interest margin decreased 17 basis points to 3.49%, a flattening yield curve and downward movement in interest rates impacted our earning asset yields which were partially offset by lower deposit rates and slightly higher loan balances in our loan held for sale book per day.
Currently our try net loans.
Another major contributor to the drop in our margin. This quarter was the reduced loan fees associated with loan payoffs, which was elevated in the third quarter. We spoke about this on the call last time.
Having said all this our balance sheet remains asset sensitive. So we do feel we are susceptible at least in the short term to more margin compression should interest rates continue to come down.
So with that let's talk about credit quality.
Reserve of 12.6 million is 89 basis points to our period end loans and that is up from 85 basis points. When we closed the deal with Athens federal in the fourth quarter.
Up 2018.
We have a 3.5 million dollar fair value Mark remaining on the Athens book and when combined with our reserve would equate to about 1.13 reserve to loans as a reminder, ours on Cecil we have chosen to delay implementation of until 2023. Since we are eligible to be a smaller reporting company.
Although we have a number of at other asset quality metrics in our press release I can say that the team is working hard to demonstrate an improved credit profile and we're pleased with the asset quality. This year, so let's move on to noninterest income.
Noninterest income to average assets was 1.12 for the quarter Treasury management other <unk> deposit service charges were down slightly from the prior quarter, but we saw some clients choosing to pay their treasury management fees with deposit balances versus hard charges in the quarter.
Originations in our trying to business continue to do well, but selling these loans in the fourth quarter has traditionally been seasonally lighter than other quarters. This year was no different in the loan sales were down from the prior quarter, but in line with last year's results.
Having said this we expect the first quarter to move up given the amount of trying it loans on our balance sheet.
As interest rates continued to move lower our mortgage business continues to do well our purchase versus refi split has remained consistent with the prior quarter. We are still very pleased that nearly 50% of the volume for the quarter is in purchase money.
Other fee businesses were relatively flat flat for the quarter and with a pretty straightforward story on our feline lets move onto expenses.
The efficiency ratio for the quarter was just over 67% ability elevated from the prior quarter. However, we took a onetime charge of 289000 for early retirements during the quarter, which takes out roughly 600000 expense on an annualized basis absent. This one.
Time charter efficiency ratio dropped some but more importantly, our quarterly expense base was below 15 million and markedly below our prior quarters run rate. This is important as we have hired several new revenue producers in Knoxville, which will add expense in the first quarter 2020 with that color, let's move on to capital as you can see on the slide all of our capital.
<unk> remission ratios remain above well capitalized. Additionally, we did not repurchase any additional stock during the fourth quarter and we have approximately $9 million remaining under our current share repurchase authorization. So with that let me turn it back to Tim quickly.
So in summary, if you look at slide 16, I think we continue to build a really great bank, we're focused on middle and East, Tennessee, and we're going to work to improve those four points that I pointed out our profitability our growth our credit and our deposits. So with that I think we're going.
On a term too.
The presentation related to our announced transactions.
If you all have those slides available.
The first slide shows sort of the footprint and you can see that expands our presence across middle, Tennessee, which we're really excited about.
Two institutions that are each over 115 years old and they are each two of the highest performing banks in the state of Tennessee, among all banks, there's roughly 150 or so banks and if you look at our away or net interest margin or really any financial metric they generally rank around the top.
20 institutions out of all 150, and it's been that way for whilst the very stable and very well run.
We hope it's a win win for both sides for Capstar, we feel it adds additional funding and in deposit capabilities.
Yeah. It provides more granular loans with higher loan yield opportunities.
And.
It also.
Allows us to do larger relationships as our capital continues to grow.
As it relates to both of those organizations, we hope we bring them additional capital additional technology additional branding and allow them to to serve larger customers as a small institution.
It also allows cap start air into the fast growing rather for county market you hear a lot about referred county, and Williamson County, So we're very excited about that.
As far as the financial just a summary, and we'll get into a little deeper in a minute, but I think versus other deals in the market I think it's very reasonably priced and on the right. You can see the financial metrics, we expect to come out of this deal a little bit less than 5% tangible book value dilution with reasonable.
All cost saving assumptions and we would expect about 5% EPS accretion this year.
And about 14% EPS accretion in the first full year next year.
Produces it was about a 2.9 year.
Earn back to tangible book value.
Importantly, it's accretive to our Nam our efficiency ratio and our away.
Rob would you like to cover the next line I'm sure. So it just covering the transaction summary.
You know, we're buying a 100% of FCB Corporation, which really owned 100%.
First National Bank of Manchester and 51% of bank of Waynesboro. We also purchased the remaining shares of of the bank Waynesboro. So we're we're buying 100% of both banks.
We're issuing a about a 70 30 stock cash mix, which we're going to issue 3.6 million capstar shares and a little over $26 million and cash the aggregate deal value is 85.1 million Capstar will have 83.5% ownership with the two banks owning about 16.5 per.
Second we will add one board member.
To our board, which is subject to our non-GAAP rules and certainly the approvals required regulatory and shareholder approval, we anticipate closing either late second quarter early.
Third quarter.
Moving onto page six there's a couple of data points certainly about the two companies that were partnering with as you can see and Tim mentioned the high quality financial performance of both banks, we're getting roughly 467 million in total assets $320 million.
And the loans and $400 million in deposits you can also see the demographics and the lower right I won't go into a lot of detailed there on page seven you can also see how we will stack up in both the deposit market share in Tennessee in total and then on the right we have a pro forma.
Our market position that have banks that are a little bit smaller and we have adjusted first bank further acquisition Franklin synergy on both of those so we're really excited about the partnership and what that does for us on a combined basis.
Moving onto just the.
Loan side as you can see the first national Bank in Manchester and the bank Waynesboro, our two highly profitable franchise that will provide further granularity and diverse vacation to our loan portfolio and gives us access to higher yielding loan opportunities.
That are available in more traditional community banking markets.
We believe that partnering with these two great companies will allow us to accelerate improvements in our efficiency and profitability. Additionally, this partnership will deepen our local banking relationship model and provide us with access into the fast growing Rutherford County market.
Do you move to deposits both the FNB at Manchester and the bank a waynesboro have demonstrated their ability to build a high quality deposit franchises in their respective markets. The cost of deposits for each of these companies at substantially lower than Capstar standalone costs and the acquisition will improve our most recent quarters cost of deposits.
By nine basis points on a combined basis with a success, we've had with the Athens Federal acquisition and competition for deposits remaining Pearson the Nashville, Emma say, we believe this partnership will help to diversify risk and improve our core deposit gathering abilities.
Moving on to deal dynamics, the transaction multiples were 139% of TC and 12.6 times last 12 months net income you look at our assumption, we modeled a conservative 25% cost saves on this transaction. We believe this is relatively low rate of cost savings demonstrates our commitment to continue the excellent service.
The first National Bank of Manchester and the bank Waynesboro have been providing to their respective communities. Weve also modeled in 7.1 million of onetime costs, which is fully phased into our tangible book value computation can also see the purchase accounting Mark cdti in tax rate assumptions at the bottom of the slide.
Moving onto the financial impact of this transaction, we think the partnership checks all the boxes for a great return on investment and deployment of capital, we're estimating 5% EPS accretion in 2020 and 14% in 2021, while earning back to 4.6 tangible book value dilution in less than three years. This will add rough.
Only 320 million of high yielding one story loan portfolio portfolio, and 400 million of low cost core deposits to our deposit book.
Given capstar standalone capital levels, and the combined pro forma capital position, we believe that utilizing a 70 30 stock cash mixes prudent and a good use of cast our capital and our pro forma capital levels at close remain robust so with that I'll turn it back to Tim for some closing comments.
So in summary, I can't tell you how excited I am for these two organizations I think.
I think if everybody goes to a restaurant you want to great meal at a at a fair price and I think you know we're partnering with two great banks at a fair price and I think it's going to be a real win win and it's going to improve both organizations I think it really helps round out Capstar Athens has been a tremendous addition to us and I think when you had these two institutions.
We're adding and building a really quality franchise here I think it also goes back to my four points that I started with profitability growth credit and deposits, which I think are that the four key areas and I think our Knoxville expansion and.
The partnership with these two banks will work towards improving our profitability I think it will help reignite our growth I.
I think it helps on diversifying our credit and bringing strong credit cultures, and and I think these two banks as well as Athens will bring a lot of deposit skills and programs that we can use companywide so very excited.
So with that we'll turn it back over to the operator to take questions.
Ladies and gentlemen to ask a question you will need a press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q and a roster.
And our first question comes from Stewart lots with KBW. Your line is now open.
Hey, guys good morning.
Good morning stirred.
Congratulations on a obviously the deal announcement last night.
But oh, I guess first want to start off on the quarter and and you know with.
Knoxville build out just curious what.
I guess, so we look at it.
From the 600000 of.
But just coming out of the run rate from the early retirement.
And then you layer on the Knoxville build out just curious what you're kind of thinking for a run rate.
Bob as you.
Go through the year prior to the deal close.
On the expense base going forward, yes, yes. So.
No we didn't get our expense base down absent the onetime charge just below 15 million. We did have some onetime charges in the third quarter as well. So we've been working hard on our expense base I think for modeling purposes.
Going forward I think 15 million is a good quarterly number that will be shooting for.
And.
I think thats, where we start Knoxville, we heard the folks.
The first part of January so there'll be a full run rate in the quarter.
Okay got it.
And then turn the fees, obviously, some seasonality with try net on but really strong your year over year growth, what's your outlook for wealth management and you're trying to business this year and we expect.
Kind of a mid mid.
At the high single digit growth rate or what is are you guys thinking about that those line items. This year, yes. So for trying that we typically see some seasonality of the buyers just kind of backing away in the fourth quarter. They traditionally don't want to put on assets because they'd have to provision for that and by that and they don't get a lot earnings in the fourth quarter, we have.
$137 million of try net on the books at year end, that's probably the highest we've ever had it we do have a number of indications either in the fourth quarter that the buyers would be back in the first quarter of the year. So I think that returns to more elevated level above and beyond the fourth quarter.
Certainly the full year of try and it was a record year that always can't print a record year, but we would love to have a solid performance from trying at wealth is doing steady and I think our fee line moves back up with trying that coming back in the first quarter.
Got it got it.
And then last one from me just bigger picture post deal close.
I know you mentioned the the 180 pre pre our away you guys are at 120 right. Now I think you know at B I guess, the two subs layer on about 140 or it was bigger picture post deal close with a 14% accretion next year.
How should we think about.
In ROI target or if you guys or given specific guidance there.
I don't think any guidance at this point I think I sort of separate the two of my head because I've already been working the last six months before these two transactions on.
I think thats an opportunity for Capstar, when I went to Hawaii at American savings Bank.
They had I think a 120 pretax pre provision to assets and we got it too and this was before the tax legislation change. It was a 120 and we got it to a 2.3% pretax pre provision to assets.
And that was before the tax change that's not a benefit from a lower tax and it was just hard blocking and tackling it was pricing loans better pricing deposits that are being more efficient minded and really starting at the top accompany mindset and I think I think perhaps within Capstar, we focus more just on our away and maybe not.
Fully understanding how we're getting our away so more to come on that I think that that you come with a a year one expense when you do a project like not Knoxville, but I think that these two banks that have already solid performance should help us get there more quickly.
I want to follow up on your first point when you were talking about the cost or whatever of Knoxville.
The way we've modeled it we've got other initiatives internally going on that while that project isolated in a vacuum and XL is five to six cents cost that in our budgets and our forecast internally for the year that it fits within the existing consensus that's been posted so.
I can't remember exactly where consensus is exactly today, but it fits right in where consensus is so while it is a cost there's other initiatives we have going on that makes it neutral for the year. Some of that is from the retirements. We've done that have been able to fund. This I don't want anybody to think that its five to six cents.
Off of current consensus.
That's helpful.
Yes, that's my my last question. So thanks again for a.
The help obviously in a congrats on the deal yeah. Thank you.
Thank you and our next question comes from Stephen Scouten with Piper Sandler Your line is now open.
Hey, guys congrats on the deal.
Thanks Steven.
I'm curious maybe Tim if you could talk a little bit about the mindset behind pursuing these two deals I mean, it seems to me to be a slightly different path than than what I've kind of heard you communicate.
From the standpoint of wanting to pare down larger loans in the Knoxville expansion kind of focusing on improving caps are that said it kind of seems to also expedite a lot of what you've been talking about so I'm just kind of curious if you could walk through.
Mindset, there and how you think about this kind of from a funding perspective related to Knoxville.
Yes so.
I hope, it's consistent with what I've been saying that I think I think again Capstar has a lot of wonderful stuff, but it also is a lot I mean, not a lot. That's wrong term, there's a percentage of stuff you know the the shared national lending that participations the national health care that that is it's not traditional.
In a regional or community bank and so I think.
No you can't come in and just turn that off overnight and that's not our intention because you'd have a lot to make up but you know how do we continue to transition more to banking in Tennessee or around Tennessee in our communities and we want to do that organically and so that that is the two bankers in Nashville, and the team and Knox.
Phil and then we want to be to seek you know very well instead, we're very well run institutions that that are we feel attractively price for our shareholders and so you don't know when those are going to come up banks are sold they're not bought and these organizations. We're looking for a partner.
Her and so we were fortunate to be the one that that received them. So I think again it just goes to a lot of what I feel we can do to further capstar.
Thank our profitability just not only then being well run, but putting more scale and leveraging our fixed cost I think funding strategy, there very well funded and I think there's opportunity to get more funds in their markets as well as us to learn from their strategies I.
I think the granularity of credits and their credit yields for a lot higher so I think it to me it sort of right in the wheelhouse.
And so we're very excited.
Perfect Thats really helpful.
And then maybe thinking about.
Loan growth kind of.
Either before the deal closes or after I'm. It sounds like it sounded like you guys were a little more enthusiastic about growth less pressure from snick pay down and you noted the 8.3%.
Theoretical growth if this Nick pay downs hadn't occurred so I'm just kind of curious how you're feeling about growth for the full year kind of pre and post the deal.
Yeah, and I'm not one.
I grew up working for Wallace Malone and he did not like to hear BB and T. report their earnings because BMT, John Allison was always where if you exclude this and exclude that Wallace was a GAAP earnings Guy. So you are loan growth is our loan growth we own it and so we didn't have much growth, but it's sort of gets messy when you say exclude.
This and exclude that but when you know the Snicks and then we've had in third quarter again.
Can't remember the number I think 20 to 30 million of elevated comp private equity backed companies that sold where we lost loans and or customers, taking their loans to insurance companies in the permanent market.
So we're excited we left that in the number so even with that in the number had we cap.
Shared national credits flat it would have been 8%. So we're feeling good the pipelines look good we have a pipeline call every second Monday.
Our pipelines look really good we think the reduction in this next we'll be opportunistic from here out we really were focused on reducing the non relationship. Once the 80 to 90 million that we have left our our relationships. We can show you that we've got solid deposits I mean, our health care.
Our banking group.
As 120 million in deposits at a cost of 65 basis points their cost of funds is actually lower than bank of Waynesboro in first National Bank, So snick isn't a snack and and so that's a long winded answer, but we feel good in fourth quarter that production was good pipelines look good.
Snick reduction will be more opportunistic now so we're hoping to point post some more points on the board in 2019, our 2020, our goal would be for that to be an 8% plus 810% range for the year.
Actual growth not excluding this and excluding that.
Great Okay Super in and just if I'm thinking about the 14% expected EPS accretion into 2021.
What's the biggest risk to that number what's the biggest to risk for you guys that you're not able to hit that 14% in your mind today.
To me. This is just me and this is today things change it would be timing of implementation I think again I don't want to reiterate enough.
I mean I just again I just came from a wonderful bank that I've dug out of a written agreement were had been in a written agreement for six years, So I've seen tough banks and I've seen good banks Weve got to really solid banks right here. So so I think it's going to be timing you know, it's always it's an IR right. It's a time value.
Money. So I think it's how quickly we can get if it closes say in late June early July than when you can schedule the conversions and how quickly can you get to your new run rate on the cost. We work very closely I think bill Bryant and Tim Spry would tell you. We work this was not a.
Downtown Nashville exercise, putting a number of spreadsheet, we worked hand in hand with those two gentlemen on where we thought the cost synergies were so I think we've got a triangle among the three of US that we all agree and I think it's the timeline of doing that right.
So that those companies perform the same or better afterwards.
So I don't I don't really feel that that much risk about achieving the 14 I think our timelines are reasonable or we wouldn't put them out there, but I think if anything it would just be a delay more than missing it.
Okay perfect. Thanks, so much for the color I appreciate it.
Sure.
Thank you and our next question comes from Jennifer Demba with Suntrust. Your line is now.
Thank you good morning, Hey, good morning, Jennifer winning.
So I think everything pretty much has been asked but just wanted to talk on ask about your strategic initiatives, let's kind of your main today's this year, which trying to get accomplished.
I think mine would be the.
I mean, it's really within those four points, but on profitability I think a lot of that is on the efficiency side.
We want to work on our margin but.
A lot of its on the efficiency side, I don't think where a company that shift is agregious on expenses, but there's enough examples over the last six months, where we're not as automate is as we automated as we could be we do still a fair amount paper based and I think we've demonstrated some of those two our team that's open semis, So I think there.
A good amount on the efficiency side on on growth really would like to reignite the middle Tennessee growth like we saw in fourth quarter and and I also think the Knoxville will help some organic.
And then lastly, the deposit strategy I think deposit is a longer thing to implement when you've not been a and I don't want to say there was no focus on deposits I don't want it to be thought of that way. It certainly was not a deposit led culture. So I think thats more of a two to three year, we'll continue to improve.
I'd put it in those buckets, Jennifer I would say profitability improvement I would say.
Reigniting organic growth, we want to be a good strong organic grower.
And then improving on deposit funding.
Okay. Thank you.
Thank you as a reminder, ladies and gentlemen that Star then one to ask a question.
Our next question comes from Laurie Hunsicker Compass point your line is now.
Yes, thanks, good morning.
I wondered if we could just start however on credit you're kind of looks great and Rob. If you have the number of the 92 million that snack of how much is in market in Tennessee.
And then just generally what we could expect to see here 92 million dollar pack shrink this year.
Let me hear calls around that.
Laurie its Chris Teets.
Well the 92 million two thirds of them are in our really local market.
And thats been a pretty consistent number all were continued their down all I believe $28 million all for the year and we will burn those off over time, but not all have a compelling reason to get out you know and so as Tim indicated we have relationships with many of these companies.
And that would be our focus going forward.
Okay, and then do you have a number for the total substandard and then of that.
How much of this substandard is cnine.
Oh 18 million is the sub standard number roughly maybe just 19 million and almost a I'd say almost all of that as see an eye or small consumer.
Okay, and then it's where as we're thinking about provisioning tariff provision this quarter.
What are your what are your goals in terms of your reserves telephones target how should we be thinking about that and how should we be thinking about.
Visioning and light as your 8% to 10% growth I mean, you all have not really been listing and provisions or how should we be thinking about that share laureates, Rob I think for modeling purposes, you can model provision at a 113 for growth the allowance piece and then obviously, we're going to be budgeting.
Or modeling some some charge offs in her we've been had a really good year with I think two basis points on a year to date basis in charge offs you know.
Thats really a very good number so I think modeling 15 basis points would be reasonable, but I would model 113 on the allowance side for any new loan growth and then roughly 15 basis points for net charge offs for the year I think thats a good number.
Okay, Great. That's helpful. Thanks, and then on the income statement.
What was the actual accretion income piece into net interest income.
Hi level.
Yeah, I think we had that on the slide on our loan yield it was around.
What page for her on a on page 10, Yeah, I live right looking for that I'm. So sorry, I didn't see it again. So it takes time, we broke out both the coupon the loan fees and the purchase accounting think that was around 14 basis points I'd have to translate that into numbers, but I'd like to you. The number after the call that's helpful.
That was 14 basis points on your NIM Muthree 49.
That is on the loan yield on page 10, 14 basis points on on the loan yield of five but do you have right do you have the arlinda accretion including everything.
I can get that for you Laura perfect. That's perfect. Okay, and then I just wanted to go back to the China is because that is a line item that's been lumpy.
And then I appreciate the color that you gave in terms of the pipeline, but how should we be thinking about that.
In terms of it actually translating into noninterest income.
Sure I think seasonally fourth quarter is has traditionally always been low if you look past three or four years that we've had trying to.
The fourth quarter has been low again, the buyers really don't want to put on those assets in the fourth quarter and I think this past year was a little elevated and it was a record year. So I think first quarter is going to be above fourth quarter and that fourth quarter should be the low point, but we should be returning to I would.
Say normalized levels and you can look at last year's run rate this years and get a good number in there were no answer just just to fine tune. It because it is such a big chunk of your non interest income if I'm looking at your first quarter of 19 over 641000, I mean could weaken seasonably see at return kids northwest that number how can be around that number I think thats.
Yes, Lori the dynamic. This this is Chris again, the dynamic that the for you to understand the business a little bit better is again when there is volatility in treasuries theres going to be changes in the yields that we earn on the sale up. So we had some tailwinds as treasuries came down in the first half on average we sell these loans with.
In two and a half to three and a half months of origination and so theres movement in treasuries in that period of time or we could see a little tighter margins or a little wider margins, depending on which direction is going so we feel good about where we are we have a good inventory we have a substantial number under ela lie pending sale of next two or three way.
Weeks and we're continuing to work the rest of the book, while we originate new loans, Okay, and I think Lori Thats. Another one that we can continue to study how how big could that be this is not a business. We've had terribly long and he does a wonderful job gets really high marks from from customers and.
I want to say, it's concentrated but he has some certain.
What's the word certain brands that he does a lot of triple net lease for and so we're evaluating what are other brands and other sectors that he could branch out on because he does it does outstanding job.
Okay. That's helpful and then tax rate for next year, how should we think about that.
21% as a good modeling number.
Okay, 21%. So you were 24% Miss your effective right. So that's that's falling for next year. Yeah. We have a couple of different strategies on the tax line that we're looking to implement so we think that could come down next year.
And does that come down to 21% starting in the first quarter I think first quarter will probably be a little bit elevated to that but for the full year. I think 21% is a good number sum it up 23% in first quarter, and then moving down and that's part of what I was speaking to earlier that there are some initiatives that will help pay for the Knoxville, where we feel.
Knoxville fits into consensus.
Great. Okay, Okay, great and then on buyback obviously, you didn't do any this quarter and so with the deal then we probably won't see you'd be active until after it closes.
I think thats accurate I think that as you I mean, everybody is different views on capital, but we recognize our capital levels are higher than peer which affects our return on equity and so then as you know we don't want to just for capital because that's not good for shareholders. But then it's what's the right returned to shareholders is that.
Is it a buyback and we think there's a breakeven point probably that it's not that economical you could do a onetime dividend you could use it for organic growth.
Or acquisitions and I think our priority would be is if we if we feel on the horizon we've got.
Positive organic growth, we would prefer to do that and then I think it becomes sort of a tie breaker. If the stock was really low I think you would buy back stock. If it was higher maybe you would do it in a dividend or look for four up and acquisition, but where we are talking at the board level about our capital levels versus peers.
Irrs, so that we can improve our returns.
Okay, Great and then.
I guess, just last question sort of bigger picture 10.
So these two deals your your Q and a half billion you do have some gaps in your math.
But your franchise footprint as his nicely round that out I mean, how do we think about if we look forward to.
Three years, how to use that from the standpoint.
Continuing acquisitions, how do you how do you think about how big you want to be size wise.
I don't have two three years sure. Thanks, I don't think that way I.
I've had the fortune for working forward for different folks I work for an individual who was focused on building on a powerpoint Matt.
And it drove us to go do acquisitions seeking them in towns to fill in a Powerpoint, Matt and you. They didn't end up being strategic they weren't priced right and that company is no longer here today, and South Trust and National Commerce were organic sales engines and they happen to do you know.
When you look when they sold if you took every asset they ever bought and subtract that it out it probably was 20% of their final assets. They were organic sales engine. So my emphasis is I want to be a great organic bank and middle Tennessee, and he's Tennessee, So I want to see middle Tennessee get going again, I want to see Knoxville get going I could.
Yes go into Chattanooga organically, and then if opportunities present themselves that are well run banks at an attractive price I think what would be foolish to not talk to them. If we think it would make us better.
I wouldn't say, we're going to be an acquisition led strategy or you see some banks say.
The old Certus Bank that was formed in Greenville, South Carolina, I think they set a goal we want to be X billion, an X number of years I think you force yourself into bad decisions. So thats not though we're thinking about shareholder value I'd, rather see our stock at 45.
In three or four years or five years, rather than a certain asset size.
That's going to be our focus.
Okay, great. Thanks, I'll leave it there.
Okay.
Thank you. Our next question as a follow up from Stewart lots with KBW. Your line is now open.
Hey, guys, sorry, you said, one follow up and it for Rob I, just curious what the pro forma margin you guys are modeling at deal close but from a core and a reported basis.
Yes so.
Right now.
You know we're around 349, I think you can expect the first quarter to continue to drift down a little bit, but I think that can stabilize in the second quarter.
Firstly with the to finance tuitions that we're partnering with that's going to be accretive I think if oh on the slides itself.
If you looked at.
The loan yield it looks like about 18 basis points on on the loan yield and improvement on nine basis points on the deposits. So I won't get specific on the margin because there's a lot other specific pieces.
On the balance sheet that will be managing through but on the loans and deposits I think we've given you have pro forma accretion. These are to find institutions that are really going to be accretive to us on the profitability side and.
But your tighter numbers once we get closer to close.
Very helpful.
Thanks for taking that and what you guys got.
Thanks Stuart.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over Tim schools for any closing remarks.
Okay. That's it we don't have any further remarks and again, we appreciate your support and following our company I think we have an exciting story and we look forward to building something special we've got a lot of great banks in our industry and.
We look forward to be in.
In one of the stories and one of the top one so thank you so much of a great day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participation you may now disconnect.