Q1 2021 CapStar Financial Holdings Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the cap Star Financial Holdings first quarter 2021 earnings conference call.
Hosting the call today from cap star or Tim schools, President and Chief Executive Officer, Dennis Duncan, Chief Financial Officer, and Chris Tietz, Chief Credit Officer.
Please note that today's call is being recorded and will be made available for replay uncapped staar's website.
Please note the cap starts earnings release, the presentation material that will be referred to and this call and from <unk>.
Form 8-K that kept STAAR filed with the SEC are available on SEC's website at Www SEC Gov.
And the Investor relation page at Cat Staar's Web site at Www Dot and I are dot cap Star Bank Dot com.
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You are cautioned not to place undue reliance on forward looking statements.
Which speaks only as of today.
Except as otherwise required by law capped star disclaims any obligation to update or revise any forward looking statements contained in this presentation.
Whether as a result, new information future events or otherwise.
In addition, this presentation may include certain non-GAAP financial measures.
The risks assumptions and uncertainties impacting for it they can statements and the presentation of non-GAAP financial measures and the reconciliation of non-GAAP measures to.
To the most directly comparable GAAP measures are included and the earnings release and the presentation materials referred to and this call.
And finally cap stories not responsible for.
And does not edit nor guarantee the accuracy of any earnings teleconference transcript commodity or third parties, the only arthritis live and archived webcast and transcripts are located on cap Sars webcasts.
With that I would now like to turn the conference over to Tim schools, <unk>, President and Chief Executive Officer.
So.
Is there a way we can do some kind of a sound check where we're having a hard time hearing here.
And we're able to get confirmation that somebody can hear us.
I guess not I dunno, alright, I'm, sorry, if you all are having difficulties we were having difficulties hearing the operator.
Good morning, and thank you for participating on our call. We began the year with a strong quarter and appreciate the opportunity to review our results with you.
We reported earnings per share of <unk> 50 cents annualized pretax pre provision of assets of 195.
And annualized return on average tangible common equity of 14.85% on a very strong capital base, whereby our total risk based capital ratio was 16.29% at the end of the quarter.
We do not provide guidance, but I'm cautiously optimistic about the remainder of the year.
In addition to our strong profitability, our focus remains sound risk management, while first quarter showed signs of an improving economy. It is still early and there are many unknowns, we feel very good about our credit and our customers continue to perform very well this quarter.
And we experienced improvements and our criticized and classified loan levels as well as past dues. If you remember of past dues were elevated at year end due to loans that have matured, but had not yet been renewed. So this positive progress was anticipated we continue to experience low loan losses, but unlike many banks.
That of releasing reserves and first quarter. We believe it is prudent to be disciplined for qualitative reasons, while credit metrics remained elevated due to the pandemic importantly, we experienced strong loan growth and provided additional reserves for this growth, resulting in our allowance for loan losses, excluding PPP loans.
And of counting for fair value marks to increased two basis points to 1.59%.
We've spoken over the past year about four strategic initiatives number one enhancing profitability and earnings consistency.
Number two accelerating organic growth.
Number three maintaining sound risk management practices and for developing disciplined capital allocation.
This quarter and last you began to see the initial benefits from the execution of our dedicated and hardworking associates.
I cannot tell you how proud I am of each of them and our team as a whole.
They are improving our performance have integrated two banks were a leader across our state and PPP and endured a pandemic at work and with their families.
I'd like to take a second to walk through how we're doing and each of these four strategic initiatives.
Number one related to profitability, we are focused on being a better manager of our net interest margin short term and long term.
We are doing our best to invest excess cash and proactively look at deposit pricing and be disciplined on loan pricing.
This quarter, we passed on a multimillion dollar renewal for an existing customer that was offered a 10 year fixed rate loan with a 120 basis point pretax spread before expenses credit risk and tax taxes.
We are just not going to do that kind of business to grow volume.
We also demonstrated prudent expense management.
We do not want to be cheap, but we do want to be frugal profitability is best when you're growing revenue efficiently not just cutting costs.
We have we have so much opportunity as a company to continue improving in this area.
Number two on growth our loans grew 11, 5% on average from the prior quarter, the strongest quarter and several years.
And that is on top of shared national credits continuing to decline this quarter to 2.8% of loans from a high of 20% to 25% of loans just about four years ago.
Had we chosen to buy additional shared national credits this quarter to keep them flat or loan growth would've probably been 13% to 15%.
This growth is not only driven by our outstanding markets, but by our new investment and Knoxville, where we added an additional commercial relationship manager and first quarter with a $100 million loan portfolio and.
And additional and a stronger core of bankers and middle Tennessee.
And historically cap star Middle, Tennessee had heavy reliance on three strong producers.
Today, we have 14 with each of their pipelines approaching or exceeding $10 million, our minimum expectation going forward I'm really excited about our east, Tennessee, and middle Tennessee bankers and I'm optimistic we will see continued strong results.
Number three I cannot say enough about our portfolio management over the past year, our frontline and credit team know our customers well and did a fantastic job of communicating and working with them.
This is another reason to deemphasize participations and.
While we have many great partner banks some partners do not always manage challenge credits to the level you would and you are not and control. We feel this is one of our strong suits and do not see that changing we have a strong balance sheet with our improved credit profile strong reserves and strong capital levels.
Yeah.
Lastly.
One of the things our board has continued to evaluate the past two years is the equity level necessary to run our business and how it relates to peers and.
In support of the prior point, we are a strong manager of risk. So we believe and having strong capital. However.
However, we also recognize it weighs on returns and hindsight more capital was raised and the IPO. Several years ago. Then the company has been able to deploy you might recall, we elected to do a partial cash transaction of our last acquisition with the goal on further investing and our business.
With the onset of COVID-19, we reversed course and chose to do of sub debt offering and the second quarter of last year to be conservative and raise capital at a very attractive rate further increasing our capital levels.
And first quarter of this year, we announced a substantial share repurchase program with the goal of returning excess capital to shareholders when and if the price is right. This will serve as an additional lever as we go forward. It was approved late in the quarter. So we did not execute much we will be weighing it versus our.
The organic growth and acquisition opportunities to try and provide the best return to our shareholders.
Our primary focus will be to invest and our business, but there are times when our stock is our best investment yeah.
Yesterday, we also announced a 20% increase and our quarterly dividend. We hope. These two positive capital actions speak further to the commitment of management and our board to run a safe, but profitable bank with that I'll turn it over to Dennis to cover our financial performance for the quarter.
Thank you, Tim and good morning, everyone and.
And the earnings release deck on slide seven and net interest income of $22 2 million for the quarter was consistent with the fourth quarter despite fewer days.
And the first quarter, our net interest margin was 3.13 for the quarter and was down.
Slightly to 335 on an adjusted basis from the fourth quarter.
Adjusted NIM.
Includes the impact of excess deposits on the balance sheet, which adversely impacted our margin by 36 basis points and P. P. P loans contributed about a million eight and fees for the quarter.
117000 and versus the fourth quarter and impacted the NIM favorably on an adjusted basis by 14 basis points.
Net interest income benefited in the first quarter from a shift of earning assets from cash into investments and our continued loan growth investments.
The investments on average were up $88 million over the fourth quarter and loans on average were up $48 million over the fourth quarter.
On slide eight deposits continue to increase the increased 55 million from the fourth quarter, largely driven by now account growth and our core markets continue to hold large levels of deposits consistent with the prior few quarters.
Our deposit costs continued to decline and were four basis points, lower and the quarter as compared to the fourth quarter deposit rates as we continued to aggressively lower our deposit rates are.
Our excess balances are continue to continuing to be strategically address through deposit pricing opportunities our focus on loan growth, including hiring new bankers purchases within the investment portfolio and strategic run off of higher priced deposits.
On slide nine average loans less P. P P increased $48 million or about 11.5% annualized over the fourth quarter as we continued to build out and that the Knoxville market add additional bankers and middle and east, Tennessee, and strengthen and grow our loan.
Lines across our company.
Total P. P. P loans were 211 million at the end of the quarter with round three of P. P. P loans, adding an additional $70 million at quarter end the law.
Loan yield for the quarter was $4 three 4% with coupons of declining slightly at 10, and 10 basis points from the court from the fourth quarter due to a growth and fixed rate loans out of slightly lower yields.
Slide 10, non interest income was strong and the first quarter with record levels of revenue and our interchange and debit card transaction fees of $1 1 million.
And ongoing strength and our fee businesses and clothing, the mortgage business Tri net and SBA. We also purchased $31 million of additional bank owned life insurance and the first quarter, which will further enhance non interest income going forward.
On slide 11 additional information is provided regarding the strength of our mortgage business, while volumes were down slightly in the quarter refinance activity continued to be strong with 64% of the origination volume for the quarter being and refinances.
And slide 12 shows our noninterest expenses, which were.
$17 4 million for the quarter, which resulted and I are record operating efficiency ratio of 53.88, driven principally by cost savings from FCB, lower salaries and benefits focused expense discipline and.
Past 91 of.
Deferrals due to our successful loan volumes and loan growth with the.
And that I'll turn it over to Chris Tietz, who will discuss our credit position.
Great. Thank you Dennis on page 14, I'll reinforce the points that we have emphasized in the past first we remain focused on growing our bank with direct customer relationships and our target markets. This was demonstrated with two key indicators continuing to show the greater than 95 per cent of our portfolio is in our target markets and now.
Now the shared national credits are less than 3% of our portfolio. We believe this continued focus best serves the interest of our shareholders our customers our communities and our teammates and will deliver consistent performance results over time also I want to emphasize that we remain committed to robust ongoing internal risk reviews.
This includes the reviews of borrowers experiencing pandemic impact and borrowers that are criticized or classified.
We evaluate each against four criteria first we make a forward looking assessment of the direction of risk and their operating performance second we evaluate the adequacy and sustainability of their cash flow third we evaluate the quality and coverage provided by pledged collateral and liquidity and finally, we look at the capacity.
And willingness of their owners and guarantors to support the borrower if needed.
Also on page 14, I note that our payment deferrals are down two three per cent of the portfolio representing nine borrowers. These borrowers are all paying interest regularly and some are expected to return to and amortizing basis in coming weeks. These borrowers are and predictable sectors impacted by the pandemic 60 per cent of.
The deferred balances are and lodging 35 per cent are tied directly to other forms of tourism and tourism support and the remaining 5% our businesses and support of live entertainment.
These balances on deferral have reduced consistently since the pandemic began well I believe that the overall trend will be down over the next few quarters. It would not surprise me to see some borrowers emerge with new request for deferrals, while I have nothing specific to base. The sawn we recognize that federal stimulus has provided and.
Port and elixir to many businesses. During this period of stimulus programs expire it is entirely possible that some who have not needed deferral assistance and the last year may step forward and requested and if they do we will seek to work constructively with them to understand and prudently meet their needs where possible.
Through this we remain committed to accurately risk rating of our borrowers based on their credit worthiness and capacity to withstand and economic stress remaining for them in the aftermath of the pandemic.
As to the Pandemics effects, we continue to believe that the direction of risk and our portfolio is acceptable and consistent with the improving economic environment.
Consistent with these observations we did we have made in prior quarters, we are continuing to see stability or improvement and the direction of risk and the vast majority of impact of credits and believe that those with lingering impact from the pandemic are generally well secured adequately capitalized and in many cases have access to external capital if needed.
In addition, we all know the tourism and entertainment oriented sectors of Nashville were particularly hard hit last year.
Just looking out the window and walking down the street. It is clear that the activity is picking up and Nashville anecdotally. We are hearing of restaurant owners speaking of volumes returning to pre pandemic levels of hotels that are nearly booked full on the weekends and this was confirmed as we ourselves struggled to even get restaurant reservations without planning days in advance.
Sometimes.
If you turn to page 15, you will see these observations manifesting themselves with improvement in key leading indicators.
First delinquencies at March 31st are back in line with our expectations and we will we believe we will be able to maintain these at good levels going forward second our criticized and classified loans of showing incremental improvement and loss rates remain low.
With these improvements we remain cautiously optimistic about the future, but remain vigilant and observation and assessment of our operating environment.
Remind you of two things the ones credits are criticized and classified it is not unusual for them to take 12 to 36 months to resolve and the different industries will shake off the effects of the pandemic at different rates with these two things in mind, we believe that these objective realities temper the optimism we feel when we <unk>.
Look out of window and see the first signs of increased tourism and discretionary spending activities returning to our markets with that turning to page 16, and all of this in mind and despite our optimism, we believe that prudence and maintaining our reserves at similar levels as warranted as we monitor how the last sectors of the economy emerge from the risk.
Session and reestablish themselves and the post pandemic economy with that I'll turn it back to Dennis.
And for Tim.
And I actually think you, Chris so that completes our presentation for today. So operator, we will turn it over for questions.
Certainly if you would like to ask and audio question. Please press star one on your telephone keypad.
Yeah.
Your first question comes from the line of Jennifer Denver of true of Securities.
Yeah.
Thank you good afternoon.
Okay.
Hi, Jennifer.
Question on your loan growth of 10 11.
11.5% annualized very strong can you give us a sense of geographically where that came from or by asset class and cash.
And I guess I could look back at all of your press releases in recent months, but how many revenue producers have you hired and let's call. It the last three to six months.
So let me that's a lot of questions, but the first one.
I would say, it's equal balance right now I would say Knoxville is holding its own with Nashville. So Knoxville has now hit and keep in mind. They didn't start till February one last year.
Started and a pandemic and worked and their houses until October they didn't even get and office space till October.
So that actually helped with the breakeven because we didn't have rent the first share but.
Anyway, they've hit 100 million, now and and loans and commitments, it's about a $90 million and loans and $10 million of unfunded commitments. So I would say theyre coming on strong so I'd say almost equal weighted generally and I would say a broad mix remember keep in mind right now we still are heavily a commercial prep.
<unk> bank, so I'd say of mix of owner occupied and C&I.
And of stuff and commercial real estate.
Less growth and our community banks and our community banks are very established and profitable, but less less growth and those markets at this time.
On the bankers, let me just counting the head.
We we added an additional banker and Knoxville, and first quarter, who had $120 million of loan portfolio of his bank.
He had worked there for 12 years, he's worked with three of our bankers previously and.
And you know they shared with him how much they love it here and everything and so he came over we added one and Sumner County.
Who had a $70 million portfolio and.
And then we added I guess in November we added the gentleman here and Davidson County that had a $65 million portfolio.
And then we've added.
We've added two and Rutherford Williamson County.
And we added one other and Davidson County, so whatever that adds up to about six that we've added and the last since November.
And so much.
Yep. Thank you.
Your next question comes from the line of Brett Robinson with have the group.
Hey, guys good morning.
Hey, good morning, Brett.
Wanted to talk about expenses for a minute and I know, there's a lot of a lot of noise and I know with the Fas 91, and the when the two newer institutions and it might be and complicated question, but.
You've got down the expenses.
Pretty strongly and the first quarter, two and a level I think you were trying to achieve can you talk maybe about what my.
The growth.
And the.
Driver for expenses from here, and then and what you might be able to achieve to keep that number from going higher.
So I don't want of Dodge that but it really I don't know about you you've done you've done modeling of long time between trying to model. Your net interest margin your excess cash and how that weighs on the margin. Your P. P. P. You've got two mergers. It. This is the hardest environment I've been in the model even internally and so.
And what we're focused on efficiency I wouldn't say, we're really focused on expenses, we're focused on efficiency and so I think theres opportunity with that said you know loan growth. When you do a 11, 5% that does help fast 91.
And you know we've got a couple of positions we need to fill and so I don't see it going up materially.
You know hopefully, we're near run rate or it's up modestly, but but don't really want to put out a number at this point.
Okay fair enough and.
And then just wanted to talk about additional M&A and all of potential and just kind of how you view the environment at this point and if you might be optimistic.
About the prospects for you guys to do additional transactions and.
And maybe any of the things that you use and sort of impediments to getting getting one zone.
Well the first thing I'd say is our employees are tired and so.
Again, if you listen to what I said I mean, all of US you yourself all of us endured a pandemic and our lives and our family last year non.
Not many people bought and converted two banks and led the state and P. P. P. So all of our implant and our employees are phenomenal and they're tired. So we have nothing on the horizon I'm real excited about the prospects of cap star and M&A.
I think we've learned a lot and our three transactions were not perfect, but we're cutting our teeth I think we've done a fairly good job were getting better on each one we wanted to improve this company. So that we trade at a higher multiple and you know right now we have the luxury that we've got a lot of cash and capital that we feel we've got dry powder to either use.
Some towards the deal that will help earnings and profitability and lower capital ratios or buy back stock. So I think it's a huge prospect for us we want to be looking but we certainly are not going to do anything this year and I.
And I can't say that we'll announce anything in the fall, but if we did anything it would be.
It would close next year.
Okay. That's good color.
And then maybe just one last one if I could just around the mortgage banking and your outlook for that and how you kind of view that as a piece of the commercial.
So to speak.
And do you want to emphasize or deemphasize mortgage banking and over.
And the next year or so Brett.
Brett This is done and this is Dennis happy to take a crack at that one.
We are just excited that mortgages has continued.
And you know through the first quarter are at pretty you know very very strong levels of.
And and seems to be continuing.
Continuing on so we're gonna take we're gonna take our good mortgage results as long as as long as the market will give them to us we have the phenomenal mortgage division Farmington mortgage and we've got great people out there they did almost $1 billion of originations and.
The 2000, and 'twenty and and they just had a another another strong first quarter of surprisingly the surprisingly and connection with the first quarter results. The the refinancings that were seeing are continuing to be a strong piece of our our mortgage group now.
All that said our more you know we have seen some softening a little bit of what I thought.
You asked about about our expenses were well you know our fourth quarter and mortgage last year was a record quarter and so the first quarter.
It was a little off of that and so some of the some of the salaries and benefits that that you see there are less of mortgage incentive and the first quarter compared compared to the to the fourth but but we're optimistic that mortgage will continue to do well. It all depends on you know rights and and.
And the like but you know where and a great position here lots of folks moving to Nashville.
And because of.
And just desirability and no state tax and lots of reasons and so our more of our mortgage got guys are of very very busy. They are the best are the best and the and the southeast maybe the best of little mortgage company and the country and.
And and we're going to keep keep riding there good results as long as of.
As long as we can.
So Brett as far as strategically, we're really committed to mortgage and our team I concur with what Dennis said, you know South Trust, we had $5 billion of annual mortgage production and at National Commerce, We had two and a $5 billion and I would put our program up against theirs and we.
We've got a small shop that has phenomenal they did a $1 billion and so it's it's it's integrated into our bank, but it is somewhat a separate business entity.
And they've got a very dominant of.
Operation here in Nashville.
We're here before we had the community bank. So we have an opportunity to integrate that some into our community banks or community banks are somewhat of a portfolio of mortgage markets. So we're going to be working on developing a portfolio of mortgage for them and so and in the speaking to our leader he even understands that probably.
We want of cap it as a percent of revenue and our company. So we don't want it to become the dominant force. It's just my goal you've heard me say this before I'm committed and I'm going to do my best to get cap stars Bank only pre tax pre provision to assets to $1 80 to 185 and that's without mortgage.
And that when we have great mortgage years, it takes us to two.
And what has happened of cap star is we historically have been a $1 45 pre tax pre provision of the assets and when mortgage has a great year. It takes us to 180, so I want to raise the bar on the core bank so that.
And great times mortgage takes us even higher.
Great I appreciate of the car thanks, Tim.
Thanks, Brett.
Your next question comes from the line of Stephen Scouten with Piper Sandler.
Yeah.
Hey, good afternoon, everyone.
Hey, it's sort of a funny time to have the card because it's afternoon for you and it's morning for us.
Good point.
I guess it Tim and then it's just a follow up maybe on the loan growth, which again was very impressive, but a little lower on AR and the period basis because of the snick reductions now that you've got the snakes down to such a low level.
Well much of that kind of be left two of its own devices. The run off or is there any more specific around enough that you'd like to take out of that portfolio.
And Troy Christie.
Good question, Steven you know right now of 3% of our portfolio I want to point out of couple of things nearly all of it is in market. We do have a good noncredit and non snick relationships with these folks we have some meaningful treasury management fees, we have some meaningful deposits and we have some.
From lending activities that we do with some of those borrowers outside of the Snick transaction. So I would just say you know this is a manageable level for us and but we have to be strategic about what we do there, we're not going to try and and and just kind of make volume happened for the sake of volume.
But use that as a as a resource that can help us with our other strategic objectives.
And I'd, just say, Steve and I'm, not anti snick, but you know I want to have a quality balance sheet and.
I saw numbers the other day I had not seen that at one point of course I don't if it was end of 17 or whatever but snacks and other participations were 32 per cent of loans. That's the staggering number to me and you know what of your bankers really doing if you've got 32% of your loans and why are you paying incentives on that and I can give my phone number to.
Two.
You know Bryan Jordan of somebody and just haven't called me I don't need to pay and Ah Ah.
Commercial banker for that so you know our participations are down we're not against them, but we certainly they're not strategic I think five per cent of Alaska is fine and we're not going to get hyper focused on it.
Frankly, I wasn't paying attention I mean, they were down like 20 million and like I said, how do I, just gone and bought 20 million of our loans would have been 15% growth and we would not have grown and snacks.
So we feel really good where we're at Knoxville is a $100 million and 11 months and they don't have one participation.
They know how to go find customers, where the lead and that's our goal.
That's great. Okay, and then if I can ask just a follow up around the the repurchase authorization and I know you mentioned, obviously want to continue to allocate capital to organic growth and maybe M&A, but.
It would appear that in the near term the buyback would be the best use of capital given where you trade on tangible book versus any sort of M&A and am I missing anything there or is that the way you guys think about it today and maybe what's the the floor on capital in terms of how low you'd take TCE or whatever your constraining ratio is.
Well, a couple of things and that's a lot of questions, but number one I'm just excited that the board gave us that lever you know running a company.
Company I want to have a lot of levers and and just being here 18 months or so I really didn't have that lever and place last summer nor was it probably prudent with the environment, but number one.
I'm happy to have that lever now hold on one second.
Right so.
I'm glad to have that lever and there's a slide in our deck. If you go to the deck Steven.
That we've been studying and we've got other slides, let me go back and the mouse is slow.
Yeah.
Right here, so on slide 19, and Theres, a slide that sort of shows and this is presented as of 12 31, because they didn't have the peer data.
And.
And so on and 12 31, you can see our CET, one and our total risk base and generally were about 200 basis points over and we're not trying to match Penny to Penny I mean, there's outstanding well run banks like service first and that's even lower than this but you know I I feel we've got $40 million to $50 million of excess capital and so.
It's hard when you're running a company I hear you on the price to book, So we'll be looking at it hard, but but if it's close we'll probably use it for investing our business. That's what we're here for if we feel it's a wide margin towards the buyback will switch and do more during that period for the buyback so.
And I don't want it really hand out our pricing targets of what we're thinking but I'm just excited to have it as another lever.
Got it yeah. That's that's very helpful detail there thanks, Tim.
And then maybe just one more from me.
You know kind of moving back to the the conversation and you've worked and much of that out of the portfolio, which is impressive and now you've got all of these new lenders and the team and Knoxville. So is this kind of low double digit loan growth is that of pace do you think is the.
Stable here near term and and maybe even that there could be some upside to it.
I do I mean, again I'm not of guidance person because I just I was always promised I was always taught to under promise and over deliver so.
I'm excited and I think you know I don't want get ahead of myself, but we've got inbound conversations from bankers and other markets that know these bankers and are like Hey, I'd like to talk we're talking to one right now I can't say, what town, but of 100 million dollar banker and the new town.
And.
So we will see but I'm, hoping I don't see why our markets and our bankers cannot grow loans, 6% to 10%.
And you know you can't count on that every quarter, but for the year I sure hope our year of loans are up on average 6% to 10%.
And at this point and time I can't tell you what end of that range it'll be.
And that's.
And I'd tell you what let me tell you one thing when I came in one of the comments I heard from you all and other people what was why doesn't cap star grow loans more here in Nashville.
The large charge offs in California, where change and that you know, we're not Linden and California, and and as far as the loan growth what I did I took total loans and I subtracted the Athens acquisition.
I subtracted our outstanding CRE group that joined about seven years ago and.
And then I backed out all shared national credits and participations and the five years before I joined our loan growth averaged about 3% per year and Nashville, Tennessee.
So we're working to change that and we think we've got the team that that doesn't need to rely on participations and that we think we can do 6% to 10%.
With keeping the same credit quality Yep Yep understood. Okay, great. Thanks for the color I appreciate the time attempt and.
Yes.
Alright.
Your next question comes from the line of Omar Tomorrow.
With Raymond James.
Hey, good morning, or good afternoon, whatever it maybe.
Maybe just the question on credit.
You know you've got the allowance plus mark coming in at the one 6%.
And obviously very robust coverage I hear your commentary on conservatism and you'll be growing organically as well. So how should we think about that reserve level trend and here in 2021.
Yeah.
It's hard to say remember number one we have and adopted Cecil So we're running parallel and see so and we're trying to think that through you have to adopt that at the beginning of the year. So our next adoption could be the beginning of next year. So that's one thing going on and then too.
While we're excited about the direction and optimistic if you look at our criticized and classified and I would think most other banks. They are still higher than this quarter last year. So we just think it's a little premature and the FERC. I mean this is the FERC go back to fourth quarter and fourth quarter I was trying to get everybody back and the office and October and all of a sudden koga.
It took off so December wasn't necessarily rosy for COVID-19 and all of a sudden where the first quarter and and everybody's releasing we just think it's the low preliminary and our minds. So we're a conservative bank and I think there is a situation.
Where you could see you know one of two things there is a situation where that could probably partially fund loan growth.
Some of the rest of the year. If this continued or if we didn't get the loan growth that it would come in like other banks, we just didn't want to do it and the first quarter. We didn't think that was.
And the right thing to do.
Okay. Thank you Tim.
Maybe switching gears a bigger picture question.
Lot of the made of the changing role of technology, especially fin tech and the banking industry can you give us here and updates.
The thoughts around the changing landscape here and how it can be a player and the space, especially as they look to drive more efficiency and profitability.
Well you got to remember our model I mean technology plays a part and our model where were a great commercial bank. So we've got very competitive cash management on the commercial side.
The growing retail bank with the community banks, and that's probably where we need to focus the more or the most sorry and.
And the commercial space.
Our customers that space is a space that needs of banker and once the banker they don't need a lot of brick and mortar, but they want to come into and office and talked to a banker of couple of times of year technologies is important but not really driving their business the the.
The consumer obviously it is and so we need to continue invest there I think for our model, where we could benefit the motion technology I feel we have a big opportunity to review our internal technology we.
We just did a.
We did a strategic plan last summer and I, just finished three weeks, where I physically and that with every employee and their location across the state.
And I'm off a little bit, but I think the numbers I saw we spend something like $12 million of year, our expenses of 61.
We spend like $12 million of year on software router circuits technology, and you know from my experience of other banks.
We often have overbought, and we're not maximizing vendor contracts, but we're not using it correctly. So I think theres, a big opportunity and that 12 million to lower that cost as well as to bring better technology internally to perform of our work whether it be manual processes or or something like that.
Okay. Thank you.
That's the idea from me thanks for taking my questions and congrats on a good quarter.
Thanks, Omar Thanks Amar.
Our final question comes from the line of Catherine Mealor with.
With the K B W.
Hey, good morning, or afternoon, Hey, how are you.
Good.
The question just I appreciate the margin guidance is really challenging right now, but that we could maybe talk about some of the components of it.
And the question one within that is just on loan yields which are the key part of it looks like this quarter was $3 95, how does that can parents of where new line.
Coming on.
That's pretty much where theyre coming and I mean, it's plus or minus and like I said, we've seen some and we saw one this week, we walked away on that was 320 <unk>.
And so you like the example, I gave you was was out.
Of $2 55 loan yield 10 year fixed the one I gave you in my and my talking points, but the ones. We're choosing the book I'd say $3 75 to four and if you do of variable obviously, they may be $3 75.
Yeah, Katherine it's Chris.
If I just look at the last month. It was about a 50 50 variable fixed split for new production and new originations and it came in right at the top high at the high.
Three and nineties.
Right.
Right.
Hey, just real quick and this environment honestly, we're focused on net interest income because I mean somebody I had one of our best customers and you can tell this is a good customer, but he called me a month or two ago and he said Hey, I wish I had this problem, but he said I just ran into the $50 million and he said I have nowhere to invest at some and it put it in my account and I said please do.
And not do it I don't want it I have nowhere to invest it so from a cash.
And from a NIM standpoint, so much cash is coming in that it's hurting our ratio, but it doesn't really hurt the income that much I mean, we may be paying 510 basis points on it or something or we may be investing it at the fed so of.
It hurts the ratio, but and the short term long term, we want that ratio to be say $3 50 to 375, but and the short term. Our goal is how do we maintain our net interest income or grow it in this environment.
Okay.
And then on the deposit side of your deposits are at 26, that's and you said, there's still room for that to move down.
We do.
Some of them just didn't mean just number one even just administratively some of them are just C. D's that just mature and time, so you've got Cds that will reprice as well as theres customers. We can continue to go to.
Okay.
And then.
And what's the outlook for SBA and China.
I think the outlook for SBA is tremendous and so I would I'm not again I'm not of guidance person, but I would encourage you to look at fourth quarter and so they've had three consecutive quarters of fees about 500000, a million and and 500000 and.
And I feel relatively confident that they can get to say 802 of millions a quarter and.
And and if they do that like let's just take this quarter. This quarter. They were 500 and fees if they get to a million.
And that's to sense more of a quarter or eight since more of year about 250000 pre tax for us as a penny so just and first quarter. If they take their 500 and go to a million and they're gonna add two cents per quarter or <unk> <unk> per year, and so if I was a betting person.
Our general them and that runs at Mark neat and Hammer is just a pro ease of superstar and.
And I really think as teams off to a great start in the last three quarters try and that's a little tougher one Chris Bahram. The gentleman that runs it is just fantastic he's been at his peak business last year and this year, it's hard to ask somebody that set and at peak business to keep go double that but we have talked about are there ways to do.
Other he does a lot of dollar generals and Cvs is and Davita dialysis centers are there other storefronts he could try but that's a little harder one.
Okay.
And then just the clarity on P. P. P M and P. P. P. On Android I think you have left the culture of this year.
We might not and we might not have that right in front of US we can get back with you I can tell you on the new on the new fees all of the new fees Kathryn It's it's roughly.
A couple of million dollars and I think on the.
Total fees are on the books is.
Close to I think eight to 10 million and something like that of fees yet to be.
<unk> brought into the <unk>.
Net interest margin the.
The the issue the issue on the net of the issue on that NIM as is the.
The the P. P. P fees have have come in and slower than what we than what we thought you know there was a there was a period in February where.
They didn't do any forgiveness. So we've got 211.
Dollars of PPP loans, and then the fees associated with those loans and so we know there'll be forgiven and probably be forgiven within the you know within the next year, but it's it's it's just very hard to predict when and when those loans are going to be forgiven and they don't seem to be coming in the free.
Given the side and any and any predictable.
Predictable manner, so real quick.
We just got the email so real quick.
And Jeff Jeff Day, and she may be able to read this email faster, but Kathryn we did on this slide number.
On this slide number nine at sites 70 million with $3 million and fees.
I guess when we presented this earlier when we produced this earlier that's just for round three that's just right. Jeff can you check your email Eric just and you know so so that's round three that's actually stale. We just got an update that number now is.
$85 million.
And the fees associated with that is $4 million.
Our PPP three is $85 4 million I don't know the remaining amount from last year.
Okay.
And I think originally it was about.
A $7 million or says I'm, assuming the age of 10, Dennis that you put it maybe that was all and not with the remaining.
That was all of that was all in and not what's remaining and it kind of looks like Catherine that remaining might be.
Somewhere in the five to six range.
Got it.
Is that with number three so with PPP three so our PPP three is about $85 million and about 4 million of fees and their thinking there may be maybe another $2 million from the old fees, because don't forget Kathryn the when we had the when we had the round rounds, one and two we're beginning we amortized some of those fees.
And and have been amortizing some of those fees and and those those basis points that those forgivenesses are affecting the NIM, we we've been pointing that those out to you.
But then once but then when the loans when those loans are forgiven, we get a little we get a little windfall and.
And the NIM because any of unamortized fees.
The hit the NIM immediately so.
You know pretty good pretty good shape, but we we we reported this time that.
The PPP loan forgiveness favorably impacted the NIM.
NIM by 14 basis points. So we'll continue to tell you what that is as we move through the year, but we know that we know that number's going away and then the.
The.
And the best thing we can do is manage the rest of the margin and try to do something with all of the excess cash which is what we're doing on <unk>.
Pricing deposits and growing a growing our loan portfolio and and and the like so.
And I think I hope that answered the question happy to.
If you need a follow up or anything just give me a call.
And then all understood. This is really helpful. Just trying to make sure we're one.
Over and over estimate and whats coming and in the next couple of quarters, but that's the get the 6 million and lapse I think of that did that and that makes sense right alright. That's all I got thank you and have a great quarter. Thanks, so much.
Okay. Thank you go generals.
We do have a follow up question from the line of Stephen Scouten with Piper Sandler.
Hey, guys. Thanks.
I did just have one follow up question, Tim and now you said you don't want to get to deepen the guidance, but just trying to figure out what happened this quarter, maybe on the expense side. If I look at slide 12, I'm just trying to figure out what the good actual starting point for kind of run rate expenses, when we think about the Fas.
<unk> thousand 91 decrease in salaries and benefits and this.
Pandemic and and recruiting bonus just kind of what you think is the true kind of again run rate number maybe coming off this quarter.
All of them and go ahead and done so I'm trying to get the slide to go and I think Stephen the the the number that's there.
Isn't isn't a bad isn't a bad starting point.
And we.
The first quarter.
The vast 91 impact.
We grew loans are a good bit but the impact of Fas 91 over the fourth quarter was was less than a couple of less than a couple of cents.
But as we have of loan growth.
We will continue to benefit from you know fast 91.
And then the mortgage incentives and the fourth quarter.
Were elevated and so we had we had of a you know pretty.
Pretty significant drop and salaries and benefits that were related and the first quarter that were related to a less mortgage and less mortgage incentives compared to the compared to the fourth quarter.
But if you say you know if you think of it with the mortgage and the first quarter as is.
You know and approximate.
And the level of mortgage you know.
And then you've got a good starting point, but we're hopeful of mortgage continues at the pace that it is but it certainly might not.
Steve and the way I think about it and we don't have it on the slide but I don't I don't think it's material and anyway.
As far as the number is I think about bank only expenses and we probably ought to think of way to disclose that but from memory, our bank and only expenses I think are like 15, $15 5 million.
And so the difference the difference would be the mortgage and so just look at that I'm on page 12 look at that top Green line. It says operating noninterest expense.
And so hard to follow because our mortgage has done so great. So.
I know that that's commission based and that's Gonna go accordance to revenues. So I don't really don't focus on that as much because that's that's largely the commission related to mortgages. So I'll try and focus on what is our core recurring expense rate for the bank and I've actually got a bank only efficiency target that we're going after and so I.
Think that's 15 to 15 of the half and I'd like to keep it and that range and.
You know like we said here there was roughly 500000 and we did of pandemic bonus and first quarter. We gave every employee I don't remember the cutoff, we didnt get it we gave every employee definitely under the executive Committee of thousand dollar just thank you for their contribution last year for work and a tail off and so we had that and then we had some recruiting expense we wouldn't.
Expect that to recur, we don't think there's really any one time benefits in there. So we think that that's that's a number.
So I would say core bank and the 15 and a half range maybe for now.
With mortgage going up and down based on success.
Got it yeah. That's helpful. Yeah, and if that becomes something you guys end up being able to disclose and I think that would help kind of the.
And why is that comes from that yeah, that's great. Thanks.
I want I want to do that even for us internally because we've not really done that internally, we've sort of looked at total and it's sort of hard to understand I know the team is doing a great job, but it's hard for that to shine when that's going up and down and so we're going to look at that.
Great alright, thanks, so much.
All right well, we appreciate everybody, calling in and that concludes our call and again, we're really excited about what's going on at cap Star and we've got a great company and it was a share challenging year, but man and we made a lot of progress and the last year and we're beginning this year with more levers than ever we've got the legacy original cash.
Star Bank, which is of tremendous commercial bank.
Bolted onto that Knoxville, which has an equivalent commercial capable team. We have three of the state's highest performing community banks and there were about 150 and all three ranked in the top 15% and performance and and we have unbelievable specialty businesses with our CRE group our mortgage Tri net.
S. P. A we've got a title agency youre going to hear more about soon we're going to try and crank that up. So we just have a lot of levers that we have never had before and it's just and we're excited about the year. So appreciate you. Following I know I just looked at the last we've got two of our new shareholders on the call that are and the top 10, and we appreciate you all be and shareholders and listening and.
And we'll talk to you later in the quarter.
Thank you for thank you and today's.
The conference call you May now disconnect. Your line is at this time.
Yeah.
And then.
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And then.
Okay.
Okay.