CSTR (2021 - Q3)

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00:03 Good morning, everyone and welcome to CapStar Financial Holdings Third Quarter twenty twenty one 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 Policy 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 capstarbank.com. 00:31 During this presentation, we may make comments, which consist of forward-looking statements within the meaning of the Federal Securities law. All forward-looking statements are subject to risks and uncertainties and other factors that may cause the actual results and the performance or achievements of CapStar to differ materially from those expressed or implied by such forward-looking statements. 00:55 Listeners are cautioned not to place undue reliance on forward-looking statements. A more detailed description of this and other risks, uncertainties and factors are contained in CapStar's public filings with the Securities and Exchange Commission. Except as otherwise required by applicable law, CapStar disclaims any obligation to update or revise any forward-looking statements made during this presentation. We would also refer you to page two of the presentation slides for disclaimers regarding forward-looking statements, non-GAAP financial measures and other information. 01:31 With that, I will now turn the presentation over to Tim Schools, CapStar's President and Chief Executive Officer.

01:40 Good morning, and thank you for participating on our call. We appreciate the opportunity to review our results with you. In the third quarter, we reported earnings per share of zero point fifty nine dollars and an annualized return on average tangible equity of sixteen point two eight percent. Our ROTCE is on top of a CET1 ratio that is now essentially fourteen percent. 02:04 I'm especially proud this quarter, as you walk down the income statement every single aspect of the bank executed, which is evidenced by the positive trends of our four key drivers in our pre-tax pre-provision to asset ratio. A stabilized net interest margin excluding PPP, loan growth, strong performance and deposit service charges and each of our Specialty Banking businesses, expense discipline as we become a more productivity driven company and focused management of our tax expenses. 02:38 I just can't say enough about our team. Equally exciting we announced our expansion into Chattanooga, with the addition of nine highly skilled banking professionals, who are leaders in that market. As we've communicated one of our four strategic focuses, the past twenty four months is putting our excess equity to work. 03:00 Our preference is to invest in the following order. First, organically, such as Knoxville and now Chattanooga; second, acquisitions such as Athens, Manchester and Waynesboro; third, opportunistic buybacks; and fourth, dividends. Each play roles in our available tools, but we have terrific investment opportunities in our core business that will remain our priority. 03:26 Chattanooga is a fabulous market and one of three in Tennessee, whose population and household income growth are faster than national averages. CapStar is blessed to operate in one of the best states across our nation to do business and live. And now CapStar is located in the three fastest growing markets. 03:46 We've included a slide to share a little bit about Chattanooga. It is a great destination, if you've not visited with one of the nation's first aquariums; Rock City, where you can see seven states on a clear day; the Chattanooga Choo-Choo hotel; and as we have illustrated it is home to an important aspect of the Southern lifestyle, the MoonPie. This is a strong team led by Brian Paris and six of his former teammates. They've worked together a long time and are extremely connected in the market. They are a true team, a dream team. 04:21 We provided some of what we feel the strategic and financial rationale are, while there are a lot of variables, we feel that this will have a meaningful impact on our financials over the next five years. Of course, it comes with start-up costs. But the level of work and risk compared to an acquisition is uncomparable. 04:43 Before turning it over to Dennis, I'll share that we have similar conversations underway in three additional markets, and the response is very positive. Highly skilled employees are looking for the next bank as their sale or become larger to the extent they feel it is harder to serve their customer or no longer has fun. CapStar's capabilities, size, responsiveness and flexibility are proving attractive. In the case of Chattanooga, they actually reached out to us earlier this summer, as is becoming a more frequent occurrence. 05:18 Dennis, I'll now turn it over to you to cover the financial results for the quarter.

05:24 Thank you, Tim and good morning, everyone. On slide eleven of our deck, you'll see that our net interest income was twenty three million dollars for the quarter, consistent with the second quarter. The net interest margin was three point one two percent for the quarter, down fourteen basis points, primarily due to record levels of deposits, and slightly less loan PPP fees in the third quarter. 05:47 Our adjusted NIM remained stable at three thirty six for the quarter. The adjusted NIM includes the impact of excess deposits, which adversely impacted the margin by forty basis points and PPP loan forgiveness fees, which favorably impacted the NIM by sixteen basis points. Net interest income continued to benefit in the quarter from the shift of our earning assets into additional investments as well as continued strong loan growth. 06:17 On slide twelve, our average deposits of two point seven billion dollars for the quarter were at a record level, average DDA and now deposits were also at record levels for the quarter and increased eighty eight million dollars from the second quarter. Our core markets continue to hold large levels of deposits consistent with the prior several quarters. Deposit costs continue to decline in the third quarter and were two basis points lower as we continue to lower deposit rights and benefit from higher non-interest bearing deposits. 06:51 Our excess balances are continuing to be strategically addressed through pricing opportunities, focusing on our loan growth, including hiring new bankers, purchases within the investment portfolio, and run-off of higher priced deposits. 07:07 On slide thirteen, total loans less PPP were at record levels at quarter end and grew forty two million dollars or nine point four percent annualized in the third quarter. We continue to build out the Knoxville market, added some additional bankers in Middle and East Tennessee and continue to strengthen our loan pipelines. Our loan pipelines continue at record levels and remain strong across all of our markets. 07:32 Total PPP loans were sixty four million dollars at the end of the quarter, down forty six million dollars from the second quarter. Total unearned PPP fees at the end of the quarter totaled two point two million dollars. Our loan yields remained strong and were four point four one percent for the quarter, with loan coupons up six basis points in the quarter to four point zero three percent. 07:57 On slide fourteen, non-interest income was extremely strong in the third quarter with record levels of revenue and deposit service charges, interchange and debit transaction fees and wealth management. Tri-Net had a tremendous quarter with almost two million dollars in revenue. SBA had a nice quarter with nine hundred and eleven thousand dollars in fees and mortgage revenues were also up for the quarter and continued to see healthy spreads offset slightly by volumes. 08:31 Slide fifteen shows our non-interest expenses, which were eighteen point four million dollars for the quarter, which resulted in an operating efficiency ratio of fifty three point zero six percent Our core bank which excludes mortgage, efficiency ratio was fifty point five eight percent which is a record. Within salaries and employee benefits, incentive expenses were increased during the quarter for mortgage and other incentive comp plans, so even with these increased incentives during the quarter, our efficiency ratio was at a record low. 09:05 With that, Chris, I'll turn it over to you to discuss our credit position.

09:09 Thank you, Dennis. The good news is that I can be brief. Turning to page seventeen, we reaffirm and underscore continued commitment to our community banking strategy emphasizing growth through in-market relationship development. With this, we also remain committed to our robust risk management on a forward-looking basis with external validation in periodic stress testing by partnering with quality external firms to assist us objectively. 09:34 These commitments continue to show results as noted on the bottom of page seventeen. Past dues continue to improve as we believe and we believe that there is continued room for improvement. As expected, criticized and classified loans continue to reduce from pandemic levels having peaked a year ago. Shared national credits continue to reduce and growth continues to be driven by in-market relationship development. 09:59 At this point, let me step aside and give you a little bit more detail into our diminishing level of borrowers on pandemic deferrals. Borrowers with pandemic deferrals continue to resume making normal payments as expected. At this point, loans on deferral totaled thirty three point four million dollars to five borrowers. Eighty five percent of this total that is twenty nine million dollars are with three borrowers that are well situated, well located new hotel projects in Nashville having both good capital and good sponsor support. 10:31 These three are on principal only deferrals with the borrowers continuing to pay interest on a timely basis. Each of these are scheduled to reduce full payments in January, -- I'm sorry, scheduled to resume full payments in January, and we have every expectation to believe that these payments will in fact resume as schedule. 10:50 The remaining two loans are SBA guaranteed transactions where we granted the deferral in recent months pursuant to the SBA standard operating procedures. One of these is on a principal only deferral and the other is a full deferral of P&I, principal and interest, but the balance sheet exposure that we have carries a seventy five percent guarantee. 11:11 Turning to Page eighteen. Please note, that as we indicated in the first quarter earnings call, our past dues have continued to reduce and we have continued to maintain them at acceptable levels for the last three quarters. As I indicated earlier, there is still room in our minds for improvement. 11:27 Also on this page, note that the trend in criticized and classified loan levels continues to improve from pandemic highs attained a year ago. While not evident in this particular chart is important to note that our level of criticized and classified loans has nearly returned to pre-pandemic levels of approximately two point five percent and one point four percent respectively. Consistent with these low levels of criticized and classified assets our net charge offs remain at very low levels. 11:57 Given these positive quality trends and low loss results, as you see on page nineteen, our assessment did not require a loan loss provision in the third quarter and we believe that our level of reserves on multiple bases of presentation remained well situated to cover any lingering residues that we may still experience as a result of the pandemic. 12:17 With that, turn it back over to you Tim.

12:20 Okay. Thanks, Chris. I hope you can see the employees of CapStar are working very hard in producing winning results. I am very excited about the future. As I stated, we are blessed to have been born where we were, but that -- we are supplemented by one of the youngest and most experienced management teams in the industry. 12:42 A closing comment for those of you that model and project financials, our outlook is very positive and strong. However, be mindful next year as a transition year for the industry. Us and others are working hard to pull PPP fees into this year, which will not recur. It is uncertain if the mortgage industry will continue its performance, and provision expense would be expected to recur after the release of reserves this fall deriving from the pandemic. 13:10 Operator, we're now happy to answer questions. Thank you, everyone for your time this morning.

13:17 Thank you. Now, first question coming from the line of Stephen Scouten with Piper Sandler. Your line is open.

13:38 Hey. Good morning, everyone.

13:40 Hey, Stephen.

13:43 A lot going on, all that sounds very encouraging, that's good. I'm wondering, if we can talk a little bit more about the -- maybe the Chattanooga team. If you could give us an idea, I know you laid out some of the accretion expectations in year two, three and four and et cetera. But can you give us an idea what the related expense base will be from those hires and what you think the scale of that loan book could eventually be? I mean, is this a similar opportunity set to Knoxville, at this point in time?

14:12 I would say, it would be larger, Knoxville is a super team. It was really even to this point was three commercial relationship managers. They began in February of twenty, the month of the pandemic and worked out of their houses through November. So the fourth commercial relationship manager, they didn't start to about April of this year. So this is five that are starting day one will be in an office, yes, we're still in the pandemic. I don't want to minimize that, but it's not like it was last summer, where it was lockdown. So, I think a bigger team and not the same situation. 14:55 So, in total, they've got a close to six hundred million dollars portfolio today when you add them all up, that doesn't all walk over day one. But we certainly expect that on average, not everyone and every year is different, they'll probably generally produce between twenty million dollars to twenty five million dollars a person and we're hopeful that we'll go towards five million dollars to six hundred million dollars by the end of that year five. And there's just a lot of variables too. I mean, they’re meeting actually this morning, they're having breakfast with one of the top bankers in Chattanooga at a different bank. 15:31 So, we're just really excited and we put in some of the modeling we looked at to see if it was a good use. And we're trying to weigh, you can always just go, I could buy thirty million dollars of stock back today if I wanted too. And -- but we're trying to weigh that versus other investment alternatives and we just thought this was a slam dunk that if you put reasonable assumptions in there, it invest in our business and a high growth market and just one of the best teams in Chattanooga.

16:00 Stephen, on page there, we gave you -- at a high level, a little bit of our thinking around from an expense standpoint in terms of how long it would take for that team to breakeven and those kinds of things. So happy to talk offline around that, but very good economics in this kind of lift out.

16:26 Sure. And then, Tim, I think you noted three additional markets where you might be looking to add teams as well. Would all of those be within Tennessee or would you guys look at other MSAs kind of in and around your existing markets?

16:42 Well, couple of things, I do not intend to take on three more and have four. But I do think that the next eighteen months it would be positive with our excess equity and almost now a year past the FCB conversion and the team has rested a little bit. I do think it'd be very positive to try and take on two. And it's a trade-off, because I know a lot of public investors quarter-to-quarter. We're trying to build a great thank for the long-term. And so, it's like anything it comes with a little more dilution year one than an acquisition, but it's much more accretive and much lower risk. 17:22 So I'd say, I'd love to have two and there is three other markets. Generally, we're focused on, Tennessee, that's our main priority. But I've mentioned to some others that the way I'm thinking about it today, Tennessee is an odd state, I guess, many states are, when you think of them graphically and that it's a long rectangle. And so where we are located from a management bandwidth, if you sort of do a three hour radius, if you just go north that sort of starts at Louisville, would cover Lexington, would cover Knoxville, Chattanooga, Huntsville, Birmingham, up to Memphis and back to Louisville. 18:04 So I would say, that we're spending ninety nine percent of our time there. If an interesting one came up somewhere else, we may consider it. But we're not doing outbound calls outside that region. And on this one, this was an inbound call, this was not an outbound call from us.

18:19 Got it. That's helpful. Okay. And then I think this kind of answers the question, but would you expect the buyback to continue to be kind of -- I don't want to call it on-hold, I mean, obviously it's out there usable. But it seems like you've got in your opinion better uses of capital to invest in future organic growth, with this mortgage and --

18:37 I do. And everybody looks at that differently. I mean, obviously, there was lot of smart people in this industry. One person has spent a lot of time with, Julian Abdey at Capital Research in San Francisco, and he has taught me a lot. You can do a lot of stuff to increase EPS, but it's not really a good return on capital. And so I'm just trying to be a great steward to the shareholder. And I know, there is an IRR drag the longer we hold it, but I'm going to do my best to rapidly deploy that in a low risk prudent way. 19:12 And if you run the numbers on buying back stock, I mean, we're proud of our valuation, I think actually it could even be a little more. But when you look at doing that, it's not the same return as what you could get -- you're not going to get a thirty percent IRR buying at this level today. So, that's our focus.

19:33 Great. Okay. Well, that's great. I'll let somebody else hop in. Thanks for the color and congrats on the quarter and the new team.

19:40 Okay. Thanks, Steven.

19:44 Our next question coming from the line of Brett Rabatin with Hovde Group. Your line is open.

19:50 Hey. Good morning, guys.

19:51 Good morning, Brett.

19:52 Hi, Brett.

19:54 Congrats on the quarter and the new hires, that was great. Wanted to talk about the margin, Denis. Could we, I guess, first from a PPP perspective, how much do you guys have left in fees related to that? And the core margins held steady, but obviously it's been impacted by the liquidity. Can you maybe talk about the deployment of that, pace of it and maybe the expectations for the core margin versus the stated one over the next few quarters?

20:22 Yeah, I think Steve and the -- we've -- I mentioned we have two point two million dollars of PPP fees remaining in the -- at the end of the quarter. We're doing our best to try to get all those forgiven by the end of the year, so we'll see how that goes. Some of it will probably carry over into the New Year. 20:54 And then really this particular quarter, we had a significant increase in the average deposits that were on hand during the quarter, so that negatively impacted the margin that the pure core margin from the last -- from the second quarter. But really looking out, we think it's definitely troughed out in our opinion. And we've been very, very conservative in our view of what to do with the excess liquidity and have not really loaded up and taken on risk. We want to keep the balance sheet at a more neutral level. 21:45 And so we have purposely not continued to really grow the investment portfolio. We think and feel and believe that loan growth and Nashville loan growth and Knoxville and now in Chattanooga and potentially other places is the better way to manage that. So I think that, we have Darling helping us, and looking at our margin modeling. And we believe we're really well positioned. And if we get any help at all from the external market from the Fed, either steepening or absolute rising in the yield curve, we will really be in good shape.

22:45 Okay. Appreciate the color there. And then it was also curious about fee income, which was obviously strength in the quarter. And China (ph) in particular has done really well the past year. I know, mortgage is somewhat difficult to predict, but could you maybe talk about the outlook for China? And then maybe the SBA operation and how you see that playing out in twenty two?

23:08 We’ll let Chris Tietz, he has been wonderful in terms of taking on the management of those specialty businesses. He is working diligently with each of the managers in those areas and just done a wonderful job. And we'll let him give you a little additional color on that Brett.

24:12 Yeah, Brett, we avoid giving specific guidance on future expectations, because there is a lot of variables. I will say, particularly with China is that, demand for what we produce there is very high. We are getting outsized premiums as a result of that. And I would expect it to continue at the average levels we've seen over the last two or three quarters -- for the next two or three quarters. Having said that, government guaranteed in SBA lending is getting a firm footing as they've gotten past PPP. And I expect that to increase over time. I don't want to give specific guidance on that right now.

24:11 Okay. Fair enough. Appreciate on the color.

24:16 Thanks, Brett.

24:21 Our next question coming from the line of Jennifer Demba with Truist Securities. Your is open.

24:27 Hey. This is Brandon King on for Jenni. Good morning.

24:31 Hey. Good morning, Brandon.

24:33 Yes. So core loan growth was pretty strong in the quarter, although a bit softer than last quarter. But I just wanted to get more color on where your customers are still feeling just far as their investment decisions on how utilization rates are trending in your outlook for loan growth in 4Q and potentially in twenty twenty two?

24:54 I'd say that, I mean, loan growth is steady, our pipeline is over four hundred million dollars. And we actually had -- we do an all-employee call the night before earnings. So we did it last night and we do sales awards, and it was really fun to reflect on what was said, because so many names were cited in all of our markets, and it didn't used to be that way in CapStar. 25:19 CapStar, when I came was really built on four people. And so strong pipeline across a lot of people in Chattanooga will only add to that. And I'm not really a big guidance person because you seem to me that always get hurt more than it helps you, I'd rather just perform and post numbers and be someone that is viewed that while they do what he says. 25:47 And so I think, we're building a capable organic team. I got to think some about how to roll in the impact of Chattanooga. But the core team we had, I feel good that we're moving towards a solid eight percent organic in Tennessee, no participations, no shared national credit, reasonable margins, regional credit risk going forward. Obviously, Chattanooga will add on top of that, so I got to play with that math and look at a little bit. But I'm just really excited with how we've transformed. 26:23 Again I'd see on the call list here, some of the folks that have called in. There is no secret that CapStar is a bank that historically had not performed. And it was up to thirty two percent or thirty three percent shared national credits at one time, we're at one point nine percent. And it's a new company, it's a new day, some of the banks in town like to still talk about the old days and talk about CapStar in that light. CapStar is a new company, and we got a lot of great stuff going on and really excited about the loan outlook.

27:02 Okay. Great color. Great color there. And then also for expenses, so it looks like expense control was pretty good in the quarter. And I wonder how confident you are in controlling the expense base, especially in the twenty twenty two, with obviously the Chattanooga expansion in the hiring pipeline. Just wanted to get a sense of where you think expenses will shake out in the near to medium-term?

27:25 Brandon, go back, pretty good -- expenses were really good. And also think about from our perspective, because we've done so well this year-to-date. Also in the third quarter, we had some catch-up in, across our incentive comp in our mortgage comp incentive accruals. So not only did we control on a bank only efficiency ratio of fifty percent, but included in that fifty percent or some additional things. 28:04 Now if you look into the details that are in the deck of the non-interest expenses, we really believe we've got the merger of the two banks behind us, all those conversion costs that happened in the end of last year and early this year, those are behind us. And then, we're really focused every month on disciplined and strong expense control. And so that's, I think that is paying-off, if you look at that efficiency ratio has gone from mid-sixty’s down to the high-fifties, and now trending very favorably. So, I mean, pretty good is, isn't -- it's kind of an understatement from my perspective.

28:55 Hey, Brandon, here is what I'd add to that. It's hard in this environment, right, like we're very proud of our mortgage division. Mortgage is an inefficient business, but it doesn't use a lot of capital. So, I guess the way I think about it is I'm trying to build a great company. And I want to build one of the great banks in the industry. And so I would love to see our core efficiency ratio, which we define as excluding mortgage, operate in the fifty percent to fifty five percent consistently. 29:26 When you roll in a project like a Chattanooga, that's an investment. And so, I'm sure that ratio may be altered a little bit the next twelve months, because you're making a big investment. But I just, when you think about CapStar, our goal, we have four key drivers, it's something Tom Garrett taught me at National Commerce. One of them is the efficiency ratio. And our goal is less than fifty five percent. 29:47 So that's my focus and I'll also say that, when I joined, I rolled out, that I wanted to get our core pre-tax pre-provision to assets to one hundred eighty. Historically, CapStar has been about one hundred and forty. Many people sort of chuckled and commented, that's going to be good luck, that's going to take some time. We've made tremendous progress. And its elevated this quarter obviously with PPP and others. But we're getting real close to a consistent core repeatable one hundred eight. So those are the kinds of metrics I'm looking for, is a fifty percent to fifty five percent efficiency. And our core pre-tax pre-provision to assets that would be one hundred and eight or better repeatable.

30:28 Okay. Thanks for all the color. Thank you for answering my questions.

30:30 Sure.

30:31 Thanks, Brandon.

30:35 And our next question coming from the line of Catherine Mealor with KBW. Your line is open.

30:41 Thanks. Good morning.

30:43 Hey, good morning.

30:46 I want to circle back on the margin, and the loan yields this quarter were up, which was great to see. And I don't think I've seen that anywhere else. So just wanted to get a little bit of color, what's driving that? Where new loan production is coming on, just to kind of get a sense as to how sustainable that is, and where it may be going? Thanks.

31:04 Well, I mean, we're having loan production, again Denis can talk about the actual yields. But as I said, we had our all employee cost shares today. And Ken Webb was given out the awards and gosh, he must have mentioned ten names. And really, I mean, we're having a loan production all over the counties. And Middle Tennessee and the Athens market and Knoxville and just all over. And here the loan yields out of Manchester and Waynesboro are fabulous. So I'd say it's very balanced on the production and Chris or -- Chris, you want to add something?

31:39 Yeah, I would just -- going on, if I just look and say the last thirty to sixty days Catherine are going on yield on larger transactions, has been in the three hundred and seventy, and in smaller transactions it's been in the four hundred fifty.

31:53 And we're being disciplined and hadn't been a lot Catherine. But we have a very disciplined pricing, and we pass on credits, and our loan growth could have been higher. And I'd say, one of our bankers one of the best I've ever worked at, where he is very disciplined and he will say, hey, I just don't think we should go to that right. And so our loan growth could have been a lot more. We see people doing loans at three hundred twenty five or three hundred ten or whatever. There are certain spreads we're looking for over the matched FHLB curve that we price too. And if we don't get that spread, we'll just say, hey, you've got a great deal of customer, I'd go with it. Congratulations.

32:35 It was so helpful. Thanks. And then on expenses, I appreciate you don't want to give specific guidance, but maybe just one line item with the data processing and software line, we still think it was down. And just wanted to see if that's a line that should kind of bounce back to where we thought saw last quarter or its --if that's a better run rate?

32:55 It should be more of this run rate, a lot of that was related to the processing fees, related to PPP where we used to our third-party system to administer that. So it should be more to a more normalized level now.

33:11 Okay. Great. Thanks so much. Congrats on the quarter and the Chattanooga expansion.

33:16 Okay. Thank you.

33:26 Our next question coming from the line of Feddie Strickland with Janney Montgomery. Your line is open.

33:33 Hey. Good morning.

33:35 Good morning, Feddie.

33:38 Just wanted to ask to stick it back to the -- to the expense line of questions here. You guys held salaries to a pretty good number. Do you -- are you experiencing any of the kind of the same wage inflation pressures that some of the bigger banks are seeing?

33:57 I would say, give and take. It's a big market out there, I mean I welcomed five to seven new employees this week. I mean, there is a lot of people, if we're all living in an unusual environment, right, you go to restaurants and there is still closed early, and all this kind of stuff we're facing. But there is still a lot of good hard work and folks that are wanting to come to work. And we benchmark to industry averages and market averages and we pay -- we want to pay competitive. But we have a lot of interest in working for our company. And so, I would say some, but there is -- I think it can be managed.

34:40 Gotcha. And Tim, I know you said buybacks are going to be more opportunistic, just given where the stocks trading today. But does the move into Chattanooga make any other capital deployment options best likely whether it's a dividend increase down the road or something like that or does this -- is just kind of more of a piece of the overall strategy where you can walk and talk at the same time?

35:07 No, I think, I think it's like I said before, they're all tools, right. And I think we've said this before, but the last eighteen months have been an unusual period. So we just went through our annual strategic plan. And this time last year was so different. We were saying, gosh, it's going to be three years of – rather I was saying rates we're going to stay low for five years. And we thought there is going to be three years of higher charge-offs and provision expense. 35:33 The plan is -- the outlook is so different. And so, frankly, we would have raised the dividend higher, even this past spring, but want to be conservative and make sure we're out of this. I think we've communicated before we'd like to see our payout ratio closer to twenty percent. So I think you'll see balanced tools. So, probably should anticipate another dividend increase this coming spring and we working at closer to twenty percent. And so I just say a balance aspect, I think we'll probably still keep that a little lower than industry averages, because I think we have more growth opportunities than most. 36:11 But I recognize we've got a certain amount of retail shareholders. When you're running a company, you've got many constituents. Institutional shareholders largely would prefer buybacks because of tax consequences, retail shareholders like to have a little bit of cash flow. So, we see opportunities. I would say buybacks are the ones that I would like to really reserve for opportunistic, because I just think we have such a great investment opportunity.

36:39 Got it. Makes sense to me. Thanks for taking my questions and congrats on a great quarter, guys.

36:44 Thanks, Feddie.

36:48 Our next question coming from the line of William Wallace with Raymond James. Your line is open.

36:55 Thanks. Good morning, guys.

36:56 Hey, Wally. Good morning.

36:59 Most of my questions have been asked and answered. But I did wanted to circle back on Chattanooga and then some of the commentary around maybe even more teams. The financials that you lay out in the deck in your cost assumptions, are you assuming any branch support in Chattanooga?

37:22 Absolutely. So the model we want to do, I admire a lot of banks. I just -- I was fortunate to be trained in two of the best, really ever. And I admire Pinnacle and our market, I admire service first down the road and our receiver with Southern First. So I'm always studying, and we've been very successful in Knoxville, sort of mirroring some of their successes. And so in Knoxville, we've got a very nice commercial office and it's staffed with commercial relationship managers, and then sort of office team leader or client service executive and then a portfolio manager. 38:05 So as we put out in our release, this team, right now, as of today, they will start with seven people in the market physically. And that will be five commercial relationship managers. We really have a single point of contact model where they will bank an operating company and the owner or a real estate investor. There'll be an office leader or a client service executive there, that we really don't anticipate a lot of walk in traffic, like a branch. Actually, we prefer not to have that. And so, no teller line, no ATM, no drive through. And those folks would be assisted in service by them and then a portfolio manager. 38:52 Herein Nashville, we added two additional members to our loan operations team, to help handle their volume. And really I've learned a lot just service first has been a great success. And here in Tennessee, if you came here and stay here a week, you would never know where they are, because they don't have any branch signage, and they've been a tremendous success. They've done a great job and they've got about one billion dollars in loans and seven hundred million dollars in deposits with no branch. So we don't expect at this time in Knoxville or Chattanooga, to have a lot of offices, really to have a commercial office, with the best talent in town.

39:37 Okay. That's very helpful. Thank you. And then if I look at kind of your loan mix in Pinnacle's loan mix, I mean, the mix is a relatively similar. Is the Chattanooga market bringing anything different or is that portfolio, kind of similar in composition, as to what you see on your own balance sheet?

40:02 Similar, and again, I'm just looking at the names are on this call right now. And many of these have prime added me great counsel, since I joined. And every bank I've joined has had opportunity and challenges. And I hope you won't get mad at me mentioning. But one of the things I'm proudest of, is one of the first people on that, with when I got here was Jerry King at Bank Funds. And he was pretty frank and direct. And I didn't know a lot about CapStar when I joined. 40:30 And he said, Tim, you've got your hands full, and you got to get this place going, or you should really think about, should this place be sold. And I'm real proud, I've got to say, I'm real proud to Jerry is on the phone today. And I appreciate that, Jerry, and I hope you won't get mad at me for mentioning that. But that's what this team is trying to do. And this is a new company, and so what I'd say to answer your question is, we had some people that we're making their living off of doing shared national credits and getting incentives. 40:59 We don't have that anymore. And so this Chattanooga team is Tennessee-based loans, not participations, not shared national credits, operating companies investor real estate, collateral, banking the owner. So I think it's consistent with the new CapStar. And we're just -- we couldn't be more excited to have them join.

41:21 And Wally that's -- we're trying to take that discipline and apply it across all of our markets and across all of our businesses. So, on the expense side, the pricing side, the administration side and of course on the revenue side, as Tim said, discipline and focus in -- and really trying to provide a really high performing bank, that all of our constituents will be proud to be associated with.

41:52 Okay. Thank you for that. Tim, I don’t know, who is Jerry King guy is, but I might have to follow-up with you offline to get an introduction. Just kidding. Hi, Jerry. So my last question is -- my last question, you talked about, you're in discussions with three different teams and three new markets. And then during the Q&A, I thought, I heard you say that you're not showing -- hire three new teams, but you might consider two. But then it sounded like you were maybe saying that, you'd want to wait a year. I just -- could you clarify, I think, I'm misunderstood.

42:35 So there are three right now, that there are different levels of discussion. And I would not take on four, right. I would not take on those three in Chattanooga that would just be too much. We would hit earnings too much it'd be lot for our team. But I do think it will be interesting to try and get a second one over the next year. And these things take time, so I don't know, if the second one would materialize in a month. I don't know if it will take six more months. I mean, you’re -- what you don't want to do, I work for one company, it's the only one. That the gentlemen, his strategic focus was filling in a PowerPoint map. 43:16 And so we would say, gosh, there is a whole in Savannah, and we are going to go to Savannah go in it. And it doesn't matter who we hire. I don't think that was a great strategy, because you don't necessarily get the best team. So we're looking for great people. We are going to build a great company. And we are looking for great people. And you got to wait for great people come to you. And it's really a situation where you got to be prepared when they are frustrated. 43:40 And when they are frustrated you have got to act, because if you don't act, they're going to go somewhere else. So I would just say, that my comment on over the year -- next year is, I think it would be, need to add a second one over the next year. And I just don't know if that will happen next week or in six months, because it's when they're frustrated and they're ready to pull the trigger. And it's CapStar doing its homework to make sure that they will produce what they say they can produce.

44:09 Okay. I think, I understand now I thought you're talking about teams and new markets not building on teams and the team in Chattanooga, so gotcha. And then last question, just as it relates to the Chattanooga team, is there in your view, is there a good fee income opportunity outside of just the lending metrics, which I'm assuming is what you're putting in the slide deck. But is there opportunity in mortgage or TriNet, or those not necessarily market specific for you guys?

44:44 I think, long-term, I think the most immediate right, if you think about it, just mathematically, the most immediate is we've got three hundred million dollars to four hundred million dollars of excess liquidity like many companies. And so if their primary focus can be loans, -- let's just say they can put our loans at three hundred seventy five. We've got that money today, the first three hundred million they do. We've got that money invested at seventeen basis points, and that's the excess liquidity. 45:09 So just the first three hundred million dollars in academically you could take that, and if they do it at three hundred and seventy five, I mean, those first are going to earn three hundred fifty net. Okay, and that's not normal. Usually on the FTP spread, you may get two hundred basis points to two hundred and fifty basis points. So we've got an unusual profitability lift, that with the power of this team. Now you've got provision, right, the first, you got to set aside one-on-quarter and every dollar they do. But that's a sort of a one-time expense. 45:43 So I'd say, number one is the impact from interest income, number one. Number two, would probably be deposit service charges related to any company. And then number three, I think over time is figuring out, how to expand our mortgage. Our mortgage today is a very dominant. I don't know if we shared this. But the NBA comes out with mortgage volume by metro area every month. And the last month that our gentleman shared with me was July. And we were number four in the entire Nashville metro area. And that's not where you're headquartered. I mean, that includes Bank of America, that includes Wells Fargo. So just think about every company in Nashville, everyone. 46:31 We have U.S. Bank regions, we've got Truist, we've got Bank of America, we've got whoever. And the four number one was the . Number two was loan depot, number three was Pinnacle and they do awesome job, they are a great company. And then we were number four. So, our company is very formidable but it's historically been right here. So, I think longer term, that's an opportunity. And the last comment I'll make is Knoxville has done a great job. I think Chris would agree on referring volume to SBA. So there could be some SBA lift, if this Chattanooga team could refer some volume there. 47:13 But Chris, do you want to add anything?

47:15 Yeah, I would say, we're well poised to support that market with our government guaranteed activities based on where we have people placed. And I would expect opportunity to come out of that.

47:27 Just priority, I think the immediate is let's get the loans on the books to get that money out of the seventeen basis points into the three point seventy percent to the four percent, that's step one. Let's get treasury fees and then let's build these other product lines into their mix.

47:45 Thank you very much. Appreciate your time. I'll step out.

47:54 Thank you, Wally.

47:55 I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Tim Schools for closing remarks.

48:01 Yeah, I don't really have any closing remarks. I just want to really commend our team internally, I've invited five or six of them in the room today here to just hear how this works and where we have a great company, lot of bricks laid before us and we're taking it to a new level. Just really -- and thankful and grateful for my teammates. And I appreciate everybody that called on in this call today, it's a growing list and some great names on here, and we really appreciate the support. We're just -- we're working hard every day for everybody. So everybody have a great weekend. Thank you.

48:34 Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.