Q3 2021 CapStar Financial Holdings Inc Earnings Call

October 22, 2021

Good morning, everyone and welcome to <unk> financial Holdings' third quarter.

'twenty one earnings conference call.

Hosting the call today from cap Star are Tim schools, President and Chief Executive Officer.

Dennis <unk> Chief Financial Officer.

And Christie Ju credit policy Officer. Please note that today's call is being recorded replay of the call and the earnings release and presentation materials will be.

'twenty on Investor Relations page of the company's website at Cat Sberbank dotcom.

During this presentation, we may make comments, which constitute forward looking statements within the meaning of the federal Securities law.

All forward looking statements are subject to risks and uncertainties and other factors that may cause the actual results.

[noise] available woman or treatment.

Of cap start to differ materially from those expressed or implied by such forward looking statements.

Listeners are cautioned not to place undue reliance on forward looking statements.

One detailed description of these and other risks uncertainties and factors are contained in <unk> public filings.

And.

The Securities and Exchange Commission.

Except as otherwise required by applicable law <unk> disclaims any obligation to update or revise any forward looking statements made during this presentation.

We'd also refer you to page two of the presentation slides well 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.

Good morning, and thank you for participating on our call. We appreciate the opportunity to review our results with you.

Billings in the third quarter, we reported earnings per share of <unk> 59 cents and an annualized return on average tangible equity of 16 point to 8%.

Our Aro TCE is on top of a CET one ratio that is now essentially 14%.

I'm, especially proud of this quarter as you walk.

The income statement every single aspect of the bank executed, which is evidenced by the positive trends of our four key drivers and our pretax pre provision to asset ratio.

Stabilized net interest margin, excluding PPP loan growth strong performance in deposit service charges.

And each of our specialty banking businesses.

Expense discipline as we become a more productivity driven company.

And focused management of our tax expenses I, just can't say enough about our team equally exciting we announced our expansion into Chattanooga with the addition of nine highly skilled banking.

<unk>, who are leaders in that market.

As we've communicated one of our four strategic focus is the past 24 months is putting our excess equity to work.

Our preference is to invest in the following order first organically such as Knoxville and now Chattanooga.

Second acquisition.

Acquisitions, such as Athens, Manchester in Waynesboro, third opportunistic buybacks and fourth dividends.

Each play roles in our available tools, but we have terrific investment opportunities in our core business that will remain our priority.

<unk>.

It's a fabulous market in one of three in Tennessee, whose population and household income growth are faster than national averages.

<unk> is blessed to operate in one of the best states across our nation to do business and live.

And now cap stores located in the three fastest growing markets we have incurred.

<unk> did a slide to share a little bit about Chattanooga, it as a great destination, if you've not visited with one of the nation's first aquariums rock city, where you can see seven states on a clear day, the Chattanooga Choo Choo hotel and as we've illustrated it is home to an important aspect of the southern lifestyle.

Style the Moon pie.

This is a strong team led by Brian Paris, and six of his former teammates they've worked together a long time and are extremely connected in the market. They are a true team a dream team. We provided some of what we feel the strategic and financial rationale are while there are a lot.

A lot of variables, we feel that this will have a meaningful impact on our financials over the next five years.

Of course, it comes with startup costs, but the level of work and risk compared to an acquisition is uncompassionate bull.

Before turning it over to Dennis I'll share that we have similar conversations.

Underway in three additional markets and the response is very positive highly skilled employees are looking for the next bank as their cell or become larger to the extent they feel it is harder to serve their customer or no longer as fun.

<unk> capabilities size response.

Business and flexibility are proving attractive in the case of Chattanooga, They actually reached out to US earlier. This summer as is becoming a more frequent occurrence.

Dennis I'll now turn it over to you to cover the financial results for the quarter.

Thank you Tim and good morning, everyone on slide 11 of our deck.

Spawns Youll see that our net interest income was $23 million for the quarter consistent with the second quarter. The net interest margin was $3 one 2% for the quarter down 14 basis points, primarily due to record levels of deposits and slightly less loan PPP fees in the third quarter.

<unk> adjusted NIM remained stable at $3 36 for the quarter. The adjusted NIM includes the impact of excess deposits, which adversely impacted the margin by 40 basis points and PPP loan forgiveness phase, which favorably impacted the NIM by 16 basis points net interest.

Our team continued to benefit in the quarter from the shift of our earning assets into additional investments as well as continued strong loan growth.

On slide 12, our average deposits of $2 7 billion for the quarter were at a record level average DDA and now deposits were also at record levels for the quarter.

Income and increased $88 million from the second quarter, our core markets continue to hold large levels of deposits consistent with the prior several quarters.

<unk> cost continued to decline in the third quarter and were two basis points lower as we continued to lower deposit rates and benefit from higher.

Quarter on interest bearing deposits.

Our excess balances are continuing to be strategically addressed through pricing opportunities focusing on our loan growth, including hiring new bankers purchases within the investment portfolio and run off of higher priced deposits.

On slide.

Higher nine total loans less PPP, we're at record levels at quarter end and grew $42 million or nine 4% annualized in the third quarter. We continued to build out the Knoxville market added some additional bankers in middle and East, Tennessee and continue to strengthen our loan pipelines our loan pipelines.

<unk>, you're at record levels and remained strong across all of our markets.

Total PPP loans were $64 million at the end of the quarter down $46 million from the second quarter total unearned PPP fees at the end of the quarter.

Totaled $2 $2 million.

Our loan yields.

Continued strong and were four.

Four 1% for the quarter with loan coupons up six basis points in the quarter to four 3%.

On slide 14, non interest income was extremely strong in the third quarter with record levels of revenue and deposit service charges.

Remain changed in debit transaction fees and wealth management.

Tri net had a tremendous quarter with almost $2 million in revenue SBA had a nice quarter with $911000 and B's and mortgage revenues were also up for the quarter and continued to see healthy spreads offset slightly.

Energy volumes.

Slide 15 shows our noninterest expenses, which were $18 4 million for the quarter, which resulted in an operating efficiency ratio of 53, 6% our core bank.

Which excludes mortgage efficiency ratio was 55.

Five, 8%, which is a record within salaries and employee benefits and incentive expenses were increased during the quarter for mortgage and other incentive comp plans. So even with these increased incentives during the quarter our efficiency ratio was at a record low.

With that Chris I'll turn it over to you to discuss our credit position.

Thank you Dennis the good news is that I can be brief turning to page 17, we reaffirm and underscore our continued commitment to our community banking strategy emphasizing growth through in market relationship development with this we also remain committed to a robust risk management on a forward looking basis with external validation and periodically.

Artic stress testing by partnering with quality external firms to assist us objectively.

These commitments continue to show results as noted on the bottom of page 17 past dues continued to improve as we believe and we believe that there is continued room for improvement as expected criticized and classified loans continue to reduce from pandemic.

Emmick levels, having peaked a year ago shared national credits continue to reduce and growth continues to be driven by end market relationship development.

At this point, let me step aside and give you a little bit more detail into our diminishing level of borrowers on pandemic deferrals.

Borrowers with pandemic deferrals continue.

To resume making normal payments as expected at this point loans on deferral totaled $33 4 million to five borrowers 85% of this total that is $29 million or with three borrowers that are well situated well located new hotel projects in Nashville, having.

Having both.

Good capital and good sponsor support.

These three are on principal only deferrals with the borrowers continuing to pay interest on a timely basis. Each of these is scheduled to reduce full payments in January I'm, sorry scheduled to resume full payments in January and we have every expectation to believe that these payments will in fact resume.

As scheduled.

The remaining two loans are SBA guaranteed transactions, where we granted the deferral in recent months pursuant to the SBA standard operating procedures. One of these is on a principal only deferral and the other is a full deferral of P&I principal and interest.

But the balance sheet.

Or that we have carries a 75% guarantee.

Turning to page 18. Please note that as we indicated in the first quarter earnings call. Our past dues have continued to reduce and we have continued to maintain them at acceptable levels for the last three quarters as I indicated earlier, there is still room in our minds for improvement.

Also on this page note that the trend in criticized and classified loan levels continues to improve from pandemic highs attained a year ago, while not evident in this particular chart. It is important to note that our level of criticized and classified loans has nearly returned to pre pandemic levels of approximately two 5% and one 4%.

<unk>, respectively, consistent with these low levels of criticized and classified assets. Our net charge offs remain at very low levels. Given these positive quality trends and low loss results as you see on page 19, our assessment did not require a loan loss provision in the third quarter and we believe that our level of reserves.

On multi.

<unk> basis of presentation remained well situated to cover any lingering residues that we may still experience as a result of the pandemic.

With that.

I'll turn it back over to you Tim Okay.

Thanks, Chris I Hope you can see the employees of cap star are working very hard and producing winning results.

I am very excited about the future as I stated we are blessed to have been born where we were but that.

We are supplemented by one of the youngest and most experienced management teams in the industry.

A closing comment for those of you that model and project financials, our outlook is very positive and strong however.

So next year is a transition year for the industry.

US and others are working hard to pull PPP fees into this year, which will not recur. It is uncertain. If the mortgage industry will continue its performance and provision expense would be expected to recur. After the release of reserves. This fall deriving from the pandemic.

Mine operator, we're now happy to answer questions. Thank you everyone for your time this morning.

Thank you, ladies and gentlemen, as a reminder to ask a question you will need to press. The Star then the one key on your Touchtone telephone to withdraw your question press the pound key.

Please standby, while we compile the Q&A roster.

Okay.

My first question coming from the line of Stephen Scouten with <unk>.

Ross Sandler your line is open.

Hey, good morning, everyone.

Hey, Steven.

A lot going on all of it sounds very encouraging so that's good I'm wondering if we can talk a little bit more about the maybe the Chattanooga.

Team.

If you could give us an idea I know you laid out some of the accretion expectations in year, two three and four and et cetera, but can you give us an idea of what the related expense base will be from those hires and what you think the scale of that loan book could eventually be I mean is this.

Similar opportunity set to Knoxville.

At this point in time.

I would say it would be larger Knoxville is a super team it was really <unk>.

To this point was three commercial relationship managers.

They began in February of 'twenty, the months of the pandemic and worked out of their houses through November.

Remember so the fourth commercial relationship manager they didn't start until about April of this year.

So this is five that are starting day, one there'll be an in office, yes, we're still in the pandemic I don't want to.

Minimize that but it's not like it was last summer where it was locked down.

So I think a bigger.

Bigger team.

And not the same situation. So in total they've got a close to $600 million portfolio today, when you add them all up that doesn't all walk over day, one but.

We certainly expect that on average not everyone and every year is different.

They'll probably generally produce between $20 million to $25 million.

A person.

And we're hopeful that will go towards $500 million to $600 million by the end of that year five.

There's just a lot of variables to I mean, they're meeting actually this morning, Theyre, having breakfast with one of the top bankers in Chattanooga had a different bank. So.

So were just real excited and we've put in some of the modeling we looked at to see if it was a good use you know we're trying to way you can always just go I could buy $30 million of stock back today I wanted to.

And but we're trying to weigh that versus other investment alternatives and we just thought this was a slam dunk that if you put reasonable assumptions.

We are investing in our business in a high growth market and just one of the best teams in Chattanooga.

Steven.

On page seven there we gave you.

At a high level, a little bit of our thinking around.

From an expense standpoint in terms of how long it would take for.

Or that team to breakeven and those kinds of things so happy to talk offline.

Around that but.

Very very good economics.

And this kind of lift out.

Sure sure and then.

Tim I think you noted three additional markets.

And you might be looking to add teams as well.

All of those be within Tennessee, or would you guys look at other msas kind of in and around your existing markets.

A couple of things.

I do not intend to take on three more than half for <unk>.

But I do think.

We're next 18 months it would be positive with our excess equity.

<unk> almost now a year past the FCB conversion and the team is rested a little bit I do think it would be very positive to try and take them to and.

It's a trade off because I know a lot of public investors are quarter over quarter.

That we're trying to build a great bank for the long term and so it's like anything it comes with a little more dilution in year, one than an acquisition.

But it's much more accretive than much lower risk. So I'd say I'd love to have two and Theres three other markets generally were focused on Tennessee, that's our main priority, but I've mentioned.

And to some others that the way I'm thinking about it today, Tennessee.

Tennessee is an odd state.

I guess many states are when you think of them graphically and that it's a long rectangle and so where we are located from a management bandwidth. If you sort of do a three hour radius.

If you.

<unk> north that sort of starts at Louisville would cover Lexington would cover.

Knoxville, Chattanooga, Huntsville, Birmingham up to Memphis and back to Louisville, So I would say that's what we're spending 99% of our time. There is an interesting one came up somewhere else we may consider it but we're.

You just got doing outbound calls outside that region.

And on this one this was an inbound call. This was not an outbound call from us.

Got it that's helpful. Okay, and then I think this kind of answers the question, but would you expect the buyback to continue to be kind of.

I don't want to call. It on hold I mean, obviously, it's out there usable.

But it seems like you've got in your opinion better uses of capital to invest in future organic growth.

With this <unk>.

Yes, I do and everybody looks at that differently I mean, obviously.

There's a lot of smart people in this industry, but one person I spent a lot of time with Julian add the capital research in.

San Francisco and he has taught me a lot and you can do a lot of stuff to increase EPS, but it's not really a good return on capital and so I'm just trying to be a great stewards of the shareholder and I know, there's there's an IRR drag the longer we hold it but I'm going to do my best to rapidly deploy that.

<unk> and a low risk prudent way.

And if you run the numbers on buying back stock I mean, we're proud of our valuation think actually it could even be a little more but when you look at doing that it's not the same return as what you could get youre not going to get a 30% IRR buying it at this level today. So that's.

Yes.

Great Okay, well, that's great I'll, let somebody else hop in thanks for the color and congrats on the quarter and the new team.

Okay. Thanks Steven.

Our next question coming from the line of Brad Robinson with hub Group. Your line is open.

Hey, good morning, guys.

Good morning, Brett Hi, Brian.

Congrats on the quarter and the new hires that helps great.

I wanted to talk about the margin Dennis could we.

I guess first from a PPP perspective, how much do you guys have left in and fees related to that and the core margins held steady, but obviously it's been impacted.

<unk> by the liquidity can you maybe talk about the deployment of that the pace of it and maybe the expectations for the core margin.

<unk> is the stated one over the next few quarters.

Yes, I think I think Stephen the.

We have I mentioned, we have $2 2 million of PPP fees remaining and the.

At the end of the quarter.

We're doing our <unk>.

Best to try to.

Get all those forgiven by the end of the year. So we'll see how that goes.

Some of it will probably.

Carryover into the new year so.

And then really this this particular quarter.

We had a significant.

The increase in the average deposits.

That that were on hand during the quarter so that negatively.

Impacted the margin.

The.

Pure core margin from from the last.

From the second quarter, but really looking looking out we think.

It's definitely.

It's definitely trough out in our opinion.

And we've been very very conservative in our view of what.

What to do with the excess liquidity and.

And have not really loaded.

Loaded up and taken on risk we want to keep.

The balance sheet at a more neutral level and so we have we have purposely not.

Two.

Really grow the investment portfolio, we think.

And feel and believe that loan growth in Nashville loan growth in Knoxville, and now in Chattanooga and potentially other places.

Better.

Is the better way to.

To manage that so I think that.

We have darling, helping us and looking at.

Our margin modeling.

And we believe we're really really well positioned.

And if we get any help at all from <unk>.

From the external market from.

It'd either either steepening or absolute rising in the yield curve will really will really be in good shape.

Okay.

I appreciate the color there and then was also curious about fee income, which was obviously a strike in the quarter and.

And <unk>.

China in particular has done really well in the past year I know mortgage is somewhat difficult to predict but could you maybe talk about the outlook for China, and then maybe the SBA operation and how you see that playing out in 'twenty two.

We'll let Chris Christie, who has been wonderful in terms of taking.

Taking on the management of those specialty businesses he has.

Working diligently with each of the managers in those areas and just done a wonderful job and we will let him.

Give you a little additional color on that.

We avoid giving specific.

Guidance on future.

<unk> expectations.

Because theres a lot of there's a lot of variables I will say, particularly with China is that <unk>.

Demand for what we produce there is very high.

Getting outsized premiums as a result of that and I would expect it to continue at the average levels we've seen over the last.

Two or three quarters.

For the next two or three quarters.

Having said that our government guaranteed SBA lending is getting a firm footing as they've gotten past PPP.

I expect that to increase over time, I don't want to give specific guidance on that right now.

Okay.

I appreciate all the color.

Thanks, Brett.

Our next question coming from the line of Jennifer <unk> with <unk> Securities. Your line is open.

Hey, this is Brandon King golfer Ginny good morning.

Hey, good morning, Brandon.

Hey.

So core loan growth was pretty strong in the quarter, although a bit softer than last quarter, but I just wanted to get more color on.

What are your customers are feeling as far as their investment decisions how utilization rates are trending in your outlook for loan growth <unk> potentially in 'twenty two.

I'd say that.

Loan growth is steady our pipeline has over $400 million and we actually had we do an all employee call.

The night before earnings So we did it last night and we do sales awards and it was really.

Fun to reflect on what was said because selling.

Sydney names were cited in all of our markets and it didn't used to be that way in cap star.

Cap Star when I came was really built on for people and so on.

Strong pipeline across a lot of people Chattanooga will only add to that.

And.

You know I'm, not really a big guidance.

Person because you seem to me to always get hurt more than it helps you I'd, rather rather just perform and post numbers.

And be someone that debt is viewed that while they do with what he says and so I think we're building a capable organic team I got to think about.

<unk> had a role in the impact of Chattanooga, but the core team we had I feel good that we're moving towards a solid 8% organic and Tennessee, No participations, no shared national credit reasonable margins reasonable credit risk.

Going forward, obviously, Chattanooga will add on top of that so I got to play with that math and look at it a little bit but I'm just really excited with how we've transformed again I'd say on the call list here.

Some of the folks that have called in and.

There's no secret that cap star is a bank that historically had not perform.

And it was up to 32 or 33% shared national credits at one time were at one 9%.

<unk> is a new company, it's a new day some of the banks in town like too.

Still talk about the old days and talk about cap star in that light Cat star as a new company.

And we've got a lot of great stuff going.

Real excited about the loan outlook.

Okay, great color and just some color there.

And then also for expenses so it looks like expense control was pretty good in the quarter.

And I'm wondering how confident you are in controlling the expense base, especially in the 2022 with obviously the Chattanooga.

On an expansion in the hiring pipeline I just wanted to get a sense of where you think expenses will shake out on the moon.

Medium term.

Brent Brandon go back.

Pretty good expenses were expenses were really good.

And also think about from.

From our perspective, because we've done so well this year to date.

Also in the third quarter, we had some catch up in a.

Across our incentive comp and our mortgage comp incentive accruals. So not only did we not only did we control.

On a bank only efficiency ratio of 50%, but included in that 50% or some additional additional things now if you look into the details.

That are in the deck of the.

Noninterest expenses.

We really believe we've got the merger the merger.

All of the two banks behind US all those conversion costs that happened in the end of last year and early this year those are behind US and then we're really we're really focused every month on.

Disciplined and strong expense control and.

So thats.

<unk>.

<unk> that is paying off if you look at that efficiency ratio has gone from.

From mid <unk> down to the high <unk> and now trending are trending very favorably so.

Pretty good.

As you know.

It was kind of an understatement from my perspective.

Well, here's what I would add to that.

It's hard in this environment right like we're very proud of our mortgage division mortgage is an inefficient business, but it doesn't use a lot of capital.

So I guess the way I think about it is I'm trying to build a great company and I.

Want to build one of the great banks in the industry and.

Hey, Brian I would love to see our core efficiency ratio, which we define as excluding mortgage operate in the 50% to 55% consistently.

When you roll in a project like Chattanooga, that's an investment and so I'm sure that ratio may be altered a little bit. The next 12 months, because you're making a.

So investment, but but I just when you think about cap star. Our goal we have four key drivers that something Tom Garrett taught me at National Commerce, one of them is the efficiency ratio and our goal is less than 55%. So that's my focus and I'll also say that when I joined I rolled out that I wanted to get our core pretax pre provision to assets.

Big ins to 180, historically <unk> been about 140, many people sort of chuckled and commented that that's going to have good lock that's going to take some time, we've made tremendous progress and it's elevated this quarter, obviously with PPP and others, but we're getting real close to a consistent core repeatable 180. So those are the.

<unk> I'm looking for is that 50% to 55% efficiency in our core pretax pre provision to assets that would be 180 or better.

Repeatable.

Okay.

Thanks for all the color. Thank you for answering my questions Charlie Brennan.

And our next.

Kind of coming from the line of Catherine Mealor with Keybanc. Your line is open.

Thanks, Good morning.

Hey, good morning.

I want to circle back on the margin in the quarter were up which is great to see and I don't think I've seen anywhere else and so I just wanted to get a little bit of color on what's driving that.

Questionnaire of many new loan production is coming on just to kind of get a sense as to how sustainable maybe Gary. Thanks.

Well I mean, we're having loan production again, Dennis can talk about the actual yields but as I said, we had our all employee cost yesterday and Ken Web was given out the awards and it.

He must have mentioned 10.

10 names and really.

I mean, we're having loan production all over the counties and.

In Middle Tennessee and in.

The Athens market in Knoxville, and just all over in the loan yields out of Manchester in Waynesboro are fabulous so.

I'd say, it's very balanced.

On the production end.

And if Chris or Chris you want add something.

Going on if I, just look and say the last.

30 to 60 days Catherine are going on yield on larger transactions has been in the three seventies and in smaller transactions thats been in the $4 50.

And we're being disciplined it hasn't been a lot.

Lot Catherine, but we have a very disciplined pricing and we pass on credits in our loan growth could have been higher and.

I'd say one of our bankers Lee Hunter is one of the best I've ever worked at where he is very disciplined and he will say hey, I. Just don't think we should go to that rate.

And so our loan growth could have been a lot more.

Sure, we see people doing loans at $3, 25, or $3 10, or whatever and there are certain spreads we're looking for over the matched <unk> curve that we price too.

If we don't get that spread will just say hey, you got a great deal customer I'd go with it.

Gratulation.

Yeah.

It's really helpful. Thanks, and then unexpected I appreciate you don't want to give specific guidance, but maybe just one one line item with the data processing.

And software line, which looked like it was down and just wanted to see if that's a line that should kind of bounce back to where we saw it last quarter or if that's a better run rate it should.

Be more at this run rate a lot of that was related to the processing fees related to PPP, where we used a third party system to administer that so.

It should be more to a more normalized level now.

Okay, great. Thanks, so much congrats on the quarter.

Thank you.

Yeah.

Yes.

And that's where my boyfriend gentlemen to ask a question. Please press star one.

Next question coming from the line off but he Strickland with Janney Montgomery Your line is open.

Hey, good morning.

Good morning, Eddie.

Just wanted to ask.

Back to the expense.

One of the questions here.

You guys held.

Salaries are pretty good a pretty good number do you are you experiencing any of the kind of the same wage inflation.

Pressures that some of the bigger banks are saying.

I would say give and take.

It's a big market out there I mean, I I welcomed five to seven new employees. This week I mean, theres a lot of people were.

We're all living in an unusual environment right you go to restaurants, and they're still closed early in all this kind of stuff, we're facing but theres still a lot of good hard working folks that are wanting to come to work.

And.

We benchmark to industry averages in market averages and we pay we want to pay competitive, but we have a lot of interest in working for our company and so I would say some but there's.

I think it can be managed.

Work.

Gotcha and.

Then.

I know you said buybacks are going to be more opportunistic just given where the stocks trading today, but.

Does it moves into Chattanooga make any other capital deployment options are less likely or whether it's a dividend increase down the road or something like that.

Or does this is this just kind of more of a piece of the overall strategy, where you kind of walk and talk at the same time.

No I think I think it's like I said before Theyre, all tools right and and I think we've said this before but you know.

The last 18 months have been an unusual period so.

We just went through our.

Our strategic plan and this time last year it was so different.

We're saying gosh, it's going to be three years of of everybody.

Everybody was saying rates, we're going to stay low for five years.

And we thought there's really three years of higher charge offs and provision expense. The plan is the outlook so different and so.

So frankly.

Annually, we would have raised the dividend higher even this past spring, but want to be conservative and make sure. We're out of this I think we've communicated before we'd like to see our payout ratio closer to 20%. So I think youll see balance tools.

So you know probably should anticipate a another dividend increase.

This coming spring and we working at closer to 20% and so I'd just say a balanced aspect I think we'll probably still keep that a little lower than industry averages because I think we have more growth opportunities than most but I recognize we've got a certain amount of retail shareholders.

You're running a company you've got many constituents.

<unk> institutional shareholders, largely would prefer buybacks because of tax consequences retail shareholders like to have a little bit of cash flow.

So we see opportunities I would say buybacks are the ones that I would like to really reserve for opportunistic because I just think we have such great investment opportunity.

<unk> got it makes sense to me thanks for taking my questions and congrats on a great quarter guys. Thanks.

Thanks Patty.

Okay.

Our next question coming from the line of William Wallace with Raymond James Your line is open.

Thanks, Good morning, guys, Hey, Raleigh.

Most of my questions have been asked and answered, but I did wanted to just circle back on Chattanooga, and then some of the commentary around maybe even more teams.

The financials that you.

Lay out in the deck.

And your cost assumptions are you assuming any branch.

Branch support in Chattanooga.

Absolutely. So the model, we want to do I admire a lot of banks I. Just you know I was fortunate to be trained in two of the best really ever.

And I admire pinnacle in our market I admire service first down the road and.

Art Seaver.

Over at Southern first so I'm always studying and.

We've been very successful in Knoxville.

<unk>.

Sort of mirroring some of their successes and so in Knoxville, We've got a very nice commercial office.

And it is staffed with commercial relationship managers.

And then sort.

Sort of office team leader or a client service executive and then a portfolio manager so as we put out in our release.

This team right now as of today, they will start with seven people in the market physically and that will be five commercial relationship managers, we really have a single point of contact.

<unk> model, where they will bank, an operating company and the owner or a real estate investor.

There'll be a office leader or a.

Client service executive there that we really don't anticipate a lot of walk in traffic like a branch actually would prefer not to have that.

And so no.

No Teller line no ATM no drive thru.

And.

And those folks would would be assisted and serviced by them and then a portfolio manager.

Here in Nashville, we added two additional members to our loan operations team to help handle.

Our volume in <unk>.

And really you know I've learned a lot yes, just service first it's been a great success in here in Tennessee.

You came here and stayed here a week you would never know where they are because they don't have any branch signage and they've been a tremendous success they've done a great job and.

And they've got about 1 billion in loans of 700 million in deposits with no branch. So we don't expect at this time in Knoxville or Chattanooga to have a lot of offices really to have a commercial office.

With the best talent in town.

Okay. That's very helpful. Thank you.

And then if I look at that.

Your loan mix and pinnacle's bottlenecks. The mixes are relatively similar is the chattanooga market, bringing anything different or.

As that portfolio kind of similar in composition.

As to what you see on.

On your own balance sheet, similar similar and again I'm just looking at the names are on this call right now.

Many of these have provided me great counsel since I joined and every bank I've joined has had opportunity and challenges.

I hope he won't get Mad at me mentioning but one of the things I'm proudest of.

<unk> is one of the first people I met with when I got here with Sheri King at Bank funds.

And he was pretty Frank and direct and I didn't know a lot about cap star when I joined and he said Tim you got your hands full and you Gotta get this place going or you shouldn't really think about should this place be sold.

And I'm real proud.

I got to say I'm real proud that Jerry is on the phone today and I appreciate that Gerry I Hope you won't get Mad at me for mentioned in that but that's what this team is trying to do and this is a new company and so what I'd say to answer your question is.

We had some people that were making their living off of doing shared national credits and getting incentives, we don't have that anymore.

And so this Chattanooga team is Tennessee based loans not participations not shared national credits operating companies Investor Real estate collateral banking the owner. So so I think it's consistent with the new cap star and.

We're just really couldnt be more excited to have them join.

And Wally that's okay, we're trying to take that discipline and apply it across all of our markets and across all of our businesses. So on the expense side the pricing side. The administration side and of course on the revenue side as Tim said, but disciplined and focused and really trying to.

I'll provide a.

A really high performing bank that all of our constituents will be proud to be associated with.

Yeah.

Okay. Thank you for that.

Tim I don't know who it is.

Jerry keen guidance, but might have to follow up with you offline to get an introduction.

Hi, Jerry.

My last question is.

My last question you talked about.

In discussions with.

Three three different teams in three new markets and then.

During the Q&A I.

Ken I heard you say that.

Youre not sure.

I have three new teams, but you might consider too, but then it sounded like you were maybe saying that that you would want to wait a year I just could you clarify oxycontin.

So there are three right now that there are different levels of discussion.

And.

I would not take on four right I would not take on those three and Chattanooga, Let me just be too much.

Earnings too much it'd be a lot for our team, but I do think it will be interesting to try and get to get a second one over the next year and these things take time so.

I don't know if the second one would.

Thought I realize in a month I don't know if it'll take six more months.

What you don't want to do I work for one company, it's the only one.

That the gentleman his strategic focus was filling in a powerpoint map.

And so we would say gosh, there's a hole in Savannah, and we're gonna go to Savannah, doggone, it and it.

Good material, who we hire.

I don't think that was a great strategy, because you don't necessarily get the best team. So we're looking for great people, we are going to build a great company and we are looking for great people and you've got to wait for great people come to you and it's really a situation where you've got to be prepared when they are frustrated.

And when they are frustrated you have got to act because if you don't act, they're going to go somewhere else. So I would just say that my comment on over the year next year as I think it would be neat to add a second one over the next year and I just don't know if that will happen next week or in six months, because it's it's when their frustrated and theyre ready to pull the.

It doesn't matter and as cap star doing its homework to make sure that they will produce what they say they can produce.

Okay, I think I understand now I thought you were talking about teams and new markets not building on teams and the team in Chattanooga, So gotcha.

And then last question.

The trigger.

Just as it relates to the Chattanooga team is there in your view is there a good fee income opportunity.

Outside of just the lending metrics, which I'm, assuming is what youre, putting in the slide deck, but is there opportunity.

And mortgage or Tri net or it does.

It's really market specific for you guys.

I think long term I think the most immediate right. If you think about it just mathematically. The most immediate is we've got $3 million to $400 million of excess liquidity like many companies and so if their primary focus can be loans.

Let's just say they can put on loans at 375, we've got that.

Not necessarily the first $300 million they do.

We've got that money invested at 17 basis points and that's the excess liquidity. So just the first $300 million and academically you could take that and if they do it at $3 75, I mean that those first are going to earn $3 50 net.

And that's not.

Normal usually usually on an FTP spread you may get 200 basis points to 250 basis points. So we've got an unusual profitability lift that with the power of this team now you've got provision write the first you've got to set aside one a quarter on every dollar they do but that's a sort.

A one time expense. So I'd say number one is the impact from interest income number one number two would probably be deposit service charges related to any company.

And then number three I think overtime is figuring out how to expand our mortgage our mortgage to date is a very.

Very dominant I don't know if we shared this but.

The NBA comes out with mortgage volume by Metro area every month and the last month that.

That are gentlemen, shared with me was July and we were number four in the entire Nashville Metro area and that's not.

Where you're headquartered I mean that includes bank of America that includes Wells Fargo. So just think about every company in Nashville, everyone. We have U S Bank regions. We've got true is we got bank of America, We've got whoever.

And then for number one was the quick and loans.

Number two was loan depot number three was pinnacle and they do an awesome job. They are a great company and then we were number four so so our company is very formidable but it's historically been right here. So I think longer term, that's an opportunity and the last comment I'll make.

Is knoxville.

<unk> has done a great job I think Chris would agree on referring volume to SBA. So there could be some SBA lift if this chattanooga team could refer some volume there, but Chris do you want to add anything I would say, we're well, we're well poised to support that market with our government guaranteed activities based on where we have people placed.

And I would expect opportunity to come out of that.

But it just priority I think the immediate is let's get the loans on the books to get that money out of the 17 basis points into the 374%.

That's step one let's get treasury fees and then let's build these other product lines into there.

Into their mix.

Yeah.

Thank you very much appreciate your time I'll step out.

Thank you all.

I'm showing no further questions at this time I would now like to turn the call back over to Mr. Tim schools for closing remarks.

Yeah, I don't really.

Have any closing remarks, I just want to really commend our team internally I've invited five or six of them in the room today here to just hear how this works and you know where we have a great company lot of bricks laid before us and we're taking it to a new level, just really and thankful and grateful for my teammates.

And I appreciate everybody that called on on this call today, it's a growing list in some great.

Names on here and we really appreciate the support we're just we're working hard every day for everybody. So everybody have a great weekend. Thank you.

Ladies and gentlemen that does some call conference call today. Thank you for your participation you may now disconnect.

Okay.

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Good morning, everyone and welcome to Capstone financial Holdings' third quarter 2021 earnings Conference call.

Hosting the call today from cap Star are Tim schools, President and Chief Executive Officer, Dennis <unk>, Chief Financial Officer.

And Christie Ju credit policy Officer. Please note that today's call is being recorded replay of the call and the earnings release and presentation materials will be available on the Investor Relations page of the company.

But at cap Star Bank Dot com.

During this presentation, we may make comments, which constitute forward looking statements within the meaning of the federal Securities law.

All forward looking statements are subject to risks and also Steve and all other factors stomach cause the actual results and performance or achievements.

Capstone.

What to differ materially from those expressed or implied by such forward looking statements.

Listeners are cautioned not to place undue reliance on forward looking statements.

I wanted to detailed description of these and other risks uncertainties and factors are contained in <unk> public filings with the Securities and Exchange Commission.

That starts.

Except as otherwise required by applicable law cap star disclaims any obligation to update or revise any forward looking statements made during this presentation.

We'd also refer you to page two of the presentation slides well disclaimers regarding forward looking statements non-GAAP financial.

<unk>.

And other information.

With that I will now turn the presentation over to Tim schools, <unk>, President and Chief Executive Officer.

Good morning, and thank you for participating on our call. We appreciate the opportunity to review our results with you in the third quarter, we reported earnings.

A measure of 59 cents and an annualized return on average tangible equity of 16 point to 8%.

Our Aro TCE is on top of a CET one ratio that is now essentially 14%.

I'm, especially proud of this quarter as you walk down the income statement every single.

Per share aspect of the bank executed, which is evidenced by the positive trends of our four key drivers and our pretax pre provision to asset ratio.

Stabilized net interest margin, excluding PPP loan growth strong performance in deposit service charges in each of our specialty banking businesses.

<unk> expense.

Expense discipline as we become a more productivity driven company.

And focused management of our tax expenses I, just can't say enough about our team equally exciting we announced our expansion into Chattanooga with the addition of nine highly skilled banking professionals, who are leaders in.

<unk> market.

As we've communicated one of our four strategic focus is the past 24 months is putting our excess equity to work.

Our preference is to invest in the following order first organically such as Knoxville and now Chattanooga.

Second acquisitions, such as Athens, Manchester.

In that matter in Waynesboro.

Third opportunistic buybacks and fourth dividends.

Each play roles in our available tools that we have terrific investment opportunities in our core business that will remain our priority.

Chattanooga is a fabulous market in one of three.

Chest, Tennessee, whose population and household income growth are faster than national averages.

<unk> is blessed to operate in one of the best states across our nation to do business and live.

And now cap Star is located in the three fastest growing markets. We have included a slide to share a little bit about.

<unk> got it as a great destination, if you've not visited with one of the nation's first aquariums rock city, where you can see seven states on a clear day, the Chattanooga Choo Choo hotel and as we've illustrated it is home to an important aspect of the southern lifestyle the Moon pie.

Chat and a strong team led by Brian Paris, and six of his former teammates they.

We've worked together a long time and are extremely connected in the market. They are a true team a dream team. We provided some of what we feel the strategic and financial rationale are while there are a lot of variables we feel that this will.

This is a meaningful impact on our financials over the next five years.

Of course, it comes with startup costs, but the level of work and risk compared to an acquisition is uncompassionate bull.

Before turning it over to Dennis I'll share that we have similar conversations underway in three additional markets.

And the response is very positive highly skilled employees are looking for the next bank as their cell or become larger to the extent they feel it is harder to serve their customer or no longer as funds.

Cap stars capabilities size responsiveness and flexibility are proving.

<unk> active in the case of Chattanooga, They actually reached out to US earlier. This summer as it is becoming a more frequent occurrence.

Dennis I'll now turn it over to you to cover the financial results for the quarter.

Thank you Tim and good morning, everyone on slide 11 of our deck Youll.

Youll see that our net interest.

Income was $23 million for the quarter consistent with the second quarter. The net interest margin was $3 one 2% for the quarter down 14 basis points, primarily due to record levels of deposits and slightly less loan PPP fees in the third quarter, our adjusted NIM remains.

Remains stable at $3 36 for the quarter. The adjusted NIM includes the impact of excess deposits, which adversely impacted the margin by 40 basis points and PPP loan forgiveness phase, which favorably impacted the NIM by 16 basis points net interest income continued to benefit in the quarter.

Order from the shift of our earning assets into additional investments as well as continued strong loan growth on.

On slide 12, our average deposits of $2 7 billion for the quarter were at a record level average DDA and now deposits were also at record levels for the quarter and increased 8%.

$8 million from the second quarter, our core markets continue to hold large levels of deposits consistent with the prior several quarters deposit cost continued to decline in the third quarter and were two basis points lower as we continue to lower deposit rates and benefit from higher noninterest bearing deposits.

On slide 13 total loans less.

Less PPP, we're at record levels at quarter end and grew $42 million or nine 4% annualized in the third quarter. We continued to build out the Knoxville market added some additional bankers in middle and East, Tennessee and continued to strengthen our loan pipelines our loan pipelines continue at record levels and remained strong.

All of our markets.

Total PPP loans were $64 million at the end of the quarter down $46 million from the second quarter total LNR and PPP fees at the end of the quarter totaled $2 2 million.

Our loan yields remained strong and were $4 40.

1% for the quarter with loan coupons up six basis points in the quarter to four 3%.

On slide 14, non interest income was extremely strong in the third quarter with record levels of revenue.

Deposit service charges interchange in debit transaction fees and.

In wealth management Tri net had a tremendous quarter with almost $2 million in revenue SBA had a nice quarter with $911000 in fees and mortgage revenues were also up for the quarter and continued to see healthy spreads offset slightly by volumes.

Slide 15 shows our noninterest expenses, which were $18 4 million for the quarter, which resulted in an operating efficiency ratio of 53, 6% our core bank.

Which excludes mortgage efficiency ratio was 55, 8%, which is a record.

Within salaries and employee benefits and incentive expenses were increased during the quarter for mortgage and other incentive comp plans. So even with these increased incentives during the quarter our efficiency ratio was at a record low.

With that Chris I'll turn it over to you to discuss our credit position.

Dennis the good news.

It can be brief turning to page 17, we reaffirm and underscore our continued commitment to our community banking strategy emphasizing growth through in market relationship development with this we also remain committed to a robust risk management on a forward looking basis with external validation and periodic stress testing by partnering.

With quality external firms to assist us objectively.

Shared national credits continue to reduce and growth continues to be driven by end market relationship development.

Yeah.

At this point, let me step aside and give you a little bit more detail into our diminishing level of borrowers on pandemic deferrals borrowers.

Borrowers with pandemic deferrals continue to resume making normal payments.

Payments as expected at this point loans on deferral totaled $33 4 million to five borrowers 85% of this total that is $29 million or with three borrowers that are well situated well located new hotel projects in Nashville, having.

Having both good capital and good sponsorship.

Port. These three are on principal only deferrals with the borrowers continuing to pay interest on a timely basis. Each of these is scheduled to reduce full payments in January I'm, sorry scheduled to resume full payments in January and we have every expectation to believe that these payments will in fact resume as scheduled.

The remaining two.

Two loans are SBA guaranteed transactions, where we granted the deferral in recent months pursuant to the SBA standard operating procedures. One of these is on a principal only deferral and the other is a full deferral of P&I principal and interest.

But the balance sheet exposure that we have carries a 75%.

<unk> guarantee.

Also on this page note that.

The trend in criticized and classified loan levels continues to improve from pandemic highs attained a year ago, while not evident in this particular chart. It is important to note that our level of criticized and classified loans has nearly returned to pre pandemic levels of approximately two 5% and one 4% respectively consistent.

With these low levels of criticized and classified assets. Our net charge offs remain at very low levels. Given these positive quality trends and low loss results as you see on page 19, our assessment did not require a loan loss provision in the third quarter and we believe that our level of reserves.

On multiple basis of presentation.

Remain well situated to cover any lingering residues that we may still experience as a result of the pandemic.

With that.

I'll turn it back over to you Tim Okay.

Yeah.

Thanks, Chris I Hope you can see the employees of cap star are working very hard and producing winning results.

I am very excited about.

About the future as I stated we are blessed to have been born where we were but that we.

We are supplemented by one of the youngest and most experienced management teams in the industry.

A closing comment for those of you that motto and project financials. Our outlook is very positive and strong however be mindful next year is a trans.

<unk> year for the industry.

US and others are working hard to pull a PPP fees into this year, which will not recur. It is uncertain. If the mortgage industry will continue its performance and provision expense would be expected to recur. After the release of reserves. This fall deriving from the pandemic.

Operator, we're now.

Now happy to answer questions. Thank you everyone for your time this morning.

Thank you ladies and gentlemen, after Monotask question do you really need to press. The Star then the one key on your Touchtone telephone.

I have question request the pound key.

Please standby, while we compile the Q&A roster.

Yeah.

My first question coming from the line of Stephen Scouten with.

Your line is open.

Hey, good morning, everyone.

Hey, Steven.

A lot going on all of it sounds very encouraging so that's good I'm wondering if we can talk a little bit more about the maybe the Chattanooga team.

Similar opportunity set to Knoxville.

At this point in time.

I would say it would be larger Knoxville is a super team. It was really even to this point was three commercial relationship managers.

They began in February of 'twenty, the months of the pandemic and worked out of their houses through November so.

The fourth commercial relationship manager they didn't start till about April of this year. So this is five that are starting day, one there'll be in an office.

Yes, we're still in the pandemic I don't want to.

Minimize that but it's not like it was last summer where it was locked down.

So I think a bigger team.

And not the same situation. So in total they've got a close to $600 million portfolio today, when you add them all up that doesn't all walk over day, one but.

We certainly expect that on average not everyone and every year is different.

Nearly generally.

Produce between $20 million to $25 million.

And we're hopeful that will go towards $500 million to $600 million by the end of that year five.

Theres just a lot of variables to I mean, they are meeting actually this morning, Theyre, having breakfast with one of the top bankers in Chattanooga had a different bank.

So we're.

Were just real excited and we put in some of the modeling we looked at to see if it was a good use we're trying to way you can always just go I could buy $30 million of stock back today, if we wanted to and but we're trying to weigh that versus other investment alternatives and we just thought this was a slam dunk that if you put reasonable assumptions in there it.

Invest in our business in a high growth market and just one of the best teams in Chattanooga.

Steven.

Age seven there we gave you at.

At a high level, a little bit of our thinking around.

From an expense standpoint in terms of how long it would take for that team.

To breakeven and those kinds of things so happy to talk offline.

Around that but.

Very very good economics.

And this kind of lift out.

Sure sure and then Tim I think you noted three additional markets, where you might be.

We're looking to add teams as well.

With all of those be within Tennessee, or would you guys look at other msas kind of in and around your existing markets.

Well a couple of things.

I do not intend to take on three more and have four but I do think that the next 18.

In months, it would be positive with our excess equity.

And almost now a year past the FCB conversion and the team is rested a little bit.

Do think it'd be very positive to try and take them to and it's a trade off because I know a lot of public investors are quarter over quarter.

We're trying to build a great bank for the long term and so it's like anything it comes with a little more dilution in year, one and then an acquisition, but it's much more accretive than much lower risk. So I'd say I'd love to have two and Theres three other markets generally were focused on Tennessee, that's our main priority, but ive mentioned to some others.

Others that the way I'm thinking about it today.

Tennessee is an odd state I guess, many states are when you think of them graphically and that it's a long rectangle and so where we are located from a management bandwidth. If you sort of do a three hour radius.

If you just go north.

Or that sort of starts at Louisville would cover Lexington would cover them.

Knoxville, Chattanooga, Huntsville, Birmingham up to Memphis and back to Louisville, So I would say that's what we're spending 99% of our time there if an interesting one came up somewhere else, we may consider it but we're not doing.

Outbound calls outside that region.

And on this one this was an inbound call. This was not an outbound call from us.

Got it that's helpful. Okay, and then I think this is kind of answers. The question, but would you expect the buyback to continue to be kind of.

Don't want to call. It on hold I mean, obviously, it's out there usable but.

It seems like you've got in your opinion better uses of capital to invest in future organic growth.

Dude.

Yes, I do and everybody looks at that differently I mean, obviously.

There's a lot of smart people in this industry one person I've spent a lot of time with is Julian add D at capital research in San Francisco.

Taught me a lot and you can do a lot of stuff to increase EPS, but it's not really a good return on capital and so I'm just trying to be a great stewards of the shareholder and I know there's on the there's an IRR drag the longer we hold it but I'm going to do my best to rapidly deploy that in a low.

Low risk prudent way.

So that's our focus.

And he's saying, okay, well, that's great I'll, let somebody else hop and thanks for the color and congrats on the quarter and the new team.

Okay. Thanks Steven.

Our next question coming from the line of Brad Robinson with Hockey Group. Your line is open.

Hey, good morning, guys.

Brett Hi, Brett.

Congrats on the quarter and the new hires that sounds great.

Wanted to talk about the margin Dennis can we I.

I guess first from a PTC perspective, how much do you guys have left in and fees related to that and the core margins held steady, but obviously, it's been impacted by the liquidity can you maybe.

Talk about the deployment of that the pace of it.

And maybe the expectations for the core margin.

Versus the stated one over the next few quarters.

Yes, I think I think Steven.

We have I mentioned, we have $2 2 million of PPP fees remaining in the <unk>.

At the end.

For the quarter.

We're doing our.

Best to try to.

Get all of those forgiven by the end of the year. So we'll see how that goes.

Some of it will probably.

<unk>.

Carryover into the new year so.

And then.

Then really this particular quarter.

We had a significant.

The increase in the average deposits.

That that were on hand during the quarter so that negatively.

Impacted the margin.

The pure core.

Core margin from from the last.

From the second quarter, but really looking looking out we think it's <unk>.

Definitely.

It's definitely trough out in our opinion.

And we've been very very conservative in our view of what to do with.

With the excess liquidity and.

And have not really loaded loaded up and taken on risk we want to keep the.

The balance sheet at a more neutral level and so we have we have purposely not.

<unk> continued.

Continued to.

Rich.

Really grow the investment portfolio, we think.

And feel and believe that loan growth in Nashville loan growth in Knoxville, and now in Chattanooga and potentially other places.

The better.

Is the better way to to.

Manage that so I think that.

We have darling, helping us and looking at.

Our margin modeling.

And we believe we are really really well positioned.

And if we get any help at all from <unk>.

From the external market from the fed.

Either steepening or absolute rising in the yield curve will really will really be in good shape.

Okay.

I appreciate the color there and then was also curious about fee income, which was obviously a strengthened in the quarter and.

China in particular has done really well in the past year I know mortgage is somewhat difficult to predict but could you maybe talk about the outlook for China.

And then maybe the SBA operation and how you see that playing out in 'twenty two.

Well I will let Chris.

Chris Tietz, who has been wonderful in terms of <unk>.

Taking.

On the management of those specialty businesses he has.

Working diligently with each of the managers in those areas.

<unk> done a wonderful job and we'll let him.

Give you a little additional color on that Brett.

Brent we are.

Avoid giving specific guidance on future.

Expectations.

Because theres a lot of there's a lot of variables I will say, particularly with Tri net is that <unk>.

Demand for what we produce there is very high.

Our getting outsized premiums as a result of that and I would expect it to continue at the average levels we've seen over the last.

Two or three quarters for the next two or three quarters.

Having said that our government guaranteed SBA lending.

Is getting a firm footing as they've gotten past PPP and I.

That to increase over time, I don't want to give specific guidance on that right now.

Okay Fair.

Fair enough appreciate all the color.

Yes.

Thanks, Brett.

Our next question coming from the line of Jennifer <unk> with <unk> Securities. Your line is open.

Hey, this is Brandon King on for Jamie Good morning.

Hey, good morning, Brandon.

So core loan growth was pretty strong in the quarter, although a bit softer than last quarter, but I just wanted to get more color on.

What are your customers are feeling like as far as their investment decisions how utilization rates are trending in your outlook for loan growth in <unk> and potentially in 'twenty two.

I'd say that I mean loan growth is steady our pipeline has over 400 million and we actually had we do an all employee call.

The night before earnings So we did it last night and we do sales awards and it was really.

Fun to reflect on what was said because some.

Yes, any names were cited in all of our markets and it didn't used to be that way in cap star.

Cap Star when I came was really built on for people and so on.

Strong pipeline across a lot of people Chattanooga will only add to that.

And.

You know I'm, not really a big guidance.

So nothing because you seem to me to always get hurt more than it helps you I'd, rather rather just perform and post numbers in and be someone that debt is viewed that while they do with it what he says and so I think we're building a capable organic team I got to think about.

How to roll and the impact of Chattanooga, but the core team we had I feel good that we're moving towards a solid 8% organic and Tennessee, No participations, no shared national credit reasonable margins reasonable credit risk.

The folks that have called in and.

There is no secret that cap star is a bank that historically had not performed.

And it was up to 32 or 33% shared national credits at one time were at one 9%.

<unk> is a new company, it's a new day some of the banks in town like too.

Still talk about the old days and talk about cap star in that light cat start as a new company.

And we've got a lot of great stuff going.

One on in real excited about the loan outlook.

Okay, great color.

There.

And then also for expenses so it looks like expense control was pretty good in the quarter.

I'm wondering how confident you are in controlling the expense base, especially in the 2022.

Obviously the Chattanooga.

The expansion in the hiring pipeline I just wanted to get a sense of where you think expenses will shake out in the near to medium term.

Brent Brandon go back.

Pretty good expenses were expenses were really good.

And also think about from.

From our perspective, because we've done so well this year to date.

Also in the third quarter, we had some catch up in a.

Across our incentive comp and our mortgage comp incentive accruals. So not only did we not only did we control.

All on a bank only efficiency ratio of 50%, but included in that 50%, where some additional additional things now if you look into the details.

That are in the deck of the.

Noninterest expenses.

We really believe we've got the merger the merger.

<unk> of the two banks behind US all those conversion costs that happened in the end of last year and early this year those are behind US and then we're really we're really focused every month on.

Disciplined and strong expense control.

So thats.

Think that.

That is paying off if you look at that efficiency ratio has gone from.

From mid <unk> down to the high <unk> and now trending are trending very favorably so.

Pretty good.

As you know it.

It's kind of an understatement from my perspective.

Hey, Brian Here's what I'd add to that.

It's hard in this environment right like we're very proud of our mortgage division mortgage is an inefficient business, but it doesn't use a lot of capital.

So I guess the way I think about it is I'm trying to build a great company and I want to build one of the great banks in the industry.

I would love to see our core efficiency ratio, which we define as excluding mortgage operate in the 50% to 55% consistently.

When you roll in a project like Chattanooga, that's an investment and so I'm sure that ratio may be altered a little bit. The next 12 months, because you're making a.

So I'd estimate, but but I just when you think about cap star. Our goal we have four key drivers that something Tom Garrett taught me at National Commerce, one of them is the efficiency ratio and our goal is less than 55%. So that's my focus and I'll also say that when I joined I rolled out that I wanted to get our core pre tax pre provision to assets.

Big enough to 180, historically cap star has been about 140, many people sort of chuckled and commented that that's going to have good lock that's going to take some time, we've made tremendous progress and it's elevated this quarter, obviously with PPP and others, but we're getting real close to a consistent core repeatable 180. So those are the.

Asset at tricks I'm looking for is a $50 to 55% efficiency in our core pretax pre provision to assets that would be 180 or better.

Repeatable.

Okay.

Thanks for all the color. Thank you for answering my questions sure. Thanks Brandon.

And our next.

Kind of coming from the line of Catherine Mealor with <unk>. Your line is open.

Thanks, Good morning.

Hey, good morning.

I want to circle back on the margin this.

This quarter where opportunity is.

Great to see.

I think I've seen anywhere else and they just wanted to get a little bit of color on what's driving that.

Questionnaire, maybe new loan production is coming on just to kind of get a sense as to how sustainable that is and where you maybe karen. Thanks.

Well I mean, we're having loan production again, Dennis can talk about the actual yields but as I said, we had our all employee cost shows today and Ken Web was giving out the awards and it.

He must have mentioned 10.

10 names and really.

I mean, we're having loan production all over the counties and.

In middle, Tennessee, and and.

The Athens market in Knoxville, and just all over in the loan yields out of Manchester in Waynesboro are fabulous so.

I'd say, it's very balanced.

On the production.

And if Chris or Chris you want add something.

Going on if I, just look and say the last.

30 to 60 days Catherine are going on yield on larger transactions has been in the three seventies and in smaller transactions, it's been in the $4 50.

And we're being disciplined it hasn't been a lot.

Catherine, but we have a very disciplined pricing and we pass on credits in our loan growth could have been higher and.

I'd say one of our our bankers Lee Hunter is one of the best I've ever worked at where he is very disciplined and he will say hey, I. Just don't think we should go to that rate.

And so our loan growth could have been a lot more.

Sure, we see people doing loans at $3, 25, or $3 10, or whatever and there are certain spreads we're looking for over the matched <unk> curve that we price too and if.

If we don't get that spread will just say hey, you got a great deal customer I'd go with it.

Congratulations.

Yeah.

A lot can still helpful. Thanks, and then on expenses I. Appreciate you don't want to give specific guidance, but maybe just one line item with the data processing.

And software line, we still think it went down and just wanted to see if that's a line that you can kind of bounce back to where we thought last quarter, whereas if that's a better run rate.

It should.

Be more at this run rate a lot of that was related to the processing fees related to PPP, where we used a third party system to administer that so.

It should be more to a more normalized level now.

Okay, great. Thanks, so much congrats on the corner.

Okay.

Thank you.

And as a reminder, ladies and gentlemen ask a question. Please press star one.

Next question coming from the line of that is struggling with Janney Montgomery. Your line is open.

Hey, good morning.

One of the 30.

Just wanted to ask stick it back to the expense.

Line of questions here.

You guys.

<unk> held salaries in a pretty good a pretty good number do you are you experiencing any of the kind of the same wage inflation pressure.

Pressures that some of the bigger banks are saying.

I would say given take it.

It's a big market out there I mean, I I welcomed five to seven new employees. This week I mean, theres a lot of people.

And.

We benchmark to industry averages in market averages and we pay we want to pay competitive but we have.

A lot of interest in working for our company and so I would say some but there's.

I think it can be managed.

Work.

Gotcha and.

Then.

I know you said buybacks are going to be more opportunistic just given where the stocks trading today.

Does it moves into Chattanooga, and make any other capital deployment options are less likely or whether it's a dividend increase down the road or something like that.

Or does this just kind of more of a piece of the overall strategy, where you kind of walk and talk at the same time.

No I think I think it's like I said before Theyre, all tools, right and and I think we've said this before but.

In the last 18 months have been an unusual period so.

We just went through our.

Our strategic plan and this time last year it was so different.

We're saying gosh, it's going to be three years of of everybody was saying rates, we're going to stay low for five years, and we thought there's really three years of higher charge offs and provision expense. The plan is to outlook so different.

So frankly.

We would have raised the dividend higher even this past spring, but want to be conservative and make sure. We're out of this I think we've communicated before we'd like to see our payout ratio closer to 20%. So I think youll see balance tools.

So probably should anticipate a another dividend increase.

Our annual is coming spring and we working at closer to 20% and so I'd just say a balanced aspect I think we'll probably still keep that a little lower than industry averages because I think we have more growth opportunities than most but I recognize we've got a certain amount of retail shareholders when you're running a company you've got many constituents.

<unk> institutional shareholders, largely would prefer buybacks because of tax consequences retail shareholders like to have a little bit of cash flow.

So we see opportunities I would say buybacks are the ones that I would like to really reserved for opportunistic because I just think we have such great investment opportunity.

Got it makes sense to me thanks for taking my questions and congrats on a great quarter guys. Thanks.

Thanks Patty.

Okay.

Our next question coming from the line of William Wallace with Raymond James Your line is open.

Thanks, Good morning, guys, Hey, Raleigh.

Most of my questions have been asked and answered, but I did wanted to just circle back on Chattanooga, and then some of the commentary around maybe even more teams.

The financials that you.

Lay out in the deck.

And your cost assumptions are you assuming any branch.

Support in Chattanooga.

Absolutely. So the model, we want to do I admire a lot of banks I. Just you know I was fortunate to be trained in two of the best really ever.

And I admire pinnacle in our market I admire service first down the road.

Art <unk>.

Over over at Southern first so I'm always studying and.

We've been very successful in Knoxville.

<unk>.

Sort of mirroring some of their successes and so in Knoxville, We've got a very nice commercial office.

And it is staffed with commercial relationship managers.

And then.

Sort of office team leader or a client service executive and then a portfolio manager so as we put out in our release.

This team right now as of today, they will start with seven people in the market physically and that will be five commercial relationship managers, we really have a single point of contact.

<unk> model, where they will bank, an operating company and the owner or a real estate investor.

There'll be a office leader or a.

Client service executive there that we really don't anticipate a lot of walk in traffic like a branch actually we would prefer not to have that.

And so.

No Teller line no ATM no drive thru.

And those folks would would be assisted and serviced by them and then a portfolio manager here.

Here in Nashville, we added two additional members to our loan operations team to help handle.

Our volume in and really you know I've learned a lot just just service first has been a great success in here in Tennessee, If you.

You came here and stay here a week you would never know where they are because they don't have any branch signage and they've been a tremendous success they've done a great job and.

And they've got about 1 billion in loans of 700 million of deposits with no branch. So we don't expect at this time in Knoxville or Chattanooga to have a lot of offices really to have a commercial office.

With the best talent in town.

Yeah.

Okay. That's very helpful. Thank you.

And then.

If I look at you.

Your loan mix and Pinnacle's one next.

The mixes are relatively similar is the Chattanooga.

Market, bringing anything different or is that portfolio kind of similar in composition.

So what you see.

On.

On your own balance sheet, similar similar and again I'm just looking at the names are on this call right now and.

Many of these have provided me great counsel since I joined and every bank I've joined has had opportunity and challenges and.

I hope he won't get Mad at me mentioning but one of the things I'm proudest of.

Is one of the first people I met with when I got here was Cherry King at Bank funds.

And he was pretty Frank indirect and I didn't know a lot about cap star when I joined and he said Tim you got your hands full and you Gotta get this place going or you shouldn't really think about should this place be sold.

And I'm real proud I.

So I'm real proud that Jerry is on the phone today and I appreciate that Gerry I Hope you won't get Mad at me, if I mentioned in that but that's what this team is trying to do and this is a new company and so what I'd say to answer your question.

Is.

You know we had some people that were making their living off of doing shared national credits and getting incentives, we don't have that anymore.

Got it and so this Chattanooga team is Tennessee based loans not participations not shared national credits operating companies Investor Real estate collateral banking the owner. So so I think it's consistent with the new cap star and.

We're just really couldnt be more excited to have them join.

And Wally.

Okay.

We're trying to take that discipline and apply it across all of our markets and across all of our businesses. So on the expense side and the pricing side. The administration side and of course on the revenue side, as Tim said, but discipline and focus and really trying to.

The more provide a.

A really high performing bank that all of our constituents will be proud to be associated with.

Yeah.

Okay. Thank you for that.

Tim I don't know, who this is Jerry keen guidance, but might have to follow up with you offline to get an introduction.

Hi, Jerry.

My last question is.

My last question you talked about Youre in discussions with.

Three three different teams in three new markets and then.

During the Q&A I.

I heard you say that.

Youre not sure.

I have three new teams, but you might consider too, but then it sounded like you were maybe saying that that you'd want to wait a year I just could you clarify.

So there are three right now that there are different levels of discussion.

And.

I thought I would not take on four right I would not take on those three and Chattanooga that'd just be too much.

<unk> earnings too much B, a lot for our team, but I do think it would be interesting to try and get to get a second one over the next year and these things take time so.

I don't know if the second one would.

Realizing a month I don't know if it will take six more months.

What you don't want to do I work for one company, it's the only one.

That the gentleman his strategic focus was filling in our Powerpoint map.

And so we would say gosh, there's a hole in Savannah, and we are gonna go to Savannah Doggone it and.

Material, who we hire.

And when they are frustrated you have got to act because if you don't act, they're going to go somewhere else. So I would just say that my comment on over the year next year as I think it would be needed to add a second one over the next year and I just don't know if that will happen next week or in six months, because it's it's when their frustrated and theyre ready to pull the.

Trigger and as cap star doing its homework to make sure that they will produce what they say they can produce.

Okay, I think I understand now I thought you were talking about teams and new markets not building teams and the team in Chattanooga, So gotcha.

And then last question.

Just as it relates to the Chattanooga team is there in your view is there a good fee income opportunity.

Outside of just the lending metrics, which I'm, assuming is what youre, putting in the slide deck, but is there opportunity.

Mortgage or tri net or it does.

Market specific for you guys.

Let's just say they can put on loans at $3 75, we've got that money.

Money today, the first $300 million they do.

And that's not.

Of a one time expense. So I'd say number one is the impact from interest income number one number two would probably be deposit service charges related to any company.

And then number three I think over time is figuring out how to expand our mortgage our mortgage to date is a very.

Dominant I don't know if we shared this but.

The NBA comes out with mortgage volume by Metro area every month and the last month that.

That are gentlemen, shared with me was July and we were number four in the entire Nashville Metro area and that's not.

Not where you're headquartered I mean that includes bank of America that includes Wells Fargo. So just think about every company in Nashville, everyone. We have U S Bank regions. We've got true is we got bank of America, We've got whoever.

And then for number one was the quicken loans.

Paul has done a great job I think Chris would agree on referring volume to SBA. So there could be some SBA lift if this chattanooga team could refer some volume there, but Chris do you want to add anything I would say, we're well, we're well poised to support that market with our government guaranteed activities based on where we have people place.

And I would expect opportunity to come out of that.

But just priority I think the immediate is let's get the loans on the books to get that money out of the 17 basis points into the $370 or 4%.

That's step one let's get treasury fees and then let's build these other product lines into there.

<unk> into their mix.

Thank you very much appreciate your time I'll step out.

Thank you all.

Yeah.

I'm showing no further questions at this time I would now like to turn the call back over to Mr. Tim schools for closing remarks.

Yeah, I don't really.

Closing remarks, I, just want to really commend our team internally I've invited five or six of them in the room today here to just hear how this works and.

We have a great company lot of bricks laid before us and we're taking it to a new level, just really and thankful and grateful for my teammates.

And I appreciate everybody that called on in this call today, it's a growing list in some great.

Having here and we really appreciate the support we're just we're working hard every day for everybody. So everybody have a great weekend. Thank you.

Yeah.

Ladies and gentlemen that does conclude the conference call today. Thank you for your participation you may now disconnect.

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