CSTR (2021 - Q1)

Good morning, ladies and gentlemen and welcome to CapStar Financial Holdings first quarter 2021 earnings conference call. Hosting the call today from CapStar are Tim Schools, President and Chief Executive Officer, Denis Duncan, Chief Financial Officer and Chris Tietz, Chief Credit Officer. 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 Form 8-K that CapStar filed with the SEC are available on SEC's website at www.sec.gov and the Investor Relations page at CapStar's website at www.ir.capstarbank.com. Tim Scho

Ma'am, I don't know if it's on your end, but we are having a hard time hearing you.

Accordingly, forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties.

Where is our IT guy?

-- of which may be difficult to predict and beyond CapStar's control. Actual results may prove to be materially different from these results expressed or implied by forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speaks 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 risks, assumptions and uncertainties impacting forward-looking statements and the presentation of non-GAAP financial measures and a reconciliation of non-GAAP measures to the most directly comparable GAAP measures are included in the earnings release and the presentation material referred to in this call. Finally, CapStar is not responsible for and does not edit nor guarantee the accuracy of any earnings teleconference transcripts provided by third parties beyond the authorized live and archived webcast and transcripts are located on CapStar's website. With that, I will now like to turn the conference over to Tim Schools, CapStar's President and Chief Executive Officer.

Okay. Is there a way we could do some kind of a sound check? We are hearing a hard time hearing here. Are we able to get confirmation that somebody can hear us? I guess now. I don't know. All right. I am sorry if you all are having difficulties. We were having difficulties hearing the operator. But good morning and thank you for participating on our call. We began the year with a strong quarter and appreciate the opportunity to review our results with you. We reported earnings per share of $0.50, annualized pre-tax pre-provisioned assets of 1.95% and annualized return on average tangible common equity of 14.85% on a very strong capital base whereby our total risk-based capital ratio was 16.29% at the end of the quarter. We do not provide guidance, but I am cautiously optimistic about the remainder of the year.

Thank you Tim and good morning everyone. In the earnings release deck on slide seven, net interest income of $22.2 million for the quarter was consistent with the fourth quarter despite fewer days in the first quarter. Our net interest margin was 3.13% for the quarter and was down slightly to 3.35% on an adjusted basis from the fourth quarter. Adjusted NIM includes the impact of excess deposits on the balance sheet which adversely impacted our margin by 36 basis points and PPP loans contributed about $1.8 million in fees for the quarter, up $117,000 versus the fourth quarter and impacted the NIM favorably on an adjusted basis by 14 basis points. Net interest income benefited in the first quarter from a shift of earning assets from cash into investments in our continued loan growth. Investments on average were up $88 million over the fourth quarter and loans on average were up $48 million over the fourth quarter. On slide eight, deposits continued to increase. They increased $50.5 million from the fourth quarter, largely driven by NOW account growth and our core markets continue to hold large levels of deposits consistent with the prior few quarters. Our deposit costs continued to decline and were four basis points lower in the quarter as compared to the fourth quarter deposit rates as we continue to aggressively lower our deposit rates. Our excess balances are continuing to be strategically addressed through deposit pricing opportunities, our focus on loan growth including hiring new bankers, purchases within the investment portfolio and a strategic run-off of higher priced deposits. On slide nine, average loans, less PPP, increased $48 million or about 11.5% annualized over the fourth quarter as we continue to build out the Knoxville market, add additional bankers in Middle and East Tennessee and strengthen and grow our loan pipelines across our company. Total PPP loans worth $211 million at the end of the quarter with round three of PPP loans adding an additional $70 million at quarter-end. The loan yield for the quarter was 4.34% with coupons declining slightly at 10 basis points from the fourth quarter due to a growth in fixed rate loans at slightly lower yields.

Great. Thank you Dennis. On page 14, I will reinforce some points that we have emphasized in the past. First, we remain focused on growing our bank with direct customer relationships in our target markets. This was demonstrated with two key indicators continuing to show that greater than 95% of our portfolio is in our target markets and now that shared national credits are less than 3% of our portfolio. We believe this continued focus best serves the interest of our shareholders, our customers, our communities and our teammates and will deliver consistent performance results over time. Also, I want to emphasize that we remain committed to robust ongoing internal risk reviews. This includes reviews of borrowers experiencing pandemic impact and borrowers that are criticized or classified. We evaluate each against four criteria. First, we make a forward-looking assessment of the direction of risk in their operating performance. Second, we evaluate the adequacy and sustainability of their cash flow. Third, we evaluate the quality and coverage provided by pledged collateral and liquidity. And finally, we look at the capacity and willingness of their owners and guarantors to support the borrower, if needed. Also on page 14, I note that our payment deferrals are down to 3% of the portfolio representing nine borrowers. These borrowers are all paying interest regularly and some are expected to return to an amortizing basis in coming weeks. These borrowers are in predictable sectors impacted by the pandemic. 60% of the deferred balances are in lodging, 35% are tied directly to other forms of tourism and tourism support and the remaining 5% are businesses in support of live entertainment. These balances on deferral have reduced consistently since the pandemic began.

Okay. Actually, thank you Chris. So that completes our presentation for today. So operator, we will turn it over for questions.

. Your first question comes from the line of Jennifer Demba of Truist Securities.

Thank you. Good afternoon.

Hi Jennifer.

Question on your loan growth, Tim. 11.5% annualized, very strong. Can you give us a sense of geographically where that came from or by asset class? And I guess I look back at all your press releases in recent months, but how many revenue producers have you hired in, let's call it, the last three to six months?

So that's a lot of questions. But the first one, I would say it's equal balance right now. I would say Knoxville is holding its own with Nashville. So Knoxville has now hit. And keep in mind, they didn't start till February 1 last year, started in a pandemic and worked in their houses until October. They didn't even get an office space till October. So that actually helped with the breakeven because we don't have rent the first year. But anyway, they have hit $100 million now in loans and commitments. It's about $90 million in loans and $10 million in unfunded commitments. So I would say, they are coming on strong. So I would say, almost equal weighted generally. And I would say, a broad mix. Remember, keep in mind, right now we still are heavily a commercial professional bank. So I would say, a mix of owner occupied and C&I kind of stuff and commercial real estate. Less growth in our community banks. Now community banks are very established and profitable but less growth in those markets at this time. On the bankers, let me just count in my head. We added an additional banker in Knoxville in first quarter who had $120 million loan portfolio at his bank. He had worked there for 12 years. He's worked with three of our bankers previously. And they shared with him how much they love it here and everything. And so he came over. We added one in Sumner County who had a $70 million portfolio. And then we added, I guess, in November we had a gentleman here in Davidson County that had a $65 million portfolio. And then we have added two in Rutherford-Williamson County. And we added one other in Davidson County. So whatever that adds up to, about six that we have added in the last since November.

Thanks so much.

Yes. Thank you.

Your next question comes from the line of Brett Rabatin of Hovde Group.

Hi guys. Good morning.

Hi. Good morning Brett.

Good morning.

I wanted to talk about expenses for a minute. And I know there's a lot of noise and I know with the FAS 91 and the two newer institutions, it might be a complicated question. But you have got down the expenses pretty strongly in the first quarter to a level, I think, you were trying to achieve. Can you talk maybe about what might be a growth driver for expenses from here? And then, what you might else be able to achieve to keep that number from going higher?

So I don't want to dodge that but it really, I don't know about you, you have done modeling a long time. Between trying to model your net interest margin, your excess cash and how that weighs on the margins, your PPP, you have got two mergers, this is the hardest environment I have been in the model even internally. And so we are focused on efficiency. I wouldn't say we are really focused on expenses. We are focused on efficiency. And so I think there's opportunity. With that said, loan growth, when you do 11.5%, that does help FAS 91. And we have got a couple positions we need to fill. So I don't see it going up materially. You know, hopefully, we are near run rate or it's up modestly. But I don't really want to put out a number at this point.

Okay. Fair enough. And then just wanted to talk about additional M&A and potential and just, Tim, how do you view the environment at this point? And if you might be optimistic about the prospects for you guys to do additional transactions? And maybe any other things that you view as sort of impediments to getting one done?

Well, first thing I would say is, our employees are tired. And so, again, if you listen to what I have said, I mean all of us, you yourself, all of us endured a pandemic in our lives and our family last year. Not many people bought and converted two banks and led the state in PPP. So our employees are phenomenal and they are tired. So we have nothing on the horizon. I am real excited about the prospects of CapStar in M&A. I think we have learned a lot in our three transactions. We are not perfect but we are cutting our teeth. I think we have done a fairly good job. We are getting better on each one. We want to improve this company so that we trade at a higher multiple. And right now, we have the luxury that we have got a lot of cash and capital that we feel we have got dry powder to either use some towards a deal that will help earnings and profitability and lower capital ratios or buyback stocks. So I think it's a huge prospect for us. We want to be looking but we certainly are not going to do anything this year. And I can't say that we will announce anything in the fall, but if we did anything it would close next year.

Okay. That's good color. And then maybe just one last one, if I could, just around mortgage banking and your outlook for that and how you view that as a piece of the commercial business, so to speak. Do you want to emphasize or deemphasize mortgage banking over the next year or so?

Brett, this is Dennis. I am happy to take a crack at that one. We are just excited that mortgages has continued for the first quarter at pretty very, very strong levels and seems to be continuing on. So we are going to take our good mortgage results as long as the market will give them to us. We have a phenomenal mortgage division, Farmington Mortgage. And we have got great people out there. They did almost $1 billion of originations in 2020. And they just had another strong first quarter. Surprisingly, in connection with the first quarter results, the refinancings that we are seeing are continuing to be a strong piece of our mortgage group. Now, that said, we have seen some softening, a little bit of what I think you asked about, about our expenses were, our fourth quarter in mortgage last year was a record quarter. And so the first quarter was a little off of that. And so some of the salaries and benefits that you see there less mortgage incentive in the first quarter compared to the fourth. But we are optimistic that mortgage will continue to do well. It all depends on rates and the like. But we are in a great position here. Lots of folks are moving to Nashville because of just desirability and no state tax and lots of reasons. And so our mortgage guys are very, very busy. They are the best in the southeast, maybe the best little mortgage company in the country. And we are going to keep riding their good results as long as we can.

So Brett, as far as strategically, we are really committed to mortgage and our team. I concur with what Dennis said. At SouthTrust, we have $5 billion of annual mortgage production. At National Commerce, we have $2.5 billion. And I would put our program up against theirs. We have got a small shop that's phenomenal, they did $1 billion. And so it's integrated into our bank. But it is somewhat a separate business entity. They have got a very dominant operation here in Nashville. They were here before we had the community bank. So we have an opportunity to integrate that some indoor community banks. Our community banks are somewhat a portfolio mortgage markets. So we are going to be working on developing a portfolio mortgage for them. And speaking to our leader, he even understands that probably we want to cap it as a% of revenue in our company. So we don't want it to become a dominant force. It's just, my goal, you have heard me say this before, I am committed and I am going to do my best to get CapStar's bank-only pre-tax pre-provisioned assets to 1.80% to 1.85% and that's without mortgage so that when we have great mortgage years it takes us to two. What has happened at CapStar is, we historically have been at 1.45% pre-tax pre-provision assets. And when mortgage has a great year, it takes us to 1.80%. So I want to raise the bar on the core bank so that in great times mortgage takes us even higher.

Great. I appreciate all the color. Thanks Tim.

Thanks Brett.

Your next question comes from the line of Stephen Scouten with Piper Sandler.

Hi. Good afternoon everyone.

Hi. It's sort of a funny time to have the call because it's afternoon for you and it's morning for us.

Yes. Good point. I guess Tim and Dennis, just to follow-up maybe on the loan growth which again was very impressive but a little lower on end of period basis because of the SNC reductions. Now that you have got the SNCs to such a low level, will much of that kind of be left to its own license to run off? Or is there any more specific run off that you would like to take out of that portfolio?

Go ahead, Chris.

Yes. It's a good question, Stephen. Right now, with 3% of our portfolio, I want to point out a couple of things. Nearly all of it is in market. We do have good non-credit and non-SNC relationships with these folks. We have some meaningful treasury management fees. We have some meaningful deposits. And we have some lending activities that we do with some of those borrowers outside of the SNC transaction. So I would just say, this is a manageable level for us. But we have to be strategic about what we do there. We are not going to try and just kind of make volume happen for the sake of volume but use that as a resource that can help us with our other strategic objectives.

Yes. And I would just say, Steven, I am not anti SNC. But I want to have a quality balance sheet. And I saw numbers the other day I had not seen that at one point, Chris, I don't know if it was end of 2017 or whatever, but SNCs and other participations were 32% of loans. That's a staggering number to me. And what are your bankers really doing if you have got 32% of your loans and why are you paying incentives on that? I mean I can give my phone number to Bryan Jordan or somebody and just have them call me. I don't need to pay a commercial banker for that. So our participations are down. We are not against them but certainly they are not strategic. I think 5% or less is fine. We are not going to get hyper focused on it. frankly, I wasn't paying attention. I mean they were down like $20 million, like I said, had I just gone and bought $20 million, our loans would have been 15% growth and we would not have grown SNCs. So we feel really good where we are at. Knoxville is $100 million in 11 months. And they don't have one participation. They know how to go find customers where they are the lead and that's our goal.

That's great. Okay. And then if I can ask just a follow-up around the repurchase authorization. I know you mentioned obviously you want to continue to allocate capital to organic growth and maybe M&A. But it would appear that in the near term, the buyback would be the best use of capital, given where you trade on tangible book versus any sort M&A. Am I missing anything there? Or is that the way you guys think about it today? And maybe what's the floor on capital in terms of how low you would take TC or whatever your constraining ratio is?

Well, a couple of things. That's a lot of questions. But number one, I am just excited that the Board gave us that lever. Running a company, I want to have a lot of levers. And just being here 18 months or so, I really didn't have that lever in place last summer nor was it probably prudent with the environment. But number one, I am happy to have that lever now. Hold on one second. I set my glasses over here. So I am glad to have that lever. And there's a slide in our deck, if you go to the decks, Stephen, that we have been studying and then we have got other slides. Let me go back, my mouse is slow. Right here. So on slide 19, there's a slide that sort of shows and this is presented as of 12/31 because I didn't have the peer data. And so on 12/31, you can see our CET1 and our total risk base. And generally we are about 200 basis points over. And we are not trying to match penny-to-penny. I mean there's outstanding well-run banks like Service First that's even lower than this. But I feel we have got $40 million to $50 million of excess capital. And so it's hard when you are running a company. I hear you on the price to book. So we will be looking at it hard. But if it's close, we will probably use it for investing in our business. That's what we are here for. If we feel it's a wide margin towards the buyback, we will switch and do more during that period for the buyback. So don't want to really hand out our pricing targets or what we are thinking. But I am just excited to have it as another lever.

Got it. Yes. That's very helpful detail there. Thanks Tim. And then maybe just one more for me. Kind of moving back to the SNC conversation. You worked much of that out of the portfolio which is impressive and now you have got all these new lenders and the team in Knoxville. So is this kind of low double digit loan growth? Is that a pace you think is sustainable here near term? And maybe even that there could be some upside to it?

I do. Again, I am not a guidance person because I was always taught to under promise and over deliver. So I am excited. And I think, I don't want to get ahead of myself, but we have got inbound conversations from bankers and other markets that know these bankers and are like, hey, I would like to talk. We are talking to one right now I can't say what town but a $100 million banker in a new town. And so we will see. But I am hoping. I don't see why our markets and our bankers can not grow loans 6% to 10%. And you can't count on that every quarter. But for the year, I sure hope our year loans are up on average 6% to 10%. And at this point in time, I can't tell you what end of that range it will be.

Yes.

I tell you what, let me tell you one thing. When I came in, one of the comments I heard from you all and other people was why doesn't CapStar grow its loans more. You are in Nashville. Why was the large charge-off in California? We are changing that. We are not lending in California. And as far as the loan growth, what I did, I took total loans and I subtracted the Athens acquisition, I subtracted are outstanding CRE group the joined about seven years ago. And then I backed out all shared national credits and participation. In the five years before I joined, our loan growth averaged about 3% per year in Nashville Tennessee. So we are working to change that. And we think we have got the team that doesn't need to rely on participations and that we think we can do 6$ to 10% with keeping the same credit quality.

Yes. Understood. Okay. Great. Thanks for the color. I appreciate the time, Tim, Dennis.

Yes.

Thank you Stephen.

Your next question comes from the line of Ammar Samma with Raymond James.

Hi Ammar.

Good morning or good afternoon, whichever it may be. May be just a question on credit. You have got the allowance plus marks coming in to 1.6%, obviously very robust coverage. I hear your commentary on conservatism and you will be growing organically as well. So how should we think about that reserve level trending here in 2021?

It's hard to say. Remember number one, we haven't adopted CECL. So we are running parallel on CECL and we are trying to think that through. You have to adopt that at the beginning of a year. So our next adoption could be the beginning of next year. So that's one thing going on. And then two, while we are excited about the direction and optimistic, if you look at our criticized and classified and I would think most other banks, they are still higher than this quarter last year. So we just think it's a little premature. Go back to fourth quarter. In fourth quarter, I was trying to get everybody back in the office in October and all of a sudden COVID took off. So December wasn't necessarily rosy for COVID and all of a sudden we are at the first quarter end and everybody's releasing. We just think it's a little preliminary in our minds. So we are a conservative bank. And I think there is a situation where you could see one of two things. There is a situation where that could probably partially fund loan growth, some the rest of the year if this continued or if we didn't get the loan growth that it would come in like other banks. We just didn't want to do it in the first quarter. We didn't think that was the right thing to do.

Okay. Thank you Tim. May be switching gears, a bigger picture question. A lot has been made of the changing role of technology, especially fintech in the banking industry. Can you give us your updates? Just your thoughts around the changing landscape here and how you can be a player in the space, especially as you look to drive more efficiency, even profitability?

Well, you have got to remember our model. Technology plays a part in our model. We are a great commercial bank. So we have got very competitive cash management on the commercial side. We are a growing retail bank with the community banks. And that's probably where we need to focus the more or the most, sorry. In the commercial space, our customers, that space is a space that needs a banker and wants a banker. They don't need a lot of brick-and-mortar but they want to come into an office and talk to a banker a couple times a year. Technology is important, but not really driving their business, consumer obviously is. And so we need to continue to invest there. I think for our model where we could benefit the most from technology, I feel we have a big opportunity to review our internal technology. We did a strategic plan last summer and I just finished three weeks where I physically met with every employee in their location across the state. And I am off a little bit. But I think the numbers I saw, we spend something like $12 million a year. Our expenses are $60 million, we spend like $12 million a year on software, router, circuits, technology. And from my experience at other banks, we often have over bought. We are not maximizing vendor contracts but we are not using it correctly. So I think there's a big opportunity in that $12 million to lower that cost as well as to bring better technology internally to perform our work, whether it be manual processes or something like that.

Okay. Thank you. That should be it for me. Thanks for taking my questions and congrats on a good quarter.

Thanks Ammar.

Thanks Ammar.

Our final question comes from the line of Catherine Mealor with KBW.

Hi. Good morning or afternoon.

Hi. How are you?

Good. A little question just, I appreciate margin guidance is really challenging right now but thought we could just maybe talk about some of the components of it. And question one within that is just on loan yield which are, the coupon looks like this quarter was 3.95%. How does that compare to where new loans are coming on?

That's pretty much where they are coming in. I mean it's plus or minus. Like I said, we have seen some and we saw one this week we walked away on that was 3.20%. And so like the example I gave you was like a 2.55% loan yield, 10-year fixed, the one I gave you in my talking points. But the ones we are choosing to book, I would say 3.75% to 4%. And if you do a variable, obviously they may be 3.75$0.

Catherine, it's Chris. If I just look at the last month, it was about a 50/50 variable/fix split for new production and new originations and it came in right at the high 3.90%s.

Just real quick. In this environment, honestly we are focused on net interest income because I mean somebody, I had one of our best customers, you can tell this is a good customer, but he called me a month or two ago and he said, hey, I wish I had this problem. But he said, I just ran into $50 million and he said that I have nowhere to invest it. So I am going to put into my account. And I said, please don't do it. I don't want it. I have nowhere to invest it. So from a NIM standpoint, so much cash is coming in that it's hurting the ratio but it doesn't really hurt the income that much. I mean we may be paying five, 10 basis points on it or something or we may be investing it at the Fed. So it hurts the ratio but in the short term, long term we want that ratio to be, say, 3.50% to 3.75%, but in the short term our goal is how do we maintain our net interest income or grow it in this environment.

Got it. And then on the deposit side, your deposits are at 26 bips and you think there's still room for that to move down.

We do. Some of them, I just give, just number one, even just administratively, some of them are just CDs. They just mature in time. So you have got CDs that were repriced as well as there's customers we can continue to go to.

Got it. Okay. And then what's your outlook for SBA and Tri-Net fees?

I think the outlook for SBA is tremendous. And so I would, again I am not a guidance person but I would encourage you to look at fourth quarter. And so they have had three consecutive quarters of fees about $500,000, $1 million and then $500,000. And I feel relatively confident that they can get to, say, $800,000 to $1 million a quarter. And if they do that, like let's just take this quarter, this quarter they were $500,000 in fees. If they get to $1 million, that's $0.2 more a quarter or $0.8 more a year, about $250,000 pre-tax for us as a penny. So just in the first quarter, if they take their $500,000 and go to $1 million, they are going to add $0.2 per quarter or $0.8 per year. And so if I was a betting person, our gentleman that runs that, Mark Niethammer, is just a pro. He's a superstar and I really think his team is off to a great start the last three quarters. Tri-Net is a little tougher one. Chris Barham, the gentleman that runs it, is just fantastic. He's been at his peak business last year and this year. It's hard to ask somebody to sit in at a peak business to keep, go double that. But we have talked about, are there ways to do other, he does a lot of Dollar General's and CVSs and DaVita dialysis centers, are there other storefronts he could try. But that's a little harder one.

Got it. And then just a clarity on PPP. How much PPP unamortized fees do you have left to pull through this year?

We might not have that right in front of us. We can get back with you. I can tell you --

On the new fees, Catherine, it's roughly a couple of million. And I think on the total fees on the books is close to, I think, $8 million to $10 million, something like that of fees yet to be brought in to the net interest margin. The issue on that NIM is, the PPP fees have come in slower than what we thought. There was a period in February where they didn't do any forgiveness. So we have got $211 million of PPP loans and then the fees associated with those loans. And so we know they will be forgiven, probably be forgiven within the next year. But it's just very hard to predict when those loans are going to be forgiven. They don't seem to be coming in the forgiveness side in any predictable manner.

So real quick, we have just got an email. So real quick, I am just -- Jeff or Dennis, you may be able to read this email faster. But Catherine, we did on this slide number nine, it cites $70 million with $3 million in fees. I guess when we produced this early, that's just for round three. That's just right, Jeff, can you check your email? Eric just send an email. So that's round three. That's actually stale. We just got an update. That number now is $85 million and the fees associated with that is $4 million. So our PPP3 is $85 million with $4 million. I don't know the remaining amount from last year.

Okay. I think originally it was about $7 million or so. So I am assuming the $8 million to $10 million, Dennis, that you quoted, maybe that was all-in, not what's remaining.

That was all-in, not what's remaining. It kind of looks like, Catherine, that remaining might be somewhere in the $5 million to $6 million range.

Is that with number three?

Yes.

So with PPP3. So our PP3 is about $85 million and about $4 million of fess. And they are thinking, there may be another $2 million from the old fees.

Because don't forget, Catherine, when we had the rounds one and two, we were beginning, we amortized some of those fees and have been amortizing some of those fees. And those basis points that those forgiveness are affecting the NIM, we have been pointing those out to you. But then when those loans are forgiven, we get a little windfall in the NIM because any unamortized fees hit the NIM immediately. So pretty good shape, but we reported this time that PPP loan forgiveness favorably impacted the NIM by 14 basis points. So we will continue to tell you what that is as we move through the year. But we know that number's going away and then the best thing we can do is manage the rest of the margin and try to do something with all of the excess cash which is what we are doing on pricing deposits and growing our loan portfolio and the like. So I hope that answers your question. Happy to, if you need a follow-up or anything, just give me a call.

Yes. This was all understood. This is really helpful. Just trying to make sure we are not over estimating what's coming in the next couple of quarters. But that's a good, the $6 million left, I think, is a good dynamic.

Right.

All right. That's all I got. Thank you and a great quarter. Thanks so much.

Okay. Thank you. Go Generals.

We do have a follow-up question from the line of Stephen Scouten with Piper Sandler.

Hi guys. Thanks. I did just have one follow-up question. Tim, I know you said you don't want to get too deep into guidance but just trying to figure out what happened this quarter maybe on the expense side. If I look at slide 12, I am just trying to figure out what the good actual starting point for kind of run rate expenses when we think about the FAS 91, decrease in salaries and benefits and this pandemic and recruiting bonus? Just kind of what you think is the true again run rate number maybe coming off this quarter?

All right. Hold on. Just go on, Dennis. I am just getting this slide to go.

I think, Stephen, the number that's there isn't a bad starting point. The first quarter of FAS 91 impact, we grew loans a good bit. But the impact of FAS 91 over the fourth quarter was less than a couple of cents. But as we have loan growth, we will continue to benefit from FAS 91. And then the mortgage incentives in the fourth quarter were elevated and so we had a pretty significant drop in salaries and benefits that were related in the first quarter that were related to less mortgage incentives compared to the fourth quarter. But if you think that mortgage in the first quarter is an approximate level of mortgage, then you have got a good starting point. But we are hopeful mortgage continues at the pace that it is but it certainly might not.

Stephen, the way I think about it and we don't have it on the slide, but I don't think it's material in any way as far as the number. As I think about bank-only expenses and we probably ought to think a way to disclose that, but from memory our bank-only expenses, I think, are like $15 million, $15.5 million. And so the difference would be the mortgage. And so just look at that, I am on page 12, look at that top green line that says operating noninterest expense. It's so hard to follow because our mortgage has done so great. So I know that that's commission based and that's going to go in accordance to revenues. So I really don't focus on that as much because that's largely the commission related to mortgages. So I try and focus on what is our core recurring expense rate for the bank. And I actually got a bank-only efficiency target that we are going after. And so I think that's $15 million to $15.5 million. And I would like to keep it in that range. And you know, like we said here, there was roughly $500,000, we did a pandemic bonus in first quarter. We gave every employee, I don't remember the cut-off, we didn't get it. We gave every employee definitely under the executive committee, $1,000 just thank you for their contribution last year for working their tail off. And so we had that and then we had some recruiting expense. We wouldn't expect that to recur. We don't think there's really any one-time benefits in there. So we think that that's a number. So I would say, core bank in the $15.5 million range maybe for now with mortgage going up and down, based on success.

Got it. Yes. That's helpful, yes. And if that becomes something you guys end up being able to disclose, I think that would help kind of diminish the noise that comes from that. Yes, that's great. Thanks Tim.

Yes, right. I want to do that, even for us internally because we have not really done that internally. We have sort of looked at total and it's sort of hard to understand. I know the team is doing a great job but it's hard for that to shine when that's going up and down. So we are going to look at that.

Yes. Great. All right. Thanks so much.

All right. Well, we appreciate it by calling in and that concludes our call. And again, we are really excited about what's going on at CapStar and we have got a great company and it was a sure challenging year but, man, we met a lot of progress in the last year and we are beginning this year with more levers than ever. We have got the legacy original CapStar Bank, which is a tremendous commercial bank. We have bolted on to that Knoxville, which has an equivalent commercial capable team. We have three of the state's highest performing community banks. There were about 150 and all three ranked in the top 15% in performance. And then we have unbelievable specialty businesses with CRE group, our mortgage, Tri-Net, SBA. We have got a title agency you are going to hear more about soon. We are going try and crank that up. So we just have a lot of levers that we have never had before and just we are excited about the year. So appreciate you following. I know I just looked at the list. We have got two of our new shareholders on the call that are in the top 10. We appreciate you all being shareholders and listening and we will talk to you later in the quarter.

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