CapStar Financial Q3 2021 Earnings Call Transcript

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Provided by Quartr
October 21, 2021

Key Takeaways

  • CapStar reported ROTCE of 16.28% and a Common Equity Tier 1 ratio of ~14%, driven by stable net interest margin (ex-PPP), robust loan growth, fee income, disciplined expenses, and tax management.
  • The bank is expanding into Chattanooga with nine veteran bankers, prioritizing organic growth before acquisitions, buybacks, or dividends, with anticipated meaningful five-year financial accretion.
  • Average deposits hit a record $2.7 billion in Q3, and the adjusted net interest margin held at 3.36%, as excess liquidity is strategically deployed into loans and higher-yielding investments.
  • Loans excluding PPP reached record levels, up $42 million (9.4% annualized), with strong pipelines, a 4.41% loan yield, near pre-pandemic criticized/classified loan levels, and no provision expense required.
  • Management cautioned that 2022 may be a transitional year as nonrecurring PPP fees will drop out, mortgage income could soften, and provisions may rise after pandemic reserve releases.
AI Generated. May Contain Errors.
Earnings Conference Call
CapStar Financial Q3 2021
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good morning, everyone, and welcome to CapStar Financial Holdings Third Quarter 2021 Earnings Conference Call. Hosting the call today from CapStar are Tim School's President and Chief Executive Officer Dennis Duncan, Chief Financial Officer and Christie, 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 atcapstarbank.com. During this presentation, we may make comments which constitute forward looking statements within the meaning of the federal Securities Laws. All forward looking statements are subject to risks and uncertainties and are 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.

Operator

Listeners are cautioned not to place undue reliance on forward looking statements. A more detailed description of these 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 is made during this presentation. We'd also refer you to Page 2 of the presentation slides for disclaimers regarding forward looking statements, non GAAP financial measures and other information. With that, I will now turn the presentation over to Tim Scholes, CapStar's President and Chief Executive Officer.

Speaker 1

Good morning and thank you for participating on our call. We appreciate the 16.28 percent. Our ROTCE is on top of a CET1 ratio that is now Essentially 14%. 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 4 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.

Speaker 1

I just can't say enough about our team. Equally exciting, we announced our expansion into Chattanooga with the addition of 9 highly skilled banking professionals who are leaders in that market. As we've communicated, one of our 4 strategic focuses the past 24 months is putting our excess equity to work. Our preference is to invest in the following order: 1st, organically, such as Knoxville and now Chattanooga 2nd, acquisitions such as Athens, Manchester and Waynesboro 3rd, opportunistic buybacks And 4th, dividends. Each play roles in our available tools, but we have terrific investment opportunities in our core business that will remain our priority.

Speaker 1

Chattanooga is a fabulous market and one of 3 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 3 fastest growing markets. We have included a slide to share a little bit about Chattanooga. It is a great destination if you've not visited with 1 of the nation's first aquariums, Rock City, where you can see 7 states on a clear day, the Chattanooga Choo Choo Hotel, and as we've illustrated, it is home to an important aspect of the Southern lifestyle, the Moon Pie. This is a strong team led by Brian Paris and 6 of his former teammates.

Speaker 1

They've worked together a long time and are extremely connected in the market. They are a true team, a dream team. 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 5 years. Of course, It comes with start up costs, but the level of work and risk compared to an acquisition is incomparable.

Speaker 1

Before turning it over to Dennis, I'll share that we have similar conversations underway in 3 additional markets and the response is very positive. Highly skilled employees are looking for the next bank as their sell or become larger to the extent they feel it is harder to serve their customer were no longer as 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 it's becoming a more frequent occurrence. Dennis, I'll now turn it over to you to cover the financial results for the quarter.

Speaker 2

Thank you, Tim, and good morning, everyone. On Slide 11 of our deck, You'll see that our net interest income was $23,000,000 for the quarter, consistent with the 2nd quarter. The net interest margin was 3.12 percent for the quarter, down 14 basis points, primarily due to record levels of deposits and slightly less loan PPP fees in the 3rd quarter. Our adjusted NIM remained stable at 3.36 for the quarter. The adjusted NIM includes the impact of excess deposits, which adversely impacted the margin by 40 basis points and PPP loan forgiveness fees, which favorably impacted the NIM by 16 basis points.

Speaker 2

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. On Slide 12, Our average deposits of $2,700,000,000 for the quarter were at a record level. Average DDA and NOW deposits were also at record levels for the quarter and increased $88,000,000 from the 2nd quarter. Our core markets continue to hold large levels of deposits consistent with the prior several quarters. Deposit costs continued to decline in the 3rd quarter and were 2 basis points lower as we continue to lower deposit rates and benefit from higher non interest bearing deposits.

Speaker 2

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. On Slide 13, Total loans less PPP were at record levels at quarter end and grew $42,000,000 or 9.4 percent annualized in the 3rd quarter. We continued to build out the Knoxville market, added some additional bankers in Middle and East Tennessee and continued to strengthen our loan pipelines. Our loan pipelines continue at record levels and remain strong across all of our markets. Total PPP loans were $64,000,000 at the end of the quarter, down $46,000,000 from the 2nd quarter.

Speaker 2

Total unearned PPP fees at the end of the quarter totaled $2,200,000 Our loan yields remained strong and were 4.41 percent for the quarter, With loan coupons up 6 basis points in the quarter to 4.03%. On Slide 14, Non interest income was extremely strong in the 3rd quarter with record levels of revenue in deposit service charges, interchange and debit transaction fees and Wealth Management. TriNet had a tremendous quarter with almost $2,000,000 in revenue. SBA had a nice quarter with $911,000 in fees, and mortgage revenues were also up for the quarter and continued to see Healthy spreads offset slightly by volumes. Slide 15 shows our non interest expenses, which were $18,400,000 for the quarter, which resulted in an operating efficiency ratio of 53.06%.

Speaker 2

Our core bank, which excludes mortgage efficiency ratio was 50.58%, 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. With that, Chris, I'll turn it over to you to discuss our credit position. Thank you, Dennis.

Speaker 3

The good news is that I can be brief. Turning to Page 17, we reaffirm and underscore our Our continued commitment to our community banking strategy emphasizing growth through end market relationship development. With this, we also remain committed to our robust risk management on These commitments continue to show results as noted on the bottom of Page 17. 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 end market relationship development.

Speaker 3

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 $33,400,000 to 5 borrowers. 85 percent of this total, that is $29,000,000 are with 3 borrowers that are well situated, well located, New hotel projects in Nashville, having both good capital and good sponsor support. These 3 are on principal only deferrals with the borrowers continuing to pay interest on a timely basis.

Speaker 3

Each of these is 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 scheduled. The remaining two loans are 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 and I, principal and interest, but the balance sheet Exposure that we have carries a 75% guarantee. Turning to Page 18. Please note that as we indicated in the Q1 earnings call, Our past dues have continued to reduce, and we have continued to maintain them at acceptable levels for the last three quarters.

Speaker 3

As I indicated earlier, There is still room in our minds for improvement. 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, it is important to note that our level of criticized and classified loans has nearly returned to pre pandemic levels of approximately 2.5% and 1.4%, respectively. Consistent with these low levels of criticized and classified assets, Our net charge offs remain at very low levels. Given these positive quality trends and low loss results, as you see on Page 19, Our assessment did not require a loan loss provision in the Q3, and we believe that our level of reserves on multiple basis of presentation remain well situated to cover any lingering residues that we may still experience as a result of the pandemic.

Speaker 3

With that, I'll turn it back over to you, Tim.

Speaker 1

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.

Speaker 1

A closing comment for those of you that model and project financials, Our outlook is very positive and strong. However, be mindful next year is 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. Operator, we're now happy to answer questions.

Speaker 1

Thank you everyone for your time this morning.

Operator

Now first question coming from the line of Stephen Scouten with Piper Sandler. Your line is open.

Speaker 4

Hey, good morning, everyone.

Speaker 1

Hey,

Speaker 4

A lot going on, all of it sounds very encouraging, so 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 2, 3, and 4, and etcetera. But Can you give us an idea of 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 To Knoxville at this point in time?

Speaker 1

I would say it would be larger. Knoxville is a super team. It was really even to this point, was 3 commercial relationship managers. They began in February of 2020, The month of the pandemic and worked out of their houses through November. So the 4th commercial relationship manager, they didn't start till about April of this year.

Speaker 1

So this is 5 that are starting day 1. They'll be in an office. Yes, we're still in the pandemic. I don't want Minimize that, but it's not like it was last summer where it was locked down. So I think a bigger team, and not the same So in total, they've got a close to $600,000,000 portfolio today when you add them all up.

Speaker 1

That doesn't all walk over day 1, but we certainly expect that on average, not every one and every year is different. They'll probably generally produce between $20,000,000 to $25,000,000 a person. And we're hopeful that we'll go towards $500,000,000 to $600,000,000 by the end of that year, 5. And there's just a lot of variables too. I mean, they're meeting actually this morning.

Speaker 1

They're having breakfast with 1 of the top bankers in Chattanooga, So, we're just real excited and we put in some of the modeling we looked at to see if it was a good use. We're trying to weigh You can always just go, I could buy $30,000,000 of stock back today if I wanted to. 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 invests in our business in a high growth market and, just one of the best teams in Chattanooga.

Speaker 2

Stephen, on Page 7 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 And this kind of lift out.

Speaker 4

Sure. And then, Tim, I think you noted 3 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?

Speaker 1

Well, a couple of things. I do not intend to take on 3 more and have 4. But I do think that the next 18 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 2. And it was a trade off because I know a lot of public investors are quarter to quarter.

Speaker 1

We're trying to build a great bank for the long term. And so It's like anything. It comes with a little more dilution year 1 than an acquisition, but it's much more accretive and much lower risk. So I'd say I'd love to have 2, and there's 3 other markets. Generally, we're focused on Tennessee.

Speaker 1

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 3 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. So I would say that we're spending 99% 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.

Speaker 1

And on this one, this was an inbound call. This was not an outbound call from us.

Speaker 4

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 market and maybe a

Speaker 1

I do. And everybody looks at that differently. I mean, obviously, there's a lot of smart people in this industry. One person I spend a lot of time with It's Julian Abdi at Capital Research in San Francisco and he's taught me a lot. And you can do a lot of stuff to increase EPS, But it's not really a good return on capital.

Speaker 1

And so I'm just trying to be a great steward to the shareholder. And I know there's 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. 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.

Speaker 1

You're not going to get a 30% IRR buying it at this level today. So that's our focus.

Speaker 4

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.

Speaker 1

Okay. Thanks, Stephen.

Operator

Our next question coming from the line of Brett Brad Rabatin with Hovde Group, your line is open.

Speaker 5

Hey, good morning, guys. Good morning, Brett. Hi, Brett. Congrats on the quarter and the new hires. That was great.

Speaker 5

I wanted to talk about the margin, Dennis. 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, the pace of it and maybe the expectations for the core margin versus the stated one over the next few quarters?

Speaker 2

Yes. I think, Stephen, the we have I mentioned we have $2,200,000 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. So And then really this particular quarter, we had a significant Increase in the average deposits that were on hand during the quarter.

Speaker 2

So that negatively impacted the margin, 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. And so we have purposely not continued to Really grow the investment portfolio. We think and feel and believe that loan growth in Nashville, loan growth in Knox And now in Chattanooga and potentially other places is the better way to manage that.

Speaker 2

So I think that we have Darling helping us in looking at Our margin modeling and we believe we're really, 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'll really be in good shape.

Speaker 5

Okay. Appreciate the color there. And then I was also curious about fee income, which was obviously a strength in the quarter. And TriNet 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 TriNet And then maybe the SBA operation and how you see that playing out in 2022?

Speaker 2

We'll let Chris Tietz, who 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?

Speaker 3

Yes, Brett. We avoid giving specific guidance on future expectations Because there's a lot of variables. I will say, particularly with TriNet, 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 2 or 3 quarters for the next 2 or 3 quarters. Having said that, government guaranteed and SBA lending is getting a firm footing as they've gotten And I expect that to increase over time.

Speaker 3

I don't want to give specific guidance on that right now.

Speaker 5

Okay, Fair enough. Appreciate all the color. Thanks, Brett.

Operator

Our next question coming from the line of Jennifer Demba with Twist Securities. Your line is open.

Speaker 6

Hey, this is Brandon King on for Jenny. Good morning.

Speaker 1

Hey, good morning, Brandon.

Speaker 6

Hey, yes. So core loan growth was pretty strong in the quarter, although a bit softer than last quarter. But I just wanted Get more color on what your customers are feeling as far as their investment decisions, how utilization rates are trending and your outlook for loan

Speaker 1

I'd say that, I mean loan growth Steady. Our pipeline is over $400,000,000 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. CapStar, when I came, was really built on 4 people. And So, strong pipeline across a lot of people.

Speaker 1

Chattanooga will only add to that. And I'm not really a big guidance person because you seem to me to always get hurt more than it helps you. I'd rather just and post numbers and be someone that is viewed that while they do what he says. 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 8% organic in Tennessee, no participations, no shared national credit, reasonable margins, reasonable credit risk Going forward, obviously, Chattanooga will add on top of that.

Speaker 1

So I got to play with that math and look at it a little bit. But I'm just real excited with how we've transformed. Again, I'd see on the call list here, Again, I see on the call list here some of the folks that have called in. And there's no secret that CapStar is a bank that historically had not performed. And it was up to 32% or 33% shared national credits at one time.

Speaker 1

We're at 1.9%. 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.

Speaker 6

Okay. 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 2022 with obviously the Chattanooga expansion and the hiring pipeline. Just want to get a sense of where you think expenses will shake out in

Speaker 1

the near to medium term?

Speaker 2

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 Q3, we had some catch up in across Our incentive comp and our mortgage comp incentive accruals, so not only did we control On a bank only efficiency ratio of 50%, but included in that 50% were some additional things. 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 2 banks behind us, all those conversion costs that happened in the end of last early this year. Those are behind us.

Speaker 2

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, it's gone from mid-60s down ratio has gone from mid-60s down to the high-50s and now trending very favorably. So I mean, pretty good is kind of an understatement from my

Speaker 1

Brandon, here's 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 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.

Speaker 1

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, Operating the 50% to 55% consistently. 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 12 months because you're making a big investment. But I just when you think about CapStar, our goal we have 4 key drivers.

Speaker 1

It's something Tom Garrett taught me at National Commerce. One of them is the efficiency ratio, and our goal is less than 55%. 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 provisioned assets to $180,000,000 Historically CapStar has been about $140,000,000 Many people sort of Chuckled and commented that that's going to be a good luck, that's going to take some time. We've made tremendous progress.

Speaker 1

And it's elevated this quarter, obviously, with PPP and others, but We're getting real close to a consistent core repeatable 180. So those are the kind of metrics I'm looking for is a 50% to 5% efficiency in our core pre tax pre provisioned assets that would be 180 or better repeatable. Okay.

Speaker 6

Thanks for all the color. Thanks for answering my questions.

Speaker 2

Sure. Thanks, Brandon.

Operator

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

Speaker 7

Thanks. Good morning.

Speaker 5

Hey, good

Speaker 8

morning. I

Speaker 7

wanted to circle back on the margin and the loan yields this quarter were up, which was great to see and I don't think anywhere else, and so I just wanted to get a little bit of color of what's driving that, where maybe 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.

Speaker 1

Well, I mean, we're having loan production again. Dennis talk about the actual yields. But as I said, we had our all employee call shows today and Ken Webb was giving out the awards and it Gosh, you must have mentioned 10 names. And really, I mean, we're having loan production all over the counties And in 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.

Speaker 1

And Chris or Chris, you want to add something?

Speaker 3

Yes. I would just going on, if I just look and say the last 30 to 60 days, Catherine, Our going on yield on larger transactions has been in the 3.70s and in smaller transactions, it's been in the 4.50s.

Speaker 1

And we're being disciplined. It hadn't been a lot, Catherine, but we have a very disciplined pricing and we pass Our loan growth could have been higher. And I'd say one of our bankers, Lee Hunter, is one of the best I've ever worked at where he's very disciplined and he will say, hey, I just don't think we should go to that rate. And so, And he will say, hey, I just don't think we should go to that rate. And so our loan growth could have been a lot more.

Speaker 1

We see people doing loans at 3.25 or 310 or whatever. And there are certain spreads we're looking for over the matched FHLB curve that we price to. And If we don't get that spread, we'll just say, hey, you got a great deal customer, I'd go with it. Congratulations.

Speaker 7

That's really helpful. Thanks. And then on expenses, appreciate you don't want to give specific guidance, but maybe just one line item with the data processing and software line, which looks like it was down. And just wanted to see if that's a line that should kind of bounce back to where we saw it last quarter or if that's a better run rate?

Speaker 1

It should be more at this run rate. A lot of that was related to the processing fees related to PPP, We used a 3rd party system to administer that. So, it should be more to a more normalized level now.

Speaker 7

Okay, great. Thanks so much. Congrats on the quarter and the Chattanooga expansion.

Speaker 1

Okay, thank you.

Operator

Our next question coming from the line of Freddie Strygline with Ginnie Montgomery. Your line is open.

Speaker 9

Just Wanted to ask, just stick it back 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?

Speaker 1

I would say give and take, it's a big market out there. I mean, I welcomed 5 to 7 new employees this week. I mean there's a lot of people. We're all living in an unusual environment, right? You go to restaurants and they're still closed early and all this But there's still a lot of good hard working folks that are wanting to come to work.

Speaker 1

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's I think it can be managed.

Speaker 9

Got you. And then I know you said buybacks are going to be more opportunistic just given where the Does the move into Chattanooga make any other capital deployment options, less likely whether it's a dividend increase down the road or something like that or does it is this just kind of more of a piece of the overall strategy where you kind of walk and talk at the same time?

Speaker 1

No, I think it's like I said before, they're all tools, right? And I think we've said this before, but The last 18 months have been an unusual period. So we just went through our annual strategic plan and this time last year, it was so different. We were saying, gosh, it's going to be 3 years of everybody was saying rates were going to stay low for 5 years, And we thought there's going to be 3 years of higher charge offs and provision expense. The plan is that looks so different.

Speaker 1

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 20%. So I think you'll see balanced tools. So probably should anticipate Another dividend increase this coming spring and we're working it closer to 20%. And so I'd just say a balanced 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, but I recognize we've got a certain amount of retail shareholders.

Speaker 1

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 The ones that I would like to really reserve for opportunistic, because I just think we have such great investment opportunity.

Speaker 9

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

Speaker 2

Thanks, Patty.

Operator

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

Speaker 8

Thanks. Good morning, guys.

Speaker 1

Hey, Wally.

Speaker 8

Hi, Wally.

Speaker 2

Hi, Wally.

Speaker 8

Most of my questions have been asked and answered, but I did want to just circle back on Chattanooga and then some of the commentary around maybe even more teams. 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?

Speaker 1

Absolutely. So the model we want to do I admire a lot of banks. I just I was fortunate to be trained in 2 of the best really ever. And I admire Pinnacle in our market. I admire Service First down the road and Art Seaver over at Southern First.

Speaker 1

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 an office team leader or a client service executive and then a portfolio manager. So as we put out in our release, This team right now, as of today, they will start with 7 people in the market physically, and that will be 5 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.

Speaker 1

There will 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 would prefer not to have that. And No teller line, no ATM, no drive thru and those folks would be assisted in service by them and then a portfolio manager. Here in Nashville, we added 2 additional members to our loan operations team to help handle the volume. And really, I've learned a lot just Service First has been a great success.

Speaker 1

And here in Tennessee, If you came here and stayed 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 $1,000,000,000 in loans, $700,000,000 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.

Speaker 8

Okay. That's very helpful, Tim. Thank you. And then If I look at your loan mix and Pinnacle's loan mix, I mean, the mixes are 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.

Speaker 1

Similar, similar. And again, I'm just looking at the names that are on this call right now. And many of these have Provided me great counsel since I joined. And every bank I've joined has had opportunity and challenges. And I hope he won't get mad at me mentioning, but one of the things I'm proudest of is one of the first people I met with when I got here was Jerry King at Bank Funds.

Speaker 1

And he was pretty frank and direct. And I didn't know a lot about CapStar when I joined. And he said, Tim, you 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 got to say, I'm real proud that Jerry is on the phone today. And I appreciate that, Jerry.

Speaker 1

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 were making their living off Doing Shared National Credits and getting incentives. We don't have that anymore.

Speaker 1

And so this Chattanooga team is Tennessee based loans, not participations, not Shared National Credits, Operating companies, industrial real estate, collateral, banking the owner. So I think it's consistent with the new CapStar. And We're just really couldn't be more excited to have them join.

Speaker 2

And Wally, that's Okay. 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, but discipline and focus and really trying to provide a really high performing bank that all of our constituents will be proud to be associated with.

Speaker 8

Okay. Thank you for that. Tim, I don't know who this Jerry Keane guy is, but I might have to Follow-up to you offline to get an introduction. Just kidding. Hi, Jerry.

Speaker 8

So My last question, you talked about you're in discussions with Three different teams in 3 new markets. And then during the Q and A, I thought I heard you say that Yes, you're not sure you'd hire 3 new teams, but you might consider 2. 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 misunderstood it.

Speaker 1

So there are 3 right now that there are different levels of discussion. And I would not take on 4, right? I would not take on those 3 in Chattanooga. That would just be too much. You would hit earnings too much, it would be a lot for our team.

Speaker 1

But I do think it would 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 6 more months. I mean, you're What you don't want to do, I work for 1 company, it's only 1, that the gentleman, his strategic focus was filling in a PowerPoint And so we would say, gosh, there's a hole in Savannah and we are going to go to Savannah, dog on it, and it doesn't matter who we hire.

Speaker 1

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've got to wait for great people come to you. And it's really a situation where you've got to be prepared when they are frustrated.

Speaker 1

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 neat to add a second one over the next year. And I just don't know if that will happen next week or in 6 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'll produce what they say they can produce.

Speaker 8

Okay. I think I understand though. I thought you were talking about teams in new markets not building on teams and the team in Chattanooga. So, got 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 are those not necessarily market specific for you guys?

Speaker 1

I think long term, I think the most immediate right, if you think about it just mathematically, the most immediate is we've got $400,000,000 of excess liquidity like many companies. And so if their primary focus can be loans, they're going to let's just say they can put on loans at 3.75 We've got that money today. The first $300,000,000 they do, we've got that money invested at 17 basis points. And that's the excess liquidity. So just the first $300,000,000 academically, you could take that and if they do it at $375,000,000 I mean those first are going to earn 3.50 Net, okay, and that's not normal.

Speaker 1

Usually on an FTP spread, you may get 200 basis points to 250 basis 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 1.25 on every dollar they do, but that's a sort of a one time expense. So I'd say number 1 is the impact from interest income, number 1. Number 2 would probably be deposit service charges related to any company. And then number 3, I think over time, is figuring out how to expand our mortgage.

Speaker 1

Our mortgage today is a very dominant. I don't know if we shared this, but The MDA 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 4 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.

Speaker 1

So just think about every company in Nashville, Everyone, we have U. S. Bank, Regions, we've got Truist, we've got Bank of America, we've got whoever. And the 4, number 1 was the Quicken Loans, number 2 was LoanDepot, Number 3 was Pinnacle, and they do an awesome job. They are a great company.

Speaker 1

And then, we were number 4. 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.

Speaker 1

But Chris, do you want to add anything? Yes.

Speaker 3

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.

Speaker 1

Just priority, I think the immediate is let's get the loans on the books to get that money out of the 17 basis points into the 3.70 to the 4%. That's step 1. Let's get treasury fees and then let's build these other product lines into their mix.

Speaker 8

Thank you very much. Appreciate the time. I'll step up.

Speaker 1

Thank you all.

Operator

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

Speaker 1

Yes. I don't really have any closing remarks. I just want to really commend our team internally. I've invited 5 or 6 of them in the room today here to just hear how this works. And we have a great company, lot of bricks laid before us, and we're taking it to a new level.

Speaker 1

Just really am thankful and grateful for my teammates. And I appreciate everybody that called on 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 have a great weekend. Thank you.

Operator

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

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