Q1 2023 CapStar Financial Holdings Inc Earnings Call
Okay.
Credit Chief Credit Officer. Please note that today's call is being recorded replay of the call and the earnings release and presentation materials will be available on the Investor Relations page of the company's website at cap Star Bank Dotcom. During this presentation, we will 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 the performance and achievements of cap star to differ materially from those expressed or implied by such forward looking statements listeners are cautioned not to place undue reliance on board.
Statements.
A more detailed description of these and other risks uncertainties and factors are contained in <unk> public filings with the Securities and Exchange Commission.
Except as otherwise required by applicable law cap star disclaims any obligation to update or revise any forward looking statements made during this presentation.
Would like to also offer you.
We also refer you to the page two of the presentation slides for disclaimers regarding forward looking statements non-GAAP financial measures and other information with that I'll turn the presentation over to Tim schools, <unk>, President and Chief Executive Officer.
Okay. Thank you Sir good morning, and thank you for participating on our call.
In first quarter, we reported earnings per share of 30 cents and a return on equity of 7.41%.
These results included a $2 million write off equating to seven cents per share of signature bank subordinated debt, which I will discuss in a minute.
As well as $216000 of loss equating to one cent per share related to our mortgage and Tri net divisions, which are valuable businesses, especially volume whose volumes are impacted by current market rates.
Additionally, our SBA division had $400000 of fees equating equating to a penny and a half per share.
Which were deferred into early second quarter twenty-three due to delayed closings I.
I will also note we returned nearly 10 million to investors in first quarter through dividends and stock repurchases as well as increased our dividend, 10%. We have now increased cap starz dividend, 120% since early 2021.
As everyone is aware the industry has faced deposit challenges the past 12 months as market rates have risen one of the fastest paces in history.
Sided deaths and warned of the outlook in our second quarter 2022 earnings call. When many banks, we're still communicating expectations of deposit growth.
The fastest change in market rates and a long time has caused industry deposit outflows migration within banks from noninterest bearing to higher yielding alternatives and overall price competition.
One of the biggest competitors the past year has been the U S treasury, where customers often in noninterest bearing accounts moved money to earn 4% to 5% and six and 12 month treasuries.
In January banks in our markets began to offer money market rates and nine nine to 12 month CD rates approaching 5%.
We've been disciplined trying to balance the repricing of our deposit portfolio, while still trying to grow deposits.
By introducing brokerage Cds.
As a younger organization cap stars deposit organist franchise, historically had a heavy emphasis on correspondent banking deposits and larger wealth management investment type accounts.
Over recent years, we've worked hard to lessen their overall emphasis while average customer deposits were down for the quarter. We are pleased our end of period customer deposits were up and stable following the silicon Valley and signature events. Our team has worked hard to communicate with our depositors.
Throughout the fall and into 2023, we've worked to reduce loan growth specifically by raising our expected spreads and curtailing commercial real estate loans, which tend to have lower deposit opportunities.
Spite these efforts loan growth was up 7% annualized on an average basis and 16% annualized in the period and the first quarter of 2023.
In each case, C&I and residential real estate loans led the growth with declines in non multifamily commercial real estate.
As noted we've had a write down this quarter or in first quarter.
Of signature bank sub debt.
I'd like to take a minute to discuss and summarize our investments in these securities.
When I joined cap star in the summer of 2019 cap Starz balance sheet had significant wholesale type balances on each side of the balance sheet.
Loan participations and H L. T loans had at one point been in the 40% to 50% of loan range.
And cap Star had had a loss of $10 million and $4 million on single individual credits.
Outside of participations in H L. T cap star loans had grown 3% a year the prior five years.
At that time, we set out to transition cap star to a Tennessee based bank focused on relationships, we would lead.
As a bridge, we invested about $70 million into investment grade liquid more granular investments.
From $10 million plus nonsecurity non guaranteed participations that were often out of state as we developed loan capabilities today.
Today, we are proud that our snacks are less than 1% of loans at $6 million and other participations or $85 million and 4% of loans.
100% of those balances are in the state of Tennessee.
Alongside this we've now also have $450 million of loans in Asheville, Chattanooga, and Knoxville, and which we lead and are largely have collateralized and guaranteed positions.
Unfortunately, <unk> signature resulted in a loss.
As many of you are aware.
Signature has had a stellar reputation for many years and was investment grade rated when we purchased it as well as at the beginning of this year.
We've outlined that the profile of our sub debt portfolio, and our investor slides as well as the underwriting criteria that was used to select these.
We've recently performed a review of our remaining investments and feel good with our holdings at the current moment.
Switching to noninterest income we were pleased with the first full quarter of our SBA group.
As I said previously 400000 of fees rolled into <unk> 'twenty three but they also generated another 350000 of fees that require seasoning under the SBA before they can be sold which will likely be in third quarter. So in total there activity generated approximately $1 $7 million.
And fees in the first quarter.
This group has a lot of potential.
Mortgage volumes increased in March and look good for April and May.
The gain on sales spread also increased in the first quarter.
If rates stay in the six to six 5% range, we would expect similar volumes to the first quarter.
Try that closed and sold its first loans since August in early April at a premium and is working on its second we are optimistic pricing might be settling down where we can return to some level of volume again, our mortgage and Tri net divisions in the first quarter had a net pre tax loss.
Costs of $216000.
Asset quality remains strong across our credit portfolio three relationships, which had entered 90 days last quarter have entered forbearance agreements and are now current.
Past dues. This quarter are comprised of one significant relationship for which we are secured and have a personal guarantee.
We're actively working with the customer.
Later in the slides, Kevin Lambert will cover information related to our CRE portfolio.
Which we are actively monitoring and feel very good about it.
I'll now turn it over to Mike <unk>.
Okay. Good.
And thank you everyone for joining.
Alright.
On page page four.
A few brief comments on liquidity.
So we have a diverse source.
Sorry, we have a diverse source.
And off balance sheet liquidity.
Totaling one $6 billion.
That.
<unk> represents 160%.
Our one 3 billion.
Of uninsured on collateralized deposits.
So we have our securities portfolio remains a modest part of our balance sheet.
Thank you.
12% of assets.
We continue to have strong capital levels.
We have.
Brokerage Cds as Tim mentioned, we have been tapping wholesale funding.
We have broker to about $370 million.
$55 million of home loan borrowings, we have not yet accessed the fed's New bank term funding program.
We are certainly considering that monitoring pricing relative to other options and certainly tap that if the economics appear attractive.
In terms of page five our deposit portfolio growth.
As Tim noted, we have seen stability and increase our customer deposit balances over the course of the first quarter.
Average versus Q4 was down but as Tim noted, we have seen an increase from year end through $3 31.
We continue to have a consistent focus on deposit growth.
Especially operating accounts.
Continue to be.
Strive to balance being very competitive while also being disciplined on pricing on the deposit side and as Tim said, we certainly continue to do that on the loan side.
Post as phebe.
We were very proactive as Tim noted, our bankers reached out to their to their largest customers and largest depositors.
And discussions to ensure they were comfortable with our situation our financial stability.
Did see some movement.
At $150 million in movement within our deposit portfolio into reciprocal deposits.
A product that we've offered for for many years that as most of you know will provide to the customer call FDIC insurance.
We have a solid pipeline on the deposit side.
And we continue to look for growth opportunities across our footprint.
Our next page I will actually skip page <unk>.
<unk> said that I think Tim covered all the key points there.
On page eight regarding key financial results as Tim noted EPS of <unk> 30 cents.
Net interest income was down.
Modestly due to a 20 basis points decline in the margin related to deposit related pricing pressure non.
Noninterest income is flat will go into more detail on that in a minute.
And expenses were up and we will cover that.
As well and then we have the $2 $4 million provision as Tim noted $2 million of that relates to our signature bank sub debt.
I will go to page 10.
And briefly comment on.
Loan growth.
Yes.
Commercial loan pipeline has slowed.
Due to our reduced market demand and to the cutback in CRE our COO.
Current pipeline is about $220 million.
We continue to focus on disciplined pricing.
Versus the match funded Hawthorne curve.
And you can see our pricing on the chart in terms of average yields on Q1 originations.
Six 8% on fixed rate locks.
Higher seven 4% given the current inverted curve on variable rate loans overall seven 1%.
As Tim noted, we continue to strive to be disciplined on pricing on both sides of the balance sheet.
And.
Certainly given the increased pressure with deposit pricing.
We continue to reiterate to the field, they need to be achieving sufficient and attractive pricing on the loan side.
Next page 11 on the margin.
Sure.
Deposit cost increased 58 basis points versus Q4.
If you look at the chart in the bottom left you can see the breakdown by category.
So.
Non correspondent customer deposits rose 32 basis points to a level of one 1%.
Correspondent and broker deposits, both rose about 98 basis points.
Overall deposits Rose 58, so we are pleased that on the customer side again, we're able to grow that modestly.
With with disciplined pricing being competitive where we need to be but but again trying to balance profitability.
And growth, we would certainly target.
Deposit growth to keep pace with loan growth challenging in this rate environment, but that continues to be the focus of the markets.
I will turn it to Kevin for a minute on page 12, the comment on loan portfolio performance.
Thank you Mark we're very pleased with the continued strong performance of the bank's loan portfolio.
Asset quality remains very good with annualized charge offs of only three basis points for the first quarter as noted in the upper left hand graph.
Past dues spiked a couple of quarters ago as detailed in the upper right hand graph the increases in both the third and fourth quarters were primarily related to a couple of large relationships totaling $8 $3 million at over $3 $3 million of this total has a 90% SBA guarantee.
And the other relationship which was acquired through a merger is now performing and is actually on pace to return to accrual status by the end of the quarter.
<unk> long term relationship that was delinquent at the end of the first quarter past use would've been 12 basis points at the end of <unk>.
Q1.
As can be seen in the graph in the lower left hand side, the bank criticized and classified loan levels increase during the quarter, primarily due to the downward migration of a single previously watch rated credit.
Craig as credit continues to perform and is fully secured and maintained a sizable amount of deposits with the bank. So no no loss is anticipated.
In summary asset quality remains very good with low levels of charge offs and past use and near record lows for criticized and classified loans.
Turning to the Nic thought in terms of our provision.
The bank adopted seesaw effect the first of this year.
Due primarily to the change in accounting methodology. The bank's allowance has increased by approximately $4 million since the end of last year and now totals approximately $25 million.
Based on our low historic levels of losses, and the quality of our portfolio, we feel the allowance continues to be sufficient.
Mark I will turn the floor back over to you.
Alright, thank you.
Alright, noninterest income on page 14.
Overall noninterest income for the quarter is flat.
However, as as Tim noted.
Activity in the SBA business and Q1.
Generated revenues that will be recognized in Q2 and Q3 of $750000.
On the mortgage side, you can see that gain on sale revenue doubled versus last quarter.
As we're beginning to see a return to more normalized margins.
And modestly increasing originations, which as Tim noted.
We expect to remain at these levels or move modestly up if mortgage rates remain at current levels.
On the next page you can say more detail on our mortgage.
And you can say that.
Our primary focus continues to be purchase money volume.
We've had very consistent.
Originations on that side.
You can see the revenue increased 650000 from last quarter and you can see the margin is up sharply about 90 basis points to 240 basis points this quarter.
Next page 16.
In terms of SBA as Tim noted a business, we're very excited about.
The new team that we hired in Q4 has really hit the ground running.
And we feel very very strong prospects looking out.
Over the remainder of this year.
You can see on the top left.
If you take Q1 revenue annualized.
We do have.
Significant upside.
Versus prior run rate.
So $6 $2 million on an annualized basis.
So we feel very good about that group.
And its prospects.
On page 17.
Regarding noninterest expenses.
We had a number of things contributing to the increase this quarter.
Number one.
You might recall last quarter, we recorded a $730000 recovery of.
Q3 operational loss.
Number two we had salaries and benefits.
Increasing including 180000 and the SBA team expansion, we had increased payroll taxes.
A little more than 300000, we had lower loan origination deferred expenses of about 110000.
And we also had something that everyone in the industry is seeing we had increased.
IC assessments.
For us that was about 144 for the quarter.
In terms of page 18, I would say these continue to be the various options from a capital allocation standpoint.
We continue to look to be balanced and disciplined in terms of deploying capital as you've heard us say in prior quarters. Our first priority is supporting organic growth.
We continue to increase our dividend over time as was noted earlier, we continue to be in the market.
With authorized share repurchases.
We did announce as you recall.
$10 million share buyback program in January we have about half of that $5 $4 million remaining.
As of March 31.
Alright, I will turn it back now to Kevin to talk about credit culture and CRE.
Skipping to page 20.
We did want to highlight are our loan portfolio, we feel very good about the composition of our loan portfolio in general and want to highlight the bank's overall portfolio mix as well as address some potential concerns related to investment CRE loans, which are obviously a hot topic in the industry is.
<unk> feel the impact of higher interest rates.
As can be seen in this slide the bank believes in a well diversified mix with the goal of assets split into equal thirds in CNR consumer.
Okay.
And investment CRE are primary, Tennessee markets, Nashville, Knoxville, Chattanooga, as well as our new market in Asheville, North Carolina continued to enjoy robust growth in normally outperform other areas of the country during downturns.
Over the past several years, we have virtually eliminated shared national credits, which now account for less than 1% of our.
Exposure.
Our focus continues to be on organic local growth with a current emphasis on C&I and consumer lending.
On the next slide.
I wanted to give some details.
In regards to our mix of investment properties.
Which.
As can be seen here the highest ever of our concentration is in multifamily projects. We feel very good about our multifamily exposure as most projects have a minimum of 35% to 40% in equity injections.
This is also true with our hotel exposure, which has performed very well at retail sector of CRE includes approximately $100 million in credit tenant exposure primarily related to loans originated through through training.
These loans generally have 10 year triple net leases, we have performed well in downturns.
We continue to avoid A&D loans, which constitute a nominal portion of our portfolio.
Several months ago to the bank began tightening its parameters and appetite for CRE loans, we've been busy analyzing our portfolio for potential weaknesses.
Especially in the opposite of being in the office sector, which is detailed in the next slide.
Okay.
So virtually all of the banks office exposure is located in Tennessee, mostly in our metropolitan areas and usually not in central business districts are there is an exception in Chattanooga as it relates to central business District as most office buildings in this CVR located in CBD.
Which has remained very very vibrant.
This area as well as others throughout the state continue to fair well as people relocate to Tennessee.
Which remains one of the fastest growing and most fiscally responsible states in the country.
On the next slide we show our general underwriting guidelines.
This slide details the three broad areas within our bank that originate CRE loans.
Our CRE group led by a very experienced team of high caliber real estate specialists handle the majority of the banks investment real estate loans.
Their portfolio is categorized by high levels of equity.
That of Tri Ed.
On average the bank's CRE group has loan to values in the 50% neighborhood <unk> portfolio has an average loan to value of 60% based on a recent review.
Our commercial bankers in our markets also do CRE loans, which are smaller in nature, but.
Which unlike the theory group and trying out and typically have unlimited guarantees.
Loan to values are usually 80% or less amortization periods are usually shorter as well in the markets.
We feel very good with the standard due diligence and conservatism over underwriting we believer CRE portfolio will fare well in the coming months.
On the next side were shy away.
Details of our maturing CRE loans with specific emphasis over the next two years as islands with fixed rates will be most impacted during this timeframe as loans are renewed.
A recent review of our upcoming maturities inner CRE group showed the ability of our borrowers to continue to perform well even with the higher levels of interest and those that are currently in place.
Loans within the CRE group, which tend to be larger that are maturing within the next two years.
Have a weighted loan to value average of less than 50%.
The group has had a debt yield for nine 5% or more depending on property type for several years. Its a its portfolio has been stellar with no losses in the history of the bank.
Also note that we expect $30 million in run off and multifamily exposure. During this quarter as a few projects are scheduled to be taken to permanent.
Financing is.
The normal course of business for these.
These top siblings.
On the next slide.
Eric.
Erlanger continuously reviewed we reviewed is both internally and externally.
External exams are down at least twice a year rollover lease risk is mitigated with higher levels of equity.
<unk> projects interest rates are stressed at the time of approval and when renewed in the bank and the bank actively manages concentration risks which are reviewed on a monthly basis.
With this I will turn it back over to Tim.
Okay. Thank you Kevin the environment continues to be challenging.
And I am proud of our team, which is working hard to provide great service to our customers and ensure we protect our financial soundness of the bank that concludes our presentation and we're happy to answer any questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press star one one again our first question comes from the line of will Jones from <unk>. Your question. Please.
Hey, great. Good morning, guys stepping in for Katherine This morning, how is everybody.
Hey, good morning, how are you.
Doing well Kevin.
I just wanted to start on the margin obviously it took a step down this quarter as you guys keeps continuing to see.
Deposit pricing pressures as well as the mix shift story play out.
Just hoping you could give us an outlook on where do you think the margin trends near and maybe if you could comment on what the spot margin was in March.
And just in terms of the mix shifts narrative playing out as I look back over a year ago now.
Noninterest bearing deposits were closer to the mid 20% range of deposits and now sits closer to mid teens today.
Just.
How far along do you feel like we are in the mix shifts or and where do you feel like those noninterest bearing deposits eventually trough out thanks.
Well great questions a couple of things on that one is I think if you go back a year ago, we probably had zero in brokerage Cds and now we have $370 million. So a big you know there has been mix shift and theres been dilution of the percentage by adding brokerage Cds I'd have to calculate it and see what the percentage was if we didn't have the brokerage Cds, but there certainly is.
Migration going on like I said, where people were getting.
When rates when fed funds was that a quarter or 50 basis points and there wasn't much to get and now they can go get a six month treasury or.
<unk> has been offering four 5% money markets here in Nashville in the newspaper, it's just there's a movement I.
I know everybody wants the magic answer I'm, a conservative person again I was the one in second quarter in August or in July that said, Hey, I think deposits are going to be tough the rest of the year I think they are going down I know other banks were saying they were going up and so well I don't have the magic answer and I think hopefully we're near the end of the.
Of the rate increases from the fed.
Banks were slow to raise rates as they tried to protect our deposit portfolio.
And it's a real balance of trying to grow versus cannibalization and that's why we introduced brokerage Cds.
I would hope that if we looked at betas, they're really people that you know we're elastic to deposit rates I hope they were impressive first and those are the ones that moved or those are the ones that salt the highest price.
That would trail off.
But that's about as best as information I can give you the March margin was around 310.
And so there is continued pressure as you know marginal deposit cost to grow our bank.
Really getting a lot of noninterest bearing you find the operating account takes longer to move and.
You know you do give an earnings credit rate on that so there isn't inherent cost, but the marginal cost right now of getting our money market or a C. D is is in the 4% to 5% range as you see our new loans are being priced at around 7%.
But.
In general the loan repricing of banks and ours has not repriced as fast the last 12 months as deposit rates have changed.
Yes.
This is Mike Fowler I would add to that.
In terms of your question about DDA.
The decline in our DDA noninterest bearing DDA balances as Tim noted a lot of that is driven or we see this in our reports through the industry a lot of that is driven by balanced centers better compensating balances.
For service activity.
And customers, obviously need to leave less.
With short term rates.
Where they are today versus where they were a year ago.
We do if rates stabilize or if we're are near the peak.
Then I think that that pressure should certainly subside.
And I think we can certainly expect to see some reversal of that when the fed starts moving rates down whenever that whenever that is.
Great. That's all helpful. I know I'm asking you to look into the Crystal ball a little bit there. So really appreciate the color.
And just kind of the growth you guys. Obviously saw really good growth trends this quarter, both on the loan and deposit side.
I appreciate that pipelines are slowing a little bit just looking to get any commentary on your appetite to grow loans from here.
Maybe where you see loan growth trending as the covenants and back half of the year here could we see a mid single digit pace.
Well I think we have you know <unk> has been a transformation right and I don't.
I'll just focus on what I can control I don't I don't like to criticize and so.
Starting point as I said has substantial wholesale really on both sides.
And we really set out in the summer of <unk> 19 to transform both sides and.
We've made tremendous progress on the loan side.
As I said the <unk>.
<unk> less than 1% other participations less than four blah blah blah.
And we actually had aggressive actions on deposits in the fall of 19, and then the pandemic happened and you had $400 million of deposits flow in.
And your phone would ring off the hook from investors.
What are you going to do with those deposits. They are sitting there they are not earning thing you know.
You need to do something you need to lend them out and so it's hard to please.
We would all love it to be a perfect environment every day and it's different when you're an operator and you're running a company and so.
Ideally in a stabilized market will I'd love to have a company I was looking at Lakeland financial slides. The other day 150 year old bank, they've grown loans and deposits, 11%. Each the last 30 years, I mean, wow, what a wonderful calibrated model they have and I think we've come a long way.
Think that in our markets with our team.
There is good CRE loans out there right now I think it's late in the cycle and do you really want to be doing development and I think they don't come with deposits. So we've slowed that down, but I think with our markets and our team we could grow loans, 8%, probably 14% I don't think thats prudent in this environment.
So we're really focused on the soundness of the bank, meaning asset quality liquidity profitability and so.
In the interim I would like to make sure that deposits have stabilized they are coming out of cost for our all banks, which is hurting the margin, but I would like to see that stabilize.
Like us to see us continue to build those capabilities I think like we did on the loan side that we can prove over time that we can gather deposits. It never really was a long term emphasis of this bank.
And so I would say that that was what I would like to see is I'd love to see where our team can bring in deposits and loans in the 8% range and let's get that going and then once we get that going we could up it but.
We're threading a needle through this challenging economic environment.
Understood all fair enough I appreciate the commentary there. Thanks.
Thank you will.
Thank you one moment for our next question.
And our next question comes from the line of Brett Robertson from Hovde Group. Your question. Please.
Hey, good morning, gentlemen.
Wanted to morning, Brian Dart.
Good morning, Tim I wanted to start with just looking at from a regulatory filing perspective, you've got about a third a third a third of assets repricing last one one year one to five and over five could you maybe give us any clarity on how much you have a pricing in our loan portfolio.
Here in the next.
Couple of corners, and then similar on Cds.
Sure Yeah. Good morning, Brett This is Mike.
So on the loan side I would say, yes about 60% of our I don't have the maturities on the loan side over the next the next few quarters I can follow up with you on that offline.
But we've got as you said we've got.
About 33% of air portfolio that is variable that will reprice immediately and about 6% that will reprice beyond a year.
So.
I'll need to come back to you in terms of the breakdown on the fixed rate that is maturing and we'll reprice over the next few quarters.
On deposits on the deposit side.
I'd say we are.
Yeah, certainly actively re pricing.
Our non maturity deposits as market rates move.
I don't have the breakdown I'll come back to you in a few minutes in terms of breakdown on the CD side by maturities. So let me come back to you in a few minutes later on the call.
Okay.
And then Tim you talked at length about the environment.
What you do.
Things like this happen.
Nashville is obviously, a highly competitive market I wanted to hear your thoughts on what you were seeing.
Funds transfer pricing spreads.
As.
Is there a widening in terms of spreads.
And if so.
Do you feel like that's.
Function of lower credit availability.
Or just where the yield curve is.
Yes, great question.
Again, I've talked about this in the past and we all have different backgrounds and I understood. There was some misunderstanding after a previous call but.
You know my experience here and at larger banks is banks price their loans off of a funds transfer pricing equivalent matched wholesale curve, whether it be the swap curve or whether it would be the FHA ob so when I talk about spreads.
Not spreads to our deposit cost it spreads to a theoretical match term if you had no deposits.
So.
Anywhere I've been I've sort of been trained to try and see 200 basis points are higher on the commercial side relative to match funding. If you go back to the fourth quarter of 2021 from memory.
FTP spread matched funding spread on commercial loans was 250 basis points.
And that's a good target Brad because if you get like a sheet of paper out.
And do 200 basis points, and XL on a $1 million $10 million loan.
You got to subtract out.
That's FTE piece, that's got your funding cost you got to subtract out some level of operating expense, whether it be servicing or incentive you've got a back out potential whatever your estimate for credit and you've got a back out tax a tax rate.
So if you don't get about 200 basis points youre not going to end up with a 121 150 ROA on that relationship.
So we had $2 50 as you enter 2022 last year. The first half of the year. Our FTP spreads were in the 150 range $1 75 range and what it was Brad and I'm not criticising.
All banks don't use fund transfer pricing and are not sophisticated on pricing.
And you've got everybody competing for volume so when rates started shooting up in the first half of last year I would say both competition people wanting to get volume as well as some lack of sophistication. They were low it was sort of like heart in the mortgage world and our mortgage company, where they've now come back and so.
So what I would say is that happen through maybe third quarter and since third quarter spreads have started to come back I think that as banks seeking less growth and so some of it is banks can get more I think some of it is banks wised up and finally raise their spreads because the deposit rates going up.
And so in.
In March I have my March numbers in my head, what we did is <unk>.
Some to offset the deposit pressure some to slow loan growth. We said in first quarter, let's target 250 basis points on three rated credits and better let's target $2 75 on fours and three on five rated credits.
We didn't always get that but that's been our target and I think our weighted average in March was much improved and our weighted average was more than the $2 25 range. So we didn't always hit what I just said on our goal, but we're creeping back to what it was in that fourth quarter of 2021.
Okay.
That's really helpful. Tim.
And then if I can sneak one last one in my line was breaking up a little bit when you were talking about <unk> 17.
Mike I, just wanted to make sure I understood.
Sort of the run rate from here on in particular, the salary employee benefits line and then just the other line.
So I'll answer that real quick we're going to work hard to target expenses at the current revenue level and the 18% to $18 $5 million range.
And obviously, if SBA does really well in trying that comes back in mortgage comes back there are variable expenses related to those.
But.
You know we had the 700000 come back in fourth quarter.
<unk> loan expense because volumes down we didn't have as much benefit as fourth quarter and then you have the FDIC.
There were one or two bills that when you're a small company our health insurance.
It tripped over it was about $150000 from fourth quarter, but we're going to work hard.
Better management as well as seeking some expense reduction.
To try and manage these between 18% and $18 5 million per quarter.
Okay.
Helpful. Thanks for all the color gentlemen.
Thank you one moment for our next question.
And our next question comes from the line of Kevin Fitzsimmons from D. A Davidson your question. Please.
Hey, good morning.
Hey, Kevin.
Hey, Tim.
Listen I know, it's difficult with the going back to margin and maybe also we can.
Tie in dollars of NII to it because I think that's important.
I know it's difficult.
The kind of Crystal ball question, but we've heard from a number of banks and whether they're right or whether they were too optimistic.
Indicate that.
Second quarter there'll be additional margin pressure, but probably at a diminished pace from that we saw in first quarter, and then likely to see margins start to stabilize in the back half of the year and I think thats all assuming the fed does one more hike in may and then pushes away.
Is that.
Yeah.
Quint.
And then in conjunction with that I think there is a sense that once the fed is done met mix shift really starts to abate all of that said I mean, just can you kind of characterize how your <unk>.
Looking at the.
That relative to.
To that.
That outlook, we're hearing from a number of banks.
I think that would be my overall thesis as well if you ask me from a probability standpoint, what do you think is more likely to play out I'm very conservative so I, probably would delay at one or two quarters than what you described I mean, I think we're near the tail end of rising.
The most aggressive people salt early in either moved or switch products.
That as that slows youre going to have.
Your loans catch up and so I think your thesis I would agree with that thesis when when it kicks in and when it has a material effect.
I'm not sure.
But I think what you described.
I would believe in it sounds the right direction.
Okay great.
And then maybe on <unk>.
You've talked.
Past year or two about.
The burden of having too much capital.
It's probably a good thing to have right now, but you guys were active with buying back stock.
Where the stock prices it seems that definitely makes sense.
Has your appetite.
So that going forward, we've heard some of the bigger banks indicate that.
There's probably could be a regulatory pushback from getting too active in buying back stock but.
So just how your thought is on that front.
Yeah, Great question. So the first thing I'll say is the buyback firm are using right now I talk to them regularly and I mean, you know this because you are in this industry and I guess people on the phone should notice too, but our buyback and he does buybacks for banks across the country and he just says tend not to tell you theres no buyers for bank stocks and so unfortunately.
It is a challenging environment and due to the environment the supply and demand on bid ask Theres, just not a lot of buyers and so you've got people that are financial focus funds at the prospectus says they will only buy financials. So they've got to stay in it but absent that our our trader just says theres very little interest.
In these stocks and so that makes it a buying opportunity.
With that said.
There's there's little volume and so there's rules around buybacks, where I'm not an expert.
The average of some amount of your prior four week volume you can do one block a week. So we've been very active it's actually harder to pick up shares and you would think in a stock that doesn't trade a lot, but we we are buyers are we did a $10 million authorization in.
January we had our board meeting Wednesday, we've talked about potentially increasing it you have different views on a board you know we had.
A director who I can't.
I was in Washington, and had meetings with certain folks and the feedback was COO.
Could be a challenging economy, there was a lot of discussions around CRE and different things and so you know I was a buyer of our stock in the summer of 'twenty. When it went to $9 and I had conviction in what we were doing in our credit portfolio and.
I didn't want to go buy a ton, but what if we buy $5 million or whatever.
And our board at that time was very conservative relative we don't want to ever dilute our shareholders. So why there's a little bit of gain we could get why take that risk and so I'd say, we're in the middle right. Now we certainly have directors that they think it's an attractively priced and we have directors that are buying director, Tom Flynn and.
But at the same time, there's people with very deep business experience that say it is very uncertain out there and.
So I'd say, we're in the middle we are a buyer right now and happy to answer anything further.
Okay, Great one quick last follow on the.
The loan.
If you're referring to within delinquencies and then the single loan you're referring to and criticized.
Different loans and and if on the one that's driving the increase in criticized I understand that.
Okay.
Feel good about it and has a lot of deposits attached to it but can you say what industry or what kind of alone. It is.
So I'll talk about the first one first the first one and pass dues is.
And again, we don't want to talk to specifics specific about either one of these.
But the first one is it.
Great well known strong operator in one of our markets that has a high character and high reputation.
Who.
Their businesses are just having some challenges is good businesses can do.
They are collateralized the borrowers worked with us and actually given us additional collateral over the last year, we're actually meet with them again next week and we'll learn more.
So at this point, it's not something that we feel has any significant loss to it.
I don't want to get too.
Complex with it but.
Its due date is is the first of every month and you report 30 days and over in past dues.
That's probably at former banks, Kevin we had strategic timing on when we did loans on due dates we would have never had a due date for a loan on the first of the month because on a on a 30 day 31 day month.
They wait and paid at the end of the month. It missed 30 days. So I say that that I think there's good operator, we'll learn more about the improvement of the operations. It's not like it's 60 or 70 days past due.
I think it possibly could have been just so it was a 31 day month and the guys sent the payment in on the 30 <unk> are the first and it missed it so we'll get more on that on the criticized classified I'll, let Kevin talk about that one.
Yes, and just to add on to Tim's comment about the first one probably about $4 million of that exposure is liquid secure so we feel very good about that with you know with nominal if any potential risk of loss on the other relationship. It has been a long term customer I'd say.
Basically in the medical industry.
Hospice.
They.
They were form probably about five or six years ago, I'm guessing and they just continue to scale that just haven't reached.
No.
Our breakeven point, yet from a from a cash flow perspective, but they continue to be very well capitalized and they have a lot of liquidity. So we feel very good.
There are potential prospects.
Okay. Thanks, very much guys.
Thank you Kevin.
Thank you one moment for our next question.
And our next question comes from the line of Graham <expletive> from PSC. Your question. Please.
Hey, good afternoon guys.
Hi, Graham.
So most of the stuffs and touched on obviously, but just kind of wanted to.
Here are a little bit from you guys on what Youre seeing on the CRE front, that's worrying you.
Making you cautious about.
Lending into that segment right now because.
We hear a little bit from banks that say, we're pulling back and then other one say actually there's a lot of opportunities for US right now because people have pulled back to to get loans at more attractive rates.
Color you can provide there on the health of that market and how you guys view it would be really helpful.
Sure. So we have Lee Lee Hunter, who has joined US here and he is a real talent. He his whole career has been in this.
Grew up and first horizon, which has been a great bank and then has been back here about eight years or so keep in mind, we have CRE right now really in three buckets. Lee has had a dedicated CRE team that has guided that since he joined.
And as we've transformed some we've allowed our markets to do CRE in the smaller end and then last year, you will remember or recall that we capped $105 million of Tri net.
Due to market rates, so Lee I'm going to ask <unk> to speak.
We can offer two things I mean, he's just a wealth of knowledge on the general overview.
The economy in our market and what we should be thinking about but you can also speak some to our portfolio and maybe how we feel or maybe how were different so Lee I'll turn it over to you for sure. So I would say first of all.
We have had have pulled back on our core lending as have most of our competitors.
Talking to some clients over the past week or two.
Kind of asking for advice.
Where to go for commercial real estate loans right now so there is a.
Definitely more leverage for those that are making real estate loans right now.
Both from a structure enterprising standpoint.
As it relates to our book of business I would say we've done a deep dive.
Particularly focusing on loans maturing this year and next.
And.
Feel really good about those Kevin.
<unk> touched on some of those.
Metrics, but if you stress them.
Two are pretty worst case scenario, we are still in good shape and so feel really good about the quality of our loans and feel really good about the.
The overall ability to renew those loans and still have good loan to values good positive cash flow.
Okay. That's really helpful. You mentioned you guys stressing each of those credits what what are those stress tests and tail I guess, where you guys are seeing.
That the portfolio is still healthy upon renewal, even if you do stress what does that mean in terms of vacancy rates and cap rates et cetera.
Well I think I think we have look I know we have looked at the overall debt yields of these projects and we've kind of said okay at the average debt yield currently.
If we ran those.
A day the you know most of our stabilized projects.
Most of these maturing or stabilized projects the vast majority.
We would typically do a five year loan and if you looked at the five year and priced at today at some of the spreads that Tim talked about you'd be kind of call. It mid sixes.
So I would just tell you that if we stressed at about 7% 25 year am we're still at a kind of a 150 debt service coverage.
And then if we stressed from a loan to value perspective.
1% increase in cap rates.
Would get us to kind of low sixty's kind of loan to value. If we stressed it to a 2% increase in cap rates would get us into the low seventies, so and talking to appraisers. Most of them would tell you that in the last six to 12 months. There has been a zero to 50 basis point increase.
<unk>.
And cap rates, depending on the market and the asset class. So we feel like the two stresses that we did both for cash flow and loan to value would still put us at a very strong position.
Okay great.
I guess, just one more follow up there and then that'll be it for me.
What is like the.
I guess, what what are the cap rates, what did you guys underwrite that portfolio and you guys think of an average underwritten cap rate for that portfolio that you could share just so I can kind of know where their starting point is you mentioned that like 1% increase a few percent increase.
Well, it's across the board I mean, obviously some of the multifamily.
Cap rates and even industrial have been extremely low.
And then we've got a hospitality in there as well so it's across the board, but basically if you if you take the starting.
If you take the starting LTV that we've got that Kevin referenced and just.
I'll take the 1% increase.
And cap rates in the 2% increase that's where it would get you up from from kind of 50 ish percent to kind of 60 ish 70 ish with the two with the two increases.
Okay, Alright thats helpful.
That's all for me thanks, guys.
Okay. Thank you Graham.
Thank you.
One moment for our final question for today.
And our final question for today comes from the line of <unk> <unk> from Janney. Your question. Please.
Hey, good morning, guys.
Hi, Savi, our afternoon I guess good.
Forgive me if I missed this.
What are the expenses what were the expenses for mortgage or I guess, what were the core bank expenses. This quarter I was looking for that or at least what I can see that.
Yes, we can get that for you right now hold on we'll look it up.
And while Youre looking for that.
Okay.
Efficiency for mortgage potentially improve over the next couple of quarters, just as you have more volume.
On seasonality.
Yes, that's what I was getting at earlier.
Nobody.
Nobody likes the environment, we're in but our mortgage company and Tri net right now lost together if you take their revenue and their direct expense. They lost 216000, together I think mortgage was a loss of 40000.
The 170000 would be in China for first quarter.
So obviously you know.
I don't have the exact numbers in front of me, but their efficiency ratios are like 100% right. So there.
There.
Their expenses are the same as the revenue so.
If revenues return.
Yes, they have some variable comp from incentives, but it's you know it's a smaller position.
Smaller proportion or percentage of the revenue. So you definitely would think that there.
<unk> ratios would improve.
Pre tax income would improve their efficiency ratio would improve our corporate efficiency ratio would improve and it obviously would improve the pretax pre provision to assets because they don't really have a lot of assets because they sell everything.
And in terms of mortgage expenses, they were right at $1 million five for the quarter.
And so the non mortgage expenses for the quarter or about 17 six.
Got it.
And that guide you gave earlier that 18 to $18 five range for second quarter.
The all in expense right.
Correct, Yes, Sir correct and I, just you know where every company I've been I mean, we've done a very good job on expenses and we had the.
Garnishment.
Operational loss in fourth quarter come in and out and.
<unk> got FICA come back and you've got the FDIC assessment, which I saw pinnacle sided and Theres came I mean that is 150000, that's going to be 600000 for the year additional which is <unk> <unk> a share.
But I still think there's other things we can do.
Both personnel as well as operating expense.
I am hopeful that we can operate that within 18 to $18 5 million.
Got it.
And just one last question for me.
I was just wondering if you could talk through a little bit more of your thinking I know you talked about some of the different funding sources. I know you said you consider using the bank term funding program honestly Im surprised more banks haven't said they'd consider using it if the rates better and the terms are better.
But just wondering if you could talk through your thinking a little bit on that.
Well I'll add some and then Mike because he has more of the expert I can tell you as the operator.
I went to Hawaii in the summer of one seven.
It was six months before the financial crisis happened and when TARP came out.
You know.
We were part of a public company. They are called Hawaiian electric and a lot of people wanted to get TARP from a security standpoint.
I had a lot of personal pride as the CEO of that bank wanted to run a great company I thought we can improve it I viewed it sort of as like a badge I would always have and so.
I really studied that bank and I didn't think I needed TARP and we didn't take TARP and that banks still here its a great bank and so I'm just glad I never had to rely on that now was that ignorant was that a young Tim that was ignorant and you should have it for security perhaps.
I would say right now we've asked around would there be any stigma from regulators or investors or anybody if you use that we're hearing now.
Mike can talk about the pricing at first we thought there was going to be a big pricing advantage. So we were thinking about hey, you know maybe as some brokerage Cds mature maybe we put it in that for a year or two because we thought it would be several basis points. The last I heard as I think Mike. Thanks, It may not be as cheap as we originally thought yes.
Let me comment briefly on that.
We when they rolled out.
So we contacted the fed about the new funding program again.
Probably the day after STB went down the Monday after.
And.
It took a few weeks for them to get us through the approval process or the setup process and then that time as Tim said the price advantage.
Windows quite a bit so when they roll that out I believe the initial.
It was 430 and you can pick your point you could pick your duration at any point up to a year.
Prepay at any time with no penalty and if you get to the appointment of head starts cutting rates.
The fed has told US you can prepay in two minutes later turnaround and apply for a new lower rate advance so.
<unk>.
We certainly looked at that as Tim said, we're sensitive to if there is a stigma.
The fed assured us in their mind, it certainly wouldn't be it would be would.
It would be viewed as a prudent.
Use of.
Liquidity tool today, though the rate.
Over the last few weeks the rate has moved up.
And as of today, there's really no pricing advantage other than you have that free option to prepay if rates start moving down in my mind, that's a valuable option, but with rates at 495 today for the third program that's right in line with where we are.
At issue brokered out to a year.
Got it.
It's pretty close to where we could issue if we wanted to tap home loan borrowing so I.
We probably will use it one advantage of that from a liquidity standpoint, as many of you might know.
As.
Everybody's investment securities portfolios are underwater given the fed hiking rates ours is no exception.
So if you were to use the securities to borrow anywhere else.
Youre borrowing capacity is based on the market value last some haircut.
The fed is trying to provide more liquidity here. So they would let you borrow at par.
With no haircut and noted action for any unrealized loss on the portfolio. So for US we look at that as another $60 million source of liquidity. So we do intend to.
Be ready to tap it I suspect we will have but we think it's prudent to do that and it would be strictly based on the economics.
No that makes a lot of sense, especially if you can turnaround.
Repay it as soon as soon as rates stop going up so I.
Great additional color thanks, guys.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to Tim schools for any further remarks.
Okay before we go Mike can you follow up do you have the CD maturity schedule I think it was Brent rabbits and that perhaps asked for that I do and I can comment briefly in a grand if you want more detail or anyone else wants more detailed here's let me know, but you had asked about both loan.
And deposit and CD maturities, so what I will give you I'll, let me rattle these off quickly and if you want our surety afterwards, Brett, but so in terms of Cds.
Over the next three months $53 million.
Over the second three months out $73 million over six to nine months $63 million.
<unk>.
And yes, so over the remainder of 2023, I'm calculating about $190 million on CD.
Now if you look on the loan side.
I don't have maturity split, but what Ive got is kind of a liquidity is a repricing gap on the loan side.
So the some balances that will reprice or are scheduled to pay down or pay off.
About theyre pretty smooth, they average about $160 million a quarter for the next year.
And he's probably.
Muted now okay. So sir thank you and that concludes our call. We appreciate everybody calling in and if anybody has any follow up questions. Please don't hesitate to call, Mike and I Hope everyone has a great day and weekend. Thank you.
Okay.
Okay.
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Yes.
Okay.
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