Q4 2021 CapStar Financial Holdings Inc Earnings Call

Good morning, everyone and welcome to cap start financial Holdings fourth quarter 2021 earnings conference call hosting the call today are cap star for from caps are Tim schools, President and Chief Executive Officer, Dennis Duncan Chief Financial Officer and Kristy.

Chief 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's website at <unk> Dot com.

During this presentation, we may make comments, which constitute forward looking statements within the meaning of the federal Securities laws. All forward looking statements are subject to risks and uncertainties and other factors that may cause the actual results performance or achievements of cap star to differ materially from those expressed or implied by such forward.

We're looking statements listeners are cautioned not to place undue reliance on forward looking statements.

More detailed description of these and other risks uncertainties and factors are contained in <unk> public filings with the Securities and Exchange Commission, 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 would also refer you to page two.

Two 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.

Good morning, and thank you for participating on our call. We appreciate your interest in cap Star we.

We had a terrific quarter and year and when we look back it is rewarding and exciting to see how far our team has come.

I saw an early note on todays earnings that said, we finished 2021 strong I understand what was Matt, but I can promise you were just getting started and.

In the fourth quarter, we reported earnings per share of <unk> 56.

And on an annualized return on average tangible common equity of 15.0% to 2%.

For the year, we earned $2 19 per share.

And the annualized return on tangible common equity was 15, 45%.

I will go into this later in the call, but our underlying profitability and capital generation is somewhat stronger as we currently have nearly 200 basis points of tangible equity than the industry average.

There is a lot of value in the excess capital is it can be invested for additional earnings.

For sure or returned to shareholders in the form of dividends or buybacks, where we would essentially maintain the same earnings as today as the excess capital resides in non earning or low earning cash.

Internally, we focused on four strategic objectives.

First enhanced profitability and earnings consistency.

<unk> accelerate organic growth.

Third maintain sound risk management, and fourth execute disciplined capital allocation.

As well as four key drivers revenue growth net interest margin efficiency ratio and net charge offs.

I'd like to highlight a few of the achievements within each of the four strategic objectives.

On profitability, we are very disciplined on pricing.

Anyone can put on growth not everyone puts on profitable growth.

Our fourth quarter match funded spreads were two 5%.

That is a lot of profitable growth.

We also have a higher discipline on expenses, we speak internally of being frugal, but not cheap.

We are also working to be productivity minded and have productivity work metrics.

Second as it relates to organic growth.

Our annualized loan production was $1 billion in fourth quarter.

Not one penny was a participation.

This is an increase from $674 million for the full year.

$445 and 296 million the prior two years.

Our Nashville market has increased production and we have added Chattanooga, and Knoxville, and three fantastic community markets.

In total our commercial pipeline currently stands at $500 million.

Excitingly, we have two offers extended for two additional bankers with over $100 million loan portfolios in existing markets and are in discussions with a team that has $500 to $1 billion in loan balances.

As noted later in our deck. We are also aided by leading market demographics.

Third we are strong risk managers we.

We have done a stellar job overseeing the health and care of our employees during the pandemic.

<unk> been proactive in managing credit risk to both assist our customers and protect our shareholders.

And while work has been done to tame interest rate sensitivity, we remain modestly asset sensitive.

Lastly, we are laser focused on putting our excess capital to work and we will cover that in more detail later.

With that I'm going to turn it over to Dennis who will provide you details related to the quarter.

Thank you Tim and good morning, everyone I'm, starting on slide seven of the.

Earnings release deck net interest income was $23 million for the quarter, which was consistent with the third quarter. The net interest margin was $3 one 4% for the quarter up two basis points due to loan growth increasing rates and continued PPP loan forgiveness phase the <unk>.

Justin NIM for the quarter was three 4% adjusted NIM, meaning we look at the impact of excess deposits, which adversely.

Impacted the NIM by 44 basis points.

And takeout PPP loan forgiveness fees, which favorably impacted the NIM by 18 basis points.

Net interest income and total continued to benefit from a shift of our earning assets into loan growth and our investment portfolio was down slightly from the third quarter, both on an average basis.

On slide eight.

Average deposits of $2 7 billion remained near record levels.

Average DDA deposits also remained near record levels for the quarter and we remain focused at cap star on building core deposit relationships across our markets.

Deposit costs held flat for the quarter at 19 basis points as we continued to lower higher.

Higher rate time deposits, partially offset.

By an increase in our correspondent banking deposits.

Our excess cash balances are continuing to be strategically deployed into loan growth and purchases within the investment portfolio, where we see opportunities and again were committed to cap star to a deposit first culture, which will ensure strong core funding as we move forward.

On slide nine.

Total loans less PPP, we're at record levels at quarter end and grew $109 million or 23, 7% annualized between the third and the fourth quarter.

Total PPP loans were $26 5 million at the end of the quarter down $38 million from the from the third quarter and total earned PPP fees at the end of the year totaled $630000.

In regards to production as Tim said, our relationship managers have done a great job in improving pipelines, which provided momentum for the fourth quarter and for 2022, and we're pleased that production for the quarter came from across our entire footprint, which includes our newest team in Chattanooga and our recent Knoxville market.

The yellow yield increased six basis points to 447% for the quarter with loan coupons, increasing by four basis points to four 7% PPP fees in total were relatively flat for the quarter.

Which contributed to some of the increase approximately five basis points.

With lower average balances.

Most importantly re.

Main discipline in our pricing on new loan production with match spreads as Tim said of approximately two 5%.

In addition to solid loan growth record pipeline levels and pricing.

We continued in 2021 to reduce our shared national credits and loan participations.

On slide 10.

Noninterest income was strong in the fourth quarter.

Our unique fee businesses have contributed over 30% of our revenue over the past seven quarters highlighted this quarter by our strong Tri net business, which generated almost $4 million in fees.

We also produced record levels of debit card and interchange fees and SBA continues to be a positive contributor with strong growth prospects.

Mortgage revenues were down some for the quarter due to seasonality after experiencing a record run of results in previous quarters. We are continuing to see a strong mix of purchase volume in our mortgage business, which reflects the economic health of our markets and the strength of our cap star mortgage team.

Slide 11.

Shows our noninterest expenses were $18 7 million for the quarter, which resulted in an operating efficiency ratio of 50, 474%.

Our core bank, which is our core bank, excluding our mortgage efficiency ratio was $52 three 8% for the quarter.

Excluding about $408000 of expenses related to our fourth quarter investment in Chattanooga expenses declined slightly from the third quarter.

Within salaries and benefits incentive expenses continued to run at higher and higher levels due to our strong operating performance for the year, So even with the increased incentives and expenses related to Chattanooga during the quarter.

<unk> ratios remained at record low levels.

With that I'll turn it over to Chris Tietz, who will discuss our credit position great. Thank you Dennis once again, it's good to be able to say that because asset quality is so good or comments can be brief.

First turning to page 13, we are pleased to report that we continue to maintain low levels of delinquency. While we are proud of the improvements that our team has achieved we believe that our focus on improving processes and oversight will all else equal allow for continued improvement over time.

The trend of improvement in our criticized and classified asset levels continues in the fourth quarter now at 264% of gross loans.

We believe that this represents a very low level, particularly given the economic challenges presented by the pandemic I also should note that at current levels our ratio of criticized and classified loans is below five year averages in the respective components and is now at near pre pandemic levels.

In our ongoing reviews of criticized and classified loans, we assess individual borrowers on the direction of risk the magnitude of exposure, if any relative to bona fide collateral values and our expectation for the future direction of the borrower's performance. The good news is that based on the future looking focus.

Of this review process and the secured nature of many of these credits we continue to maintain a positive assessment and outlook for credit risk in coming quarters.

As noted in the lower left graph with improvements in asset quality, we continue to experience very low levels of charge offs with an average quarterly loss experience over the last eight quarters of less than $165000 per quarter.

While we are proud of our measurable asset quality results I also want to highlight that we are proud of our continued focus and disciplined adherence to our community based banking strategy qualitatively. We have achieved these results and our growth remaining focus on lending to relationships in our local markets and without reliance on <unk>.

Oncentration of risk to a small number of large individual borrowers are projects. We remain committed to this and believe it will yield consistent results over time.

Finally, turning to page 14, we note that improvements in asset quality in general.

General economic environment enabled us to reduce our overall level of reserves to a level that given the positive factors that have all I previously noted as appropriate to our current assessment of risk and expectations in this environment with that I'll hand, it back to Tim to discuss profitability and capital management.

Thank you, Chris I'd like to spend a moment on slide 16 of today's presentation.

I know everyone thinks about this differently.

I referenced earlier on our profitability and capital generation.

This page takes our reported numbers and adjust our profitability. If we were to operate an industry capital levels. As you can see on an equivalent basis, we are a very profitable business model.

This excess capital, which in this example is $66 million is earning close to zero.

Therefore, it could theoretically be dividend it out in the shareholder would have the same earnings with $2 to $3 per share in their pocket.

I do not have today.

If we maintained our 'twenty three consensus which by the way we feel is reasonable at this point.

<unk> of 10, five times that is value that is not in our current stock price.

If you take the position the excess capital is in our current stock price and valued at one times book than the remaining bank is trading at eight five to nine five times 23 consensus.

On page 17, we lay out our capital management priorities, we're actively focused on putting our excess capital to work.

In the high capital generation of our core business.

This week, we reauthorized, our $30 million share repurchase authorization and envision that dividend increases will be part of our capital plan.

We see these as valuable and important secondary tools, we will use depending on our growth and equity market conditions.

On slides 19, and 'twenty through 'twenty, one we share some of the hard work that is occurring that does not show up in the financial statements.

We appreciate the support of all the constituencies that we interact with.

We have a larger number of people paying attention to cap star today, and we value the time put into understanding our business vision and results.

Yeah.

Particularly I would like to thank Wellington.

<unk> capital <unk> Kennedy Ranger Covington, Minden in bank funds.

And all of the others that have supported us during our transformation.

The support and guidance has been invaluable.

On slide 22, we present a scorecard.

Of the highest valued banks our size in our region.

At this point based on a price to earnings.

Of note our profitability growth and soundness are favorable to this group.

However, our valuation on an earnings basis has 20% upside.

We believe we have a high performing and scarce franchise deserving of a similar if not higher earnings multiple.

Our price to book multiple is hard to compare again due to the excess capital we have even to this group.

On slide 23.

We are excited about the upside in the valuation of our company.

Whether it is multiple expansion multiple expansion and a return of excess capital in some form.

Or multiple expansion and investment of the excess capital at our core return on tangible <unk>.

Capital level.

There is a strong case for 30% to 40% upside in the valuation of cap star in the reasonable future.

As I said, we're just getting started.

Once again, thank you for the time, you invest and following and understanding our company. We appreciate your support.

This concludes our comments for today's call and welcome the opportunity to answer any questions.

Thank you.

Going back to a question.

You will need to press star one on your telephone to withdraw your question press the pound key.

First question comes from Stephen Scouten with Piper.

Sandler you May proceed with your question.

Yes.

Hey, good morning, everyone.

Yes.

I guess, maybe maybe if I could start just around.

The capital plans of share repurchase I mean, I know you said.

Do you want to be opportunistic there.

But obviously, it's been outstanding for some time and hasn't been utilized to just want to think about that in the context of where you feel like.

Youre illustrating its potential upside in the shares and how aggressive you might be with that today.

I would say medium.

We're more focused on growth.

We reported here that Chattanooga.

Was $53 million in about 40 days as of today, they are at $75 million.

They anticipate that they could book another $75 million this quarter.

Like I said, we've got two offers out to other people and we're talking to a team that has 500 to a $1 billion. So when you look at an IRR of that kind of model. We've got two now Knoxville and Chattanooga, the IRR on that is closer to 30% to 35% and.

And if you built an IRR model buying back a share today.

At $21 and even though I think the price is worth 25 to 27, if you do the IRR of.

Buying it today at $22 or whatever and the dividends you would save.

Those IRR has come out to be about 20%. So still a fantastic IRR, there's economic value added to your cost of capital, but we believe the franchise value in absolute IRR of our core investment is higher.

So as long as we think those are realistic and in the near term. We understand there is a time value of money and I think this money has been setting in cap star too long.

So as long as we think they are reasonable ones. We will do that I will tell you in Hawaii.

Did a onetime dividend of $65 million to shareholders because they were sitting all this equity they werent using and it wasn't growing.

And so I've done it before and we will consider all levers, but we're very focused on putting this capital to work.

Got it got it so it sounds like I mean, obviously organic is the focus which again I agree I think that's right, but maybe it could be both at the same time share repurchase and inorganic.

Plenty of capital above, yes, and what I would say is it's been an evolution of cap star when I came in and I don't want to criticize anybody's views because theres a lot of smart people in the world and Tim schools does not have all the answers but.

When I came in we talked when Coursera was exiting three years ago about buybacks should we buy all of their shares should we not.

And there was a lot of different views I mean, theres a lot of people that have more of a regulator view that you can't have enough capital.

But you're never going to grow your book value at the same rate so.

I just believe that capital management, if you read the book.

The outsiders, it's a big contributor to returns.

So I would say we've gotten the board there that I don't want to say, we've educated them that they're further along on the role of that in managing returns and I would say that last year. When we put in the 30 million. We thought that it was still an uncertain economy didn't want to be too aggressive in our price.

It was a pretty low price at that point and I would say, we will take a more balanced approach right now going forward.

Okay. That's helpful. And then maybe other question for me is just around.

These new teams you are looking at can you give us a feel for if these are end market team if youre looking at additional expansion markets like Chattanooga, and Knoxville or kind of what the what the focus is in 'twenty two.

As it pertains to new hires and then what that could look like from an expense standpoint.

And kind of how how.

How we could best model expenses is it a 2% of average earning assets or how do you think about that in budget expenses for 2015.

So I don't really want to comment on markets I would say just so we're all on the same page if I had to draw up a loose.

I imagine your focus.

I would say.

I just I don't see us at this point, there's no need for us to go say.

Further east of a Charlotte or in Asheville.

And I don't know if we'll go west from here. So I would just I mean, you can sort of ring fence the markets we're interested in.

I would say principally middle, Tennessee, East, Tennessee, maybe western North Carolina to Charlotte Upstate South Carolina, maybe maybe northern Alabama, but nothing outside that.

While there can be teams available I, just don't know, it's hard to manage as far away. So.

That would be our focus at this time.

Okay, and then just how to think about the expense build up teams like that.

Yes, I don't have my number.

Guidance, there, but yes, I think if everyone reflects back to our last quarter slides, we tried to put more than other banks try to.

Treat it more like a merger and I think we put the expected earn back period and dilution as well as growth and I don't have it right in front of me, but from memory like Chattanooga.

They are starting at the beginning of the year, which is rare because sometimes the middle of the year and I think we were anticipating that that may be a cost of like <unk> or something that first year and then the second year of the full year, it's basically breakeven and in the third year I can't remember you may get 5% or 10.

But man when you get to year, three and four it gets to be like $20 $30 40, and so.

Youre not handing out shares they're easier than acquisitions to roll in.

And so.

If we do another one we will lay that out again, and we're trying to get better each time to give as much information as we can but from memory. The Chattanooga expectation a number a number this year was about one <unk> cost.

Yes, there is a slide there is a slide in our in one of our previous decks Stephen that laid out the economics of it.

Sure and we're just.

We're being fairly conservative in terms of.

The loan growth in the.

Buildup on the revenue side.

And being conservative like that.

Tim's right it would have been about a five 5% dilutive.

Impact on our EPS and the and the 12 months following the lift out.

Then it turns then it turns depending on your assumptions for loan growth and it turns to neutral.

To slightly accretive in the second full calendar year, and then gets.

<unk> gets a lot better.

As you move forward.

So if we were able to.

Do another one at Hatter announcement of another similar Chattanooga lift out.

<unk>.

In accordance with.

Announcing that we'd probably.

Show you, how the economics work or get you that information.

And I can't promise because.

You're dealing with people in different situations and families and other opportunities, but it's my hope and my expectation that we will we will announce another Chattanooga this year.

Yes.

Okay.

And I guess, maybe just to follow up on that.

I don't really have a good feel for you guys for where expenses are going right. I mean, it is $18 7 million run rate that you don't do any new team acquisition. I mean is that 18, seven a good run rate or.

We talking 10% growth in expenses next year are we talking five.

Just kind of any color on how you think about that a ring fence and those numbers a little bit. When we think we think we've done a really really good job of managing expenses. So there are but but then within that $18 5 million and there are certain things that.

Are beyond our control would depend on what you how you model your stuff out but mortgage is very.

Compensation rely on in terms of how much mortgage volume you have would drive mortgage incentives.

Theirs.

But on the core bank on the core bank expense.

Expenses in the core bank.

Estimates.

We don't see we don't see.

Right now unless we did another lift out.

Our expenses are.

In pretty good shape.

We're working hard to try to keep that efficiency ratio down under under 55 for the total company but.

Fully get the.

No.

The core bank efficiency ratio down closer sustainably to somewhere around 52, or even maybe just a little bit better but.

This year and this and this.

These numbers that you.

Are looking at we maxed out because just because we had such a great year, we maxed out on all of our.

Corporate incentive plans.

So as we move forward into 2022, as we've reset budgets and reset expectations and the like.

Have we have really in our budget more kind of more normal levels of corporate incentives. So I mean, there is some there is some.

Benefit that we'll get there.

Depending on whether mortgage goes up or down with drive.

Compensation levels and mortgage.

But in general.

We feel we feel pretty good about our expense levels.

Okay very helpful. Thank you guys for Sky budget, yes.

Yes.

Thank you. Our next question comes from Greg <unk> with Citigroup you May proceed with your question.

Hey, guys good morning.

Yep.

I wanted to talk about the fee income guidance for a minute and just particularly the China They had.

Really good 21 and results kind of built throughout the year and I guess I'm not sure.

When I look at the guidance.

Sure.

Fee income this year, I guess I understand the mortgage piece, but.

Maybe you can talk about China.

Fourth quarter.

<unk> and then kind of why.

The reset on a quarterly basis for 2002.

Yes, sure I'll start and then let Chris pitch in on the.

One of the challenges of the year like 2021, as we all get excited right and I think we lose sight of the PPP the mortgage to Tri net unusual Miss that's not sustainable.

If you go back and you chart Tri net as a business and Chris will be able to quote the exact numbers, but I.

I think 19 may have been about $3 million for the year and 'twenty may have been about $4 million for the year and then all of a sudden 21 was this crazy year and I think he is going to tell you is two things led to just unbelievable performance in 'twenty one.

One is everyone in the country has a ton of liquidity and does not have the asset generation of cap star and so banks need need investments.

And so.

There was a lot of volume that we produced.

That went into that and because of the bidding the spreads got wider.

So I think what we're doing is reasonable business people is doing more of a linear line.

And <unk>.

Trying to.

Look at our regression may be taken out to abnormally of 'twenty one.

And even if this year was $5 million or whatever it is a continued steady growth. It's just there was a huge blip last year, but I'll, let Chris expand but that's the challenge. It's really it was hard as it is for you all to forecast we'd love all of these to stay at the 21 level, we hope they do but even as when we do our 'twenty one budgets.

We're trying to not fool ourselves and just say, okay, let's look at the prior year or two where were they hopefully we're doing better than those years, but let's do something reasonable. So we're not putting a hockey stick out there, but Chris what would you add yes, I would say Brent.

Big scheme of things like mortgage we will make more money and tri net when rates are going down and we will have a little bit of a squeeze as rates transitioned to higher levels until they plateau as I said last quarter, we avoid giving specific guidance on tri net.

I went ahead and did go out and say that we would have expected it to to achieve levels of performance similar to the earlier quarters in 2021.

The fourth quarter, clearly exceeded that by a long shot.

We're still holding to the guidance that I gave you last time, if you were to look at it on the full year basis, it would be somewhere our expectation would be somewhere between the roughly $3 $7 million, we made in 2020 and the <unk>.

The $8 $6 million, we made in 2021.

Hi, Brett this is Dennis.

You have same page 25 of your earnings release deck.

Yes, Okay got it.

So even if we do a $1 three to $1 five I mean, that's that's five 5% to 6 million a year, which would be a nice increase over where we were in 'twenty.

Okay.

Fair enough and then can you guys talk.

Maybe about the variability of the loan portfolio and how much is at or below floors and.

Just thinking about the.

Potential margin upside I know in your filings you got a 1% increase in NII for 100 basis points, which.

Seems like you're asked your asset sensitivity would be a little bit higher given the cash you have on the balance sheet maybe.

Talk about the margin and the asset sensitivity in the variables.

Well, that's a very complex topic and then we can have a whole hour on that and so it's hard to just talk about one component of like loans and floors.

We've got beta is while you have all the cash you also have betas on your deposits that will go up as well so.

I would just say what we've done.

As a young company what I saw when I came in and studied I think our margin went down more than the bank was modeling.

When you ask why did that happen.

Think that we were not managing deposit betas, and we had a lot of risk in our deposit side.

<unk> had a lot of individual negotiated rates with wealthy people.

When rates went up say in 15 and 16 I think the overall increase in the margin was what was expected.

They've got their a different way I think that all of the data went to sort of the most vocal people that called in and wanted all the data and a lot of people got no data and so when rates went down.

Those people that got 100% of the beta didn't want to give it up but you didn't have any relief you could give you the others. So I would just say on interest rate risk.

We've been working the last 24 months to manage closer to neutral and we want to grow our bank by putting on profitable balances. We're still asset sensitive we've really reduced that deposit risk both through the acquisition of three community banks, but also getting away from all that hot money. So.

We can talk offline about if you would like more detail about individual categories, but I think thats a complex conversation for the phone.

I would just I would just add on that one thought as we feel we feel given our given our loan portfolio and the.

The pricing on it as well as the expected.

Things that the fed is going to are going to do in the near term.

We feel like Brett we will we will be able to add net interest we will as rates go up we will be able to add that interest income. It's just a matter of.

<unk>.

How much so.

We are well positioned on our balance sheet to be able to and I wouldn't call it take advantage, but to maximize our ability to.

<unk>.

Driving that net interest income higher.

Okay, Great I appreciate the color.

Thank you. Our next question comes from Catherine Mealor with <unk> you May proceed with your question.

Thanks, Good morning, Hey, good morning, Jeff.

A follow up on interest rate sensitivity conversation do you have can you remind us what percentage of loans are floating and we will reprice immediately when we start to see right.

I don't have it exactly on us now.

Okay.

Okay.

And then so another.

So maybe asked another way is would you expect.

And then as I look at the.

I kind of agree that the 1% up.

In a 100 basis points scenarios feels really low just kind of given the structure of your balance sheet, and particularly I remember last cycle. It feels like the loan book with.

Very highly floating and maybe just.

Without asking for a specific number.

So.

Yes.

Sure.

As it has that change because you've kind of gotten rid of Nick than you've done so much change within your loan portfolio. Maybe are you not as variable rate as you, possibly were last cycle any of that the way to think about it probably not because there were a lot of the snacks were LIBOR based and overnight number one and we're doing more traditional regional bank lending so that would be one and number two.

Two I, just we're continuing to learn and evolve I just learned in our latest outcome I.

I think some of the beta is we're using in our modeling are too aggressive and I'm not quite sure why we were using them but.

If the betas on the deposits were too aggressive that's going to lessen your reported asset sensitivity because it's showing that your deposits are going to go up faster and thats. So.

And the way we've been managing closer to neutral, we think will be modestly asset sensitive but were not we were not one sitting here, giving up earnings betting on a big rate increase we really really focused on growing the balance sheet profitably.

And as our loan coupons here at four seven this quarter with new production coming on.

I would say.

Tom.

Yeah.

So it varies across the footprint obviously in Chattanooga.

The organization they came from US is offering some very low rates.

To maintain some customers so as part of our new investment, we're having to match or do some of those but I would say generally in the market.

Again back to a $2 50 spread so it depends on the tenor.

I'd say, it's anywhere from $3 75 to $4 25.

What we do what we do is on any commercial loan we used the <unk> web site and we go find the matched tenor.

And we ask our bankers to seek 200.

350 basis points on top of the match, what it would cost us to borrow.

Yeah.

Okay.

And then on the Securities book the Securities balances decline this quarter. So what's your appetite for adding to the bond book of business.

Sure.

Sure.

We're beginning to take a look at that Kathryn.

<unk>.

<unk> improving in the last couple.

A couple of three weeks, we've got some some really good.

Strategic things that we will be implementing that will probably.

Fell back up.

Some of that.

Decline in the investment portfolio, we have we really want to we really want to eliminate though.

But we will replenish.

Good bit of that in there is there is opportunities to do that so I think you'd see investment.

Investment balances go back up we've had a lot of other.

Good opportunities to do things.

Kind of alternative investments like corporate owned life insurance has done real well.

Making investments in Chattanooga, and the like but yes.

So Catherine I would leave this call today with one message and that's what we're going to put this capital to work or we're going to give it back.

And so.

I view the securities portfolio as a liquidity tool.

If you do if you do a funds transfer pricing.

ROE on our security is very low because.

You don't typically take a lot of credit risk in the investment portfolio. So we're going to hold that around 500 million guests in fourth quarter. It ran off some so we're going to reinvest cash flows we're going to put it on the $25 million, but we want to stay short.

We want to take this excess liquidity thats sitting in cash or securities and put it in loans or give it back to the shareholder in some form.

Catherine I'm not sure it's Dennis I'm not sure what I'm not sure. What you were looking at trying to do but.

We just we just.

Firm that relative to our <unk>.

The variable rate loans in our portfolio or somewhere between 40 and 40.

Two or 3% up to 47 or 8%.

As the variable versus fixed.

And if you look at the up the F 100, or the down 100 basis point moves in the market we believe.

We know.

Not just believe we know that we can be.

Be able to make money in net interest income in a rising rate environment. So I don't know what.

Sticks that youre looking at there but.

We've had very conservative.

That base betas that we've been.

Assuming and we.

Feel pretty good that we'll be able to now it's all market. It all depends on what the market does out there too right I mean, some banks will aggressively try to.

Get some of those deposits that we have but I think in general my sense is backs will it'll be very competitive there is plenty of liquidity out there there are plenty of deposits.

And the ability of a bank to bring that.

Those changes in interest rates to the bottom line will be in their ability to.

Hold off on.

Deposit betas and keep some of that.

As much as much as for as long as possible.

It that way.

Got it okay.

Super helpful. Thanks for that.

Okay.

Hi, guys, if I could squeeze in one more question just on the expenses.

<unk> guided to $16 5 million of expenses ex mortgage.

Can you can you can you give us.

Maybe mortgage expenses this quarter, just so we can kind of get a base for what that looks like and maybe what kind of mortgage efficiency ratio would be appropriate.

Model next year.

We can look that up I don't know if we have that right at our fingertips lens here is looking but we probably can do a better job because tri net.

And.

Especially coming off of last year, because China in mortgage are pretty big piece of our company now and they are so variable.

It is it is interesting internally and for you all to understand what is the core expenses and what is it for them. So.

If you can pause just a minute.

I don't know Theres, a slide there is a slide on page 11.

In the deck I think.

I think it's page 11.

Maybe it's not in your deck, but we have a slide that somewhere breaks down all of the noninterest expense in mortgage mortgage banking expense has been running at.

It did run in the fourth quarter somewhere in the two.

$2 $5 million range.

What was the mortgage expenses and.

And so that would take you from the 18 and a half you guys were talking about about being total expenses down to the.

16% to 16, and a half would be the core.

Pre tax pre provision.

Expenses.

The core bank expenses.

And again, we had again Kathryn.

I don't know the exact amount of difference but.

Included in our 2021 expenses for cap Star War.

Record record levels of corporate incentives that will we'll pay out to all of our folks know they deserve it because they've done a great job but.

<unk>.

We just had really didn't have any idea that in 2021, all of our all of our businesses and everything would kind of come together for a record net income year. So next year as we've set our 2022 incentive plans and budgets budgets, obviously, our budgets will be higher.

It will be probably more likely that we would be back to nor.

Normal levels of corporate incentives. So we feel like we probably have some some room there that you.

Wouldn't wouldn't put end of the year.

Next year's expenses.

Got it makes sense all right. Thank you very much.

Sure.

Thank you. Our next question comes from Kevin Fitzsimmons with D. A Davidson you May proceed with your question.

Hey, good morning, everyone.

Hey, Kevin and we appreciate you being a new partner this quarter in initiating coverage.

Yes no.

Very happy to two.

Joined the the folks covering cap starting in.

Most of my questions have been asked and answered but one.

One I wanted to ask about him.

D.

Your reference to talking to her team.

And I totally understand about not wanting to get into the specific markets, but it's all very fluid, but I think last quarter you might have been.

If I remember right.

You were talking about.

That you had kind of wrestled with and we're getting more comfortable with the thought of.

We might be able to do more than once and I got the sense from your tone that you.

You guys were getting multiple inbounds and it was.

Potentially.

More than one team and new markets that you might be willing to shoulder and do at one time.

The fact that Youre just referencing the one team.

<unk> slowed down or you're just keeping the bar on our LOE because of everything being so fluid ends are in not wanting to over promise.

We just not want to over promise you I am sort of like the Hulk I've got the wallet in the where he went up 13 straight years with consecutive GAAP quarterly EPS increases so I've got that beating them ahead, and then I've got Tom GERD and me, which is the entrepreneur and I went down to the Sandler comp.

<unk> and I hosted a dinner and it was neat because I met with about eight people at dinner for two hours.

There was one sell side I mean, obviously, Steven it was just conference.

And.

There probably was six to eight investors at the table and.

And one of the investors I don't want to say, who but a prominent investor spoke up and said Hey, let.

Let me ask a question.

Why would you even buy back one share <unk>.

<unk> said you all have a great company Youre in great markets Youre getting inbound calls.

As a company why wouldn't you want like a private company and a Chattanooga cost you <unk> why wouldn't you go to three more why why wouldn't you take on as many as you can that you can handle.

And just explain to us explain to us that hey, this is going to hit 22 10.

But look at what 23 and 24 does so I was really happy that Thats why I really put those comments in my commentary about thinking people.

Because this is a smaller company that ive been in not used to having all of this excess equity and we're not South trust were not a $40 billion steady machine and so I do think we need to be a little entrepreneurial. So that was very welcomed input and it opened my eyes, that's more how I think I didn't know how investors.

React, but if you were a private company and you were in my chair and you have this extra money you would be doing irr's and you wouldn't be worried about am I going to increase <unk> next quarter. So I'd say, we're all over it and.

So I would be.

With that support I would be open to doing multiple as long as my company internally can handle the volume and at this time as of January 28.

<unk> got to offer letters out for two bankers and market that each have more than $100 million portfolios.

And then we're in pretty good discussions with the team that would depend on the team members that joined.

But depending on the team members sort of $500 million to $1 billion is what they have.

And Kevin and Kevin don't forget.

And the timeframe when Tim was talking about multiple ones.

We've now done Chattanooga.

So.

Right no I understand that I thought it was on top of that one but.

That's fine I appreciate just getting that insight into your thought process in and disagree with that at all.

One other question just on that because it sort of relates to.

This.

How the investors think and so I'm wondering in your earlier commentary when you were talking about with some we want to ideally invest and get this growth.

Opportunities are great markets and so you can see the growth out there, but you also referenced if it if it doesn't come if things change or it doesn't come in a reasonable time that you would look at giving it back and I'm just curious like how you weigh or how you define that reasonable time, and what you think because it seems like Tim you listened a lot too.

These these investors that Hudson currently up and so when you talk to them about that Optionality. When you if you see that loan growth coming two to three years.

<unk>.

Is that enough time or do you feel.

Maybe not pressured isn't the right word but do you feel this decision has to be made within the year.

No I don't think within a year, but thats, where I view like the buyback.

I view that Theres at least.

Again, I'm not a big acquisition person.

But I view, we have at least three levers put acquisitions off the table.

You got dividend increase.

No.

Maybe retail shareholders value that more than institutional shareholder, but got dividend increases <unk>.

Got share buybacks and as I said previously I think we we will change our posture from last year to being sort of a bottom Fisher to to maybe a mixed strategy and then I think you always have the opportunity to do a onetime dividend and.

Tom.

What I mean, you've worked with me now 25 years, what I'm not going to do and I am not criticized in the past, but I would not have sat on this capital since the IPO like this I would have already got.

Just to let you know and I'm, not saying I could have been wrong, but I was encouraging us buying stock in third quarter of 'twenty and it was at $9 a share and I would not have gone out and bought 20 or $30 million, but I was for us doing much toe in and do $4 million to $5 million and so I think theres going to be a balanced approach going forward and it's a little bit like.

Piccolo and baseball, where someone's comp between first and second and we're going to get the player on base.

Okay I appreciate that Tim.

Yes.

Thank you. Our next question comes from Jennifer <unk> with <unk> Securities. You May proceed with your question.

Thank you.

Question for you about wage inflation and what Youre seeing there is.

As it relates to new hires or even you are correct.

Base.

I mean, we all everybody wants to make more money and Thats just part of life right, but I would say in Nashville, Theres a lot of workers. There is a lot of people wanting to move here. So I would say it has not been extreme and we've got a management as a company we value our employees and we want to pay people as fairly as possible, but there is also a market out there and so.

We hope our employees are reasonable we want to be reasonable we love our employees, but we've not seen that as much I'll tell you. What we see more is just people that want to work from home.

<unk>.

That's more of a challenge of what I see I was talking to one of our board members yesterday.

And they run a substantial company and their CFO retired.

And it's a huge manufacturing organization and they offer the CFO job to a new person who accepted it was going to start like this week and the person call. This week and said I'm, sorry, I can't take the job My company matched your compensation incentive can work from home.

And this person is running a substantial manufacturing place they want their CFO there at the office.

We have a little bit of that and I respect my employees that feel that way and if they find an opportunity.

We will we will hit that but we'll work with that and find a replacement because.

I just think in our business, whether youre in loan ops, our deposit ops or the accounting Department you can't build hustle and you can't build culture I mean, Jennifer It drives me nuts, you don't know how many times.

You need a meeting and it's like Okay hold on let me get this person on the phone okay. We need the second person, let me get them out.

They didn't answer their phone and I'll come back to the first person.

Oh <expletive> that person's come calling and now let me hung up and call them back I mean, it's a nonstop it's maddening and so.

I would say that's the biggest issue we're facing is the lack of productivity and inefficiency.

<unk> of people wanting to be out of the office.

It's a big issue.

To your point, Jennifer I was just I was watching and listening. This morning, I think there was a really good article somewhere about that in general it's costing employers something in the neighborhood of seven 7% or so is this wage wage inflation thing that you've that you mentioned in <unk>.

<unk> point I don't think we have that I don't think we've experienced that in Nashville.

But it is something that we are.

I mean, the whole dynamic it is something that we're watching and and the like but we've been very successful.

I mean, we had a.

All employee call yesterday afternoon, and we must have had three or four.

Pages of new new hires that had started in our last 60 to 90 days in.

And really haven't haven't had significant.

Turnover either so.

We are we're making.

Our case for for employees with good jobs and opportunities and.

So far.

It hasn't run out from under us yet, but we're definitely keeping an eye on and your best recruiters Your best employees and I got an E mail yesterday from one of our highest thought of employees and they've got a friend that I won't mention but works at one of the really big banks.

I looked at the linked in and I think had been there 16 or 17 years.

And our highest employee said that employee reached out to him and said anything at cap Star NHS, they've had enough of that really big bank. So.

People like being on winners and we've created a winning culture here. So I think we can.

There may be some increase I'm, not saying there won't be any but I think we can balance it.

Okay. Just a follow up question you've had a lot of questions on operating expenses during the call.

Let me take it from another angle.

It's hard to know what theyre going to be this year, depending on your hiring.

But is it fair to say.

If you look at your bank only expenses.

And you're successful with the recruiting that you have in your pipeline today the ones you've mentioned on the call.

Wood wood with those new hires essentially offset.

The.

Ian.

The hiring Ken as you had this in 'twenty one.

I think it depends on the size of the team you hire right. So.

The team we're hiring comes with five people. That's one thing if it comes with tenants. Another so I think that's I mean I.

I appreciate the angle you are coming from but to give you an honest answer I think that's hard.

Hard to do.

One thing I'd say about our expenses I don't think we've talked about today.

There's a lot of leverage in our current expenses.

The the model when I got here is there really was for bankers that were truly producing when I got here.

One of them did about a 100% shared national credits one of them that about 40% out of Nashville participations.

Those two are no longer with us.

And we've got now probably.

I'm guessing 10 bankers in Nashville that are part of that $500 million pipeline and they've got anywhere from 25 million to $100 million portfolios well all of them should be able to achieve $100 million higher so.

In addition to what is the expense base I think there's a lot of revenue that can come out of the existing expense base because several of the bankers. We've gotten we've got this pipeline and I think their books, we have the ability to grow books and loans without having to add a lot of new expense.

Okay. Thank you.

Sure.

Thank you. Our next question comes from Freddie Strickland with Gms you May proceed with your question.

Hey, good morning, guys Hi.

Hi, good morning.

Just.

I'm wondering what the incremental some of it is just an economic outlook among our customers.

Did they seem a little more positive.

Especially I would guess.

So given your guidance.

Loan growth, but just.

Are they running up against issues with Amazon supply chain issues or things largely looking brighter.

This is where an interesting markets I mean I go back to if you will if everybody will reflect on page 22 of our slides.

Yeah.

You look towards the bottom of our access growth.

Just take a second and look at our projected population growth and these are pretty good banks on this page I mean these are the banks that are trading at the highest <unk> size I mean, you've got Greenville, I mean, <unk> has an outstanding bank and think about the great market season and.

You've got some good.

Dana has great markets at home Trust look at the population growth for our markets and look at the household income growth and what ours is versus these great banks. So I would just say we've had a lot of resiliency through the pandemic.

<unk>.

We unfortunately have had health issues and sickness and death in our communities.

But our communities have remained robust and I think some of that's the leadership of Tennessee, where very fiscally well run state I think that Knoxville, Chattanooga, and Nashville are very physically well run so.

Yes.

Don't want to say, we didn't have a blip, but I think our credit and our deferrals and all of that speaks to that.

Our customers held up very well and were positive to it and I think theyre just as positive today have not heard any major supply supply issues. Chris anything you are hearing from what I would say is everybody has some sort of constraint that is a result of the pandemic, but theyre finding ways to shuffle things around.

And to make it work.

We also have.

A strong construction market that continues to drive demand.

A good supply of new workers coming into the marketplace and so on yes. There is there is positives and minuses because of the pandemic and supply chain, but it's better to be managing those in a growth market than than in a stagnant market.

Yes.

Got it so just kind of managing through it and continue to move towards kind of the way we should think about it.

I would say I have a little stronger.

Spreads are a little stronger than that I think they've managed to I mean, you just have to come over here.

<unk>.

It's been probably 12 or 18 months, but I mean, Nashville had more cranes per capital than other than Dubai. We were number two in that that also can be a scary time, but.

But.

My daughter, just started girl Scouts, we had a late child, she seven and my wife win and we were like the resident Nashville in and we've been here two years in.

There was a lady from Australia, one from Switzerland to from New York and one in four women Wilmington, North Carolina.

So I.

I mean, it's unbelievable the companies that are moving offices.

And then even individuals that Jeff I heard yesterday, I think I can't remember what firm it was but one of the people that run the technology.

Investment banking practice at one of the Bulge bracket firms I don't remember if it was Morgan Stanley or Goldman our JP Morgan, but they are moving from California to here and Theyre just going to run the whole practice from here. So a lot of great things happening across these three metro areas and frankly, our community markets tell us it blends into there.

There's a lot of people that don't mind, driving 45 minutes to an hour to work, especially if they're coming from California.

So they want a little bit more land or not not urban so.

I think it's pretty strong steady.

I think youre over that way I would put it very similar to Charleston, Greenville and Charlotte.

Very similar our three markets I would say to those three markets.

Gotcha.

A lot of sense I appreciate the color on thanks for taking my questions.

Thank you.

Thank you. Our next question comes from William Wallace with Raymond James You May proceed with your question.

Hi, good morning, guys.

Morning.

Alright.

I'll, probably beating a dead horse here, a little bit but.

And just a little bit confused in the.

In the deck and in the prepared remarks, you spent.

Decent amount of time talking about capital deployment and suggesting that.

Youre going to be more aggressive, suggesting that a special dividend was a very realistic potential and then during the Q&A Tim It sounded like you were saying well, we're not really interested in that.

Those forms of capital deployment, because it's a higher return on capital to hold it and invest in teams. So I just I'm trying to figure out what is the tipping point for you to decide one method versus another.

As youre thinking about the kind of optimizing the capital base at the banks. So any color you can help to.

I don't know more specifically.

Kind of help us think about.

When you might do a special dividend versus sitting on the capital to Opportunistically hire myself.

Hi, Betty this is Dennis I won't give time to think.

And tell you.

As Beth there as I see it that we will be.

Number one we will be more.

Interested in the buyback based on our renewed repurchase authorization.

That will that.

We just announced in connection with the release so Thats number one we will we will utilize that lever. We will also be looking very closely at making sure that our dividend payout ratio gets up closer in line with some of our peers. So we will we will be taking a look.

At that and utilizing it we will be evaluating.

Good organic growth opportunities, whether thats in individual bankers or teams of bankers and the like.

And then on top of all of that.

Those are three pretty good things, we've got in front of us.

We are going to deploy some level of this excess capital that we have here.

Okay.

So we are going to.

Return that capital utilize that capital deploy that capital you pick the additive in the.

That you want to.

Frame it around but.

It is affecting our I mean, it is affecting our ratios and how we get compared to other peer banks just as Tim mentioned on that slide thats in the deck with all of those peers across the top of it.

For whatever reason.

We are not getting the same multiple than we think.

Our shareholders deserve.

Deserve some of that excess capital back in one way or the other and we have three or four good ways to do it and I don't know if Tim wants to put a timeframe on things but.

We have.

Go into the interest rate environment, that's going to be a rising rate environment here and we're going to have so we're going to have.

Just a ton of opportunities we would like we would like the investment community to really look at the upside of cap star in light of these opportunities.

See the see the franchise from our perspective I think that's what Tim was trying to do.

Yeah, So William what I'd say I guess my message is.

The company IPO, Ed I was not here I believe it was in 2016 and.

There is no criticism, but.

In hindsight looking back which is easy too much equity was raised for the growth that was delivered.

So <unk>.

Messages.

<unk>.

I think and I think because of that I think there is a hidden asset on our balance sheet, but if you do my math I'm a shareholder too.

I don't think thats in our value.

And I could in theory, and I used to work theoretically in here I could in theory dividend that out today and I would have the same net income.

So I think we have a hidden asset that everyone's sort of gotten comatose or immune to.

Because it's just been there and the cap the Companys Jesse it's just almost like part of our company and so my main message is we are not going to operate that way going forward that's number one.

And so I would just say back to that slide I don't know the number there is a order right and the first order is organic growth.

And if we had no organic growth possibilities or reasonableness.

Would be looking at the economics of buyback, increasing the dividend or one time share repurchase.

Fortunately I think we've demonstrated with Knoxville, and Chattanooga that those don't need to be high priorities. So somewhere in my comments I mentioned that the return of capital will be secondary so messages are really number one.

We have sat on capital too long.

We're going to put it to use we believe that we have demonstrated in the activity. We have we got plenty of reasons and ways to put this to us. So I think that's going to be the outcome.

And in the interim.

We will probably use our buyback.

And increasing the dividend.

Secondary more lightly used to work around the edges of of when this growth comes in so I don't foresee a special dividend. My message is that we are not going to hold onto this capital. It is an under appreciated asset on our books and if you adjust.

Just for it.

TCE last year would have been nearly 19% that's really what we want our investors to know is this is a much more I mean go to page 22.

And look at all of these great banks that are trading higher.

They've got 180 basis points less TCE, if we adjust ours would be 19% on this page there are <unk>.

Estimate is there going to be 11, six and you All's models. So that's really what we're trying to get out is just.

You all have 5000 banks to follow and if I was an institutional investor. There's 5000 I can pick from we're just trying to do some of this and put some points in front of people that are maybe not popping out as much.

And also don't forget don't forget that each year that goes by.

We're adding 40 48.

<unk> 48 or $50 million of additional capital into our into our franchise. If we don't do anything just from the just from the net income of the company.

So each and every year each and every quarter we have.

We are generating additional excess capital that adds to the excess that we already have so.

Tremendous opportunity.

Thanks, guys I appreciate you taking the time to provide some clarification I'll step back thanks.

Alright go RBA.

Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Tim schools for any further remarks.

I don't have any further remarks, I, just I'm really sincere that we really appreciate our revised guidance and help this has been a great team effort and our employees are working hard our board's working hard the management team I. Appreciate all the institutional investors that have come along and given our guidance and I. Appreciate the sell side analysts that are following us so.

I think collectively we're all doing a great job and we look forward to a really exciting 2022, so everybody have a healthy year and we look forward to seeing you soon.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

[music].

[music].

Good morning, everyone and welcome to cap start financial Holdings fourth quarter 2021 earnings Conference call.

During the call today are our cap software from GAAP start Tim schools, President and Chief Executive Officer, Dennis Duncan Chief Financial Officer, and Kristy Chief Credit Policy Officer. Please note that today's call is being recorded replay of this call and the earnings release and presentation materials will be available on the Investor Relations page.

<unk> of the company's website cap Star Bank Dot com. During this presentation, we may make comments, which constitute forward looking statements within the meaning of the federal Securities laws. All forward looking statements are subject to risks and uncertainties and other factors that may cause the actual results performance or achievements.

<unk> started 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 a more detailed description of these and other risks uncertainties and factors are contained in <unk> public filings with the Securities and Exchange Commission, except as otherwise required.

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

We would also refer you to page two of the presentation slides for disclaimers regarding forward looking statements non-GAAP financial measures and other information with that I'll 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 your interest in cap star.

We had a terrific quarter and year and when we look back it is rewarding and exciting to see how far our team has come.

I saw an early note on todays earnings that said, we finished 2021 strong I understand what was Matt, but I can promise you were just getting started and.

In the fourth quarter, we reported earnings per share of <unk> 56.

And on an annualized return on average tangible common equity of 15.0% to 2%.

For the year, we earned $2 19 per share.

And the annualized return on tangible common equity was 15, 45%.

I will go into this later in the call, but our underlying profitability and capital generation is somewhat stronger as we currently have nearly 200 basis points of tangible equity than the industry average.

There is a lot of value in the excess capital as it can be invested for additional earnings.

For sure or returned to shareholders in the form of dividends or buybacks, where we would essentially maintain the same earnings as today as the excess capital resides in non earning or low earning cash.

Yeah.

Internally, we focused on four strategic objectives.

First enhanced profitability and earnings consistency.

Accelerate organic growth.

Third maintain sound risk management, and fourth execute disciplined capital allocation.

As well as four key drivers revenue growth net interest margin efficiency ratio and net charge offs.

I'd like to highlight a few of the achievements within each of the four strategic objectives.

On profitability, we are very disciplined on pricing.

Anyone can put on growth not everyone puts on profitable growth.

Our fourth quarter match funded spreads for two 5%.

That is a lot of profitable growth.

We also have a higher discipline on expenses, we speak internally of being frugal, but not cheap.

We are also working to be productivity minded and have productivity work metrics.

Second as it relates to organic growth.

Our annualized loan production was $1 billion in fourth quarter.

Not one penny was a participation.

This is an increase from $674 million for the full year.

And 445 and 296 million the prior two years.

Our Nashville market has increased production and we have added Chattanooga, and Knoxville, and three fantastic community markets.

In total our commercial pipeline currently stands at $500 million.

Excitingly, we have two offers extended for two additional bankers with over $100 million loan portfolios in existing markets and are in discussions with a team that has $500 million to $1 billion in loan balances.

As noted later in our deck. We are also aided by leading market demographics.

Third we are strong risk managers.

We have done a stellar job overseeing the health and care of our employees during the pandemic.

We've been proactive in managing credit risk to both assist our customers and protect our shareholders.

And while work has been done to tame interest rate sensitivity, we remain modestly asset sensitive.

Lastly, we are laser focused on putting our excess capital to work and we will cover that in more detail later.

With that I'm going to turn it over to Dennis who will provide you details related to the quarter.

Thank you Tim and good morning, everyone I'm, starting on slide seven of the.

Earnings release deck net interest income was $23 million for the quarter, which was consistent with the third quarter. The net interest margin was $3 one 4% for the quarter up two basis points due to loan growth increasing rates and continued PPP loan forgiveness phase.

The adjusted NIM for the quarter was three 4% adjusted NIM, meaning we look at the impact of excess deposits, which adversely impacted.

Impacted the NIM by 44 basis points.

And takeout PPP loan forgiveness fees, which favorably impacted the NIM by 18 basis points.

Net interest income in total will continue to benefit from a shift of our earning assets into loan growth.

And our investment portfolio was down slightly from the third quarter, both on an average basis.

On slide eight.

Average deposits of $2 7 billion remained near record levels.

Average DDA deposits also remained near record levels for the quarter and we remain focused at cap star on building core deposit relationships across our markets.

Deposit costs held flat for the quarter at 19 basis points as we continued to lower high higher rate time deposits.

Really offset by.

By an increase in our correspondent banking deposits.

Our excess cash balances are continuing to be strategically deployed into loan growth and purchases within the investment portfolio, where we see opportunities and again were committed to cap star to a deposit first culture, which will ensure strong core funding as we move forward.

On slide nine.

Total loans less PPP, we're at record levels at quarter end and grew $109 million or 23, 7% annualized between the third and the fourth quarter.

Total PPP loans were $26 5 million at the end of the quarter down $38 million from the from the third quarter and total earned PPP fees at the end of the year totaled $630000.

In regards to production as Tim said, our relationship managers have done a great job in improving pipelines, which provided momentum for the fourth quarter and for 2022, and we're pleased that production for the quarter came from across our entire footprint, which includes our newest team in Chattanooga and our recent Knoxville market.

The yellow and the yield increased six basis points to 447% for the quarter with loan coupons, increasing by four basis points to four 7% PPP fees in total were relatively flat for the quarter.

Which contributed to some of the increase approximately five basis points.

With lower average balances.

Most importantly.

Main discipline in our pricing on new loan production with match spreads as Tim said of approximately two 5%.

In addition to solid loan growth record pipeline levels and pricing.

We continued in 2021 to reduce our shared national credits and loan participations.

On slide 10.

Noninterest income was strong in the fourth quarter our.

Our unique fee businesses have contributed over 30% of our revenue over the past seven quarters highlighted this quarter by our strong Tri net business, which generated almost $4 million in fees.

We also produced record levels of debit card and interchange fees and SBA continues to be a positive contributor with strong growth prospects.

Mortgage revenues were down some for the quarter due to seasonality after experiencing a record around our results in previous quarters. We are continuing to see a strong mix of purchase volume in our mortgage business, which reflects the economic health of our markets and the strength of our cap star mortgage team.

Slide 11.

<unk>, our noninterest expenses were $18 7 million for the quarter, which resulted in an operating efficiency ratio of 50, 474%.

Our core bank, which is our core bank, excluding our mortgage efficiency ratio was $52 three 8% for the quarter.

Excluding about $408000 of expenses related to our fourth quarter investment in Chattanooga expenses declined slightly from the third quarter.

Within salaries and benefits incentive expenses continued to run at higher and higher levels due to our strong operating performance for the year, So even with the increased incentives and expenses related to Chattanooga during the quarter.

<unk> ratios remained at record low levels.

With that I'll turn it over to Chris Tietz, who will discuss our credit position great. Thank you Dennis once again, it's good to be able to say that because asset quality is so good or comments can be brief.

First turning to page 13, we are pleased to report that we continue to maintain low levels of delinquency. While we are proud of the improvements that our team has achieved we believe that our focus on improving processes and oversight will all else equal allow for continued improvement over time.

The trend of improvement in our criticized and classified asset levels continues in the fourth quarter now at 264% of gross loans.

We believe that this represents a very low level, particularly given the economic challenges presented by the pandemic I also should note that at current levels our ratio of criticized and classified loans is below five year averages in the respective components and is now at near pre pandemic levels.

In our ongoing reviews of criticized and classified loans, we assess individual borrowers on the direction of risk the magnitude of exposure, if any relative to bona fide collateral values and our expectation for the future direction of the borrower's performance. The good news is that based on the future looking focus.

Of this review process and the secured nature of many of these credits we continue to maintain a positive assessment and outlook for credit risk in coming quarters.

As noted in the lower left graph with improvements in asset quality, we continue to experience very low levels of charge offs with an average quarterly loss experience over the last eight quarters of less than $165000 per quarter.

While we are proud of our measurable asset quality results I also want to highlight that we are proud of our continued focus and disciplined adherence to our community based banking strategy qualitatively. We have achieved these results and our growth remaining focus on lending to relationships in our local markets and without reliance on <unk>.

<unk> of risk to a small number of large individual borrowers are projects. We remain committed to this and believe it will yield consistent results over time.

Finally, turning to page 14, we note that improvements in asset quality and the general economic environment enabled us to reduce our overall level of reserves to a level that given the positive factors that have all I. Previously noted is appropriate to our current assessment of risk and expectations in this environment with that I'll have.

It back to Tim to discuss profitability and capital management.

Thank you, Chris I'd like to spend a moment on slide 16 of todays presentation.

I know everyone thinks about this differently.

Referenced earlier on our profitability and capital generation.

This page takes our reported numbers and adjust our profitability. If we were to operate at industry capital levels. As you can see on an equivalent basis, we are a very profitable business model.

This excess capital, which in this example is $66 million is earning close to zero.

Therefore, it could theoretically be dividend it out in the shareholder would have the same earnings with $2 to $3 per share in their pocket that they do not have today.

If we maintained our 'twenty three consensus which by the way we feel is reasonable at this point pay of 10 five times that is value that is not in our current stock price.

If you take the position the excess capital is in our current stock price and valued at one times book than the remaining bank is trading at eight five to nine five times 23 consensus.

On page 17, we lay out our capital management priorities.

We're actively focused on putting our excess capital to work.

And the high capital generation of our core business.

This week, we reauthorized, our $30 million share repurchase authorization and envision that dividend increases will be part of our capital plan.

We see these as valuable and important secondary tools, we will use depending on our growth.

And equity market conditions.

On slides 19, and 'twenty through 'twenty, one we share some of the hard work that is occurring that does not show up in the financial statements.

We appreciate the support of all the constituencies that we interact with.

We have a larger number of people paying attention to cap star today, and we value. The time, you put into understanding our business vision and results.

Yeah.

Particularly I would like to thank Wellington.

<unk> capital <unk> Kennedy Ranger Covington Mendan in bank funds.

And all of the others that have supported us during our transformation.

Our support and guidance has been invaluable.

On slide 22, we present a scorecard of.

The highest valued banks our size in our region.

At this point based on a price to earnings.

Of note our profitability growth and soundness are favorable to this group.

However, our valuation on an earnings basis has 20% upside.

We believe we have a high performing and scarce franchise deserving of a similar if not higher earnings multiple.

Our price to book multiple is hard to compare again due to the excess capital we have even to this group.

On slide 23.

We are excited about the upside in the valuation of our company.

Whether it is multiple expansion multiple expansion and a return of excess capital in some form.

Or multiple expansion and investment of the excess capital at our core return on tangible <unk>.

Capital level.

There is a strong case for 30% to 40% upside in the valuation of cap star in the reasonable future.

As I said, we're just getting started.

Once again, thank you for the time, you invest and following and understanding our company. We appreciate your support.

This concludes our comments for today's call and welcome the opportunity to answer any questions.

Thank you as a reminder back to a question.

You will need to press star one on your telephone to withdraw your question press the pound key.

First question comes from Stephen Scouten with Piper.

Sandler you May proceed with your question.

Yes.

Hey, good morning, everyone.

Please go ahead.

I guess, maybe maybe if I could start just around.

The capital plans of share repurchase I mean, I know you said.

You want to be opportunistic there.

But obviously, it's been outstanding for some time and hasn't been utilized so just want to think about that in the context of where you feel like.

Youre illustrating its potential upside in the shares and how aggressive you might be with that today.

I would say medium we are more focused on growth.

We reported here that Chattanooga.

Was $53 million in about 40 days as of today, they are at $75 million.

They anticipate that they could book another $75 million this quarter.

Like I said, we've got two offers out to two other people we're talking to a team that has 500 to a $1 billion. So when you look at an IRR of that kind of model. We've got two now Knoxville and Chattanooga, the IRR on that is closer to 30% to 35%.

And if you've built an IRR model buying back a share today at $21 and even though I think the price is worth 25 to 27, if you do the IRR of.

Buying it today at $22 or whatever and the dividends you would save.

Those IRR has come out to be about 20%. So still a fantastic IRR, there's economic value added to your cost of capital, but we believe the franchise value in absolute IRR of our core investment is higher so as long as we think those are realistic and in the near term we understand there is a time <unk>.

You have money and I think this money has been setting and <unk> are too long.

So as long as we think they are reasonable ones, we'll do that I will tell you in Hawaii.

I did a onetime dividend of $65 million to shareholders because they were sitting all this equity they werent using and it wasn't growing.

And so I've done it before and we will consider all levers, but we're very focused on putting this capital to work.

Got it got it so it sounds like I mean, obviously organic is the focus which again I agree I think that's right, but maybe it could be both at the same time share repurchase and organic.

Excluding capital ARVO, Yes, and what I would say, it's been an evolution of cap star when I came in and I don't want to criticize anybody's view because theres a lot of smart people in the world and Tim schools does not have all the answers but.

When I came in we talked when Coursera was exiting three years ago about buyback should we buy all the shares should we not.

And there was a lot of different views I mean, theres a lot of people that have more of a regulator view that you can't have enough capital.

But you are never going to grow your book value at the same rate so.

I just believe that capital management, if you read the book.

The outsiders, it's a big contributor to returns.

So I would say we've gotten the board there that I don't want to say, we've educated them that they're further along on the role of that in managing returns and I would say that last year. When we put in the 30 million. We thought that it was still an uncertain economy didn't want to be too aggressive in our price.

It was a pretty low price at that point and I would say, we will take a more balanced approach right now going forward.

Okay. That's helpful. And then maybe another question for me is just around.

These new teams you are looking at can you give us a feel for if these are end market team if youre looking at additional expansion markets like Chattanooga, and Knoxville or kind of what the what the focus is in 'twenty two.

As it pertains to new hires and then what that could look like from an expense standpoint.

And kind of how how.

How we could best model expenses, and a 2% of average earning assets or how do you think about that in budget expenses for 2020.

So I don't really want to comment on markets I would say just so we're all on the same page if I had to draw up a loose.

I imagine your focus.

I would say.

I just I don't see us at this point, there's no need for us to go say.

Really further east of a Charlotte or in Asheville.

And I don't know if we'll go west from here. So I would just I mean, you can sort of ring fence the markets we're interested in.

I would say principally middle, Tennessee, East, Tennessee, maybe western North Carolina to Charlotte Upstate South Carolina, maybe maybe northern Alabama, but nothing outside that.

While there can be teams available I, just don't know, it's hard to manage as far away. So.

That would be our focus at this time.

Okay, and then just how to think about the expense build of teams like that.

Yes, I don't have my number.

Guidance, there, but I think if.

Everyone reflects back to our last quarter slides, we tried to put more than other banks try to TD.

Treat it more like a merger and I think we put the expected earn back period and dilution as well as growth and I don't have it right in front of me, but from memory like Chattanooga.

They're starting at the beginning of the year, which is rare because sometimes in middle of the year and I think we were anticipating that that may be a cost of like five or something the first year and then the second year of full year, it's basically breakeven and in the third year I can't remember you may get 5% or 10.

But man when you get to year, three and four it gets to be like $20 $30 40, and so.

Youre not handing out shares they're easier than acquisitions to roll in.

And so.

If we do another one will lay that out again, and we're trying to get better each time to give as much information as we can but from memory. The Chattanooga expectation a number a number this year was about <unk> cost.

Yes, there is a slide there is a slide in our in one of our previous decks Stephen that laid out the economics of it and share and we're just.

We're being fairly conservative in terms of.

The loan growth in the.

Buildup on the revenue side.

And and being conservative like that.

Tim's right. It would have been about a <unk> <unk> dilutive.

The impact on our EPS and the and the 12 months following the lift out.

Then it turns then it turns depending on your assumptions for loan growth and it turns to neutral.

To slightly accretive in the second full calendar year, and then gets.

It gets a lot better.

As you move forward.

So if we were able to.

Do another one at Hatter announcement of another similar Chattanooga lift out.

<unk>.

In accordance with.

Announcing that we'd probably.

Show you, how the economics of auto worker gets you that information.

And I can't promise because.

Youre dealing with people in different situations and families and other opportunities, but it's my hope and my expectation that we will we will announce another Chattanooga this year.

Yes.

Okay.

And I guess, maybe just to follow up on that.

I don't really have a good feel for you guys for where expenses are going right. I mean, it is $18 7 million run rate that you don't do any new <unk> acquisition. I mean is that 18 seven a good run rate.

We talking 10% growth in expenses next year, we're talking five.

Just kind of any color on how you think about that a ring fence and those numbers a little bit. When we think we think we've done a really really good job of managing expenses. So there are but but then within that $18 5 million there are certain things that.

<unk> are beyond our control would depend on what you how you model your stuff out but.

Mortgage is very.

Compensation rely on in terms of how much mortgage volume you have would drive mortgage incentives.

Theirs.

But on the core bank on the core bank.

Expenses in the core bank.

<unk> estimates.

We don't see we don't see.

Right now unless we did another lift out of Andrew our expenses are.

In pretty good shape.

We're working hard to try to keep that efficiency ratio down under under 55 for the total company but.

Hopefully get the.

The core bank efficiency ratio down.

Most are sustainably to somewhere around 52, or even maybe just a little bit better but.

This year in this but these numbers that you.

Are looking at we maxed out because just because we have such a great year, we maxed out on all of our.

Corporate incentive plans and so as we move forward into 2022, as we've reset budgets and reset expectations and the like we have we have really in our budget more kind of more normal levels of corporate incentives. So I mean, there are some there are some.

Benefit that we'll get there.

Depending on whether mortgage goes up or down with drive.

Compensation levels and mortgage.

But in general.

We feel we feel pretty good about our expense levels.

Okay very helpful. Thank you guys subscribe akshay.

Yes.

Thank you. Our next question comes from Brett <unk> of the group you May proceed with your question.

Hey, guys good morning.

Yep.

Wanted to talk about the fee income guidance for a minute and just particularly the China They had.

Really good 21 and results kind of built throughout the year and I guess I'm not sure.

When I look at the guidance.

Sure.

Fee income this year, I guess I understand the mortgage piece, but.

Maybe you can talk about China.

Fourth quarter.

Formats, and then kind of why.

The reset on a quarterly basis for.

'twenty two.

Yes, sure I'll start and then let Chris pitch in on.

One of the challenges of the year like 2021, as we all get excited right and I think we lose sight of the PPP the mortgage the Tri net unusual Miss Thats not sustainable.

Go back New chart Tri net as a business and Chris will be able to quote the exact numbers.

But.

I think 19 may have been about $3 million for the year and 'twenty may have been about $4 million for the year and then all of a sudden 21 was this crazy year and I think he's going to tell you is two things led to just unbelievable performance in 'twenty. One one is everyone in the country has a ton of liquidity and.

<unk> does not have the asset generation of cap star and so banks need need investments.

And so.

There was a lot of volume that we produced.

That went into that and because of the bidding the spreads got wider.

So I think what we're doing as reasonable business people is doing more of a linear line.

And trying to.

Look at our regression may be taken out the abnormally of 'twenty one.

And even if this year was $5 million or whatever it is a continued steady growth. It's just it was a huge blip last year, but I'll, let Chris expand but that's the challenge it's really as hard as it is for you all to forecast we'd love all of these to stay at that 21 level, we hope they do but even as when we do our 'twenty one budgets.

We're trying to not fool ourselves and just say, okay, let's look at the prior year or two where were they hopefully we're doing better than those years, but let's do something reasonable. So we're not putting a hockey stick out there, but Chris what would you add yes, I would say Brent in the big scheme of things like mortgage we will make more money and tri net win rate.

So we're going down and we will have a little bit of a squeeze as rates transitioned to higher levels until they plateau as I said last quarter, we avoid giving specific guidance on tri net.

I went ahead and did go out and say that we would have expected it to to achieve levels of performance similar to the earlier quarters in 2021.

The fourth quarter, clearly exceeded that by a long shot.

We're still holding to the guidance that I gave you last time, if you were to look at it on the full year basis, it would be somewhere beat our expectation would be somewhere between the roughly $3 $7 million, we made in 2020 and the <unk>.

The $8 $6 million, we made in 2021.

Hi, Brett this is Dennis.

You have same page 25 of your earnings release deck.

Yes, Okay got it.

So even if we do $1 three to $1 five I mean, that's that's five $5 million to $6 million, a year, which would be a nice increase over where we were in 'twenty.

Okay.

Fair enough and then can you guys talk.

Maybe about the variability of the loan portfolio and how much is at or below floors and.

Just thinking about.

Potential margin upside I know in your filings you have got a 1% increase in NII for 100 basis points, which.

Seem like Youre asked your asset sensitivity would be a little bit higher given the cash you have on the balance sheet maybe.

Talk about the margin and the asset sensitivity in the variables.

That's a very complex topic.

We can have a whole hour on that and so it's hard to just talk about one component of like loans and floors.

We've got beta is while you have all the cash you also have betas on your deposits that will go up as well so.

I would just say what we've done.

As a young company what I saw when I came in and studied I think our margin went down more than the bank was modeling and when you ask why did that happen.

Think that we were not managing deposit betas, and we had a lot of risk in our deposit side.

<unk> had a lot of individual negotiated rates with wealthy people.

When rates went up say in 15 and 16 I think the overall increase in the margin was what was expected.

They got there a different way I think that all of the data went to sort of the most vocal people that called in and wanted all the data and a lot of people got no data and so when rates went down.

Those people that got a 100% of the beta didn't want to give it up but you didn't have any relief you could give to the others. So I would just say on interest rate risk.

We've been working the last 24 months to manage closer to neutral and we want to grow our bank by putting on profitable balances. We're still asset sensitive we've really reduced that deposit risk both through the acquisition of three community banks, but also getting away from all that hot money. So.

We can talk offline about if you would like more detail about individual categories, but I think thats a complex conversation for the phone.

I would just I would just add on that one thought as we feel we feel given our given our loan portfolio and the.

The pricing on it as well as the expected.

Things that the fed is going to are going to do in the near term.

We feel like Brett we will we will be able to add net interest we will as rates go up we will be able to add that interest income is just a matter of.

<unk>.

How much so.

We're well positioned on our balance sheet to be able to and I wouldn't call it take advantage, but to maximize our ability to.

<unk>.

Drive net net interest income higher.

Okay, Great I appreciate the color.

Thank you. Our next question comes from Catherine Mealor with <unk> you May proceed with your question.

Thanks, Good morning, Hey, good morning, Jeff.

A follow up on interest rate sensitivity conversation do you have can you remind us what percentage of loans are floating and will reprice immediately when we start to see right.

I don't have it exactly on us now.

Okay.

Yes.

And then so another.

So maybe asked another way is would you expect.

And then as I look at the.

I kind of agree that the 1% up.

In a 100 basis points feels really low just kind of given.

The structure of your balance sheet, and particularly I remember last cycle. It feels like the loan book with.

Very highly floating so maybe just net without asking for a specific number.

So sorry.

So again.

Or is it how does that change because you've kind of gotten rid of nick than you'd like.

Change within your loan portfolio, maybe are you not as variable rate as you, possibly were last cycle I think that the way to think about it.

Not because there were a lot of the snacks, where our LIBOR based and overnight number one and we're doing more traditional regional bank lending so that would be one and number two I just we're continuing to learn and evolve I just learned in our latest Alco I think some of the beta is we're using in our modeling are too aggressive and im not quite sure why we were using.

And then but.

If the betas on the deposits were too aggressive that's going to lessen your reported asset sensitivity because it's showing that your deposits are going to go up faster and that's so.

Anyway, we've been managing closer to neutral, we think will be modestly asset sensitive but were not we were not one sitting here, giving up earnings betting on a big rate increase we really really focused on growing the balance sheet profitably.

And as our loan coupons here at four seven this quarter with new production coming on.

I would say.

Tom.

You know it varies across the footprint obviously in Chattanooga.

Organization. They came from US is offering some very low rates.

To maintain some customers so as part of our new investment, we're having to match or do some of those but I would say generally in the market.

Again back to a $2 50 spread so it depends on the tenor.

<unk>.

I'd say, it's anywhere from $3 75 to $4 25.

What we do what we do is on any commercial loan we used the <unk> web site and we go find the matched tenor.

And we ask our bankers to seek 200 to 350 basis points on top of the match, what it would cost us to borrow.

Yes.

Okay.

And then on the Securities book.

<unk> balances decline this quarter whats your appetite for adding to the bond book of business for this year.

We are beginning to take a look at that Kathryn.

<unk> rates improving in the last.

A couple of three weeks, we've got some some really good.

Strategic things that we will be implementing that will probably.

Fell back up.

Some of that.

The decline in the investment portfolio, we have we really want to we really want to eliminate though.

But we will replenish a good bit of that in there is there is opportunities to do that so I think you'd see investment.

Investment balances go back up we've had a lot of other <unk>.

Good opportunities to do things.

Kind of alternative investments like corporate owned life insurance, that's done real well.

Making investments in Chattanooga, and the like but.

Yes, so Catherine I would leave this call today with one message and that's what we're going to put this capital to work or we're going to give it back.

And so.

I view the securities portfolio as a liquidity tool if.

If you do if you do a funds transfer pricing.

On a security is very low because.

You don't typically take a lot of credit risk in the investment portfolio. So we're going to hold that around 500 million guests in fourth quarter. It ran off some so we're going to reinvest cash flows we're going to put another $25 million on but we want to stay short.

We want to take this excess liquidity that sitting in cash or securities and put it in loans or give it back to the shareholder in some form.

Catherine I'm not sure it's Dennis I'm not sure what I'm not sure. What you were looking at trying to do but.

We just we just confirm that relative to our <unk>.

The variable rate loans in our portfolio or somewhere between 40 40.

Two or 3% up to $40 seven or 8%.

As the variable versus fixed.

<unk>.

And if you look at the up the F 100, or the down 100 basis point moves in the market we believe.

We know.

Not just believe we know that we can be.

Be able to make money in net interest income in a rising rate environment. So I don't know what.

Statistics that you are looking at there but.

We've had very conservative.

That base betas that we've been.

Assuming and we.

Feel pretty good that we'll be able to now it's all market. It all depends on what the market does out there too right I mean, some banks will aggressively try to.

Get some of those deposits that we have but I think in general my sense is backs well it'll be very competitive there is plenty of liquidity out there there are plenty of deposits.

And the ability of a bank to bring that.

Those changes in interest rates to the bottom line will be in their ability to.

Hold off on the deposit betas and keep some of that.

As much as much as for as long as possible I would say it that way.

Got it okay.

Super helpful. Thanks, Karen.

In fact, if I could squeeze in one more question just on the expenses, so you've guided to $16 5 million of expenses ex mortgage can.

Can you can you can you give us that.

Maybe mortgage expenses this quarter, just so we can kind of get a base for what that looks like and maybe what kind of mortgage efficiency ratio would be appropriate to model next year.

We can look that up I don't know if we have that right at our fingertips lens here is looking but we probably can do a better job because tri net.

<unk>.

Especially coming off of last year, because China in mortgage are pretty big piece of our company now and they are so variable.

It is it is interesting internally and for you all to understand what is the core expenses and what is it for them. So.

If you can pause just a minute.

There's a slide there is a slide on page 11.

In the deck I think.

I think it's page 11.

Maybe it's not in your deck, but we have a slide that somewhere breaks down all of the noninterest expense in mortgage mortgage banking expense has been running.

It did run in the fourth quarter somewhere in the.

$2 $5 million range.

No.

What was the mortgage expenses and.

And so that would take you from the 18 and a half you guys were talking about about being total expenses down to the.

16% to 16, and a half would be the core.

Pre tax pre provision.

Expenses.

The core bank expenses and again, we had again Kathryn.

I don't know the exact amount of difference but.

Included in our 2021 expenses for cap Star War.

Record record levels of corporate incentives that will we'll pay out to all of our folks know they deserve it because they've done a great job but.

<unk>.

We just had we really didn't have any idea that in 2021 all of our all of our businesses and everything would kind of come together for a record net income year. So next year as we've set our 2022 incentive plans and budgets budgets, obviously, our budgets will be higher.

It will be probably more likely that we would be back to nor.

Normal levels of corporate incentives. So we feel like we probably have some some room there that you.

Wouldn't wouldn't put end of the year.

Next year's expenses.

Got it makes sense all right. Thank you very much.

You.

Thank you. Our next question comes from Kevin Fitzsimmons with D. A Davidson you May proceed with your question.

Hey, good morning, everyone.

Hey, Kevin and we appreciate you being a new partner this quarter in initiating coverage.

Yes no.

Very happy to two.

Joined the the folks covering <unk>.

Most of my questions have been asked and answered but one.

One I wanted to ask about him.

D.

Your reference to talking to her team.

I totally understand about not wanting to get into the specific markets, but it's all very fluid but.

Last quarter, you might have been if I remember right.

You were talking about.

You had kind of wrestled with and we're getting more comfortable with the thought of.

We might be able to do more than one and I got the sense from your tone that you.

You guys were getting multiple inbounds and it was.

Potentially.

More than one team and new markets that you might be willing to shoulder and do at one time.

The fact that Youre just referencing the one team.

<unk> slowed down or you're just keeping the bar on our LOE because of everything being so fluid ends are in not wanting to over promise.

We just not want to over promise you I am sort of like the Hawk I've got the wallet in the where he went up 13 straight years with consecutive GAAP quarterly EPS increases so I've got that beating them ahead, and then I've got Tom GERD and me, which is the entrepreneur and I went down to the Sandler comp.

<unk> and I hosted a dinner and it was neat because I met with about eight people at dinner for two hours.

There was one sell side and obviously, Steve and it was just conference.

And.

There probably was six to eight investors at the table.

And one of the investors I don't want to say, who but a prominent investor spoke up and said hey.

Question.

Why would you even buy back one share <unk>.

<unk> said you all have a great company youre in great markets, you're getting inbound calls.

As a company why wouldn't you run it like a private company and a Chattanooga cost you <unk> why wouldn't you go to three more why why wouldn't you take on as many as you can that you can handle.

And just explain to us explained to us that hey, this is going to hit 22 10.

But look at what 23 and 24 does so I was really happy that Thats why I really put those comments in my commentary about thinking people.

Because this is a smaller company that ive been in not used to having all of this excess equity and we're not South trust were not a $40 billion steady machine and so I do think we need to be a little entrepreneurial. So that was very welcomed input and it opened my eyes, that's more how I think I didn't know how investors.

React, but if you were a private company and you were in my chair and you have this extra money you would be doing irr's and you wouldn't be worried about am I going to increase one pending next quarter. So I'd say, we're all over it and.

So I would be.

With that support I would be open to doing multiple as long as my company internally can handle the volume and at this time as of January 28.

<unk> got to offer letters out for two bankers and market that each have more than $100 million portfolios.

And then we're in pretty good discussions with the team that would depend on the team members that joined.

But depending on the team members sort of $500 million to $1 billion is what they have.

And Kevin and Kevin don't forget.

In the time frame when Tim was talking about multiple ones.

We've now done Chattanooga.

So right now.

I understand that I thought it was on top of that one but that's that's that's.

That's fine I appreciate just getting that insight into your thought process in and disagree with that at all.

One other question just on that because it sort of relates to this.

Uh huh.

How the investors think and so I'm wondering in your earlier commentary when you were talking about with some we want to ideally invest in this growth opportunity and they are great markets and so you can see the growth out there, but you also referenced if it if it doesn't come if things change or it doesn't.

Come in a reasonable time that you would look at giving it back and I'm just curious like how you weigh or how you define that reasonable time, and what you think because it seems like Tim you listen a lot to these these investors using highly up and so when you talk to them about that Optionality. When you if you see that loan growth coming two or three.

Years.

Is that enough time or do you feel may.

Maybe not pressured isn't the right word but do you feel this decision has to be made within the year.

No I don't think within a year, but thats, where I view like the buyback.

I view that there is at least.

Again, I'm not a big acquisition person.

But I view, we have at least three levers put acquisitions off the table.

You got dividend increase.

No.

Maybe retail shareholders value that more than institutional shareholder, but got dividend increases you've got share buybacks and as I said previously I think we we will change our posture from last year to being sort of a bottom Fisher to two maybe.

Our mix strategy.

And then I think you always have the opportunity to do a onetime dividend and.

What I mean, you've worked with me now 25 years, what I'm not going to do and I am not criticized in the past, but I would not have sat on this capital since the IPO like this I would have already got.

Just to let you know and I'm, not saying I could have been wrong, but I was encouraging us buying stock in third quarter of 'twenty and it was at $9 a share and I would not have gone in and bought 20 or $30 million, but I was for us doing much toe in and do $4 million to $5 million and so I think theres going to be a balanced approach going forward and it's a little bit like.

Piccolo and baseball, where someone's comp between first and second and we're going to get the player on base.

Okay I appreciate that Tim.

Yes.

Thank you. Our next question comes from Jennifer <unk> with <unk> Securities. You May proceed with your question.

Thank you.

Question for you about wage inflation and what Youre seeing there is.

As it relates to new hires or even you are correct.

<unk> base.

I mean, we all everybody wants to make more money and Thats just part of life right, but I would say in Nashville, Theres a lot of workers. There is a lot of people wanting to move the year. So I would say it has not been extreme and we've got a management as a company we value our employees and we want to pay people as fairly as possible, but there is also a market out there and so.

We hope our employees are reasonable we want to be reasonable we love our employees, but we've not seen that as much I'll tell you. What we see more is just people that want to work from home.

<unk>.

That's more of a challenge of what I see I was talking to one of our board members yesterday.

And they run a substantial company and their CFO retired.

And it's a huge manufacturing organization and they offer the CFO job to a new person who accepted it was going to start like this week and the person call. This week and said I'm, sorry, I can't take the job My company matched your compensation incentive can work from home.

And this person is running a substantial manufacturing place they want their CFO there at the office.

We have a little bit of that and I respect my employees that feel that way and if they find an opportunity.

We will we will hate that but we'll work with that and find a replacement because.

I just think in our business, whether youre in loan ops, our deposit ops or the accounting Department you can't build hustle and you can't build culture I mean, Jennifer It drives me nuts, you don't know how many times.

You need a meeting in a cycle okay hold on let me get this person on the phone okay. We need the second person, let me get them out.

They didn't answer their phone and I'll come back to the first person.

Oh <expletive> that person's come calling and now let me hung up and call them back I mean, it's a nonstop it's maddening and so.

I would say that's the biggest issue we're facing is the lack of productivity and inefficiency.

<unk> of people wanting to be out of the office.

It's a big issue.

To your point, Jennifer I was just I was watching and listening. This morning, I think there was a really good article somewhere about that in general it's costing employers something in the neighborhood of seven 7% or so is this wage wage inflation thing that you that you mentioned in <unk>.

<unk> point I don't think we have that I don't think we've experienced that in Nashville.

But it is something that we are.

I mean, the whole dynamic is something that we're watching and and the like but we've been very successful.

I mean, we had a.

All employee call yesterday afternoon, and we must have had three or four.

Pages of new new hires that had started in our last 60 to 90 days in.

And really haven't haven't had significant.

Turnover either so.

We are we're making.

Our case for for employees with good jobs and opportunities and.

So far.

<unk>.

Hasn't run out from under us yet, but we're definitely keeping an eye on and your best for crude or is your best employees and I got an email yesterday from one of our highest thought of employees and they've got a friend that I won't mention but works at one of the really big banks.

I looked at the linked in and I think had been there 16 or 17 years.

And our highest employee said that employee reached out to him and said anything at cap Star NHS, they've had enough of that really big bank. So.

People like being on winners and we've created a winning culture here. So I think we can.

There may be some increase I'm, not saying there won't be any but I think we can balance it.

Okay, and just a follow up question you've had a lot of questions on operating expenses during the call.

Let me take it from another angle.

I know, it's hard to know what theyre going to be this year, depending on your hiring.

But is it fair to say.

If you look at your bank only expenses.

And you're successful with the recruiting that you have.

And your pipeline today, the ones you've mentioned on the call.

Wood wood with those higher new hires essentially offset.

<unk>.

Ian.

We're hiring Ken as you had this in 'twenty one.

I think it depends on the size of the team you hire right. So.

Team, we're hiring comes with five people. That's one thing if it comes with tenants. Another so I think that's I mean I. Appreciate the angle you are coming from but to give you an honest answer I think thats hard.

Hard to do.

One thing I'd say about our expenses I don't think we've talked about today I think there's a lot of leverage in our current expenses.

The the.

The model when I got here is there really was for bankers that were truly producing when I got here.

One of them did about 100% shared national credits one of them did about 40% out of Nashville participations.

Those two are no longer with us.

And we've got now probably I'm guessing 10 bankers in Nashville that are part of that $500 million pipeline and they've got anywhere from $25 million to $100 million portfolios well all of them should be able to achieve $100 million higher so.

Yes.

In addition to what is the expense base I think there's a lot of revenue that can come out of the existing expense space because several of the bankers. We've gotten we've got this pipeline and I think their books, we have the ability to grow books and loans without having to add a lot of new expense.

Okay. Thank you.

Sure.

Thank you. Our next question comes from Freddie Strickland with Gms you May proceed with your question.

Hey, good morning, guys Hi.

Hi, good morning.

Just.

I'm wondering what the incremental some of it is just an economic outlook among our customers.

Did they seem a little more positive.

Especially I would guess.

So given your guidance on loan growth, but just.

Are they running up against listening to them across the supply chain issues or things largely looking brighter.

This is where an interesting markets I mean I go back to if you will if everybody will reflect on page 22 of our slides.

And.

You look towards the bottom <unk> growth.

Just take a second and look at our projected population growth and these are pretty good banks on this page I mean these are the banks that are trading at the highest <unk> size I mean, you've got Greenville, I mean, <unk> has an outstanding bank and think about the great market season and.

You've got some good.

Dana has great markets at home Trust look at the population growth for our markets and look at the household income growth and what ours is versus these great banks. So I would just say we've had a lot of resiliency through the pandemic.

<unk>.

We unfortunately have had health issues and sickness and death in our communities.

But our communities have remained robust and I think some of that's the leadership of Tennessee, where very fiscally well run state I think that Knoxville, Chattanooga, and Nashville are very physically well run so.

Hi.

I don't want to say, we didn't have a blip, but I think our credit and our deferrals and all of that speaks to that.

Our customers held up very well and were positive to it and I think theyre just as positive today have not heard any major supply supply issues, Chris anything you are hearing from.

I would say is everybody has some sort of constraint that is a result of the pandemic, but they are finding ways to shuffle things around to make it work.

We also have.

A strong construction market that continues to drive demand, we have a good supply of new workers coming into the marketplace and so on yes. There is there is positives and minuses because of the pandemic and supply chain, but it's better to be managing those in a growth market than than in a stagnant market.

Yes.

Got it.

Managing through it and continue to move forward, then as kind of the way we should think about it.

I'd say I have a little stronger.

Express a little stronger than that I think they've managed through I mean, you just have to come over here.

<unk>.

It's been probably 12 or 18 months, but I mean, Nashville had more cranes per capital than other than Dubai. We were number two in that they also can be a scary time, but.

Got it.

My daughter, just started girl Scouts, we had a late child, she seven and my wife win and we were like the resident Nashville in and we've been here two years in.

There was a lady from Australia, one from Switzerland to from New York and one in Womens Wilmington, North Carolina.

So.

It's unbelievable the companies that are moving offices.

And then even individuals that just I heard yesterday, I think I can't remember what firm it was but one of the people that run the technology.

Investment banking practice at one of the Bulge bracket firms I don't remember if it was Morgan Stanley or Goldman R. J P. Morgan.

They're moving from California to here and Theyre, just going to run the whole practice from here. So a lot of great things happening across these three metro areas and frankly, our community markets tell us it blends into there is a lot of people that don't mind, driving 45 minutes to an hour to work, especially if they're coming from California, and so they want a little bit.

More land or not not urban so.

I think it's pretty strong study.

I think you are over that way I would put it very similar to Charleston, Greenville and Charlotte.

Very similar our three markets I would say to those three markets.

Got it that makes a lot of sense I appreciate the color on thanks for taking my questions.

Thank you. Our next question comes from William Wallace with Raymond James You May proceed with your question.

Yes.

Hi, Good morning, guys good morning.

Sure.

Alright.

I'll, probably beating a dead horse here, a little bit but.

And just a little bit confused.

<unk>.

In the deck and in the prepared remarks, you spent.

Decent amount of time talking about capital deployment and suggesting that.

We're going to be more aggressive, suggesting that a special dividend was a very realistic potential and then during the Q&A Tim It sounded like you were saying well, we're not really interested in those forms of capital deployment, because it's a higher return on capital to hold it and invest in teams.

I just I'm trying to figure out what is the tipping point for you to decide one method versus another.

As youre thinking about.

<unk> kind of optimizing the capital base at the banks. So any color you can help too.

I don't know more specifically.

Kind of help us think about.

When you might do a special dividend versus sitting on the capital to Opportunistically hire myself.

Hi, Betty this is Dennis I'm going to give him time to think.

I would tell you.

As Beth there as I see it that we will be.

Number one we will be more.

Interested in the buyback based on our renewed repurchase authorization.

That will that.

That we just announced in connection with the release. So Thats number one we will we will utilize that lever. We will also be looking very closely at making sure that our dividend payout ratio gets up closer in line with some of our peers. So we will we will be taking a look.

Look at that and utilizing it we will be evaluating.

Good organic growth opportunities, whether thats in individual bankers or teams of bankers and the like.

And then on top of all of that.

Those are three pretty good things, we've got in front of us.

We are going to deploy some level of this excess capital that we have here.

Okay.

So we are going to.

Return that capital utilize that capital deploy that capital you pick the additive.

That you want to.

Ill frame it around but.

It is affecting our I mean, it is affecting our ratios and how we get compared to other peer banks just as Tim mentioned on that slide thats in the deck with all of those peers across the top of it.

For whatever reason.

We are not getting the same multiple than we think.

Our shareholders deserve.

Deserve some of that excess capital back in one way or the other and we have three or four good ways to do it and I don't know if Tim wants to put a timeframe on things but.

We have.

We're going to go into the interest rate environment, that's going to be a rising rate environment here and we're going to have so we're going to have.

Just a ton of opportunities we would like we would like the investment community to.

Really look at the upside of cap star in light of these opportunities and see the see the franchise from our perspective, I think thats what <unk>, yes.

Yeah, So William what I'd say I guess my message is.

The company IPO, Ed I was not here I believe it was in 2016 and.

There is no criticism, but.

In hindsight looking back which is easy too much equity was raised for the growth that was delivered.

And so my main messages is.

I think and I think because of that I think there is a hidden asset on our balance sheet, but if you do my math I'm a shareholder too.

I don't think thats in our value.

And I could in theory, and I used to work theoretically in here I could in theory dividend that out today and I would have the same net income.

So I think we have a hidden asset that everyone's sort of gotten comatose or immune to.

Because it's just been there and the cap the Companys jest is just almost like part of our company and so my main message is we are not going to operate that way going forward that's number one.

And so I would just say back to that slide I don't know the number Theres a order right and the first order is organic growth.

And if we had no organic growth possibilities for reasonableness.

Would be looking at the economics of buyback, increasing the dividend or one time share repurchase.

Fortunately I think we've demonstrated with Knoxville, and Chattanooga that those don't need to be high priorities. So somewhere in my comments I mentioned that the return of capital will be secondary.

Messages are really number one.

We have sat on capital too long.

We're going to put it to use we believe that we have demonstrated in the activity. We have we've got plenty of reasons and ways to put this to us So I think thats going to be the outcome.

In the interim.

We will probably use our buyback.

And increasing the dividend.

Secondary more lightly used to work around the edges of when this growth comes in so I don't foresee a special dividend. My message is is that we are not going to hold onto this capital. It is an under appreciated asset on our books and if you adjust.

Just for it.

Oh TCE last year would have been nearly 19% that's really what we want our investors to know is this is a much more I mean go to page 22, and look at all of these great banks that are trading higher.

They've got 180 basis points less TCE, if we adjust ours would be 19% on this page their estimate is there going to be 11, six and you All's models. So that's really what we're trying to get out is just.

You all have 5000 banks to follow and if I was an institutional investor. There's 5000 I can pick from we're just trying to do some of this and put some points in front of people that are maybe not popping out as much.

And also don't forget don't forget that each year that goes by.

We're adding 40 48.

<unk> 48 or $50 million of additional capital into our into our franchise. If we don't do anything just from the just from the net income of the company.

So each and every year each and every quarter we have.

We are generating additional excess capital and adds too.

The excess that we already have so.

Tremendous opportunity.

Thanks, guys I appreciate you taking the time to provide some clarification I'll step back thanks.

Alright go RBA.

Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Tim schools for any further remarks.

I don't have any further remarks, I, just I'm really sincere that we really appreciate our revised guidance and how this has been a great team effort and our employees are working hard our board working hard the management team appreciate all the institutional investors that have come along and given our guidance and I. Appreciate the sell side analysts that are following us so.

I think collectively we're all doing a great job and we look forward to a really exciting 2022, so everybody have a healthy year and we look forward to seeing you soon.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.