Q4 2022 CapStar Financial Holdings Inc Earnings Call
Speaker 3: The conference will begin shortly. To raise your hand during Q&A, you can dial star 11.
Speaker 4: Good morning, everyone, and welcome to CapStar Financial Holdings' fourth quarter 2022 earnings conference call. Hosting the call today for CapStar are Tim Schools, President and Chief Executive Officer, Mike Fowler, Chief Financial Officer, Chris Teets, and Tim Schools.
Speaker 5: Chief Credit Policy Officer, Executive VP of Specialty Bank. 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 capstarbank.com.
Speaker 6: During the presentation, we may make comments which constitute forward-looking statements within the meaning of the federal security laws.
Speaker 7: All forward-looking statements are subject to risk and uncertainties and other factors that may cause the actual results and the performance or achievements of CAPSTAR to differ materially from those expressed or implied by such forward-looking statements. Customers are cautioned not to place undue reliance on forward-looking statements.
Speaker 8: A more detailed description of these and other risk uncertainties and factors are contained in CapStar's filing with the Securities and Exchange Commission. Except as otherwise required by applicable law, CapStar disclaims any obligation to update or revise any forward-looking statements made during this presentation.
Speaker 9: 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 will now turn the presentation over to Tim School, CapStar's president and chief executive officer.
Speaker 10: Okay, thank you, Star.
Speaker 11: Good morning and thank you for participating on our call. We appreciate your interest in CapStar.
Speaker 12: We're pleased with our results for 2022 and the quarter. We reported earnings per share of $1.77 and a return on equity of 10.7%.
Speaker 13: Strong loan growth, NIM expansion, discipline expense control, and low credit cost each contributed.
Speaker 14: In line with our capital allocation efforts, we also returned a record $17.9 million to shareholders through dividends and share repurchases.
Speaker 15: What is significant is within the annual numbers we had 2.7 million of loss.
Speaker 16: related to mortgage and the wire loss.
Speaker 17: and TriNet was break-even.
Speaker 18: We're in a complex operating environment, but our mortgage and TriNet divisions are outstanding businesses that have strong earnings power in the right markets.
Speaker 19: As we mentioned last quarter, we had two operational losses of which one for 732,000 was fully recovered this quarter. 1-800- ± Weathergenters were
Speaker 20: We remain optimistic that we will have a recovery also related to the wire later this year.
Speaker 21: As an aside, I will mention the FBI.
Speaker 22: the TBI and the Cleveland Tennessee Police Department have identified the fraudster and have put out a national indictment which is unusual if they typically are limited to 500 miles.
Speaker 23: The TBI also intends to add the individual to the Tennessee top 10 most wanted list.
Speaker 24: In contacting our core FIS, this individual's online credentials showed up across their operating system attempting to penetrate other banks.
Speaker 25: He also attempted to fraud another Tennessee bank a few weeks after us.
Speaker 26: Assuredly, he is part of a larger network and is trying to impact a number of banks.
Speaker 27: In the third quarter, we reported $0.47 per share and a return on equity of 11.8%.
Speaker 28: As noted, our earnings included the recovery of $732,000 related to one of the operational errors.
Speaker 29: It is subject to appeal, but our council feels it is more likely than not that the opinion will remain favorable to CapStar.
Speaker 30: The appeal process could continue through year-end.
Speaker 31: Loan growth for the quarter remains strong at 11.1% average and 8.6% end-to-period linked quarter annualized when you exclude the tri-net balances that we moved this summer and are holding in loans held for investment.
Speaker 32: Our markets remain strong, although lending has begun to slow due to the impact of higher rates.
As a bank, we are being cautious with the uncertain economic and funding outlook, having pulled back on CRE last summer, tightening some underwriting criteria, and maintaining our discipline on loan spreads.
We have a strong loan engine and advantageous markets that continue to be in a conservative nature.
Our credit metrics remain strong, which Chris Teets will cover later.
We have three past dues we are addressing, two of which have been problem loans for a while.
We are performing active portfolio management.
with higher rates to identify customers early who might become a problem now or in a slowing economy.
As we communicated last summer, depositors became very aggressive in the second quarter of 2022, and that continues today.
One of the biggest competitors to date has been the U.S. Treasury and Treasuries, where individuals have pulled money from banks into treasuries.
We are working hard to offer competitive rates and products to maintain and attract new depositors.
while not cannibalizing the portfolio.
It is as challenging as I have seen it.
More recently, banks have stepped up to wholesale prices on their deposits.
you face a situation that you either have to match or lose the relationship.
We hope this will slow as the Fed slows.
but margin pressure will likely continue in the near term through the first half of 2023.
Until deposit rate until then deposit rates will continue to rise
We will work hard to get as much offset as we can on the loan side.
Some of the specific actions we're taking related to deposits include, we are monitoring competitor bank rates in our markets and their specials.
To date, it appears our betas are in line or a little lower than our local competition.
We are proactively discussing each customer request that comes to the table. We're requiring the primary deposit relationship on all new loans.
We are calling on all relationships where a deposit was not obtained historically. We are calling on all customers for accounts.
that they might have elsewhere.
Lastly, we've changed our incentive plan to require a certain level of funding percentage to loans for each banker and market.
Our highest paying category has always been deposits and specifically DDA.
This will also ensure our great staff are outstanding bankers and not just outstanding lenders, encouraging them to call on deposit only customers as much or more as borrowers.
As it relates to fees,
Mortgage volumes remain at historical lows nationally.
We have a tremendous mortgage company and team and are monitoring local and national markets.
We reduced staff in the third quarter and have an opportunity to evaluate that further.
Again, we have a strong division and do not want to be short-sighted, but it is something we are discussing.
TriNet was paused in third quarter 2022 due to the unusual rate environment.
We will be testing a limited pool in the first half of 2023 with a different rate structure and risk protocols. We do not have a tolerance for further losses, so volumes might be lower, but we want to ensure we have a gain on sale.
We're very excited about our new SBA expansion.
From my experience, SBA is something you should really be committed to or not do it. Capstar has had a limited investment to date and demonstrated some success over time.
In fourth quarter 2022, we were approached by a top 10 team that elected to join us. Over time, we are planning that they can generate 2 million plus of quarterly gain on sale. There are three other revenue components that Chris will discuss later.
but that is the most visible component. In the past, we've cited 16.5 million as our non-mortgage expense.
non-interest expense range.
Recently, we've been running under that, and this team adds another approximate $800,000 a quarter of non-interest expense to include commissions that would go with their revenues.
Lastly, we've worked hard to put CapStar's capital to use in a productive manner.
by entering new markets and growing loans, increasing our dividend and buying back stock.
We renewed our buyback this week, albeit at a lower level of $10 million.
We feel that is prudent with the uncertainties with the economy at the moment and will continue to evaluate as the year progresses.
Now I'll turn it over to Mike for more details on the margin and other items.
All right, thank you, Tim, and good morning, everyone.
So on page 5, a few quick comments on
Thank you.
financial results.
For the quarter, we reported net income of $10.3 million, 47 cents a share. As Tim noted, Q4 results do include a 700,000 recovery related to one of the two third quarter operational losses.
Total revenue was $31.2 million in Q4. That is up $2.4 million versus Q3. They'll recall that Q3 did include $2.1 million of realized and unrealized losses related to selling.
or transferring to held to investment the remaining Trinet loans which were in held for sale.
Expenses were $16.3 million for the quarter. They were down $1.3 million versus the prior quarter. But again, as Tim noted, recall that the prior quarter did include $2.2 million of operational losses, partly offset by an $800,000 voluntary executive budget.
We reported return on assets of 1.31.
and reported return on tangible equity of 13.6%.
And we will go through, Chris will review the credit metrics, obviously, later in the presentation. On page 7.
in terms of net interest income and net interest margin.
after rising materially in the second quarter and the third quarter, where we benefited modestly from Fed hikes.
and remixing the assets shifting excess cash into loans. As Tim noted, the fourth quarter net interest margin of 344 was down six basis points versus the third quarter.
primarily due to two factors on the deposit side. One was a mixed shift into higher cost categories and run off of customer funds.
which we'll talk about in the next slide, and number two is additional deposit pressure.
from increases in customers seeking alternatives.
but also from an increasingly competitive local deposit market.
And I would say some of that is from local competitors, locally based competitors within our footprint.
I've been surprised somewhat to see more aggressive pricing both on promotions and on an exception basis from some much larger regional players and from some very large national players. Haven't seen that until recently.
Overall, our deposit data increased to about 40% in Q4.
And as Tim alluded to, we have seen NIM pressure late in the quarter. And that does suggest likely near term NIM pressure in the next one to two quarters.
on page 8.
in terms of deposits, total deposits.
were roughly flat. I would say in terms of deposit pricing,
Yeah, we have seen.
our betas and as Tim said we actively monitor competitor pricing.
through S&P, we monitor standard rates, we monitor promotional rates, and we monitor exception rates through what we're hearing from our bankers. And we certainly, as we've seen in prior cycles, and as we expected, we have seen betas.
increase, the deeper the Fed has gone into their Fed hiking cycle.
In terms of balances, we did see customer balances decline this quarter by $156 million.
We saw about $60 million in our correspondent banking division as our correspondent bank clients are deploying their excess liquidity, but we also saw about $97 million in other bank customer balance decline.
We offset that this quarter with
$160 million in broker deposits.
And from a price, from a cost standpoint, as you can see in the chart, our deposit cost rose 58 basis points.
to an average of 1.2%.
If we look at page 9.
in terms of loan growth and loan yields.
We continue to have solid lung growth.
The bar chart on the left is our reported loan balances. The first bullet that Tim referred to in terms of our health or investment loan growth.
that is excluding the TriNet transfer from, it's removing TriNet loans that we have had in-held for investment. Normally those are in-held for sale. So we did remove the TriNet impact.
from the 11.1 average growth and the 8.6 percent end of period. Without excluding those, you can do the math, but the period end is a little bit under 4 percent without adjusting for TRINET.
We continue to see strong long production.
It is down a bit from last quarter, I believe, but we're continuing to see solid loan production, $150 million in Q4.
And the pipeline remains strong across our markets. Commercial pipeline of 450 million.
As we've said on the last call, and I know we're hearing more of this in the industry, we are being more disciplined and somewhat limiting our loan growth.
maintaining discipline pricing.
which I would say we've seen more challenges on the deposit side from a pricing standpoint. We've seen, I would say to some respects, the flip side of that on the loan side. Middle of last year when the Fed was hiking 75 basis points every meeting.
rates were going up sharply along the curve, as we mentioned on earlier calls, we were remaining disciplined but seeing more competitive pricing that hadn't caught up to where market rates have gone. I think with the Fed slowing and the yield curve flattening and inverting,
We're seeing competitive pricing more in line with where the markets are. I think giving us more comfort and ability to achieve our targeted spread on the long side.
A loan yield did increase this quarter, 41 basis points, and we did achieve in terms of originations for the quarter match funded spread against wholesale funding, against home loan funding of 2.39% as of the time of funding.
On page 10.
related to non-interest income.
Mortgage revenue, as you know, has been down sharply from a year ago with the increase in mortgage rates. We do believe at this point mortgage revenue reflects limited volume in line with national trends.
margins however have started to rebound and are returning to what we view as more normal levels.
As Tim mentioned, TriNet, which we had announced previously, we had paused in third quarter, that remained paused through the fourth quarter, but as Tim said, we are now testing a limited pool in the first quarter. As he said, we have no appetite for additional losses.
and these are originated to sell. We're cautiously optimistic that our testing will be successful and will lead to potentially further expansion in that business.
SBA lending revenue, as Tim said, very excited about that. Chris will talk about that more in a few minutes.
You certainly see the results.
of a recent SBA expansion in terms of fourth quarter revenue where fourth quarter SBA lending revenue is up a little bit under a million five..
up about 900,000 from last quarter.
In terms of page 11 and non-interest expenses.
Adjusting for, well again, we reported $16.6 million.
That includes...
The recovery that Tim had mentioned of 700,000 operational loss from Q3.
That is down from $17.9 million last quarter, but recall as Tim mentioned, last quarter did include $2.2 million of operational losses and partially offset by $800,000 voluntary executive bonus reversal.
A good part of the increase in adjusted expenses versus last quarter is the additional SBA or costs related to the additional SBA hires, which again, we're very excited about and I will turn that over to Chris to discuss now.
Great. Thank you, Mike. Turning to page 12, we're excited to announce additions to our SBA team under the leadership of its newly appointed director, Mark Gilson. Mark is assembling a team of seasoned professionals that I have been impressed with at every interaction. This team generally comes from high production SBA lenders.
with volumes rating them in the top tier of national lenders. Their primary target is the origination of SBA 7A loans, generally with a 75% government guarantee where we will intend to sell the guaranteed portion for a fee.
As shown in the chart on page 12, while we are pleased with the historical trend in growth in the SBA group, we felt that it had potential for more.
Please note that of the $2.5 million in SBA net fees for 2022, over half of this was earned in the fourth quarter. While net interest income will change with variable rate pricing, we believe that the fourth quarter provides good insight into near-term expectations for fee growth.
Last quarter, we provided guidance to you of $750 to $1 million in fees for the fourth quarter. With the addition of this new team, we were able to exceed that guidance at $1.4 million for the quarter. Having said that, we believe that the near-term average will increase by $1.4 million.
be in the $1 to $1.5 million range per quarter on a growth trajectory to $2 million per quarter as the team settles in and gains cadence and efficiency in their process.
In addition, we continue to recruit new business development officers coming from efficient, well-run lenders demonstrating long-term credit loss experienced below the SBA averages.
Execution is the key in this arena to be sure we maintain the SBA guarantee. We believe that we must have strong investment in revenue production, robust underwriting and approval support, and a strong and seasoned servicing team.
With this in mind, we believe our strategy is sound, with the goal of staffing our team with seasoned SBA lenders, but we are also adding the oversight of an SBA-specific post-closing loan review by an external accounting firm to mitigate execution risk and to hold us accountable to strong expectations.
Now turning to risk management, on page 14, we are pleased with continued improvement in our overall level of criticized and classified loans, having achieved a 50% reduction for the year from 2.64% of loans at December 31, 2021 to 1.31% of loans at December 31, 2022.
improvement in overall asset quality. There are some data points relating to the level of impaired and doubtful loans and past dues that warrant some additional insight.
First, let me remind you of the evolution of problem loans. Often they start exhibiting red flags with us, either through identification of borrower operating results, giving us pause for concern, or delinquency, or a combination of both.
Upon identification of concern, such borrowers will generally be rated special mention and may migrate up or down from there over time.
Once a loan migrates to substandard, as I've indicated in prior quarters calls,
It often takes 18 to 24 months to resolve the situation.
Approximately 38 of the 41 basis points in impaired loans are in three borrowing relationships in active workout status.
These loans are impaired and have been subjected to impairment review with approximately $700,000 in specific reserves applied to account for potential loss.
These three impaired relationships also account for 41 of the 50 basis points in past dues.
Despite the negative migration in that small number of credits, we remain encouraged with overall asset quality for the following reasons.
The improving trend in special mention and substandard loans is a favorable leading indicator for future asset quality in the near term. With each of these two categories at 25 basis points and 65 basis points respectively, they represent historically low levels.
which buffers us against the impact of potential deterioration in uncertain economic times.
Adjusting for these three relationships and active workout, past dues would be an exceptionally good nine basis points continuing a favorable trend from prior quarters.
So let me step into the three relationships I've mentioned.
The total of these three relationships is approximately $8.9 million.
Of this $8.9 million, approximately $5 million is a single relationship where the primary collateral is real estate. This relationship came to us through an acquired institution.
The remaining two loans totaled $4.9 million, and our SBA guarantee transactions originated in 2020, with $3 million of SBA guarantees retained on our balance sheet, mitigating us against risk of loss.
Subjecting these three loans to impairment reserve or review, we have accounted for $700,000 of potential loss in the specific reserve accounted for in our provision of $1.5 million for the fourth quarter.
Turning to page 15, with the impairment of the loans previously discussed, our provision expense of $1.5 million takes us to 113 basis points at $1,231.
including fair value marks.
As you know, like others, we adopted CECL on January 1st. Our general guidance is that the impact of the conversion to us is in line with other banks.
As to the expectation for direction of change in the allowance for credit losses under CECL in coming periods, we would expect it to be driven by macroeconomic conditions with modifiers based on the direction of risk in our own portfolio assessment from period to period. With that, I'll turn it back to Tim. Thanks a lot.
OK, thank you.
Thank you, Chris. I'm really proud of our team and look forward to 2023. Since the onset of the pandemic, the environment continues to bring new challenges, and we continue to work hard to address each one and improve the bank along the way. That concludes our presentation, and we are happy to answer any questions. We appreciate your support.
And thank you. As a reminder to ask a question, you'll need to press star 1 1 on your telephone.
Please stand by while we compile the Q&A roster.
One moment for our first question.
And our first question comes from Brett Rabatten from OBD Group. Your line is now open.
Hey, good morning guys. Appreciate you taking the question. Wanted to start off with the margin and just the expectations for the first half of the year. And if you had the December margin, that would be helpful. And then just maybe thinking about the spread, the 2.39%.
Tim, that seems a little lighter than what I think you would have indicated you would be comfortable with previously. Just want to make sure I understood if that was primarily
on the lending side that you're not being able to accelerate the Yield as fast or if that's just a deposits are so much more expensive. Thanks
So, I'll start on the loan spread first and I'll let Mike talk about the margin. And good question. Thank you for the question. I am a details policy
You know, you can sort of just do it on a napkin or an Excel, but if you take a 200 basis point spread, right, and then you got to multiply, just take a million dollars and multiply it by 2%, and you're assuming that is your spread minus your FTP cost.
if you're going to assign some level of credit expense.
some level of operating expense, and then taxes today at 20%.
To me, you really want to get a 200 basis point spread. There's times where other banks
I remember when I was in Memphis, there was competitors that would do large churches over there at 110 basis point spread. If you think about that, if you're going to have operating expenses, commissions, expenses and taxes, you're not going to get a 125 ROA.
So, it's just been a rough rule of thumb for me, Brett, in my career, that on the commercial side I try and get my teams to do a minimum of 200. Sometimes we don't. Last, if you go back to the fall of 21, I think that fourth quarter, that's when the kids have their marking on.
Our commercial spreads were 250 basis points from my memory in that range.
As we entered the spring of 2022, you might remember me mentioning that we have extreme discipline, probably too much. We wanted to hold tight at that, and as rates went up, we were able to get a better understanding of what was going on in the spring.
banks did not move their market rates to match the underlying rise in FHLB sort of base rates.
So the rates we put on the spreads we put on the first half of last year, I think from memory, we're in the 170 range. And so I'm actually pleased that this quarter was 239 again. I think that would be great in a normal operating environment. So I'm glad to see that we need to keep trying to get as much as we can. I saw someone put out a note on Home Bank and
the margin. And I think the December is a good question. Right. So thank you. Appreciate the question.
So our margin in December had compressed.
to about 335.
We did see deposit pricing pressure pick up late in the quarter.
and we saw the beta related to FedMoves pick up in the quarter. We are
We are hopeful that some of that is.
competing with banks that are sort of getting ahead of the Fed's next move from a pricing standpoint. But we clearly saw deposit pricing pressure on an exception basis and a promotion basis pick up late in the quarter. You know one thing I would say in terms of Marge and as Kim said,
deposit pricing getting more aggressive, we are getting more spread on the deposit side to contribute to the margin than we did when rates were at historic lows. The wholesale rates we have been tapping which have been brokered not home loan.
After a year, they've ranged 30, 40, 50 basis points below match funded wholesale home loan. Our deposit pricing, we are trying to be flexible in terms of responding to competitor offers and competitor exception rates.
to retain profitable customers and to potentially attract broad relationships.
we will never go really to or above our wholesale alternatives.
So even at more aggressive deposit price and we are still getting reasonably attractive spreads on the deposit side, but less so than a little bit earlier in the year.
Okay, that's helpful. And then wanted to just turn to the SBA business and wanted to make sure I understood the pace of the improvement to the 2 million quarterly number, what that might look like. And then, you know, I've heard some banks say that they're less optimistic on SBA in the current environment. And O Bronze, and Nike, and all those those largest banks, run are incredibly passionate about thatif system didn't play it well and started to play it.
business where margins have been under pressure. Okay. A loan that you could, a guaranteed portion that you could sell for 10 to 12 percent premium, say a year or two years ago, might go for something around an 8 percent premium or less. And I suspect that that impacts the expectations of some of these lenders out there in the space and so on.
So, as to the trajectory for growth, I think it will be fairly rapid. I am optimistic that we will be at that run rate that I mentioned of about $2 million by the end of the year, but I think that we need another quarter or two to settle in at current levels before we push the envelope on that.
And Brett, I might add that.
I mean, we understand we're running a public company and there's different mandates from different investors and we want to build a great company and we want to build an institution to last. And so this is one of those that as we continue to improve our performance, this actually came to us. We didn't go seeking.
with this product over time. So spreads and different things will come and go. You know, these are people that we referenced and checked and very great reputations. They've done it a long time.
from top 10 SBA units and so
you know, we're gonna
We want to go fast and we want to go slow, right? We want to generate the earnings, but we also want to do it the right way where we've got a quality business and it continues to build the brand of Capstar and make it a well-rounded financial institution. Ok, thank you You're welcome
Okay, that's great. If I could sneak in one last one, Chris, just on CECL. You mentioned the implementation. I think at the end of 3Q, I think your reserve on CRE was 85 basis points.
With C-Soil, it seems like we could see some rebuilding of reserves for the industry, assuming using Moody's Model, etc. Chris wanted to hear if you anticipated a building of reserve levels in somewhat of an uncertain environment from current.
1.03 percent. Thanks. Well, I think it's hard to answer that. You know what I would say is that you see Cecil is so heavily tied to to national macro economic trends.
and that has been the most resilient and predictable kind of indicator of loss over time. So I mean we have the opportunity to modify that based on qualitative criteria. You mentioned commercial real estate for instance specifically. Again I'll remind you that our underwriting model for commercial real estate.
has and continues to be a high equity model, which we believe mitigates us against anomalies in the business cycle and cyclical risk from higher rates and lower valuations.
I don't know if that answers your question, but it's probably about the best guidance. Could I add maybe to what he's asking? And we have Jeff Moody here, our controller as well. So correct me if I get off track here, but we are adopting as of January 1 and evaluating it.
the banks that have adopted previously the, I don't know the correct term, but the adjustment for CECL appears to be in line with what other banks have had when they've adopted. And I think that, you know, reserves tend to go up, but I don't, I think that's more from the adoption of CECL.
I don't think it's anything due to the environment or the current economy. I think investors should expect something in the range to what other banks have had when they adopted. Then I'm not an expert on it, but as the macro environment changes one way or the other, that will determine your question, Brett.
But nothing, I would say nothing more so, and Jeff please correct me, but I think nothing more so than normal adoption levels that maybe we've seen from other companies.
Okay, he's confirming that.
Okay.
That's really helpful. Thanks for all the call guys.
Thank you.
And one moment for our next question.
And our next question comes from Graham <expletive> from Piper Sandler. Your line is now open.
Hey, good morning guys.
Good morning, Graham.
I just wanted to circle back to the margin conversation quickly. So you mentioned that at December margin of 3.35% and beta is accelerating during the month.
When you guys look to the beginning of this year, I guess one Q and maybe into two Q a little bit would you expect the margin to?
to be about that 335 level or above it or slightly below it.
Trying to feel out how you'll see it trending in the near term.
Well, I think, I mean, as a con, this is Tim, I apologize. As a conservative person, you know, I would follow recent trends. You know, I would love to be able to promise to you that it was going up and we want it to go up as much as anybody and we're going to, you know, we've been working very hard and we're going to continue working hard. As you know, this is, this is sort of a macro and industry item and it's, it's challenging. So
We're going to work hard. We've been, you know, tempering our loan growth and really focusing on pricing to main spread. And then we're going to be working extra hard on those projects that I mentioned to you.
I don't have an answer to give you as a conservative person. I think that we're probably viewing that we'll be probably that level or slightly down. We're hoping that as the Fed slows its rate increases, hopefully the next six months.
Hopefully that will slow banks from raising in some level of calm. And as Mike said, hopefully some of these banks are getting ahead to the next increase. But I wouldn't want to lead you otherwise. I'm an under promise and over deliver kind of person. And it's a challenging operating environment right now on the deposit side.
Okay, that's helpful. I guess specifically on the loan side, you mentioned home bank, you know, getting 7.1%. Just wondering what you guys are seeing on new production today that's in the pipeline, and what you can expect to see hit the balance sheet this year in terms of loan yield.
And then also, I guess, if you could share what your pricing wholesale or broken CD is at right now, that'd be helpful as well.
Okay, so we'll start with I'll ask Kevin Lambert who's here who's our chief guard officer. He may pitch in on
not a specific deal, but just general maybe 520, 525 kind of rates you're seeing, Kevin, and then maybe Mike can pitch in on brokerage CDs. So Kevin.
Right, as far as the rates go, you will probably see rates that range in the 6 to 7 and higher kind of range.
All right.
And yeah, Kevin, on the on the brokered side.
I would say looking at pricing as of Monday.
We have been issuing really generally out to about nine months.
have been issuing really generally out to about nine months.
I would say nine month rates right now we'd be issuing around 465 all in.
6 months we would be issuing around $450 to $455, 3 months around $430.
And again, each week we compare the curve on our broker to home loan. We also compare it looking at Fed Funds futures.
to where those are suggesting rolling overnight home loan borrowings will be over the course of the year and
We're trying to be very prudent in terms of tapping the most cost effective source to do that. A broker continues to be, right now, six months about 45 basis points under a home loan, about 20 under where Fed Fund's futures are.
Hopefully it gives you a sense for the current wholesale pricing we're looking at.
No, definitely, that's very helpful. And I guess just one quick one on expenses. I just wanted to know what the mortgage banking unit expense was this quarter.
Our teammate Lynn Rhodes is here. I believe it was around 1.5 million. Is that approximate? Approximately 1.5 million, Graham.
And again, you know, that was that I think I think our gentleman that runs that he's tremendous. I think, you know, this was the lowest gain on sale. He may have had in history and he's a real pro and it's just
That's an issue as I'm sure you're hearing from other banks. They're just limited to no volume. And fortunately the spreads came back for the volume you get.
sure you're hearing from other banks, they're just limited to no volume. And fortunately the spreads came back for the volume you get, but-
You know, there's additional, you know, we're actually interviewing a person. We've interviewed her twice this week from another mortgage company that got laid off in town.
You know the big companies are doing that and and there's there's a potential we of Maybe some further reductions. We did reduce about four hundred thousand in operating expense, but it's a balance of again You know we really have an outstanding mortgage company It's not a monoline that we blew up for the for the when I say blew up
I'll point out that we view March and April as being important kind of watershed periods to gauge where we see the rest of the year going. We are seeing a pickup in applications. Of course, rates have come down. Margins on the gain on sale have gone up. At this point, we're encouraged by the application volumes, the declining rates.
the resilience incumbent in the quality and quantity of housing demand in our markets, particularly middle Tennessee, where we're really have historically been a top five kind of mortgage originator for the market.
Okay, great. It's all very helpful. Thanks, guys. Thanks, guys.
Okay, thank you. And thank you.
And one moment for our next question.
And our next question comes from Kevin Fitzsimmons from DA Davidson. Your line is now open. CBS News.
Hey, good afternoon, everyone.
Bye, Kevin.
So appreciate all the information here, and we've talked a lot about margin, but
If we look at dollars of NII, are we likely in the first half of the year, if loan growth is more limited, so overall balance sheet growth is more limited and the margin is under pressure, is it likely that dollars of NII will be...
slacked it down in the first half of the year and maybe.
and are you hopeful it goes from goes to flat to up in the back?
Well, definitely on the backside and on the first side, I'd like to see that. I think one issue is just managing overall liquidity and the quality of the balance sheet.
Fourth quarter, Mike mentioned our correspondent division, you know, other banks are having the same issues. So there's pros and cons to correspondent balances because they're having issues too with customers. And so our correspondent balances were about half the decline.
We had some customer decline. Capstar historically had some really large metro Nashville. I don't want to call it hot money, but more rate sensitive money. And that's some of what has been leaving. So I would say Kevin.
From Tim's perspective, what I would love to happen is I hope the correspondent sort of settles down. One strategy I didn't mention when I listed them is we do have a new correspondent banker that I announced previously. He was the top correspondent banker at First Horizon.
I don't want to scare you. He actually had 700 million in deposits in his portfolio. So we're going to be working with him. Hopefully we can stem and grow correspondent. Hopefully the core customer deposits, you know, the larger, more rates and incentives maybe have fled. And definitely second half of your question, but I would love to see in the first half.
fourth quarter to make sure there's not further customer declines.
Okay, that's helpful.
Leads into my next question that I was going to ask about, you know, a loan to deposit ratio here is about 86%. Given, you know, your outlook for loan growth and what you just said about deposits is it seems like the goal is
to mostly fund loan growth with deposits, but obviously the deposit side is is larger. Keep in mind, keep in mind, you know,
That sort of public reporting or regulatory reporting, that our loan to customer deposit ratio is probably more 90, 95%. You know, when you report deposits, especially in this environment for our bank and others, brokered CDs are reported in deposits. So,
When you look at that chart in our PowerPoint of the loan to deposit ratio in the 80 range, that's with the benefit of 150 million or so of brokered CDs already.
So, I would say our core, if you want to call it that, our core loan to deposit ratio is probably around 95% or so right now.
Where do you want that to be, Tim? Where are you comfortable with that being?
That loan to deposit ratio?
Yep.
I think in that range, you know, back when we first met when I was at South Trust, I'm pretty sure our loan to deposit ratio was 115 or 120. And I'd have to go back. That's how banks used to run back then. I don't think that's well thought of today. So we generally have from memory, our, our, uh, board approved policy for wholesale funding is 25.
funded and then have availability on that 25 percent.
And right now we're using some of that 25%. So as I said, the customer is in the 95% range and we do have that. So, you know, I think in this environment, you're gonna use some wholesale. I think you are gonna use some brokerage CDs, especially with our tight bank and balance sheet. But I really look forward, our team has done anything we've asked them to do, and I'm actually looking forward to getting involved myself this spring.
trying to you know get correspondent going with Chuck Hunt our new guy and hopefully the most rate sensitive have slowed and we start to get some traction.
On that same topic, Kevin, just because we forgot to bring it up, I know it's unrelated, but talking about the best balance sheet of customer on both sides.
This is sort of irrelevant to today's discussion, but we showed our board this quarter.
Capstar's shared national credits this quarter, I think, are 0.3% of our loans.
which, you know, we've really turned the loan side to a customer balance sheet, and that would be my goal on the deposit side long term.
Great point. Thanks very much, Tim.
Thank you, Kevin. And thank you.
And one moment for our next question, please.
And our next question comes from Betty Strickland.
L
Bye, Sadi.
I just want to go back to expenses for a second and make sure I understand the expense guide. If I back out that $1.5 million in mortgage expenses from the fourth quarter numbers,
I think I get about 15.9, 16 million in the fourth quarter. 22 is kind of the core bank expenses. That's actually down a little bit in my quarter.
But your guidance seems to imply expenses ex-mortgage are going to rise to $17.4 million on a quarterly basis.
Are we going to see that all occur starting in the first quarter or is that sort of an average quarterly rate for the year and if you average all the quarters together that's what you would get.
First of all, good job and good math because that's pretty much what we came up with. Yeah, so Capstar to me is a little unusual versus some of my other banks that we've got these three businesses.
Sometimes it's frustrating even internally to get your arms around it because I'm used to maybe just a bigger, stabbier balance sheet and not more the fees on the deposit service charges which are steady.
So that's why in the past we've said, hey, 16 and a half. I mean, we don't want to, I don't want to be ultra conservative, but also, you know, I want to under promise and over deliver. So we've generally been under that 16 and a half a little bit. I know there was some questions after third quarter, but that's generally what we came up with in fourth quarter is that, you know, we've continued to operate under that range that we put out there.,
You know, when you reverse the recovery in fourth quarter, we also got about 15.8. If you put a million five on that, you know, it's like you said, remember, there'll be the 800 additional for the SBA. And then remember, in first quarter, FICA comes back.
So that is a number that comes back in. And secondly, fourth quarter didn't have any executive incentive accrual, because we had backed out 600 or 800,000 in third quarter and then did not do any in fourth quarter. So I can get with you offline, but you generally on track, Feddy. Thank you.
But, just keep in mind, you've added back the recovery, you've got FICA tax coming back. I think the executive recall runs, when is it, 200 or 250 a quarter?
It's about 250 a quarter, Fede, for the executive one that wasn't in fourth. So you've got the 15-8, you had 800, you've got FICA, and then you've got the 250. That sort of gets you to your core. And then you've got the million five of mortgage on it, which that doesn't really have a lot of risk.
variable in it, there's some, you know, not far underneath that would be the core run rate just to run the business. That again, we could continue to look at throughout the year if it stays slow.
Gotcha. And I guess on mortgage, you know, if that's a little better, the expenses will be a little higher, but the revenue will be a little higher because you'll have better gain on sale. That's absolutely correct. I got a frog in my throat.
That's exactly correct. If you look at fourth quarter, I think there was $600,000 perhaps in fees on mortgage. So there'd be some commission in that number and so forth. But you are correct that if that went up any, you would get associated revenue. Same thing with SBA. The number I gave you of the 800.
that does have some commissions sort of for the million and a half level. But if it went up to two, two and a half, three, there would be additional revenues for that expense.
Got it. And then just one last one for me, just more broadly speaking, when you're talking about internal investment.
Is that going to be focused more on augmenting your existing markets or are you considering further expansion in new markets, either with an LPO or a team left out or what have you?
Well, I would say before this rate environment, like if we go back to whenever, fourth quarter of 21 or last December , you know, my view to the management team and our board is we have enough right now. And you know, we've done a, this was a fabulous company that had a lot of positive aspects to it. And you know, perhaps It's just going away now positively.
You know, we've changed the strategic direction a little bit. We've maybe changed the culture a little more towards performance.
It was a great company to start with.
You know, profitability was a little lower, growth was a little slower. So you know, wanted to do these investments and I think they've worked. You know, I don't think we covered it specifically, but Chattanooga and Knoxville today are almost 500 million dollar banks.
They are bigger than Athens and FCB. I think Athens, we may have bought for 100 million. In FCB, we may have bought for 80 million, handed out shares. So that's almost a $500 million bank that we didn't hand out shares on. So I think we have enough.
I would have said that before the rate environment and my goal really would be to continue to maximize those markets and maybe look for bankers in those markets. But we already have a great team. We don't need a lot more bankers. And so we've got a wonderful team in those markets and they we need to keep getting customers like they've done with that 500 million.
and really fund it and get the deposit side. That's the emphasis even before the rate environment.
SBA, I don't know if somebody came with a new line of business today.
We have enough going on with our core markets and our current fee businesses. I don't think we would step into a new fee business. This was really that we were already in SBA. I think we'd had some wins, but it was sort of here and there, and we thought this would really solidify what we were attempting to do. Got it. Thanks.
Hey guys, just one quick follow up. You know, you talked about the competition and the markets, and clearly you had two players I think trying to get ahead of the curve for this year in terms of growing your deposit base by being aggressive. So you can make an argument that those two players in particular sort of...
did some of their heavy lifting, you know, in 4Q as opposed to doing it, you know, in 1Q and 2Q. And so you could say, well, maybe the link quarter changes and pressures on the funding slows from the pace in the fourth quarter, particularly in middle Tennessee. Or you could make an argument for that. Anyway, I just.
Wanted to get your perspective on that thesis and what you're seeing maybe today versus in December on.
Thanks. Well, I'll comment first and then Mike can comment. I'll just say, first of all, we've got outstanding competitors in Nashville and Tennessee, and I think everybody does a great job. And so I think everybody's fighting through this the same way. I think you could make an argument to that. I think it goes back to Kevin Pitts Simmons.
you know, if I can see that the
that the..................
attrition is ceasing or slowing down, I would be for the same thing. I know it's not what we all want or I want long term, but I think, you know, we're a great bank. We're the third or fourth largest bank in the state and, um, have a, have a long future. And you're in this for the long term, but I think there's markets where
you know it's not the goal isn't to have the most margin it's to have you know growth and earnings and a good ROA and ROE.
I think they're doing a good strategy. I don't follow all of their exact balance sheets, but we have seen that. I'm not sure if that's what they were doing or I think it's more what Kevin was asking earlier. I think they're just sort of plowing through it and saying in this short term environment, we're going to grow NII and it's going to cost us to do it. And over time that will settle out.
and I'm hopeful we can get there in the first half of the year. Yeah, thank you, Tim. And I would add to that, I think I might have mentioned, I might have touched on this a little bit earlier in discussing the margin.
Again, hard to predict, but I did mention to your point...
that we have seen competitive pricing including from
I think some of the banks you had in mind.
more aggressive. We don't know to what extent that may be. We've seen banks in our markets that are trying to get ahead and deal with liquidity challenges. I don't know to what extent the rates we're competing with might be getting ahead of the next.
that move, we hope that is the case.
But we don't know. So that is certainly a possibility. We hope to see that, which would give us some potential upside in Q1. But as Tim said, I think we want to be conservative and cautious in any outlook we provide. So I would say time will tell.
We are monitoring conditions.
really day by day. We have very active dialogue with people in the field and what they're seeing.
And
So we do hope that the race that we've been competing with will slow.
Okay, that's helpful. Appreciate it. Thanks, guys.
And thank you. And I am showing no further questions. I would now like to turn the call back over to Tim Schools for closing remarks.
Okay, this concludes the call and we appreciate everybody taking time out of their day today to listen and speak with us. Have a good weekend.
This concludes today's conference call. Thank you for participating. You may now disconnect.