Q2 2021 CapStar Financial Holdings Inc Earnings Call
Yeah.
Good morning, everyone and welcome to Capstone Financial Holdings second 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 Policy Officer.
Please note that today's call is being recorded.
On the call and the earnings release and presentation materials will be available on on the Investor Relations page other companies' website at cap Star Bank Dot com.
During the presentation, we may make comments, which constitute forward looking statements within the meaning on the federal security laws on.
All forward looking statements are subject to risks and uncertainties and other factors that may cause the actual results and the perform performance or achievements of cap started differ materially from those expressed or implied by such forward looking statements.
Listeners are cautioned not to place undue reliance on forward looking statements.
A more detailed description of these and other risks uncertainties and factors are contained in caps on public filings with the Securities and Exchange Commission.
Except as otherwise required by applicable law capstone disclaims any obligation to update or revise any forward looking statements made during this presentation.
We would also refer you to page 2 of the presentation slides for disclaimers regarding forward looking statements non-GAAP financial measures and other information with that I will now turn the presentation over to Tim schools, <unk>, President and Chief Executive Officer. Please go ahead Sir.
Okay. Thank you.
Good morning, and thank you for participating on our call. We appreciate the opportunity to review our results with you in the second quarter. We saw the beginning of positive economic trends and continued favorable developments from the hard work of our associates, we reported earnings per share of 54 cents and annualized return on average equity.
13, and a half per cent.
Year to date, we've earned a dollar on 4 cents per share and our return on average equity was 13.13 per cent.
We continue to benefit from P. P P and mortgage related revenues, which will not continue at the level. They have in this quarter benefited from a release of our reserves related to potential credit losses due to improved credit trends.
I'm very proud of our team and the results. They are producing in this highly unusual environment. While some of this year's earnings are not sustainable GAAP stars competitiveness and performance is strengthening as a company. We are focused on 4 strategic initiatives enhancing profitability and earnings consistency accelerating organic.
Again, it growth maintaining sound risk management practices and executing disciplined capital allocation as we illustrate on slide 3 we achieved many new milestones across our company that support the above mentioned initiatives and our risk management. During this cycle has been strong.
It is hard to highlight 1 achievement over the other is everyone is chipping in and doing a great job.
With that I'll turn it over to Dennis to cover our financial results for the quarter.
Yeah.
Yeah.
Thank you. Thanks, Thank you Tim and good morning.
On slide 8.
Net interest income was 23 million for the quarter.
$800000 from the first quarter due to the increase in the net interest margin and an additional day in the board on.
Our net interest margin.
It was 3.26 for the quarter up about 13 basis points.
Our adjusted NIM for the quarter.
Up 1 basis point from the first quarter.
Our adjusted NAV.
Includes the impact of excess deposits, which adversely impacted the net inter.
Interest margin by 28 basis points.
For the quarter and PPP loan forgiveness favorably impacted our NIM by 7 basis points.
Net interest income benefited in the second quarter from a shift.
Of our earning assets into additional.
Investments as well as very strong loan growth as you saw.
On slide 9.
Deposits of 2.8 billion at quarter end were at a record level.
DDA deposits also were at record levels for the quarter and increased $45 million from the first quarter.
Our core markets continue to hold large levels of deposits consistent with the prior.
Several quarters.
Yeah.
Our deposit costs continued to decline and we were 5 basis points lower in the first quarter as we contended the lower deposits.
Reits during this quarter.
We have excess balances continuing debate.
Strategically addressed through pricing nowadays.
On loan growth, including hiring new bankers.
Purchases of the investment.
No.
Additional investments on the investment portfolio and then just trying to run off additional higher priced deposits.
Slide 10.
Total loans less P. P. P were at record levels at the quarter in wood.
We grew total loans at the end of the period by $67.6 million.
Or 15.7%.
Annualized.
Right.
We've continued to build out our Knoxville markets, adding additional adding additional bankers in middle and East Tennessee.
Strengthening and growing our loan pipelines.
Our loan pipelines were at record levels at the end of the quarter and remains strong.
Across all of our markets.
Total P P P loans at.
At the end of the year were $110 million.
Down on $100 million from the first quarter.
In total on our P. P P fees remained.
At about.
3.8.
Millions of dollars.
Our loan yields for the quarter were 4.
4.41%.
And our loan coupons.
Were stable at about 3 point 95 per cent.
Yeah.
On slide 11.
Our non interest income was strong in the second quarter.
With record levels of revenue and.
Deposit service charges.
Interchange and debit card fees.
Tri net.
Wealth management.
Our mortgage revenues were down just a just a little bit for the quarter due to lower volumes and.
Decreasing spreads.
But otherwise our noninterest income increased for the quarter primarily due.
2.
Additional purchases of bank on life insurance light in the first quarter.
And were very.
Very proud of our <unk>.
Overall.
Levels of.
Non interest income.
Okay.
Okay.
Slide 13 shows our noninterest expenses were up.
Yeah.
The $19.1 million for the quarter.
We had on operating efficiency ratio of about 57.19%.
And we'll then salaries and benefits are incentive expenses were increased during the quarter.
Related to mortgage and.
Overall.
Additional corporate incentive compensation plans.
With that I'll turn it over to Chris who will discuss our credit book.
Alright, Thank you Dennis turning to page 14, let me start by saying that the good news is that a year ago in the midst of the pandemic my prepared notes for several pages long and today they are only too.
Some points of emphasis we continue to believe that the interest of our shareholders customers employees and communities are best served with a continued portfolio emphasis in our community markets and with efficient capital generation coming from our specialty fee businesses.
So that objective relating to portfolio composition first shared national credits also known as snacks are now less than 2 per cent of our portfolio Outstandings.
We have steadily reduced our snick exposure from a high of $208 million on the first quarter of 2017, we do not seek to reduce next to zero, but rather to align our exposures with businesses in our local markets, where we know management and are able to provide profitable non credit services would that profile snips will remain a small P.
<unk> of our portfolio.
Second 96% of our portfolio remains in market, we have steadily increased our in market share of portfolio from a low of approximately 70% about 3 years to 4 years ago. This was a reduction from our peak in 2017 of about $220 million in out of market exposures with improvements in our <unk>.
Strategic portfolio composition, we continued to maintain high levels of diligence on asset quality with an emphasis on early problem identification through monthly internal asset quality reviews robust external reviews from quality firms and an emphasis on not just riding the historical performance of our borrower under stress, but also.
And insightful review of drivers to future performance and assessment of collateral in the event on potential deterioration as a result of these areas of focus.
Turning to page 15, you will note delinquencies remained within an acceptable range criticized and classified loan levels are improving from elevated levels experienced as a result of the pandemic and net charge offs remain low with all these factors turning to page 16, we believe a small release of reserves as warranted, reflecting our optimism.
As we continue to monitor the diminishing effects of the pandemic on our borrowers and on the economy in general with that I'll turn it over to Tim.
Operator, we're now happy to answer questions.
Thank you.
To ask a question.
You will need to press Star then 1 on your telephone to withdraw your question. Please press the pound key.
These standby, while we compile the Q&A roster.
Our first question comes from the line of Graham <expletive> with Piper Sandler Your line is now open.
Hey, good morning, guys.
Good morning, good morning.
So Tim I was wondering if there are any other markets that you're maybe looking to expand your lending operations and.
Kind of similar to what we saw you guys do in Nashville.
The success, you've had there and then particularly if theres anything out of state that you might be looking at.
Nothing in particular.
I mean, I guess I would respond that you know something that we'd make logical to manage to Nashville, and really not focusing on markets, but rather the quality of bankers and so you know it's more opportunistic we were fortunate that our group and in Knoxville was.
Looking to make a change and was excited about us and so we just you know we're keeping our ears open and we did hire 1 of the top we're also looking in market by the way, but we hired 1 of the top mortgage originators by volume and the Metro Nashville area. This quarter. So I would put it more around looking for talent and you're not sure when that will.
Pop up.
Okay, Great and then I guess, just maybe more generally to loan growth obviously in other another good quarter for you guys, great production and the pipeline looks good as well.
Has your outlook changed maybe since we talked last I think it was I think we have coined like a 6% to 8% range on it.
Return on them do you think it might be.
Maybe get closer to 10% over the next few quarters as there's pent up demand continues to I guess come through to you guys.
Well it seemed every bank that I saw it had pretty good loan growth. So on you know I'm real happy what we had but it seems like everybody is doing a great job out there and it seems like the economy is coming back I guess on our side as I don't you know I don't want a hyper mislead people you know we.
To me, where we're transforming our company and.
We we did a fair amount of participations in share credits before.
And we have some new banker. So I just don't want everybody to get ahead of it but our pipeline does look great. It's it's you know largely in Tennessee. So knock on wood you know maybe the last 2 quarters. We've had good growth I hope that will continue but you know would really like to see 3 or 4 quarters of that to know that it is sustainable.
But I think I, certainly think we have the right activities and we're heading in the right direction.
Okay, and then I guess the last the last question from me is kind of on on the buyback.
On the current evaluation its not as much of a no brainer it might've been a.
A year ago or several months ago on but probably still somewhat appealing given how much capital you guys have at your disposal.
How are you thinking about utilizing this going forward, while also making sure you've got enough.
Capital set aside for organic needs that would actually build franchise value more so than than buying back the stockwood.
Well I'll, let Dennis pitch and also I guess my thought is is where we're still solving that we're still we talk about it a lot. We're still trying to crack it and you know people think about buybacks in different ways, we try and think about it as an internal rate of return, which you need to have a pretty good forecast you can discount back in.
You know its uncertain times right now so I'd say, we're trying to balance that with some of the exciting growth opportunities. We feel our pipeline is looking pretty good and we're having some conversations on other market. So it's not a real black and white thing and Dennis I don't know if you have anything you want to add to that on your thoughts.
No no Graham I Graham I would say are I would say if you look at our if you look at our capital ratios in General I mean, we've got we've got roughly are in terms of our excess capital we've got probably 40.
40 odd million dollars of excess capital that we could put to use we would like to put it to the highest and best use obviously.
And buying the stock back Ah is obviously something that we now have in place and we're ready to go on that.
Bank stocks in general have you now have rallied have rallied pretty pretty well over the last.
334 kinds of months, so it's tough it's difficult to like you said justify.
Using that to buy your own stock back. If you have if you have the organic in your market type of opportunities to deploy that capital. So.
We're continuing to look to look at it.
Oh.
You know there's a there we look at the levels of.
On the internal returns, we could get on buying the stock back versus.
You know versus using it in and in and are in within our businesses and so you know.
Great for us to be able to have that flexibility to be nimble and use that use that excess capital to our to the highest and best use.
Okay, Great and then if I could just sneak 1 more on here I'm just just quickly it looks like the loan coupon on how pretty steady by loan fees were up a.
A little bit quarter over quarter, do you think those loans diesel or normalize back to more historical levels going forward here.
I think it bounces up and down.
Hard to predict hard to predict but.
The long yields surprisingly had been pretty good and.
So it's been fairly stable.
Okay, great. Thanks, guys.
Thank you.
Thank you. Our next question comes from the line of Jennifer Denver would choose Securities. Your line is now open.
Hey, this is Brandon King on for Jennifer How're, you doing it Okay, Hey, good morning Brendan.
Good morning, good morning, So I would like just to update on the hires you made in the quarter and if there are any plans to get more aggressive hiring, especially in Nashville with the acquisition that was announced most recently from a competitor bank.
Yeah, why don't want to comment too much on that rely on his outstanding Bank in United Community Bank is outstanding Bank, that's an exciting transaction, but you know I would just say for US you know I don't know I'm trying to think back I don't know we hired 1 of the top mortgage originators this quarter.
In first quarter near the end of first quarter, we hired a banker in Knoxville, who had had 100 million dollar plus portfolio. So I would say those are our 2 recent hires there had been some that were hired earlier in the first quarter also but it's exciting when we look at our pipe.
<unk> you know they've got growing pipelines and this week or maybe it was last Monday. They now have several million dollars of balances. So I don't think there was really no substantial hires this quarter really looking for the ones and you know first quarter 2 to see their exciting contribution.
We're always looking and always talking on how always having discussions both end market and in other markets and I would say.
There's good good activity on cap starts to go reputation.
And I would say that the 4 acquisitions.
Get people thinking so whether it would be those banks or other banks.
You know it has led to good conversations and I'll leave it at that.
Okay.
And deposit growth in DDA balances is pretty good and I noticed the focus for the bank going forward I wanted to know.
Where is that growth coming from is it coming from more existing customers is increasing their own liquidity or are you seeing market share gains.
I'd I'd say more existing customers I mean, it's a it's a good problem in a bad problem right. I mean 18 months ago cap stars a bank, that's young and and.
Had more ease in finding loans and deposits. So you know at times you know it was with scratch and claw on for deposits and now we have more deposits like everybody that we can use so.
We had started.
Higher emphasis on deposits across our bankers.
Before the crisis and there was actually a good traction in the first quarter or 2 and then the crisis came so you're sort of hate to tell everybody Hey, wait a minute we tricked you stop.
So you know we wanted to still be an emphasis on it's a dilemma because it's hard to put it to work but to be honest I would say the vast majority is just existing customers in all of the excess liquidity.
Stimulus money, that's in the economy to be honest.
Okay.
And just lastly, I know last quarter, you mentioning that.
Company was reviewing the technology investments.
Our efficiency opportunities and wanted to get an update on that and see if there's anything go no from the review so far no. There's not I mean, just I just I think I mentioned that is in each of the banks I've been that that's been a.
Interestingly, it's ended up being a pretty sizable opportunity.
From at least 2 frames, our 2 angles 1 is.
It's just interesting you know software sales folks are very good and banks tend to get software that either doesn't do all maybe it was marketed to do or maybe it was not a good fit and so there's opportunity to sort of evaluate do you have what you need number 1 and.
And.
Automate more processes. So that's all 1 big project and then number 2 just getting the contracts coterminous and negotiating and bidding pricing and so that's a longer term project that doesn't happen quickly.
But I suspect there'll be some level of opportunity there and then outside of that and I think we noted in our slides and second quarter from memory about $250000 is in our run rate related to P. P. P software processing that should go away at some point.
But we're just at the infancy of really studying our whole I T and software strategy.
Okay. Thanks for the answers.
Sure.
Thank you.
A reminder to ask a question you will need to press Star then 1 of your telephone.
Yeah.
Yeah.
Our next question comes from the line of Catherine Mealor with K B W. Your line is now open.
Thanks, Good morning.
Hey, good morning Catherine.
Wondering if you could good morning, I wanted to see if you could give us your thoughts on updated view of the core margin I know, there's Atlanta is in part seems like you put a lot of excess liquidity to work on.
This quarter, which is great and so just how are you kind of thinking about what the core margin I mean, any moving pieces at the core margin on over the next couple of quarters. Thanks.
Would you like to address that Dennis.
Oh sure sure Tim Katherine with William Blair.
Well generally work on that with our new partner called Darling who is.
Specialists in this in this business but.
We've got we've got.
Several several initiatives going on with the margin 1 obviously that you've seen that has paid off a substantially is really just in the overall deposit pricing.
Strategy that we've been deploying so we're down to 21 basis points deposit Oh of deposit costs. We we can we can take that down a little bit more and we will we will be doing that very shortly.
And then longer and then longer term are deploying our investments.
Deploying investments are and are in the shorter term.
That we've been doing you know very very conservative.
<unk>.
Mortgage backs.
The sub debt.
Kinds of investments so we've got some investment.
Investment capacity that will be.
<unk> will be deploying and and then just generally you know positioning ourselves for as interest rates rise.
On being able to take advantage of within our loan portfolio, just the rising rates and repricing within our.
Within our our own loan portfolio I would say at 333.36.
You know our goal is to get it back up over 350 closer to $3.60, if you look at our our goals and our strategies are we want them, we want the net interest margin to be.
On a backup into the the you know north of $3.50, and close to $3.60 kind of range and you.
You know it will take it'll take several other.
Several things to be able to do that but where we are definitely Catherine moving in the right direction on.
On that as you as you saw this score.
And he would tell you that follow on scale still requires higher rate debt right.
So erinn definitely environment, no no totally totally and what I'd say again I just want to commend you know really it's been managed great across.
I think that the community banks, we partnered with brought stronger funding.
Thank debt.
Dennis and the finance team has done a great job on really instilling deposit pricing discipline. There was not a monthly pricing committee at cap Star, which is something we've started and you know over a year ago, and that's just gone well on learning and talking and disciplines. So that's done great.
We talk a lot about the spreads we've walked from loans I think I shared didn't share the customer name, but I think it was 2 quarters ago debt. You know, we really talk a lot on the spreads we wanted and lets be disciplined and in an walk if we have 2 so I think we're doing a great job to stabilize it and get it as strong as we can but obviously not just the steepness.
On the curve, but the level of the curve you know your DDA is worth very little today.
If the whole curve shifts up your D. D. A doesn't go up in price and so that DDA becomes more valuable. So we're trying to take you know a lot of the interest rate sensitivity out, but we would benefit from an absolute rise up the curve, which is what it will take to get it towards our goal.
Right.
And on loan pricing tier that seems to be holding in what where would you take on average.
New productions coming on versus your I guess, your current yields without 2 or 420th.
I'll tell you, how we think about it and it's hard because we have a different product mix now right. We've got 3 community banks that have more business banking and consumer products. So they tend to come at higher yields. They also have you know higher delinquencies and a little bit higher charge offs are on the commercial.
Syed.
We target.
No a spread to the matched F. H L. B theoretical funding right. So on each loan we go out to the F. H L. B website and look at what our theoretical cost of funds would be that's sort of our cost of goods sold and then we put a spread over that based on sort of the commercial risk right.
Of the loan.
And.
So.
Chris I don't know if you want to comment what you're seeing come into other general generally speaking Kathryn on a monthly basis, we monitor all of the new and renewed yields are really coupons I should say and they had been holding out on the commercial this addresses the largest transactions in the portfolio and generally they're holding out on the high threes.
All low 4 kind of range right now.
Great.
That's on a weighted average basis.
Okay.
Makes sense great. Thank you very much.
Yeah.
Thank you there are no further questions I will now turn the call back to Tim schools for closing remarks.
Okay. That's it that concludes the call. We appreciate everybody taking the time to call in and we appreciate you following cap star. Thank you so much.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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