Q1 2020 Earnings Call

During the call today from Capstar or Tim schools, President and Chief Executive Officer, Robert Anderson, Chief Financial Officer, and Chief administrative Officer, and Christie Chief Credit Officer kept our bank.

Please note that today's call is being recorded will be made available for replay on cap Staars website.

Please note the catheters earnings release, the presentation materials that will be referred to in this calls and the form 8-K that Capstar filed with the FCC are available on the FCC website at Www Dot FCC Dot Gov, and the Investor Relations page I kept staars website at Www Dot IR Dot Capstar bank Dot com.

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We're looking statements are not historical facts and are based upon cap starts 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 kept starts control.

Actual results may prove to be materially different from the results expressed or implied by the forward looking statements.

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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 and a reconciliation of non-GAAP measures to the most directly comparable GAAP measures are included in the earnings release and the presentation materials referred to in this call.

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The only authorized live and archived webcast and transcripts on located on cap Staars website.

With that I'm not going to turn the presentation over to Mr., Tim schools cap starts president and Chief Executive Officer.

Good morning, Thank you for taking the time to participate in our call. This morning, we look forward to updating you on our results initial assessment of potential risks associated with the code at 19 pandemic.

Outlook.

Oh for opportunities are capstar.

While it is still early in the estimated impacts of the crisis range widely Capstar is a quality organization and we feel well positioned as we face the challenge before us.

Well first quarter seems so far a go with all that has occurred since we had an outstanding quarter building on my comments from the fourth quarter call comp store Capstar has a number of opportunities to improve its core profitability and earnings consistency.

I was pleased with the stability of our net interest margin.

Expense discipline.

Continued strong credit quality.

Our mortgage and try not businesses also remained robust thus far in the first half of the year.

All of these aspects have so much opportunity.

In a second Rob will highlight a few aspects of our first quarter performance.

We will keep it briefer than normal so that Chris Teets can share our initial thoughts of potential credit risk in our portfolio and how we are growing about monitoring and managing knows.

Before we address those topics I'd like to acknowledge the tremendous efforts of all banks and especially the capstar team over the last 45 or so days.

At first glance, a bank does not appear on the level of first responders as our nation's health professionals.

We are so fortunate that those have dedicated themselves to health and risk there in their own family's health to protect ours.

However, as the crisis evolved we all witness the important role the banking system plays and providing relief for loan payments.

Comfort and clients on the safety of their deposits.

Dispersing relief funds such as PPP.

On top of still running the bank for many many organizations who are still operating.

Look forward to sharing a few comments later.

Some of our successes during this period.

Well in by saying I'm really proud of our industry and of Capstar.

Thanks, often get a bad wrap and in some cases, well deserved but it is so nice to see everyone working together to help everyone succeed.

Rob would you please take a minute and review our first quarter financial highlights.

Sure Thanks, Tim and good morning, everyone.

Today's presentation will be slightly different given the unprecedented circumstances and we hope you and your family members are safe and healthy.

First I'd like to state that the underlying performance of the bank the strong and has been improving over time.

Our pretax pre provision earnings and the return on those earnings are up over prior year and on a linked quarter basis.

Within the quarter, we <unk>, we reach new records, both on our total deposits in or D.D.A. balances total deposits eclipsed 1.8 billion in our D.A. balances reached 443 million within the quarter and those records heavy extended into April as noted on the page.

While our average loan growth for the quarter was slightly down our E coat, our ending or ERP loan growth spiked at quarter end. So we experienced growth late in the quarter.

Additionally, our Knoxville team is gaining traction with clients and currently has a nice pipeline of activity.

One of the highlights that should not be over look for the quarters, our margin, which is up one basis point from the prior quarter. We took several initiatives on both sides of the balance sheet, including lowering rates on over 400 million of deposit balances emphasizing in market relationship oriented fixed rate loans, increasing credit spreads to 200.

50 to 400 basis points over FHLB.

Versus our previous stance of 200 to 300 basis points and implementing floors on all variable rate loans and try and that fixed rate loans.

We continue with solid momentum in our fee businesses were sold postings from our mortgage and trying to businesses the sales and pipelines remain inline or better than 2019 levels for both businesses one opportunity that we have pointed out from time.

The time is our expense line and we have felt we have an opportunity for improvement.

We are creating a culture of accountability within the organization and our efficiency ratio reflects a marked improvement over prior prior periods. We are implementing expense discipline throughout the enterprise to ensure a processes are perficient and evaluating how we can operate within owner operator mindset. This is not to say, we're being cheap running on the right.

Sales were even increasing risk the simply ticking and ownership mindset and applying it to how we operate as an example of this we are reviewing incentive plans for our alignment with shareholder value creation and have already changed a few for this coming year.

Moving onto credit I would say, we're entering this crisis from a position of strength personal talked about that second.

First quarter had nominal net charge offs in our criticizing classified asset levels remain low and stable.

As it relates to our loan loss reserve I'll remind you that we were not required to implement Cecil Saar reserve does not incorporate a lifetime loss expectation on the loan portfolio.

We increased the reserve 7.5 million for the quarter, which does include specific reserves of over 700000 on a couple loans.

All this equates to cap start recording operating net income of 1.6 million for the quarter or eight cents EPS on a fully diluted basis.

We paid a five cents dividend in the quarter and announce a five cents per share dividend to common shareholders earlier. This month on April 22nd.

And we currently have no plans to change our stance on the dividend, we intend to maintain the dividend.

Last and most importantly, we believe Capstar is entering this crisis from a position of strength, we have significant on and off balance sheet liquidity strong and then proving pretax pre provision income healthy reserved for potential loan losses and in an uncertain time above average capital ratios and we're nearing our close date with two of Tennessee.

Hi is performing banks.

As you can see on the next page our income statement reflects these comments with our operating revenue up 3.7% over prior year and 4.2% on a linked quarter basis. This is driven by a relatively flat net interest income growth with interest rates dropping in the second half of last year.

We have spoken about our fee businesses and how those businesses are counter cyclical to a low interest rate environment and fees were up 24.1% over prior year, and 10.9% sequentially Treasury management mortgage and trying to all had solid quarters.

<unk> expenses were low this quarter in a marked improvement from prior quarters. The decrease is coming predominantly from the salaries and benefits. One a few things are driving this decline as you may recall from the prior quarter. We had several early retirements in the fourth quarter, which took out approximately 600000, an annual operating expenses and we re negotiate.

Got it or Ben that's package for 2020, which is also generating approximately 400000 of annual savings.

Additionally, we are accruing or incentives at 50% of target for the quarter.

As it relates to our key performance metrics for the quarter I'd like to highlight a couple of commentary first understand this you can see credit continued a path to blow net charge offs in a low and stable npis to loans, we had one basis point of net charge offs for the quarter.

The reserve was increased 50 basis points to 1.39% and our tangible common equity to tangible assets assets is at 11.43%.

Your profitability I would highlight a margin of 350 efficiency ratio at 61.78% and our pretax pre provision or away at 1.68%.

Under growth I would highlight deposits up 9.3% over prior at 1.736 billion pretax pre provision income 8.61 million, which is up 13.3% over prior year and our tangible book value per share at $12.66, which is up 6.8% annualized over the prior.

Peter and up 9.6 from the prior year.

So with that let me turn it back to Tim.

Thank you Rob.

I would now like to take a few minutes to discuss our preparedness and response to cope with 19.

On slide 10. This illustrates how we've mobilized in are managing the crisis. They pandemic oversight Committee has met daily at to discuss every.

Changing aspect of our operations.

We've had an internal risk committee and we've had a pandemic credit committee.

In each of these efforts we were supported by our external partners, who continue to provide great guidance in a very experienced board of directors Capstar is fortunate to have an extremely strong board with decades of multibillion dollar banking experience as well as other large complex operating experience our goal.

All in these efforts was to one provide care for our employees and clients to protect the bank and three make Capstar shine.

Moving to the next slide we've performed marvelously.

I have seen a number of banks report, 50% to 75% of their non branch teams working remotely.

Due to afford technology investments, 100% of cap stars non branch employees have dark been working remotely for over a month.

It has been remarkable.

We've not miss to be although many are clamoring to return to the office for the camaraderie.

Importantly, capstar wasn't early mover in leader on deferrals counseling with our regulators, we enacted full 90 day deferrals for all borrowers prior to others in any industry guidance because it was the right thing to do in times of heightened stress we wanted to provide.

Comfort to all of our customers that we care.

About 20% of our customers elected deferrals some out of need some to sleep better at night. We also have been a leader in PPP Capstar invested in an SP a team two years ago, while the trans system has proven a challenge for all banks due to the volume Capstar invest.

Got it and an additional system over this period.

And it went live in a little more than a week.

This allowed us to indirectly work with any trends.

In around one we received about a thousand applications and process 670 for $164 million.

Yesterday alone in round, two we processed another 861 loans for $72 million.

Comparing round one two to 10 to 20 billion dollar southeast banks I saw report, our number of loans and dollars or about 20% higher than each adjusting for their size.

Importantly, our deferral in PPP leadership, not only helped people in the time of need it is built loyalty and new relationships. We received so many calls from people, saying their bank was not returning their messages in many cases, there accountants said call capstar to be clear, we helped our customers.

And non customers and processed first in first out and several of these comments are highlighted in the presentation.

Robin Chris if you could now walk through our thoughts around risk management.

Sure, let me pick up on the liquidity slide.

Caps or has plenty of on and off balance sheet, who support the bank first let me note that these balance or balances are as of April 17th.

Which should give you a good sense of activity on strength given the pandemic.

Dennis.

Venturing into the second quarter in past quarter end.

As noted earlier deposits continue to climb as banks move to cash draw lines and stimulus checks were deposited from the federal government.

As a point of reference the day the stimulus chats were issued our deposits increased by $100 million.

As a for 17, we had $227 million in cash hundred 53 million of Unpledged Securities.

Hundred 71 million and loans available so.

You also note that we do not have a lot of wholesale funding, which we could easily access internal alco guidelines limit our capacity to 15% of our total deposits.

And as those deposits.

Or as total deposits grow that lever also growth.

Also one area that most consider as a lender of last resort with perhaps a negative stigma attached to it as the fed discount window and although we have always had a borrowing arrangement in place we are updating or loan collateral to determine which are borrowing capacity.

So with liquidity risk, let's move onto capital.

First of all capital ratios far above well capitalized guidelines and higher for the year ago. Our total risk based capital is up 100 basis points at 13.64% in our tangible common equity to tangible assets up a 112 basis points.

The 11.43%.

Again, we paid a quarterly dividend of five cents per share in February we announced thing on April 22nd for payments in the second quarter and we have no plans to change our stance on the dividend.

As noted on the slide we repurchased 147800 shares during the quarter Adnan at an average price at $9.

First share for a total of 1.4 million and although we have temporarily it's continued repurchases we still have 7.6 million under our current authorization.

That let me turn it over to Chris to speak about the loan portfolio.

Thank you Rob turning to slide 17, as we've previously discussed the pandemic creates an environment of economic uncertainty as we maneuver through unprecedented times, having said that we also note that capstar enters this period of uncertainty from a starting place that includes good asset quality resilient and diversified Maher.

Buckets as well as limited portfolio exposure in industries directly sensitive to the pandemic.

As I'll discuss in a minute. We also feel that our continued discipline in commercial real estate underwriting will further insulate us against shifts in market conditions on consumer behavior that may result from the pandemic.

Well, Tim noted the market the market leading position we took in offering a hassle free 90 day deferral to our customers. It's important to note that as of April 15th only about 20% of our borrowers have opted into the deferral program.

In general we believe some customers opted in because their business had been impacted to some degree by the pandemic. However, as we hoped others opted in simply as a tool to build liquidity in an uncertain environment.

Keep in mind that this offer was made by US in mid March when there was considerably less there was considerably more uncertainty over where the pandemic might go.

The pandemic emerged we noted borrowers increasing utilization and lines of credit, but subsequent to 331, we have seen utilization returned to prior levels. In addition, we quickly evaluated our portfolio to assess potential impact on asset quality from the pandemic at about 11% of loans, we are pleased and no.

So relatively low direct exposure in the sectors for lodging recreation restaurants, retail and senior living.

They said previously we feel good about our credit quality metrics, our primary leading indicator of credit issues in our is our level of criticized and classified loans, we hold ourselves responsible for internally rating our credits and have continued in our commitment to external validation of our risk rating disciplines and risk management protocols by engage.

So again three external own reviews of our portfolio in 2019 and by recently completing an annual stress test exercise using a well regarded external analytics for because of the timing of this stress testing engagement. We were also able to expand its scope to anticipate potential pandemic impacts.

Well, we feel confident of where we are and and have seen no deterioration and asset quality at March 31st due to the pandemic. We also know that no model exists to address the challenges of this unprecedented time and feel prudence is warranted in increasing our allowance for loan losses until we find equilibrium in the comp in the economy. So.

With that backdrop, turning to slide 18.

As I said, we believe that diversification offers strength and flexibility right now 42% all the portfolio is either commercial and industrial or owner occupied commercial real estate, 35% is investor real estate and or commercial construction and 23% is spread across consumer.

Her product types with about 80% of that subtotal being real estate secured.

As noted on the right our classified in nonperforming asset ratios are at very low levels expressed as a percentage of our strong capital position.

And expressed as a percentage of loans are criticized and classified levels are stable over the last two years and we believe represent top del Sol performance based on indications, we are able to obtain from external resources.

Turning to slide 19.

We are all sensitive to certain industries that have immediate and well publicized impact from the pandemic, including retail lodging senior living and businesses engaged in recreation and or restaurants retail will be discussed in three separate ways and my comments direct loans, we have to retailers try net.

Loans originated as held for sale that we make based on national chain retailers and loans, we make for retail commercial real estate based first on the strength of the project owner and market characteristics, where we place less emphasis on the actual retail tenant.

Let me deal with the first two direct loans to retailers and loans underwritten in our trying that program based on retail tenants. We note that a substantial portion of our China business is focused on financing properties leased by national chain retailers as a reminder, trying it as a business, where we make loans to investors for properties.

Where we placed primary emphasis on long term triple net leases to national tenants with investment grade characteristics, while our minimum cash equity is 30% and we often obtain much more than that our primary emphasis and underwriting is based on the retail tenant and their lease.

Well retail is an important focus of the business, we have resist the temptation to expand volume into big box and discretionary retail tenants instead, our primary focus remains on the central service providers as quoted in an article dated April 22nd in National Real estate Investor. It is noted that net lease.

Commercial real estate is faring, well and I quote for assets leased by a central service providers, the cap rates haven't changed and quote because of the stable and resilient profile. We continue to have good demand for try net loans, we originate and believe that this demand will continue despite the pandemic as the banks, we sell trying to.

Loans to seek a flight to quality represented by the assets we originate in this space.

Removing that $132 million I'm trying to its loans held for sale at March 31st representing the top graph.

And taking it out to re representing the portfolio allocation in the bottom graph you can see we substantially reduce our direct exposure to the retail sector. This is separate from indirect exposure we have in the retail segment through our local market commercial real estate originations, but we will present that separately for reasons that all explained in a minute and is not.

Included in the cut out on this page with that in mind, let's specifically look at those four pandemic sensitive industry concentration starting on line on slide 20.

At March 31st we have 5.9% of our loans in the lodging segment consistent with our overall disciplines in commercial real estate underwriting you will note that these projects have very low leverage and a good history on debt service coverage given the nature of the Pandemics impact excluding construction loans in process, which would not have been.

Eligible for payment deferral, 53% of term loan borrowers in the lodging exposure opted in to our 90 day deferral offer 100% of our lodging exposure is rated pass and given the historical results in good debt service coverage. We believe that these borrowers will have resilience to withstand challenges, but the pandemic poll.

This is in the future.

There was a similar story on senior living, albeit with lower with much lower exposure and only 45% of balances opting into the payment deferral program, we offered while our senior living projects have stable operations. We're keenly aware of the inherent risk of a segment of our population that has served by these borrowers in the senior living space we have.

One project that was criticized for reasons related to an unusual weather event. This individual projects risk is mitigated by ownership that as part of the borrow group, whose revenues our diversified across multiple senior living facilities.

Moving to slide 21, the category of recreation in restaurants includes the broad sector covering restaurants, the arts entertainment and recreation.

These aren't large categories to us and we only have to criticize loans in the sector that account for a small portion of our overall criticized and classified loans in this sector. There is a relatively low deferral rate and the majority of exposure is secured by real estate.

Similarly, our direct exposure to retailers is very low with no criticized or classified loans and a very low deferral opt in rate of less than 3%.

Moving to slide 22, we'd like to share some important insights about the quality of our commercial real estate portfolio.

Earlier in my comments I highlighted our continued discipline in commercial real estate underwriting and risk selection.

Unlike trying it where our primary emphasis is placed on the tenant and long term lease our core commercial real estate strategy is focused on end market season project owners, who are in a position to provide substantial cash equity. We also focus on tenants submarkets and property types, but our primary emphasis is placed on our relationship with the people.

Greetings and the cash equity that mitigates the indirect risks relating to tenant and we'll vacancy as you will note on slide 22, we do have indirect exposure into retail properties, but with our high cash equity discipline. There is substantial mitigation to the indirect risks.

Relating to the tenant or shifts in market rent rates or occupancy.

Therefore, we are presenting this as a separate subset to highlight that our strategy of targeting high cash equity project profiles converts to low loan to value ratios and attractive debt service coverage characteristics across the commercial real estate space, providing us in our borrowers considerable flexibility. We also see this is a major.

Driver to a 100% pass rating within our commercial real estate portfolio and now I'll turn it back over to Rob to lead you through the steps, we're taking to address market uncertainty through our allowance for loan losses.

Thank you Chris stated earlier, we are entering the crisis from a position of strength.

First quarter had nominal net charge offs and our criticized and classified assets.

Remain at a low and stable level.

As it relates to our loan loss reserve I'll remind you that we were not required to implement Cecil sorry reserve does not incorporate the lifetime loss expectation on the loan portfolio. We did increase the reserves $7.5 million for the quarter and the bulk of that was related to the uncertainties around the pandemic. We also had 700000 for too.

Credits that have specific reserves and if you add in the fair value Mark of 3.2 million on our acquired loans are effective reserve is at 1.61, so with that let me turn it back over to Tim for some closing comments.

Thank you, Chris and Rob as you can see we've put an awful lot of thought.

Into this and it's just begun we have escalated monitoring and we will be very proactive and working with weakening credits.

On slide 25, we have an update on the timing of our merger with FCB. We're very excited about partnering with these two organizations as we've previously stated they usually rank in the top 10% performance wise, among Tennessee's 100, or 50 or so banks in each are over 100.

15 years old they will further our deposit focus and diversify our loan portfolio in revenue.

In closing I want to share how excited I am about our prospects at Capstar I've now been here three full quarters, and we have a quality organization with tremendous opportunities on slide 27, I've laid out our focused priorities.

First we are strong risk managers, but our near term priority will be heightened risk management, we're going to work to continue to improve our pretax pre provision and intend to maintain our dividend.

Second.

We have great opportunity to improve and stabilize our net interest margin and improve our efficiency.

At American savings Bank, which I led from 2007 through 2010, we improved our pretax pre provision to assets from a five year historical average of about 1.3% to 2.35% over four years. It was achieved by margin improvement and Afib.

Currency I do not know that we can achieve the same level here at capstar as it has a different market, but I do see the same type of opportunities.

Third the success of our deferral and PPP results on top of our wonderful reputation in our markets and we are in great markets bodes well for the local market expansion combined with opportunities like our Knoxville investment and Athens and FCB part.

And our ships, we have expanding growth opportunities.

Lastly, those that known me no I am an advocate for shareholders and have a strong track record for improving shareholder returns.

Capstar has accomplished a lot over it short 12 years. Our returns have lagged that is important to me and is one of my main priorities in something I take very seriously.

That concludes our call and will now be happy to take questions.

Ladies and gentlemen to ask a question you will need to press Star then one on your Touchtone telephone to withdraw your question press the pound team.

Our first question comes from the lineup Catherine Mealor with KBW. Your line is now open.

Thanks, Good morning.

Morning, Kathryn.

I'm sorry first on the margin in labs.

You can give us a little bit of update on your outlook for the margin just given your asset sensitivity you give us a couple of a couple of data points that I think maybe two questions. Within that is is when you shed repressing for variable loans were down about 17 Thats. This quarter can you talk about what that looks like with the full impact your hit rate cut.

Our next quarter and Dan to second question would be.

The deposit side, we saw a really big DTA growth this quarter.

Give you any of that is temporary or should we grow the CD balances from this higher level. Thanks.

Yeah sure. Thanks Catherine.

First let me talk on the deposit side.

Deposits actually have been.

Nice bright spot for us our deposit balances were up for the quarter. We gave some data points on the slide that those records on spot balances continued.

I saw the spot balances here. This morning, both D.A. are up over.

Quarter end, so I think with the strong leading aid balances in our deposit balances.

That give us an opportunity to be a little bit more selective areas. As we go deeper ended the quarter on on pricing.

On the loan side, we are going to see the full impact of that variable rate.

Loan book Reprices, we have loans that are contractually on the first of the month last of the month on first of the quarter ended the quarter. So it all various but typically takes close to 90 days to have that.

Cycle through.

I would say overall, you should expect near term that our margin will.

Contract. Some I think we have some tools to offset it with good deposit growth, but certainly with the PPP loans with a 1% yield carry on that that's going to impacted as well.

And then as the SB eight fees kick in probably in the second half of the year our margin could come back strong as those loans are either forgiven are paid off price six months down down the road, but I would say near term Kathryn we probably see a little bit a contraction on the margin.

And Catherine this is Tim I'll, just add I think it's a very challenging environment for us and for you to try and predict margins I will share that we get a daily balance sheet. Our D.D.A. crossed 500 million yesterday. So we had a record Friday I think we hadn't the slides a 49 yesterday crossed 500 million.

So so many balances are moving in and out and the economy's unstable that I think you know not trying to truck shy away from giving your direction, but I think it's a challenging quarter.

I'm trying to understand all that's going on I think you can take a position like Rob said on the loan side on the deposit side, we're getting all this free money and what what's the impact of that going to have and.

So I'll just share that that the deposits continue to be strong and and you also have the influence of the TPP coming in at a very low rate which will.

You know again help on fees over time, but hurts your margin in the short term.

Yes that makes sense, yes.

The challenge forecast that's for sure [laughter] and then maybe just one follow up question on.

Your loan deferrals.

Yes at about 20% if it feels a little on the high side, but.

Well I'd say tie that many other banks are kind of at that same level.

Think about.

Or how would you think about our ability to think about deferrals as a leading indicator for credit stress or would you view the level of deferrals that you have is more the statements how proactive you work with here.

We took a very different approach I think I never thought of it like the way you all are thinking of it as a sign of stress, we didnt take that approach so.

We reached out to the fed I'd have to look at my calendar the fed NR Accountants Elliot day, that's probably.

It may have been March 14, or in that week and I, just said, hey, I'm not certain where this is going and you know we want to be a company that cares and let's talk about the pros and cons of why wouldn't we just offer all customers 90 day full deferral what.

Does that hurt the bank in any way, what what let's talk at through and we worked with the our regulators as well as our accounts and we made a decision before really any bank I saw we actually got a write up in that in the Tennessee and in the Nashville newspaper about sort of being proactive and being the first so we never really.

I thought about it in that angle.

We'd have to breakthrough and go pull financials to see which ones really were more.

Again, we don't have a lot of credit criticized or classified or 90 days past due and we only did it to people that were less than 30 days past due so we didnt take that approach and I think that thats just a mix of of of types I certainly wouldn't do it that way for US I was surprised how low it was since we offer to to all come.

Summers many banks came out and it was on US selective basis, and you had to be underwritten and you had to have it was done in need more like you're talking about that was not our stance.

Catherine This is Chris all all interject a couple of things keep in mind, when we were offering it it was over a month ago. When we you know when there was a lot of uncertainty a lot of anchor of expectation are uncertain expectations in the marketplace I'll expand on Tim's comment just a bit that all of our criticized and classified loans only.

25% of our criticized and classified borrowers opted into the program and within our criticized classified our portfolio are those borrowers have almost received as much in aggregate in PPP funds as we have led to them.

As a pool. So again, we don't see that as necessarily something that prompts concern. However, we will have escalated monitoring on those in a number of other credits as we maneuver through this period.

Okay helpful Understood Alright, thank you so much.

Sure.

Our next question comes from Stephen Scouten with Piper Sandler Your line is dolphin.

Hi, guys failed to swim.

Great Good morning.

Morning.

So I'm curious in terms of you outlined some of the specific sectors that people are more concerned medium presentation, obviously, but I'm wondering.

Maybe specific areas where you.

Tightened underwriting standards today, and I know some competitors in your mortgage we've seen some weakness specifically in healthcare sector was wondering if you could remind us what your exposure is there and maybe this is nick balances as well.

Yes again this is Chris the the health care.

Health care for Ross is still a diversified a portion of the portfolio. The largest area of concentration we have within health care, which was down to about $130 million in terms of the legacy Nashville program.

Remains in ambulatory surgery centers and so when we look at health care, while ambulatory surgery centers fall into the discretionary realm, all pandemic response.

Our position is that they may be a beneficiary from this as hospitals work to get our cobot patients out of in wine surgical space using those facilities a they have been recipient of a number of government programs to maintain their liquidity and so on.

And we believe that they continue to represent an important social need off for the portfolio or for the for the the community going forward.

Steven I'd say due to underwriting one of the main things. We did was we raised our desired credit spreads and loan floors. So whether it be at trying that are internally, we've raised that bar and that has significantly stem volume and we're looking for the best credits.

And then number two I would say we did already started before I got here.

But we've taken a more proactive approach to focus on banking the state of Tennessee, and 100 miles with any of our branches and lessen reliance on participations I think the company at one point Snicks may have been over 20% and there was some reliance on whether it be.

Credits or participation some other banks and if you went and talk to any of my teammates. They will tell you that I constantly preach we shouldn't need a participation. We should have so many loans that were to participating out. So I would say the two changes would be we've raised our spreads we've put floors and and then secondly weve.

Very little focus on participations and shared national credits I believe our shared national credits are approaching 5% and I believe our HL TV is approaching 5%.

Okay very helpful. Thank you and then thinking about the.

Potential for line draws from here I think you guys noted that they rose, but then since quarter end, they've actually decline back maybe a couple of percent, but I'm curious on a 490 million or so it's unfunded today, how much of that can be drawn down without any.

Additional oversight or review from the bank is that all of that or are there some new kind of chaos another covenants in there.

Stephen and I will tell you, yes, there are borrowing bases in place there are a covenants that might pull it all limitations in place I would say hey, I can be specific to it's not something that's easily tracked however, I will tell you that a portion of it is available a portion of it would not be.

Not something were overly concerned by right now.

Okay. Good.

And then maybe just last thing for me I'm wondering if you guys could opine a little bit just on the Nashville economy, I know that that's hard given where we are still nine out of the woods, yet but just.

Given the theoretical dependency on tourism, and then healthcare sectors.

I'm wondering if you could comment just given the the extreme strength that market over the last couple of years and just where do you think you stand today.

I think I think anything any of US would say would be speculative I don't think any of us have any data in its early what I'd say you know I've only been here now a year is obviously, whether it be from the NFL draft last year or the TV show or the music stars if the entertainment that I think hits the spotlight, but.

It's the state capital it has vanderbilt here and as Lipscomb here.

I think it was a.

You know alliance Bernstein, moving here Amazon's, putting a facility here.

I'm trying to think I think it was Mitsubishi that announced in the fall there moving their U.S. headquarters to Franklin So middle Tennessee offers a lot more than entertainment industry. It certainly will have an impact with people not traveling but I think it's a dynamic market and.

There are certainly our risk because there's growth and there's investment being made to meet all that need but.

I just think its preliminary for any of us to comment so we'll have to wait and see but it is a dynamic much more than entertainment just here.

Yes for sure. Okay. Thanks, guys appreciate the impact.

Thank you.

Thanks.

As a reminder, ladies and gentlemen that is star then one if you'd like to ask a question at this time.

Our next question comes from Jennifer Demba with Suntrust. Your line is now open.

Good morning.

Hi, Thanks.

And expenses just curious about the mortgage pipeline as it stands right now what you're seeing here in the second quarter.

And also.

Good run rate of good going Oh looking out the next couple before there. Thanks.

Sure Jennifer it's Rob.

First of all address the mortgage.

Mortgage actually has probably when the stronger pipeline. So I've seen I think the pipeline at the end of.

The quarter was around 130 million previously in the quarter.

You know us around 100, and I think at the end of February and then at the end of January was around 80, some but thats, but all those numbers are up over over prior year.

Mortgage is very strong I think once we got passed the dislocation that happened in the mortgage market, that's starting to settle down so we're anticipating.

A consistent and strong performance from our mortgage group certainly in the second quarter and for the year absent any.

Volatility that goes on within the market.

On the expense side I think the run rate that you see here is a good one for now it could be.

Slightly up 200000 above this but this would be a good run rate again, our goal over time is to improve our efficiency ratio. Tim mentioned that I think we have opportunities to get that below 60 at some point part of that's revenue part of that's expenses, but on the expense run rate.

I think this quarter is a good indication of future quarters as well.

And Jennifer what I'd add is at ASV, when we embarked on that I think there efficient when I started their their margin was 310 and you go pull it up it margin was 310 I think the efficiency ratio was 70% and when I left the margin was about 14 and the efficiency was about 55%. It took four years, but it was higher.

Hard to give a prediction to my board quarter to quarter. So when you embark on something like this we posted a great number and first quarter. That's certainly not a stabilized number so I don't see any reason that it's going to shoot back up but also don't want to.

Mislead you are or whatever.

Until you get that all solidified I think there's great opportunity overtime to keep it in that range or maybe even work on it a little bit I think with FCB coming and you've got to more high quality banks with a low efficiency ratio I think that should bring us operating leverage and help us towards that goal also I just I just for sea based on.

Multiple banks in my experience, we've got a great platform here that we should overtime be able to enhance our margin a little bit.

Stabilize a little bit and improve the efficiency I'd love to see the efficiency as a step one the in that 58% to 59%, let's get that first and then we can worry about any improvement from their later.

Thanks, so much.

Sure. Thank you.

I'm showing no further questions in queue at this time I'd like to turn the call back to management for closing remarks.

Yeah I'll just say we appreciate your time. This morning, it's a hectic period. We appreciate you following us and stay tuned and we'll talk to next quarter. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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