Q1 2022 CapStar Financial Holdings Inc Earnings Call
[music].
Okay.
Good morning, everyone and welcome to cap Star Financial Holdings first quarter 2022 earnings conference call hosting the call today.
Tim schools, President and Chief Executive Officer, like Fowler, Chief Financial Officer, and Chris Tietz, Chief Credit Policy Officer. Please note that today's call is being recorded a 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 cap Star banked.
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 and performance or achievements of cap star to differ materially from those expressed or implied.
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 and uncertainties and factors are contained in <unk> public filings with the Securities and Exchange Commission, except as otherwise required by applicable law cap star.
Claims any obligation to update or revise any forward looking statements made during this presentation. We will 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 will now turn the presentation over to Tim schools cap.
<unk>, President and Chief Executive Officer.
Good morning, and thank you for participating on our call. We appreciate your interest in cap Star our first quarter results reflect the focused strategic plan and disciplined execution, we put in place three years ago at that time, we established four strategic objectives enhanced profitability and earnings consistency.
Great organic growth maintained sound risk management and execute disciplined capital allocation.
This quarter, our loan growth, excluding PPP exceeded 100 million for the second consecutive quarter.
Leading to 31% annualized growth.
Our past dues were a record low 17 basis points, and we increased our dividend, 67% as part of our balanced capital allocation strategy.
As you know this is a transition quarter with the industry coming off two historical outlying years, specifically mortgage volumes and PPP income will not recur at those levels and in many occasions provisions increased significantly.
And then have been decreasing.
As we return to more normalcy I'm excited at what I see.
Our markets are healthy we have improved organic growth engine.
With additional teams inquiring about joining.
Over 20 banks have sold in our state with our state's largest bank first horizon, having sold this quarter.
And we have significant excess liquidity and capital.
Three items I'd like to point out in reviewing our first quarter results are.
Boldly death benefit.
Expenses related to severance slash retirement.
And deferred loan costs from prior periods.
They net out, but particularly the deferred loan cost true up is important to understand as it impacted the reported NIM for the quarter.
Excluding this PPP and adjusting for excess liquidity, we estimate our NIM to be 3.32%.
Down eight basis points.
Mike will expand in his comments, but some of that is related to some one year specials, we've offered in Chattanooga as they attract new customers. So.
So we will not expect that to be ongoing.
There are always near term challenges when you're running a business and they change over time.
We've migrated from the potential pandemic led credit risk to supply chain inflation and interest rate risk.
For our core bank, we feel these risks are manageable, we remain optimistic growth will continue and we recently updated our deposit beta assumptions and asset sensitivity results, which show we are favorably positioned in both a traditional rate shock situation as well as a <unk>.
<unk> of the curve.
Which might be a more likely scenario.
As it relates to our Tri net in mortgage fee businesses. They are each coming off of record years and face some near term headwinds as a result of rising rates.
Tri net volumes remained strong however spreads are lower at the moment as we work through our inventory of loans held for sale and the recently increasing rate environment.
Generally we expect this business to return to a level slightly above the pre pandemic 2019 level.
We had a great first quarter as we worked through volume from last year, but again with the recent rise in rates and spreads will be challenged for a quarter or two.
I am hopeful trying that can produce 750000 to $1 million of fees a quarter over the long run.
We have an outstanding mortgage division I do not think it would be a long shot to say the absolute best in Nashville.
It is built on purchase money.
Transactions were in our non refinance market, 80% has historically been purchase money.
It also is coming off of a record year and we feel can return to slightly above the pre pandemic 2019 level.
However, the industry faces several near term challenges and that refinance volume is declining with the increase in rates.
Spreads have tightened as competitors fight for less volume and there was a shortage of inventory.
We feel this is temporary and that cap star is in a position of strength. Historically this situation causes smaller refinance oriented competitors, who are often the ones offering lower spreads to exit the market.
And we have a long list of customers there or just a limited supply of houses for sale at the moment.
I am hopeful mortgage can produce 2 million to $2 5 million of fees are quarter over the long run, but this business can have more variability than most with changes in rates and in different seasons of the year, Chris will expand on each of these in his comments.
We are equally excited about our SBA division.
It has had to light quarters, but we feel has tremendous potential as demonstrated by a few quarters close to $1 million.
It is not as impacted by rates. It is more that we are working on our business development capabilities as we have in the core bank.
We feel this can eventually be a $1 million a quarter revenue business, which in the near term could help us try that and mortgage normalized.
As I turn it over to Mike I want to take a minute to thank Dennis Duncan who served as CFO over the past year as Mike faced a family emergency soon after taking on the CFO role at cap Star.
We are grateful to Dennis for stepping out of retirement, he did a great job in advancing many of our initiatives.
<unk>, Mike situation did not work out as we hoped but we are thankful he had time to spend with his wife.
And are excited to have him back.
Thank you Chris.
I'm sorry to you Mike.
Yes.
Alright, Thank you Tim and good morning, everyone.
So on slide seven of the deck.
Net interest income was $21 million for the quarter.
That was down one $9 million from the fourth quarter.
And that decline was driven by a number of factors, we had a 700000 favorable impact.
The strong loan growth that Tim described that was more than offset by.
A $1 $2 million decline in PPP interest and fees.
500000 deferred cost loan origination expenses related to prior periods.
400000 impact of two fewer days in the quarter.
And a $200000 decline in interest related to loans held for sale.
The margin of 297% for the quarter as Tim noted is down 17 basis points versus Q4.
Excluding the deferred cost adjustment.
P P and excess liquidity.
The adjusted NIM was 332%, which was down eight basis points versus Q4.
There are a number of factors that contributed to that none of them very large.
Had about a two basis point drop in non PPP loan fees.
Had about a one basis point decline.
And the impact of purchase accounting and.
And we have about a little less than three basis point impact.
From the the near term specials that Tim mentioned, so offering in Chattanooga to attract.
New customers to that to that new market.
The improvement in the loan to deposit ratio driven by strong loan growth.
We expect.
We expect net interest income and NIM to improve going forward due to a number of factors.
Our strong loan pipeline and production, obviously provide tremendous opportunity to continue to remake thing our balance sheet and redeploying excess liquidity into loans.
Number two loan pricing tailwind.
As competitors respond to the dramatic recent market rate increases, we've seen especially since year end.
Yeah.
We remain asset sensitive.
And expect to benefit through.
The aggressive.
Series of fed rate hikes that has now started and.
And expect that to continue over the next one to two years.
On page eight.
On talk a minute about our interest rate risk sensitivity, which Tim touched on so as Tim noted, we recently refreshed our deposit repricing beta assumptions.
And the net result is.
A little bit lower beta assumptions.
We remain asset sensitive.
And as you see on the charts.
We our model shows that we will have a four 1%.
<unk> net interest income.
Increase for an immediate 100 basis point parallel yield curve increase.
Obviously, the fed is broadly expected to aggressively raise short term rates.
Following the significant yield curve steepening.
In recent months as Tim noted, we believed and I think the market believes a yield curve flattening scenario is very likely.
So in a scenario where fed funds rise 200 basis points gradually over the next year and five year rates move up by a more modest 45 basis points, we estimate that net interest income over that year will rise by about one 7%.
On page nine <unk>.
Average deposits of $2 7 billion remained near record levels.
We continue to be focused at cap star on building core responsibly priced deposit relationships.
We want relationships.
Certainly to cover both sides of the balance sheet.
Loans and deposits as well as fee income et cetera deposit costs have held flat for the quarter at 19 basis points.
We will be very focused on disciplined deposit pricing.
As the fed raises short term rates.
We will be focused on optimizing profitability.
While remaining competitive to ensure that we can be effective in retaining and attracting core profitable relationships.
We're committed to a deposit first culture, which will ensure strong core funding and stronger profitability a more balanced profitability as we move forward.
On slide 10.
Total held for investment loan growth.
Excluding PPP.
<unk> 31, 1% on average or 21, 3% based on end of period balances and you can see we have only $6 million of remaining PPP loans.
The remaining fees related to those are about 170000.
So the headwind if you will related to PPP loan forgiveness is essentially essentially done.
Our Q1 production of 186 million.
And held for investment loans.
Annualize that equates to $755 million and you can see from the last few years numbers that demonstrates continued momentum.
And growing our loan origination.
In the last few years, so loan pipeline the commercial loan pipeline exceeds 500 million with strong strong contributions across our markets.
Our loan yield in Q1 declined significantly 50 basis points.
Four basis points of that is due to lower PPP fee recognition.
11 basis points is due to the deferred cost adjustment for prior periods.
The remaining 15 basis points is due to a number of factors.
Loan coupon and other loan fees.
<unk> accounting accretion all items I noted in the <unk>.
Explaining the difference on adjusted NIM.
We had disciplined pricing in Q1, we.
We had match funded spreads of about 211 basis points.
Though as Tim noted.
In Chattanooga, and very selectively elsewhere, where appropriate.
We have had some originations at lower than targeted spreads.
Given lag competitor responses to market rate increases, where we are seeing recent recent movement, which we're obviously very pleased to see.
On slide 11.
Solid noninterest income for the quarter.
Thanks to our unique fee businesses, our noninterest income as it exceeded 30% of revenue over the past eight quarters.
As Tim touched on with large market rate increases.
And very sudden interest rate increases mortgage income is normalizing coming off record highs.
In prior quarters.
And Tri net had a very solid quarter.
Though down from the record 4 million quarter.
In Q4.
As Tim noted, we also had onetime bully income of 858000.
On slide 12 related to expenses, our total expenses were $17 7 million for the quarter.
We continue to focus on maintaining strong expense discipline.
With the adoption of a productivity mindset across the organization.
Excluding 385000 of severance retirement expense in the quarter.
Noninterest expenses declined $1 3 million from the fourth quarter.
A number of factors driving that but primarily lower incentive accruals coming off.
Record.
Revenue period.
And reduced recruiting expenses.
On page 13, actually I will turn it over to Chris to talk about our risk management and credit great. Thank you Mike.
Turning to page 14, once again on asset quality. We are pleased to report the trends of improvement have exceeded our expectations from the cautious view, we took in the early months of the pandemic first as it related to integrating merge banks processes and systems, we have achieved consistent improvement and past dues remain well.
Within our guidelines, we've done a pro forma look combining the legacy cap star results with the results of the banks. We acquired in recent years and are excited to note that 17 basis points in delinquency represents a record low EBIT, including those new markets that we've partnered with while we were pleased with the 17 points 17 basis.
Points reported we aspire towards continued improvement to even lower levels over time.
Second criticized and classified loans are now below the level, we reported at December 2019, before the pandemic, we point to a number of outcomes that encourage us.
First despite substantial provisions for uncertainties early in the pandemic as highlighted in the lower left chart, we did not see meaningful losses occur and now believe that the residual impacts of the pandemic, especially in the hospitality and tourism sector is important to our local markets have passed also.
With an immaterial exception all borrowers with pandemic payment deferrals have resumed normal payments and the criticized and classified loan levels noted on this page reflect our assessment of our borrowers and real time based on current operating results and future expectations.
Turning to page 15.
The positive asset quality trends I have already mentioned in addition to other factors that we track in our overall asset quality oversight, we feel that a small net release of reserves as warranted this quarter.
We previously noted that we experienced substantial loan growth in the quarter within our model. This growth has been appropriately provided for with an allocation that exceeds the overall levels noted here at 102 basis points and 116 basis points respectively.
While making appropriate allocations for growth qualitative considerations are objectively accounted for based on the improvements in delinquencies criticized and classified loan levels.
And changes in portfolio concentrations among other factors. It is also important to note that while we are reporting improved asset quality results as compared to pre pandemic levels. Our allowance remains at a level higher than pre pandemic levels to account for remaining uncertainties that exist relative to newly emerging issues in the economy.
The world's geopolitical situation with that I'll turn it back over to Tim to discuss profitability and capital management, Okay. Thanks touch.
A little bit on slide 17, I don't have any prepared comments for this so I'm just going to add level a bit but on page 17, this sort of speaks to.
What we've been all about the last three years, we recognize we have excess capital we've improved profitability. So that's a good problem, but are causes your capital to grow even more.
This illustrates our capital ratios versus the peer median and I would argue that peers are probably overcapitalized at this point so.
A reasonable targets might be.
For leverage intangible comment, maybe eight and a half.
Hey.
<unk>, maybe on common equity tier one capital, perhaps 10 five.
On total risk base overtime, 12, and a half so we're not going to get there overnight, but long term as.
As we work to lever this bank those may be more reasonable targets to work towards so how are we going to do it as.
As you've heard and I hope everyone feels that we are a management team that delivers on what we say.
And we've talked a lot about at the beginning of lessening the reliance on participations and increasing the organic growth rate.
So I'm excited on number one about the results of Knoxville, Chattanooga, and we don't talk as much about going into Rutherford Williamson in Nashville, The cap Star had really been a Davidson County bank.
Those three markets today have $500 million and 24 months ago. It was zero and so if you think about the power of that.
As well as probably $200 million of shared national credits that we let it run off that's huge operating leverage in that arena. So we're excited about that.
Number two we announced yesterday an increase in our dividend.
I've met with most of our large shareholders.
And the capital priorities and its hard meeting with investors because everybody may have something a little different.
But generally their capital priorities match ours and.
They are open to buybacks, but I would say two of the industry's most prominent investors have said Tim don't buy back shares you have too much opportunity in your markets in hiring teams like Chattanooga and number two if you do it only do it at the right price so.
However, they were interested in a higher dividend yield because it helps achieve their target.
They've got a.
If they have a 10% annual target on their fund and they can get 2% off of a dividend yield that helps get there. So.
We raised it that gets us to about a 20% roughly payout of normalized earnings.
We're excited to be able to do that so we'll go from <unk> to <unk>.
Third is in the first quarter.
This slide doesn't have it but the earlier entry slide had in the first quarter I don't have it in front of me, but.
We.
Hold on one second.
We repurchased 36000 shares in the first quarter and then since that.
This is not a quarter end number but to help you in your modeling as of yesterday and it was 120000 shares I wouldn't view that as a change in view that we're buying more we've established certain price targets and tearing and just where the market was we're up to a 120000 shares right now.
That leaves $27 5 million and then lastly, always keep M&A on the list I would say.
I haven't received a book in two years and not not looking to do anything, but that's always an option and we would want to make sure that it is very strategic in that.
It's disciplined pricing I was looking yesterday at our Chattanooga model and Chattanooga started.
The like Middle to third week of October .
And we had modeled that to be five to six.
Dilutive the first year.
And they've put on so many loans.
They actually are we have a very detailed model with all of their cost directly to them.
And they actually are pre tax pre provision positive.
So there.
Interest income is overcoming their salary expenses and rent expense now obviously as fast as they are putting on loans theres provision expense. So theyre not net income positive yet, but I don't have my model in front of me, we didn't expect them to be pre tax pre provision profitable till like.
<unk> months eight to 12, so they are ahead of schedule.
Lastly, I am just going to end with a few prepared remarks here that we're really excited by what we're building here at cap star and the tremendous opportunity before us we're really only in the first inning of a nine inning game I would say so it's going to be really fun to see our progress and all we accomplish over time.
That concludes our call and we will open it up for questions. Thank you for supporting our company and dialing in.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Your question press the pound key.
Our first question comes from Stephen Scouten with Piper Sandler You May proceed with your question.
Hey, good morning, everyone.
Hey, Steven.
I guess, maybe my first question would be around views on <unk>.
New potential markets versus deepening.
Some of your existing market you guys noted I think either the deck or the release the opportunity from the first horizon deal obviously, the reliance deal and other deals throughout the state that you noted how can we think about your priorities I guess or desires for how you might take advantage of that from a.
Again, new market expansion versus deepening your existing footprint.
Yes, that's a great question and I think that.
The number one priority would always be in existing markets.
It doesn't work that way.
Have to be available when talent is ready to move.
So if there was an additional group in Nashville, Chattanooga, and Knoxville, we'd be very interested and add them.
And.
Sometimes it is disruption, it's usually an event that causes somebody to want to change.
And we actually have a meeting today what times the meeting Chris three o'clock, we Havent meeting today in another city at three o'clock today, we have four teams we're talking to.
<unk>.
Let me just go in my head real quick.
Three of them are related to.
Mergers are involved in and just disruption.
And the other ones and other situations. So I think we are definitely interested in our current markets and that would be priority number one, but it's really a function of where they are available talent.
Yes that makes sense.
Went to a new market I mean, just from a size perspective, I mean, something like Memphis is that bigger than you would want to target like Asheville South market.
How do you think about where your brand fits the best.
Tertiary growth or the bigger markets.
I don't really know that that matters I don't think youll see us go into Atlanta, I mean, I know you are in Atlanta, I know Atlanta, well went to Emory my wife's from Atlanta, That's just so big but outside of Atlanta, I really think any market.
I think it's about what's the quality of the team and what size of book do you think you could get and if we were to go to.
Memphis and I've met with several teams there theres a steak restaurant, there called folks Folly and <unk>.
I've told them, let's be folks folly, but we don't have to be outback steakhouse and have 10 locations, let's have the best and folks valleys the best Steakhouse. So.
It's really what quality team can you get and then what size of business. Do you think you can get in that market. We have a pretty elaborate model. We've built that calculates an internal rate of return.
And the internal rate of return on these we are seeing is.
32% to 40%.
And.
If I bought back stock right now in my model says it would be about 17% internal rate of return.
So don't mind buying a low stock right now but.
Again, I've talked to a lot of our larger investors that actually own our stock sophisticated folks and I had one specifically I think you were at the dinner Steven.
Why would you buy back your stock and so.
We're really focused on the model and how much would the team cost based on the size of the team what book do they think they could get and then what's the IRR of that so.
I would really leave any market opened other than hate to say never but I don't see us go into Atlanta, That's just so big to bite off sure sure.
Sure.
Helpful and you guys put something really interesting in your presentation here.
Discussion of the matched funding spreads to 11 I think it was.
And I know Mike.
And some of the.
Maybe temporary.
Discount in Chattanooga, and some other places, but how does that $2, one 1% compare to maybe historical or or even last quarter. How can you frame up kind of that spread so a little bit.
Couple of things match coming from.
Sure. So we actually published that for the first time last quarter and last quarter, we published that it was $2 50 and.
A lot of banks and analysts right. We all site loan yields well, that's not really a great metric because what if you put on a seven year fixed rate loan and I put on a one year fixed rate loan I mean, my loan yield may be lower but it should be lower because.
Is it lower end of the curve and it's going to it's going to prepay earlier so.
Many banks are most banks used fund transfer pricing and so you have a theoretical cost of funds that should match the duration of the loan. So removes all interest rate risk and if you didn't have a dollar of deposits what would the funding cost the bank if you had to borrow.
To fund that and lock in that profit with no interest rate risk.
Probably in banks use different FTP funding curves.
Thank most knowledgeable treasurers would recommend <unk> curve.
That is the rate at which a bank can borrow some banks I think in my opinion, maybe not as knowledgeable might use.
Treasuries or something that's an index you can price off of but thats not your cost of funds because you can't borrow at treasuries. So we use the <unk> curve and we generally target of 250 spread. So if you came and wanted to borrow commercial building often has a five year <unk>.
<unk> with a 20 year amortization it.
It may be a $5 25, it may be a 720.
We go out to the <unk> website, and they post rates with all those durations and we look at that and then based on the credit risk of the loan.
The loan was Super strong denim business 15 years stable cash flow strong DSC are a lot of liquidity low loan to value.
Lots of guarantees you might price down towards 200, we don't really go below 200.
And if it has lesser qualities there you might price up towards 300, but our average.
Fourth quarter was $2 50, we generally target $2 50, what we're seeing right now is two things Stephen.
One is when we go into a new market, we permit markets a certain amount of money, we almost equate it to marketing dollars to go move some business and so we will do some one year specials and so.
That 211 would include the weighting of some one year specials.
Number two is that what we're seeing in a rising rate environment.
As we are competing for loans, we are holding our discipline. So that FHA will be curve went up so we're quoting loans at $2 50 over that we're seeing other banks, either lagging or not having a fund transfer pricing model and not yet raising their rates. So we're having to accept some thinner spreads and we nor.
Emily would now we're not going to compete just to get volume. It's only on the relationships. We really want we think the industry will normalize over time, but right now they are slow on raising their rates with the increase of the base rate.
That helps got it yes, no that's extremely helpful and maybe one just last clarifying question for me on the expense guide that $16 million for the core Bank and then some variability with mortgage how do we think about mortgage expenses is there a range or is it maybe its an 80% efficiency ratio or something along those lines how can.
When we think about what to layer on top of that so real quick.
Our core bank.
You weren't on the company.
There is expense timing Bill may come in this quarter and it is not always linear but our core bank is running give or take about <unk> 16, a quarter right now one quarter. It may be 15, eight one quarter. It maybe 16 to just timing of bills and so forth, but we're running about 16.
We're joined today by heart Weatherford that runs our mortgage company in the event that you all had a question so im going to let heart maybe answer how he thinks about that and heart, maybe a way to answer it for him.
As if we say, we're going to try and target two to $2 5 million of revenue. How would you think about offsetting expenses is at 80% of that 70% of that how do you think about it if it was two to $2 5 million a quarter.
And this is heart Weatherford here.
Well.
It's been variable over the last couple of years, we're trying to get to more normalized number right now as we speak but we'd like it to be 70% to 75%.
But ultimately our goal is to make <unk>.
Roughly 70% to 85 basis points on our production after expenses. So we're working through that with the volatility right now working through our expense numbers and we have a plan moving forward and we will execute on that plan. If the market continues to be like this.
And I know I'm supposed to say that this because I work for cap star and heart sitting in this room.
But.
If I was to retire today I've worked with some great folks and they were talented as well I mean, South Trust had $5 billion of annual production and National Commerce had $2 billion and that was a normal market not the peak last two years and I'm, telling you Hearts, a great operator, and I'm, just so proud and fortunate to have him running that ship and.
He doesn't just think about volume he's he thinks about the spread in <unk>.
<unk> got a very quality shop.
Fantastic Thanks, Tim and team appreciate the time today, congrats on a great quarter.
Alright, Thanks, Stephen I appreciate your support.
Thank you. Our next question comes from Kevin Fitzsimmons with D. A Davidson you May proceed with your question.
Hey, good morning, everyone.
Hey, good morning, sorry.
Tim on your comment on.
The new market entries in that you're meeting with <unk> is it fair to say because last quarter, you talked about it being a pretty optimal environment for that and then Steve brought up.
The first horizon situation is it fair to say that.
These kind of conversations you're having today are ones.
We're kind of not maybe not already out there, but they were they were kind of existing potential opportunities and maybe maybe up a gen opportunities are going to be.
There's going to be a lag and theyre going to be further back because I would imagine theyre going to lockup some people.
Then after a while they get freed up.
So is that fair to say that.
Got it.
This is kind of pre existing opportunity and then maybe you get a kicker.
Six months, a year down the road from FHA.
I would say none of these four.
Talking to them at the last earnings call and the last earnings call I don't even remember, but I was talking to one or two one of those so I guess, maybe there's five but but.
One or two of those.
I was talking on the last call.
I am still talking to it's just taken a long time, but theres four really active ones right now and what's not talking to him in January that doesn't mean, the first horizon, but there are interesting because it's a lot like dealing with the merger I mean youre. According your dating there understanding you youre understanding them.
Got families. They talk to their spouses about who we want to change so it's not.
It's very interesting, it's equivalent I'd, probably bought more banks than than higher de novo teams, but it's sort of fun, but it's a very similar.
Process, but if I go down the list real quick.
I mean, I don't think we contacted any of these folks.
As I'm thinking about.
<unk>.
Just quickly of these four I believe they all reached out to us.
And Tim of those four if you said it before I apologize if I missed it but do.
Any of those four represent new markets or are they all existing markets.
They would all be new.
Okay.
And how do you feel about.
Look I know a couple of quarters ago, you talked about at first you were kind of trying to.
Not not to hit profitability all at once with too many new market entries, but then I think you really.
Came to more of a realization that hey, just.
When the opportunities there jump on it just explain it.
To the investors.
How do you feel about.
That today.
Well I guess I'm a function of how I was trained.
So, it's a little bit like being a marine.
And.
Wallace Malone increased earnings for 13 consecutive years on a GAAP basis. If you remember he didn't report operating earnings I don't know how he did it I think thats 48 consecutive quarters. He did 13 years of quarterly GAAP increases that's how I was trained that you're supposed to grow.
Yes every quarter and so.
This is the second smallest company I've ever been and I've never had all this excess capital that I've had to deal with.
So.
Some peers and friends like you that ask that with that are actually buy side.
Very smart money.
Sort of said, Tim why are you thinking that way. It's a different situation. This is not south trust and Youre saddles at this capital Youre in great markets Youre Young company your entrepreneurial.
And yes, you could do a onetime dividend you could raise the dividend you could buy stock, but you've got this great business opportunity.
Why not why not explain the math to us and why not go get as many as possible that you can manage and make successful and just pointed out when you do it and say hey, this one is going to be five since year. One that we think it's going to be 30 in year, three or whatever so I would say that that opened me up some in.
I, just want to perform and deliver and so.
I think if I was a private company that's definitely what I would do because I've got a long horizon, but I didn't know what the broader investor spectrum, how they would receive that but I would say.
We had a meeting I don't want to say, who with what Mike Falor was with me with it.
Around our I'm not going to say I should say say top 10, but one of our top 10 shareholders in January and they echoed that same thing and just said love what you're doing.
Keep it up and invest that capital I wouldn't buy stock and.
Just explain to us the expense and what you think is going to come.
So that's a long winded, but but it's just I'd say fundamentally in the fall been trying to get my arms around cap star and trying to make the profitability better and trying to get the organic growth Chattanooga was the really first one because the other one was my team in Knoxville. They work for me before.
So.
But I am excited I don't think we could probably take on all four but.
It would be exciting to maybe get two of them.
Yes, no that's great that's great great color.
One last one for me.
On.
The.
Tweak in the deposit betas for the asset.
Sensitivity.
Are you guys comfortable sharing what that was and what changed.
Changed too in your new analysis.
Sure Mike do you want to explain.
Sure So Kevin.
Let me just give you sort of on average.
So our average.
So the repricing beta for non maturity interest bearing deposits.
Had been 68%.
And I think as we reviewed it again I think that was more a through the cycle thinking.
And the current data for up 100 basis for the first 100 basis point rate move.
Is 44%.
And real quick Mike can you explain we use a firm called Darling.
And you may have heard of it our people on the phone may have heard of it but it's a very prominent firm out of Boston that does a lot of Alco interest rate risk work for probably some 500 banks across the country not going to mention some of their customers, but very highly successful banks and do you want to mention.
That we worked with them and they have that average of all of those banks and that number would be in line by Mike.
Yes, absolutely.
Right.
Yeah.
Okay great.
Yes, I would just say, Kevin our assumptions Im not sure why I don't think we've gotten into it since I've been here, but our assumptions were Darling even felt.
Were much more aggressive and above the average of they see of all their customers. So with their experience and we're very fortunate Mike in this kind of environment. He has got a lot of balance sheet management experience.
Both of them felt they adjusted them to the appropriate level.
Okay, great. Thanks very much.
Thank you.
Thank you. Our next question comes from Brian <unk> with <unk>.
You May proceed with your question.
Hey, guys good morning.
Hey, Brett.
Wanted to first just talk about fee income and trying that specifically last quarter I think I asked the question and you said it might be more like <unk> and now you are talking about it being more like 19 in terms of normality of income.
But the first quarter continued to be I guess stronger than what you were talking about.
Can you just talk about the.
The environment for that business.
And any visibility of.
Either a return of normalcy or whats going on that would give you the thought to continue to trim. The outlook for that for these are real quick before Chris answers. The main difference from what we said before is the sharp rise in rates that incurred in first quarter that we didn't it did not anticipate on Alaska, we do.
Rates were going to go up we didn't know what's going be so sharp so fast Chris can explain how the pricing works on when we set these rates and how we sell them, we're going to have some spread compression just the way. We're set up right now we may be able to work on our hedging strategy that in the future would manage that interest rate risk better, but it's really in.
The most immediate one or two quarters, we could have some spread compression still great activity great volume, Chris do you want to explain through set the pricing and then the timing to when you sell them.
But it really does come down to its a margin business its premium.
And the outsized spike it, particularly in the seven and 10 year treasuries is having an impact on it the way that that business works is we're pretty much locking rates about 45 days to 60 days before a close then we have a bundling and marketing peer.
<unk> for the pools of loans that we make so there might be a 90 to 120 day gap between when we locked rate and when we have a a transaction ready to market or a pool of loans to market.
Basically the spread has just gotten compressed which will impact margins in the short term having.
Having said that.
Tim already referenced we're looking at hedging strategy since we do anticipate some prevailing increases in rates over time, and we want to protect ourselves against some of those hedges or some of those spikes, but will still come back to a core strength that we have in the training business, which is.
Is that first we have a nationally recognized presence and and really we believe we can share. We believe we have a nationally recognizable share in the triple net space and that makes them a preferred provider in transactions meeting our target profile and theres going to be a period of lull here, where buyers and sellers retrench and.
<unk>, what they're looking for in transactions, we have seen that a number of times over the years and we anticipate volumes that will come back I think ultimately in the new rate environment to 2019 levels.
Okay.
That's helpful. Chris appreciate it.
And then wanted to ask about just the balance sheet management.
And just thinking about if I look at the trends in the first quarter, you're obviously using some liquidity you are posting really strong loan growth.
Going forward it would seem like you would continue to use some of the liquidity and so the balance sheet growth.
Could be.
Depending on how aggressively usable liquidity minimal too.
Some.
Lower level than loans can you just talk maybe about.
<unk> of the balance sheet.
<unk>.
And how you plan on on.
Dealing with that equation as the year progresses.
Yes, so I would like to maximize the balance sheet I don't see a need to grow the balance sheet I think that we have excess cash and actually excess securities more than we'd like to have so I think there is a tremendous opportunity for the immediate 12 months to 24 month loan growth to put that on without having to grow assets, which should improve.
Your net interest income should improve your net interest margin youre pre tax pre provision to assets.
ROA and ROE.
Okay, and then just lastly for me.
Chris If I heard you correctly it sounds like the point, we're at the end of the credit leverage.
So to speak from here provisioning.
Good assumption might be 1% of <unk>.
Originations or can you give us any color on how you think about the environment from here from a provisioning perspective.
Well, let me take something before Chris answers because.
I want to make sure Chris May you all we're all in the same page I forget the number Chris but the summer of 'twenty.
We did a pandemic.
Qualitative.
Allowance of some $7 million to $9 million.
The total number wise I think that ultimately over a period of quarters, we probably had $9 1 million in special provisions relating so summer of 'twenty like many banks, we put in roughly $9 million I think over two quarters and.
Allowance isn't a black and white thing you've got your existing portfolio that we put on new loans. We've had mix changes. So it's hard to be exactly black or white, but we had about $9 million that we put in related to the pandemic.
Chris Correct Me keep me honest here, we haven't had one loss.
From those loans not meaningful.
So so that pandemic in hindsight wasn't really needed now there's other dynamics that have gone on to the balance sheet. Some credits have gotten better some credits have gotten worse, we've grown loans. So I don't want to say that it's a $9 million in and 9 million out because it gets reallocated to stuff, Chris one way to think about it maybe.
For Brett is.
How do we think about of that $9 million is there any of that left or how do you think about it yes, I think what.
What I would say is if we just get down to raw numbers before the pandemic Q4 of 2019 without purchase money marks.
Or fair market adjusted fair value adjustments, we were at 89 basis points in our core allowance.
Today using the slide that you have in front of you were at 102 basis points without fair value marks of that 102 basis points about 10 basis points is still a residue from the qualitative adjustments we made for the pandemic, which means that we are at a higher level of core a triple.
On a pre pandemic the current level comparison apples to apples does that makes sense.
Yeah. That's helpful. I appreciate it Chris.
That doesn't mean that necessarily next quarter or the quarter. After we're going to take it out that's generally what's there.
Else could happen to warrant it put in it may warrant a qualitative factor I think I read J P. Morgan's Jamie Diamond they increased our qualitative for inflation in the Ukraine. So don't know that that will come out, but there is a little bit left that technically you could probably associate with what went in for the $9 million two summers.
Yes, Brian I would add a little bit more color for instance, the allocation under our model based on our qualitative and quantitative factors for say a commercial loan is at a rate of about two to two five times, what it would be for a commercial real estate loan. So a lot will have to do with.
The volume of concentrations and where we have a different areas and so on.
I do think youre thinking about it right because I think what youre getting at.
Can get really mechanical and technical on this whole model, but.
<unk>.
We put on what.
I don't have it right in front of me $110 million of loan growth this quarter or something so we used a factor of that we use a factor of I am not sure what Chris used one 120, we use a factor on that so the way to think about it.
Is based on the improvement of the overall quality of the release really would've been more.
So you are thinking about it right that incremental growth is going to have that one 120 or whatever.
And so that's what we did on this growth this quarter or otherwise, we would have reversed even more than the 700.
Okay.
That's great color I appreciate it guys.
Thank you.
Thank you. Our next question comes from Betty strictly with Janney Montgomery Scott You May proceed with your question.
Hey, good morning.
Hey, good morning Patty.
So Tim just wanted to go back to your comments earlier.
On that slide 17 capital deployment page it sounds like the options you list on there.
More or less in order of likelihood right just given how things have gone in Chattanooga.
Correct.
They are in the priorities that we prefer and how we think we want on for <unk>.
<unk>, we want to invest in ourself.
Then keep a competitive and sustainable dividend, we definitely want to have a sizable buyback authorized and.
I didn't have all of this in place at the time, but.
<unk> would have been encouraging my board to buy a little bit not go crazy, but in the third quarter of 'twenty.
No.
Certainly there was a lot of uncertainty and I'm, not saying I had the crystal ball, but when our stock was at $9 I don't know that it would have been bought that by say maybe $5 million.
So anyway, we've got that number three available for any market disruptions are very.
Opportunistic buys and then well keep our ears open for M&A, but I don't have im not talent bankers to go find me something or we don't have a full time employee that's really working or looking for deals.
Got it and then I was.
Just curious what sort of loan yields that you guys see on new production.
Again, it depends on the duration or the tenor so if you did a.
Three year equipment loans. They are typically three years and fully amortized over three years or if you do a seven year maturity with a 25 year commercial real estate, it's hard to just say.
Yield to yield.
I would say right now I wish I had it pulled up we just bid I don't want to say the banks because I want to be a good competitor, but we just bid on some I think it was in Cleveland, Tennessee, which is in between.
Knoxville and Chattanooga.
I'm pretty sure it was a commercial loan of like a five year maturity and 20 ml.
I think we were at 4%.
Which would still be a.
Tighter spread I don't have the FHL be pulled out, but I think that <unk> rate, maybe around $2 40 to 50, so that would only be a 150 basis point spread versus that 211, we talked about I think there was a bank that bid $2 75, and one bid $3 25.
So that's back to my comments earlier that banks right now are slow to adjust their rates to the change in the base rate.
We're trying to stick to our discipline, but then if we want to compete and get some volume, which we're not going to fight for volume.
Sometimes you have to take a little thinner spread.
Got it no that makes sense. Thanks for answering my questions guys ill step back in the queue.
Thank you.
Thank you. Our next question comes from Catherine Mealor with <unk> you May proceed with your question.
Thanks, Good morning.
Hey, good morning, we waited till 902, because we didn't see you on the list. So we told them to hold off and wait a minute or two.
I was late coming in.
A lot of my questions were already answered.
Maybe just one big picture question, which is I know, it's hard to answer but just wanted to get your thoughts on it.
A couple of quarters ago, I remember you were talking about.
Take your profitability targets, you had like a one eight.
PNR target yes.
55% efficiency ratio.
Yes.
I think the world is totally changed since then was that higher rate, which is good but you've got the.
Initiatives in there as well.
Think about how borgata changing.
Perfect with that target.
Well I don't know if im a believer and if you don't believe youre not going to do it. So we actually had our all employee call yesterday with our board meeting yesterday and in both meetings I told him that number needs to be 185, and Thats, just a well run bank. So we're going to keep scrapping and we're going to find a way to do it and it's not all expenses, it's a function of.
It's a function of revenue expense and your asset level and so right now we've got.
You turn over every rock and so in Wayne County, Tennessee, We've got.
Building on our books for $100000 that came with the merger is not a branch. It's just a building they had.
Sitting there and if you don't make it a priority and get rid of it that's a $100000 non earning asset.
Got a lot in Murphy's borough, Tennessee.
Came to that acquisition, that's on our books for $1 million, we don't plan to build a branch there.
<unk>.
It could be out of sight out of mind ignore it move on there's other priorities, we get rid of it theres a $1 million non earning asset gone.
<unk> got 45 properties in Athens, So I, just I think it's just bird dogging, it and working it hard so I'm, an optimistic person and theres always going be challenges I can tell you in Hawaii.
When I got there our pre tax pre provision was $1 35, and when I left it was 235 pre tax pre provisioned assets. So I don't think we can get ours to $2 35, I think it's a different model that was a 90 year old bank much more mature.
Little bit more of a growth phase one thing that could hold that number back Catherine is like right now we've got the investment.
Chattanooga in there right. So that's an expense.
But I think a stable normalized bank, we want to get it up towards 185.
That's great.
Then more near term on the SBA piece I feel like that.
Really excited about that and you've been talking about the $1 million a quarter call. It can be yes, we get there as quickly as next quarter and what.
What what's driving the lower level versus the ramp to $1 million.
Right.
Well I don't mind, saying that this is <unk>.
Public call and it's recorded in all of that Theres no guarantees, but we have good insight that we do feel second quarter is going to be $1 million. There now could change something could happen something that youll could fall out, but right now thats looking good.
I don't think like this quarter or next quarter I want to get that I think that forget the last two years.
That and try and that can be pretty consistent recurring quarterly fee income businesses. So we've got to do what we did in the core bank. We've got the core bank now, where it's generating 10% plus loan growth.
We're lacking the business development capabilities, we've got the engine the underwriting we know SBA and if you look at the last five or six quarters. We've had some wins we've had some quarters that we did 900 or a $1 million, but then the last two quarters. It was $2 50, and it's totally a function of getting the right business development engine, that's under Chris now.
That's one of the reasons why I thought it would be good to have somebody over specialty banking I know he'll get up there and maybe he can comment on some of the things. He is doing but once we get that I think that can be that and trying that forget the last two years can be pretty recurring things. We can count on heart has the best mortgage shop in Nashville.
But thats just a volatile business that one is going to be volatile Chris do you want to add what youre doing on business development.
Catherine if we go back and look say two two and a half years ago to comment that Tim was making about cap star and us remaking ourselves. He was he was not focused on production. He was focused on pipeline because the first stage to building production is pipeline. If we go and look specifically at our government guaranteed group.
SBA lending in particular.
I can make a similar observation in fact in our bi biweekly pie.
Pipeline calls I can go and I could look at a fourfold increase in their pipeline just since the beginning of the year in part driven by adding business development talent to the team and we're constantly in continuing to recruit for new talent on that team, but that's how we're going to get there. So we've had we've had more of a <unk>.
<unk> on the backend efficient delivery now we're investing more substantially on the front end to get business development activity and.
Underscore tim's confidence and again part of it is I sure at Tims confidence that we are on the right track to get that where we want it to be sooner rather than later.
Okay very helpful. Thank you so much.
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.
That's all we have a we appreciate everybody's time and we have a great weekend. We appreciate your support and we're having fun and think we're doing good things and we look forward to a good year.
So we will talk to you next quarter. Thank you so much.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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