CSTR (2019 - Q3)

Good morning, ladies and gentlemen, and welcome to CapStar Financial Holdings Third Quarter 2019 Earnings Conference Call. Hosting the call today from CapStar are Tim Schools, President and Chief Executive Officer; Rob Anderson, Chief Financial Officer and Chief Administrative Officer; and Chris Tietz, Chief Credit Officer, CapStar Bank.Please note that today's call is being recorded and will be made available for replay on CapStar's website. Please note that CapStar's earnings release, the presentation materials that will be referred to in this call and the Form 8-K that Capstar filed with SEC are available on the SEC's website at www.sec.gov and the Investor Relations page of Capstar's website at www.ir.capstarbank.com.Also during this presentation CapStar may make certain comments that constitute forward-looking statements within the meaning of the federal security laws. Forward-looking statements reflect CapStar's current views with respect to among other things future events and its financial performance. Forward-looking statements are not historical facts and are based upon CapStar's expectations estimates and projections as of today.Accordingly, forward-looking statements are not guarantees of future performance and are subject to risk, assumptions and uncertainties many of which are difficult to predict and beyond CapStar's control.Actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of today.Except as otherwise required by law Capstar disclaims any obligation to update or revise any forward-looking statements contained in this presentation whether as a result of new information, future events, or otherwise.In addition this presentation may include certain non-GAAP financial measures. The risk, assumptions and uncertainties impacting the forward-looking statements and the presentation of non-GAAP financial measures and the reconciliation of non-GAAP measures to the most directly comparable GAAP measures are included in the earnings release and the presentation materials referred to in this call.Finally, CapStar is not responsible for and does not edit nor guarantee the accuracy of its earnings teleconference transcripts provided by third-parties. The only authorized live and archived webcast and transcription are located on Capstar's website.With that, I'm now going to turn the presentation over to Mr. Tim Schools, Capstar's President and Chief Executive Officer. Tim Scho

Good morning. Thank each of you to investing time to listen to our call this morning and follow our company. Since joining in late May I have spent a great deal of time getting to know our team, the underpinnings of our operational and financial performance and have met with most of our large customers in both East and Middle Tennessee. We have an outstanding company, led by well-respected bankers and support staff, positioned in two of the most vibrant and growing regions in the southeast.In each of these regions, we are blessed to have many of the leading operating companies and real estate investors as our customers. Meeting individually with these customers, the feedback is consistent.CapStar differentiates itself in our markets through four factors; its ease of doing business, flexibility, responsiveness and customer service. With many customers stating we are the best bank in town and that they have ever had. I have also had an opportunity to meet with many of our current investors and potential investors. We appreciate your support.With your support, a great foundation has been built, which I feel has as much potential as any bank in the Southeast. However, we recognize our historical returns to shareholders today, have not kept pace with market averages or expectations. That will be a key focus of mine and our team as we move forward.This fall as we work to put our 2020 and outer year plans together, some of my key focuses will be; number one to improve the profitability, earnings consistency and growth. And number two, to rebuild confidence in our credit quality, which has been outstanding since inception outside of two sizable individual losses.I would like to see us develop a leading sales culture, operating with disciplined pricing, credit and efficiency. Our goal will be to build on the great foundation before us, and continue to operate a company we can all be proud of.To support this, we'll be instituting shareholder ownership guidelines for my executive team, and I will be working with our board to ensure executive incentives are tied to metrics that are aligned with shareholder value creation.Turning to our results this quarter on page four, we had a solid quarter with earnings of $0.36 and a return on assets of 1.31%. Performance was led by continued strengths in mortgage and our TriNet business. Our credit metrics remain outstanding, and we are pleased with our deposit growth, as that is one of the single biggest opportunities in our company.We recognize these businesses and credit can be cyclical. So we will be working to strengthen the potential for balance sheet growth, and work to improve our net interest margin, which like many others in the industry faces some challenges in the near-term. We are also very pleased with our East Tennessee operation, which is concluding its first year, where it is often common to have runoff of some business in the first year, we actually are up in deposits and flat in loans.Additionally, we have had nominal voluntary turnover. We are very proud of all of our CapStar teammates across the company for making this a success, and look forward to their impact on our company.Another exciting accomplishment this quarter was assisting a Founding and our largest shareholder exit their investment due to the conclusion of their fund. We worked diligently where we could support them, and a key focus was also the support of all of our other remaining shareholders.By all measures, it was a success for all shareholders. Essentially over a couple day period, nearly 9% of our company traded hands with the resulting stock price and on-going liquidity increasing.We are very grateful for their long-time support as an investor and to our new investors who helped to make this happen. I'll now turn it over to Rob Anderson for a more detailed review of our financial performance in the quarter.

Thank you Tim and good morning everyone. Let me pick up on the deposit slide as Tim has covered many of our highlights, and you can see our operating metrics on page six. Average deposit balances grew 6.3% on an annualized basis from the second quarter, and more importantly, we grew the right type of deposits.DDA balances were up 25.1% and Interest bearing checking accounts or NOW accounts were up 51.3%. Our correspondent banking group is driving the bulk of this increase. As you may recall, our correspondent banking group, banks around 50 financial institutions, and typically has a mix of both DDA and NOW accounts to support their business needs.As a data point, our correspondent group has approximately $265 million in deposits and roughly $61 million is in DDA and over $200 million is in NOW for money market accounts. In total, the correspondent banking deposits were up approximately $100 million from a year ago.You also notice that Time Deposits are down sharply. This is a conscientious effort to move our balance sheet to a more neutral position. As CDs have matured, we are being very careful on pricing to reduce the length of our deposit book. We have 88 million of CDs that we will reprice over the next six months at a weighted average rate of 203, another 83 million at an average rate of 210 will reprice over the next six to 12 months.This is 56% of our CD book that we will have to reprice within the next year. As you can see on the chart on the lower left, the overall cost of our deposits did not move down significantly this quarter with Federal Reserve rate cuts. Pricing peaked in July and then came down further by September. We do expect a more meaningful decrease in our deposit rates in Q4 as rates were reset later in the quarter.So let's move on to loan growth. Average loan balances decreased 6.3% on an annualized basis, and is predominantly attributed to pay-offs and pay-downs late in the quarter. We discussed the possibility of muted loan growth on our last call. So this should not be a surprise. We are seeing payoffs in commercial real estate with some large projects getting refinanced into the permanent market at very low long term rates.Valuations remain high in Nashville, so we are also seeing projects sell to buy sooner than anticipated in both, commercial real estate and some, in our core C&I that are predominately backed by private equity firms.Although our loans decline, the number of opportunities that we considered but passed on, has increased as our bankers maintain discipline in terms of pricing and requested deal structure. We intend to continue this tact as we focus on those opportunities that are more consistent with our principles of sound profitable growth.We have been talking for some time about the type of client relationship we want on our balance sheet. In short, we want full relationships with operating companies and the owners and operators of those companies. We also want in-market relationships where we can fully support our clients banking needs. This means, we have passed on some opportunities that are not full relationship, are out of market, or do not fit within our stated strategy.As renewals have come around, we are being more selective. A data point demonstrating the selectivity is our in-market loans versus out-of-market loans. As you can see on the chart on the lower left, our out-of-market loans are down from the prior year, and relatively flat to the prior quarter.At this stage of the business cycle, we believe this selectivity will help us maintain credit quality going forward. So with that, let's move on the loan yields.Overall loan yield was 5.48% and up 4 basis points from the prior quarter, with the 2 FOMC rate cuts and the change in LIBOR our variable rate loans repriced and cost us 9 basis points from the second quarter. However, we received an additional 12 basis points of loan fees with the immediate recognition of the amortizing loan fees with those early pay-offs I just discussed.The yields on new loan production had been above our portfolio average for the last four quarters, which should help offset declines in our variable rate loans, should we have further rate cuts from the Federal Reserve, and to further mitigate the impact of falling rates we're continuing to work with our sales force to emphasize fixed rate loans, and to implement flaws on our variable rate loan production whenever possible.So let's see how this impacted our margin. Net interest margin decreased 2 basis points to 3.66%. And although there are some moving parts, it can be summarized as follows. We brought in a number of quality deposits in the quarter, and while we would have liked to put those deposits to good use on the loan side, we experienced loan payoffs late in the quarter, resulting in more cash on the balance sheet.We also had slightly lower investments than prior quarter with a lower yield. As prepayments pick up on our security book, the yield on our security portfolio dropped slightly. Additionally, 6% of our securities portfolio is variable rate in nature. More importantly is what are we doing to protect our margin in the face of declining rates.First, we will be more aggressive in our deposit pricing, especially with rate sensitive clients when the Fed cuts rates. With our loan-to-deposit ratio at 84% we believe we have ample opportunity to push deposit rates lower in Q4.Additionally, we'll be looking to shorten the duration of our CD book. We mentioned the amount and rates paid on maturing CDs on the previous slide. As a reminder, we have an opportunity to reprice 56% of our CD book within the next year. We're also encouraging more fixed rate lending with the sales force, and requiring floors on variable rate loans whenever possible.Having said all this, we do feel we are susceptible at least in the short term to more margin compression. We have 55% of our loan book that is variable rate in nature, and predominantly index to one month LIBOR or to prime. One of the major contributors of keeping our margin relatively stable this quarter was the loan fees associated with the loan pay-offs and those can be lumpy and episodic in nature.So until we can move the balance sheet to a more neutral position, we do expect further rate compression. With that, let’s talk about credit quality. The reserve of $12.8 million is 91 basis points to our period in loans and that is up from 85 basis points when we closed the deal with Athens in the fourth quarter of last year.We have $4 million fair value mark remaining on the Athens book, and when combined with our reserve, would equate to a 1.19% reserve to loans. As it relates to Cecil [ph] we have chosen to delay implementation until 2023 since we are eligible to be a smaller reporting company. Although not on the chart, we have a small recovery this quarter and our NPAs to assets remain at a low level.We did have an uptick in our special mentioned bucket, but this is attributed to a real estate secured credit with no loss expectation. Although we have a number of other asset quality metrics in our press release, I can say that the team is working hard to demonstrate an improved credit profile and we are pleased with asset quality this year.So let's move on to non-interest income. Non-interest income to average assets was 1.34% for the quarter. Treasury management and other deposit service charges were down slightly from the prior quarter, but we saw clients choosing to pay their treasury management fees with deposit balances versus fees in the quarter. This also reconciles back to our growth and deposits for the quarter.TriNet continues to do well in this rate environment, and is squarely within the guidance we provided you on our last call. With the drop in interest rates, mortgage is another business that continues to do well. Purchase origination volume versus refinance volume split, moved down from 80:20 last quarter to 50:50 this quarter.Additionally, we originated $179 million during the quarter, which is up $43 million from the prior quarter and $52 million from the prior year. Other fee businesses were up as well for the quarter, and with a pretty straightforward story on our feline, let's move on to expenses.The efficiency ratio for the quarter was just over 64% and a bit elevated from our previous guidance. We booked a higher incentive accrual for the quarter, which is predominantly centered around our mortgage and TriNet businesses.In addition, we eliminated a few positions which trigger 172,000 of severance expense. This resulted just under $1 million of personnel expense reduction on an annual on-going basis. This will either translate into on-going expense savings or be reinvested into new revenue producers. Our preference will be to reinvest these dollars into stronger, frontline, revenue producers.We did receive a small bank assessment credit from the FDIC, which helped us by approximately $200,000 and we expect to have an additional credit in the fourth quarter. Additionally, while still -- we are still working through the conversion of a key IT provider which is causing us to run $100,000 worth of double IT expenses as we bring on one vendor and drop off the other.With that color, let's move on to capital. As Tim mentioned, Corsair Capital, which was one of our founding shareholders exited this stock in September. I'd personally like to thank Corsair for the trust and partnership through the years, as there are great shareholders and partners.In summary Corsair Capital sold approximately 1.5 million shares in September, and this included the conversion of the preferred shares and non-voting common into voting common shares.As Tim mentioned, CapStar purchased 129,000 or $2 million of the stock and we have $9 million remaining under our current share repurchase authorization. As a reminder, select members of management and board purchased approximately $3.5 million from Corsair wealth.As you can see by the chart all of our capital ratios increased for the quarter, and our above well capitalized guidelines. With that, let me turn it back to Tim for some closing comments.

Thanks, Rob. We're optimistic about our future. We are focused on making progress and are excited about the opportunities we have to improve our revenue and processes to make us more efficient.Our markets are exhibiting strong, underlying, economic activity and CapStar is well positioned with a great team to build upon our foundation. This concludes our prepared remarks and I'd now like to turn it over to the operator to open it for questions.

[Operator Instructions] Our first question or comment comes from the line of Stephen Scouten from Sandler O'Neill. Your line is open.

Hey, good morning everyone.

Good morning, Stephen.

I'm curious on the loan yields, the new loan yields in particular, which you've kept above your average, which is really impressive. I just wanted to see if you could give any more color about how you've been able to do that. I mean I think a lot of the companies I've heard from this quarter just talked about huge competitive pressures, and you know move as much as 50 basis points quarter-over-quarter and new loan yield with the move in the five years.So can you talk a little bit about that and maybe the composition of fixed versus floating within that as well?

Yes. First of all, I would say we're being much more selective with some of our clients. Certainly on the structure, we are seeing things that I would characterize as being late in the cycle behaviour, whether it's loosening of guarantees, loosening of covenants, but pricing we're also being careful on what we put on the balance sheet.I would say it's probably about 70, 30, 70% variable still 30% fixed with a good mix across the board of C&I and on a little bit on CRE. We did have pay-offs in both of those buckets, so it kind of mass production of both of those engines are working fine.Stephen. I also think that Athens has contributed where I don't want to say a less competitive market, but probably maybe more rational competitors. And so they've been a nice addition on pricing discipline.

Okay, yes, that makes sense to me. Where did they contribute those East Tennessee markets? I think you said loans have stayed relatively flat since the acquisition, but what did they contribute in the quarter to the loan originations, maybe your production overall if you have that number?

I do not. I’m going to let Chris…

It's single digit millions.

Got you. Okay.

So they obviously have, they obviously have normal principal amortization and pay downs and pay off, so they have no replacement as well. But they -- I think they've -- think it's a good market, and that there certainly is competition, but not is hyper competitive and just historically they've got very good pricing discipline.

Yes. Okay, great. And then if I'm thinking about loan growth from here moving forward, and maybe even average earning asset growth more specifically. If I'm hearing you guys correctly, it feels like you're going to continue to focus more on a kind of relationship production, probably smaller loan sizes to some degree than what has been seen in the past. I'm wondering, one, how that impacts your healthcare book, the size of that moving forward. And again, how that impacts the average earning asset balances kind of from here over the next maybe two to three quarters in particular?

Yes. Good question, and I don't think it's smaller loans. I think that there's a little bit of mis-number here. I think that this bank unfortunately had two losses that happened to be larger loans and unsecured. But, I think we're going after all the similar sized loans. We would prefer for them to be in the state of Tennessee or close to Tennessee. We prefer for the majority of them to be collateralized with guarantees, that's not going to always happen. So I think the only real mix shift would be in the healthcare book, where a lot of that was -- I hate to say a lot, but a material portion of that would be outside of Tennessee, a material portion would be large, and a good portion of that would be unsecured without guarantees. I think that's the major change that.We want to target what a lot of other people do. We want to target great operating companies that have long histories and stable businesses with good operators, and get their working line of credit, their equipment, their operating building, bank to owners, and if they expand to other regions, follow them to those regions. Secondarily, investor real estate. We've got one of the best people on our team in the St. Louis Hunter [ph] and do really well at that.So I would say similar sizes. I think on the growth, I’ve really studied that, because you know I think when you start a company and this company is only about 11 years old, it goes through phases. And I think, it's stalled the last two or three years if you look at these sort of organic loan growth, and I don't think it's any one factor. I think some of the economy with payoffs. I think some we need to look at our producers, and production, and some as we have been shrinking the healthcare.So I don't think it's any one factor. But I'd like to get it where it's what I described. And let's target to try and get back to at least a sort of 6% to 8% balance sheet growth, appropriately priced with good credit and then manage our expenses.

Okay. But in the nearest term I guess, you would see especially with the move down we saw in end of period loan to this most recent quarter, we should see probably some pressure on average earning assets at least.

Yes. I'm talking holistically. Yes sir, I agree with you. I agree with you. And what we're seeing I mean I said at last call. It's happened again. Just call this to -- I don't want to say it's unique to the industry, but I think it is a little bit unique to most banks that I've seen here, on what's happening right now. One, in all the markets I've been in, one of the neat things about Nashville is it has a lively private equity community, and it's a really neat thing about our community .And what it does, I think it provides you good loan opportunities that have good credit risk, because you know the equity investor, that's going in there. The trade off on that Stephen what I'm learning, the average life of that relationship is a lot shorter.So when a PE firm goes, you know that company is going to have a liquidity event in four or five years. You know whereas every other bank I've been at, when you look at an operating company that's owned by a family or a group of investors, that thinks in business for 100 years. So that loan may mature and they'll renew with you. So it's a little bit of a faster relationship turnover, when you've got exposure to private equity firms.Number two, our commercial real estate is very high quality, extremely high quality. And some of those borrowers have access to the institutional markets. The only bank I've been at that really had that was South Trust which was a $50 billion bank, where we would do a loan and at some point it would go to Protective Life or the Torchmark.So those are two unique aspects in addition to finding production. I think that presents maybe versus some other banks, some shorter average lives on relationships that we need to overcome.

Okay, that’s very helpful. Maybe one last little clarifying question. On the new CD rates, I think you talked about maybe 203 and stuff was running off in the next six months, then 210. Where are new CD rates coming on relative to those, to that run- off?

What we're going to do is we in our monthly pricing committee, where we're putting heightened discipline around all deposit pricing and really monitoring market rates, tracking about 10 competitors in Middle Tennessee and East Tennessee. We're going to target to price our CDs 25 to 40 basis points below the match borrowing rate from the FHLB. So each month, we'll look at the six month, one year, two year, three year, bullet borrowing rate at FHLB, and price that accordingly to make sure we're making a profit on CDs.Historically that's what -- that's what banks do historically, and that's generally a range that you can raise CDs at.

Okay.

So I don't I don't have those rates right in front of me. I apologize. But you could look that up.

Sure. All right guys. Thanks.

Thank you. Our next question or comment comes from the line of Catherine Mealor from KBW. Your line is open.

Thanks. Good morning. If you go back to the one year old rail forward chart that you have on Slide 9, and Robbie talked about how the repricing is variable rate loans impacted loan yield by about 9 basis points this quarter. Is that a fair kind of measure? I mean, I guess you think about this past quarter, we could move in LIBOR, you kind of got the impact in. So for July and September cut. So is that a fair assessment of what loan yield should do kind of per two cuts. Or will it be more than that moving forward for any reason?

Yes. The loans are certainly contractual. We have a number of them that are repriced monthly, some reprice quarterly, but LIBOR moves down typically in advance of anticipated rate cuts from the Fed. So you have that going throughout. But I think that's indicative of what we could see with rate cuts and LIBOR movement.So as I said Catherine, 55% of our book is variable rate. We've been talking about moving to a more neutral position from an interest rate risk position, but I think near-term given LIBOR is moving down, that you can expect those variable rates to move down as well.And I do think Catherine on that chart on Page 9 it is important. You know we're pleased our margin was basically flat this quarter, but we're also aware that that some of that was due to the prepayment in loans, and the expedition of the fees. So the loan yield would have been lower and our margin would have also been lower in line with some of the other banks.

But I would think that the non-listed pricing would actually – just felt low to me, just given the amount of variable rate loans that you have and a minimum LIBOR that we had. Well you haven't come my question from…

Yes, but you also have a number that's on tied to prime, and then you got the September 1 which was mid. So we'll probably see a little bit more impact to that late or September rate cut on our prime book in the fourth quarter.

And I’ll have to go back and look at. I’ll have to go back and look at June 30 numbers. But my suspicion is that LIBOR probably, the people have been calling for rate cuts earlier this year. My suspicion is that LIBOR had come down a great deal by June 30. So a lot of our loans probably had priced down during second quarter as well.

Yes, good point, good point. That's really helpful. And then on expenses, I appreciate all the color on the puts and takes there. Can you help us think how more broadly about the efficiency ratio? And [indiscernible] said you have there and maybe are there any other expense levers that you have that you could pull to get that efficiency ratio lower even in the face of a lower margins?

Yes. I think there is a lot. And, but that's what I think I may have commented on the call in the second quarter.That's something that you need precision. No, you can't comment and just go axe things. But I'll give you one example, and this has happened at every company out there in there. And you don’t know where you're going to find it.So, health insurance. You know, health insurance is a fast rising cost, we're fortunate this year that our insurance agent, we use Blue Cross Blue Shield as the underwriter. But our agent came back with shot me a proposal to only go up 3%. That's a pretty low increase.Nevertheless, I said let's put it up a bid to others. And we came back and bidding it out, Blue Cross heard we were bidding it out and they came back and said "Hey, tell them we'll actually go down 5%." So, we went just by simply taking an extra month and not signing that contract, we went and got from a 3% increase to a 5% decrease.A 200,000 and that's going to be a penny per share next year. So, that was a simple month and we easily could have just said let's -- 3% sounds great, let's sign on and move on. So, you just have to have the discipline and that's why I want to get the stock ownership guidelines, not that our team wasn’t always thinking like that.But the more stock we all own we will think like owners and like it's our home and ask those tough questions. We also as Rob mentioned we lowered salary expense a $1 million and several great outstanding teammates and friends but that strategically the roles were not as strategic in our operation today.So, we released those funds and we'll be looking to either go permanently into cost savings which would be about $0.04 to $0.05 a share or would be reinvested into revenue producers.

Got it. And then with the cap ownership guidelines, will you put out financial target maybe on the next call as we move into 2020 and to show what specific profitability targets or growth or whatever those metrics are that you're targeting?

Absolutely. I think they need to evolve a little bit because I think this is my fifth month. But in general, I want to run a great bank like City Hold and this is a great bank; I'm saying financially.Financially, we've got to get our financial performance to say City Holding in West Virginia, South State Bank, in South Carolina, Southern First in South Carolina and I think we're a long way there but there are areas we could improve.We need to strengthen our pre-tax pre-provision so that when we -- so that we're not hitting our ROA by having no credit. We need to essentially get to where we hit our ROA and can absorb some credit. And so but yes, I'll continue to weigh that out.And timelines, next question will be once you do that what's your timeline and that's hard to determine. When you're running a company it takes time but I think we have an outstanding foundation. I think we have more growth prospects than most banks and just excited to get started.

Great, that's very helpful, thanks. Great quarter.

Thank you.

Thanks, Catherine.

Thank you. Our next question or comment comes from a line of Jennifer Demba from SunTrust. Your line is open.

Thank you. Good morning, everyone.

Hey, good morning Jennifer and thank you for initiating coverage on us this quarter. We appreciate that.

Good morning, Jennifer.

Oh, great. Two questions. You said you may be reinvesting those personnel costs into new hires. What kind of capacity would you have? How many people would you be thinking about hiring if that was the case?And then secondly, your credit is great. Can you just give us some and you talked about a special mentioned loan you don't expect a loss on. Are you seeing any cracks in any sectors in your portfolio at all? We've seen credit costs start to sort of normalize for the industry this year.

Sure. So, I'll take the first one and then I'll let Chris Tietz handle the second one. On the revenue producers specifically related to those funds, that probably would be four to five people.However, I don't want to be a copycat, I'm learning more about Pinnacle since I'm here in Nashville they're an outstanding company. I've always heard great things and I am not trying to copycat but I love their mantra that you hire athletes when they're available.So, specific to those funds, I think that would be four to five people that would make that expense neutral but you get revenue. But we want to become offensive minded a sales organization and we want to look for great producers when they're out there.

Yes, Jennifer this is Chris. Relating to your second question on credit, first of all what Rob referenced was that the change quarter-to-quarter and special mention was related to a commercial real-estate credit that we don't anticipate a loss in.And again, I'll highlight that in the commercial real-estate sector the last analysis I did in our large credits are we generally have about 33% cash equity on a weighted average basis across our CRE portfolio. And that's a credit that falls in that bucket and that's why we don't anticipate loss and we anticipated getting refinanced.In general, we're not seeing pervasive trends in one sector versus another. When something gets on to special mention, we've shown a track record in propensity over the last two to three years to work out about 40% to 55% over the next 12 to 18 months and we don't see anything different occurring in the portfolio that we have right now.

Thank you.

Thank you.

Thank you. Our next question or comment comes from the line of Tyler Stafford from Stephens. Your line is open.

Hey, good morning guys.

Good morning, Tyler.

Hey, I wanted to go back to the margin and the loan fees that you mentioned earlier. So, obviously that was a boost to the overall margin this quarter. If that reverses back and then the kind of the full impact from the September cut.Just can you size up the margin expectations for the fourth quarter just given your earlier comments about some fairly sizable reductions on the deposit cost side as well?

Yes. What I would say is we probably would have been in line with some of the other companies that you're seeing and the relative drop in the margin. It would probably be anywhere from 5 basis points to 10 basis points with the recent rate cuts.It would probably be more normalized without those pre-payments and the fees in there.

We certainly anticipate the margin to come down in fourth quarter. It's sort of hard to precisely get the exact right now as it comes through the system, Tyler. A good portion of the loan piece has been in on the deposit side.A lot of the deposit changes actually weren't made until effective October 1. So, I think all in all it should be down but we hope we do have some relief on the deposit side and we're going to be working diligently to improve our deposit mix as well.

Okay, I understood, thanks. And then either maybe for Tim or Chris just expectations for Tri-Net fees at this point here in the near term?

Actually I will comment and Chris knows the specifics but I tell you what Tri-Net and that's an interesting one. I guess it's somewhat cyclical like a mortgage company but Chris does such a great job. Chris Palm does a fantastic job and you just wonder could that not be expanded and they've worked great on volume.They've really worked great on improving the yields we get on each sale. There's great demands from banks all over the country. He has a great following. So, my understanding is we Chris has the numbers we had a good pipeline already at the end of 930 that was really close to closing.So, we have all that to come through as well as stuff he'll do this quarter. So, Chris would you like to say?

Yes. And we don't want to raise expectations over last quarter, Tyler. It's a different rate environment than it was, still expect to have. We still have good demand for the product but we're not going to guide you to a higher level at this point.

Okay, alright understood. I guess it's been a year maybe longer now since you guys brought over the SBA team. I'm just curious kind of how that team's tracking at this point and kind of I don't think we see the numbers on our side.So, just a update on kind of the profitability and revenue from that SBA team?

Yes Tyler, its Rob. We've been very pleased with the team. The fees that we originate and then sell the government guaranteed portion is buried within other. If you look on that line item from last year, it's been picking up fairly steadily. There's a number of things in there but the SBA fees are within that line.So, from all measures, that team has a good pipeline of deals. They have balances on the books right now and we had some loans that were sold in the second or third quarter and second quarter and we anticipate some in the fourth quarter as well.So, the teams met expectations. They're doing well and we're looking to continue to grow on that line item.

And we're really excited about them Tyler. I think it's a very professional group, they really know what they're doing. I think our core I want to see us return on focus to our core Middle Tennessee and East Tennessee markets.We were best-in-class in those markets and I think we have a number of these initiatives and they're all outstanding but it takes time. You've got the Tri-Net, you've got the SGA, you've the healthcare banking and I think at times it then brings lack of focus on your core hometown Middle Tennessee, East Tennessee.So, we've got to get that growing and I'd love to see those grow 6% to 8% and then I think all these businesses can just be additive on top of that.

Got it, okay. And then just one more Tim on the insider ownership guidelines that you mentioned earlier. So, the proxy actually said that you guys have specific insider ownership guidelines for executive officers and the board but the details weren't provided.So, I guess or you're just saying what's in place today is too low or insufficient and you want to take those hurdles up or is the proxy wrong and it's actually there's nothing in place now?

Yes, I have sort of rearranged the executive team. So, it's making sure that the executive team I've put in place that that we're all aware we're going to own stock, relook at the levels.I'm actually in the middle of a project now, we're reviewing all of the incentive plans to see what we want to edit and change for next year but it's really related to a new sort of leadership structure I've put in place.

And Tyler, I would just say it's a small difference but to your point the proxy would be specific to named executive officers which are typically three. I think Tim's talking about a little bit broader subset on.

Okay. Tim, just in terms of the leadership structure that you just mentioned. Is it, can you comment on what changes you've made so far in terms of kind of putting a new team together?

Yes, it's really hard to sort of describe changes because there was they're unfortunate, the company's been through a lot in the last 12 months with the passing of Dan and then myself working with Claire.So, when someone passes away, then we're sort of re-juggling of just letting things settle for a year. But I can't really speak to the changes but what we have in place is a very traditional and I don't have it right in front of me. So, I may have the number wrong.But I've created a market president for Middle Tennessee. That job did not exist because I really -- this is probably our biggest opportunity. We are in one of the top two or three metro areas in America. So, we need to kill it. And so we have an executive reporting to me that's over the Middle Tennessee market president.We already had the East Tennessee market president which is the incumbent from Athens. These, the businesses; healthcare banking; Tri-Net; correspondent banking - I put them under a specialty banking unit and then we have mortgage. So, we have four revenue executives very focused.Two in our core markets and specialty banking and in mortgage. And then we have the required sort of administration personnel, CFO, chief credit officer and operations IT, just the normal. So, there's about six or seven of us.

Okay. Okay great, and I appreciate all the details. That's great, thanks.

Thanks.

Thanks, Tyler.

Thank you. [Operator Instructions] Our next question or comment comes from the line of Laurie Hunsicker from Compass Point. Your line is open.

Yes hi, thanks. Tim and Rob, good morning.

Hey, good morning.

Good morning, Laurie.

I wanted to go back to your comments to Tyler around the 5 basis points to 10 basis point margin reduction and was hoping maybe you could give us some actual numbers as thus far as what was the prepay income that was in this quarter and last quarter.And then also if you have the bid dollars on actual accretion income?

Yes. The dollars on the actual accretion income. It's on page nine, it's about 13 basis points. My guess is that looking at my controller right now, it's probably around little over $500,000 -- would probably be my guess but we could do the math for you.And then on the 5 basis points to 10 basis points, I mean again I just want to emphasize the pre-payments that we had on the loan side triggered acceleration of loan fees. Without that, I think we would have been down 5 basis points to 10 basis points.Now I can do the math for you and get that back to you, but.

Okay. So, I think you probably had around $250,000 or so of prepaid fees, is that right?

It's --.

I don’t think we have that in front of us.3

Yes, we don’t have in the front of me. Let me get back to or --.

Okay, sorry. But that was about five years this much. Okay, now that's helpful. And then also you mentioned that effective October first you have some deposit pricing reset. Can you help us think about how much that was and then what the delta pick up and basis point?

Now, I don't want to give any forecast on that. But basically we've got almost a quarter of our deposits are in sort of individually priced, individually negotiated arrangements with customers and so it takes time to go and call them and work their way down. And so that effort ensued twice in the third quarter.One on the first reduction, one on the second reduction. And so a lot of those were not input or agreed to or administered until October one. So, I don't have a way to size that for you. I just want to point out that there is a good piece that and I'd be conservative and probably say that the margin without those loan fees would have gone down 10.And then, the question is any changes in LIBOR or additional repricing that wasn't in that weighted average and then what from the deposits can offset that. And I think there will be a good amount of offset but I don't think we're unusual than any other banks that I'm seeing on margin decline right now.

Okay and then how should we be thinking about correspondent deposits going forward, how are you approaching that?

That group's doing great. That group, Rob I don't know did you hear back from Karen or?

We had a number of new customers that we typically have three to five new what I'd call settlement customers where we actively get their operating account. Sometimes we do start the relationship with the NOW account and work into a DDA settlement type accounts but we typically will have three to five new banks per year.The corresponding group has been meeting expectations that those balances in there are sort of a function of also all those 50 banks that we bank and how their book is doing. So, sometimes those balances today I would say are elevated and could be seasonal.Certainly just on an annual basis we typically see cash build up in the first quarter and then with tax season it usually goes down in the second and third and they start picking up in the fourth. So, I think where we ended in the third quarter is certainly a high water mark for that group. But certainly the group has been doing well and continues to pick up new clients every year.

Yes. And talking to the team, they had a great third quarter and they mentioned they have a couple that are going to come in line in fourth quarter and it's neat.They bring in basically the Fed account which I would say if you map that to FHLB match-funding, you're not making a lot of money on that but it comes with their DDA. And so when you look at the blended value of the relationship, it is value-added to what you could borrow at.With all that said, we need a deposit strategy. I would say most banks it's a lot easier to find loans or at least it's I wouldn't say it's easier but it's quicker, it's probably more interesting but we really can improve our deposit side as probably a lot of banks can.And then what I point to is there was a bank here that are reliant acquired, it's a contiguous county to downtown Nashville and that bank it was just acquired or announced 45 days ago or so. They had a cost of deposits I believe of 0.77.It was founded 20 years ago. We're 11 years old or just say 140. So, there's a real opportunity out, there are deposits out there. So, correspondent's great but there's a lot of other vehicles we should and need to go find.

Okay. That's helpful, great. And then, if we can just jump over to credit, your credit booking. Great backing and off of page 11, it looks like your substandard loans are $9.9 million or so down from $12.6 million last quarter.Can you share with us which categories improved and then also can you share with us just what are the balances there?

Sure. So, in the substandard loans which is really the non impaired loans is about $9.7 million in total.

Okay.

About 3.6 is in commercial real-estate, 1.8 about consumer real-estate and 4.2 in C&I, Laurie.

Okay that's great, okay. And then, just last question here, generally. Can you help us think about how you're approaching shared national credits going forward, how that plays into your business strategy?I know you mentioned more of an in-market focus but can you help us think about where you want to see that portfolio as a percentage of loans and how you're thinking about growing both that and healthcare. And certainly, I realize that some of your stakes are healthcare but if you can just share with us more broadly how you're approaching that strategy, thanks.

Yes. I'm going to give you an answer and then the next question is going to be what's the timing and I'm a marathon not a sprint person. I personally don't see why a bank and too the best markets in the southeast needs a single shared national credit.I think we should have more opportunities and we can even put on our balance sheet and we should have great selectivity. We're not there yet.So to me, it's -- I was describing it to somebody other the day if you all are watching the World Series and if you're a baseball fan, you know pick all this. When you leave first base and you're caught between first and second.I'd like to get us to where we have the luxury that we can select between so many credits across Tennessee but we don't need that but we're not there yet. And so it's a bridge to get there.And the second thing I'll say is all shared national credits, the majority of share of national credits are what you envision of shared national credits. It's Verizon. Its Simon malls. It's whatever. Huge things you can go by piece. There also are very local credits that are defined as shared national credits just because it meets the number of banks that are in it. And so I don't know that it'll ever be zero but, and so I hope that answers your question. I'd love to get to where we are so filled up that its local relationship stuff. A few of them may be defined as shared national credits but that's simply because they're in Tennessee and they've got five or six banks or whatever and it qualifies for that.

Great. That's helpful. Thank you.

A real quick on that the reason it is one, you get deposits. You get fee income. You get collateral. You get personal guarantees and they tend to be thicker margins because shared national credits are very efficient, very thinly priced. Variable rate. Low to no collateral. No guarantees. No deposits for the most part.

Great. Thank you for taking my questions.

Sure. Thank you.

Thanks Laurie.

Thank you. I'm sure no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

That covers it. Thank you so much for innnd. We appreciate your support. We're going to work hard. There's few small near-term challenges but there's a lot of great things going on here and everybody's working hard. So, we'll talk to you I guess in January. Thank you.

Thank you.

Ladies and gentlemen thank you for participating in today's conference. This concludes the program. You may not disconnect. Everyone have a wonderful day.