CapStar Financial Holdings, Inc.
Q2 2017 Earnings Call Transcript

Published: 29 Jul 2017

[Operator:]

Good morning, ladies and gentlemen and welcome to CapStar Financial Holdings Second Quarter 2017 Earnings Conference Call. Hosting the call today from CapStar are Ms. Claire Tucker, President and Chief Executive Officer; Mr. Rob Anderson, Chief Financial Officer and Chief Administrative Officer; Mr. Dan Hogan, Chief Executive Officer, CapStar Bank; and Mr. Chris Tietz, Chief Credit Officer, CapStar Bank. [Operator Instructions] Please note that today’s call is being recorded and will be available for replay on CapStar’s website. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation and instructions will be given at that time. Please note that CapStar’s earnings release, the presentation materials that will be referred to in this call and the Form 8-K that CapStar filed with the SEC yesterday afternoon are available on the SEC’s website at www.sec.gov and the Investor Relations page of CapStar’s website at www.ir.capstarbank.com. Also, during this presentation, CapStar may make certain comments that constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements reflect CapStar’s current views with respect to, among other things, future events and its financial performance. Forward-looking statements are not historical facts and are based upon CapStar’s expectations, estimates, and projections as of today. Accordingly, forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, and uncertainties, many of which are difficult to predict and beyond CapStar’s control. Actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of today. Except as otherwise required by law, CapStar disclaims any obligation to update or revise any forward-looking statements contained in this presentation whether as a result of new information, future events or otherwise. In addition, this presentation may include certain non-GAAP financial measures. The risks, assumptions and uncertainties impacting forward-looking statements and a 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 materials referred to in this call. Finally, CapStar is not responsible for and does not edit nor guarantee the accuracy of its earnings teleconference transcripts provided by third-parties. The only authorized live and archived webcast and transcripts are located on CapStar’s website. With that, I am now going to turn the presentation over to Ms. Claire Tucker, CapStar’s President and Chief Executive Officer.

[Claire Tucker:]

Thank you, operator and good morning everyone. Thank you for joining us for our second quarter 2017 earnings call. If you have the presentation deck in front of you, I direct your attention to Page 4. There are four important themes that we would like to discuss with you today. These include, number one, organic growth of the company remains strong comparing to the second quarter of ‘17 with the second quarter of ‘16. Pre-tax, pre-provision income increased 31%, average loan growth was up 18%, average DDA and NOW accounts increased 14%, and treasury management and deposit service charges increased 13%. Number two, we charged off the existing balance of the non-performing loan relationship that we discussed with you previously. Number three, we will talk about overall asset quality of the bank. And number four, our focus is on delivering strong operating and financial results and we remain committed to delivering a 1% return on average assets by the end of 2018. Moving to Page 5, as we reported in our earnings release late yesterday afternoon, the bottom line results were unacceptable with a net loss of $3.3 million fully diluted EPS or a loss of $0.26 for the quarter. The loss is attributable to a pre-tax charge of $9.7 million on the relationship we discussed with you during the first quarter earnings call. You may recall that we took a specific reserve of $2 million on this loan during the first quarter. Otherwise, strong quarterly operating performance was overshadowed by the conservative measures we took related to this relationship. Pre-tax pre-provision income in the second quarter of ‘17 was $5 million versus $3.8 million in the second quarter of ‘16, a 31% increase. Moving to Page 6, I would like to provide relevant context for the charge-off of the non-performing borrower relationship. Previously, we recorded a specific reserve of $2 million on this credit, which was originated in the healthcare line of business in 2015. In concert with plans for prepackaged bankruptcy filing, an asset purchase agreement was negotiated with the potential purchaser who was backed by a private equity investor. CapStar agreed to fund the debtor in possession loan to bridge the bankruptcy to the sale of the company. Issues emerged, which negatively impacted the potential purchaser’s ability to close, causing our assessment of an expedient outcome to deteriorate. The decision was made to charge-off the existing balance of the loan relationship. Although active recovery efforts continue as we pursue our secured creditor claims and other sources of repayment. By taking a conservative approach and effectively ripping the band-aid off, we will be able to move forward with the momentum that was created by our other operating and financial results in the second quarter. On Page 7, we believe that the overall asset quality of the company remains sound as substantiated by key credit metrics. In collaboration with our credit partners, our bankers do a thorough job of assessing risk characteristics and properly assigning a risk rating to each of their loan relationship. As I have mentioned in the past, during 2016, we conducted a series of deep dives into our primary lines of business and introduced refinements to further strengthen the quality of loan originations. Some of these items included lower levels of acceptable leverage, deeper stress testing on loan request that would involve acquisitions by our borrowers and continual assessment of regulatory, legislative and reimbursement trends impacting the healthcare sector. Moving to Page 8, there are several graphs on this page that provide more quantitative information surrounding loan portfolio. CapStar’s reserves to loans remains healthy at 1.25%. Rather than reducing the reserves to cover the charge-off in the second quarter, we took the conservative approach. With disposition of this credit, our NPAs now totaled $3.2 million. The allowance to NPAs coverage is 386%. And finally, the trend line on our total criticized and classified loans is improving. On Page 9, as I referenced at the beginning of my comments, otherwise strong operating results in the second quarter were overshadowed by the charge-offs that we took. The underlying financial and operating results are solid and organic growth continues as evidenced by some key statistics in the second quarter when compared to the same period of 2016. Again, pre-tax, pre-provision income increased by 31%, average loan growth increased 18%, average DDA and NOW accounts increased 14%, and our treasury and deposit service charges increased 13%. Importantly, we added two new revenue producers in the second quarter who are off to a good start. We have recently engaged Greenwich Associates to complete a study around CapStar’s place in the market in terms of customer satisfaction as well as market penetration. We received excellent customer satisfaction marks highlighted by the ease of doing business, our banker responsiveness and proactively providing advice to our clients. The level of market penetration provides great opportunity for continued organic growth, so great results that validate the very positive impact that our bankers are having and taking care of their clients. I will now ask Rob to provide more color around our operating results.

[Rob Anderson:]

Thank you, Claire and good morning everyone. As Claire mentioned, absent the one charge-off in the second quarter, the underlying performance of the company was strong. Loans grew at 18% on average, with most of that growth coming from C&I and commercial real estate. Our DDA and NOW account balances grew 14% on the quarter and 25% on a year-to-date basis. So while total deposits were mostly flat, the DDA growth shows our focus on growing stable, low cost deposits. And then we continue to grow our overall balance sheet with total assets up 12% for the quarter. As we move down into the income statement, our net interest income grew 15% and non-interest income grew at 4%, which led to 12% total revenue growth for the quarter and 10% on a year-to-date basis. Another metric I would like to highlight is our operating leverage, as you know we have stated that our desire is to maintain an operating leverage at a ratio of two to one. In Q2 our revenue grew 4x faster than our expenses and 2.5x on a year-to-date basis. This shows we are leveraging our expense base as we bring on additional revenue. Although our bottom line net income was served by the one charge-off, our pre-tax pre-provision was up 31% for the quarter and up 22% on a year-to-date basis. Moving on to our loan growth, we experienced loan growth in all areas of the bank, most notably in our core C&I businesses and in commercial real estate. In our C&I line of business, the growth is coming from both our middle market business and business banking teams. As you can see by the chart on the lower right our held for investment ending loan balance is lower than our quarterly average. This is due to two items. First, we charged off one relationship for $11 million at quarter end. And second, we moved $43 million of TriNet loans out of held for investments and into held for sale. As we mentioned before, we started the TriNet business last fall and the team has been busy on the origination front. We were successful in selling a portion of these loans in the second quarter and I will cover this when we get to our non-interest income slide. However, I did want to point out that we moved $43 million of loans to held for sale and is one of the drivers between our quarterly average and our ending loan balances. Lastly, at the end of the quarter, 64% of our loan book is variable rate in nature and predominantly tied to one month LIBOR. So let’s talk about our loan yields. Our loan yield moved up 5 basis points for the quarter to 4.29%. This improvement is due to several moving parts. First, we benefited from higher loan yields on new loan production and our variable rate loans continued to re-price upwards, improving the overall loan yield by 9 basis points for the quarter. However, these improvements were offset by lower loan fees, which is primarily attributable to a large pre-payment fee we received in Q1. Let’s move onto our deposit book. While our total deposits were up slightly over prior year, they were down from Q1. There are some dynamics here worth noting. First, we typically see an influx of correspondent banking deposits during the first quarter with balance peaking right around tax time. Then in early Q2, we see those deposits start flowing out and then building back up over the second half of the year. Those deposit balances dipped a bit more in Q2 relative to prior years which from conversations we have had with our clients is due to increases in their own loan demand rather than any dissatisfaction with our rates or services. As I stated before, we expect these balances to build back up over the second half of the year. Couple of other points I would like to convey here. We have experienced 100 basis point rate movement from the Fed since Q4 2015. However, our cost of deposits has increased 16 basis points during this time. Although a portion of this cost is being masked by our growth in DDA, it does demonstrate our ability to grow core relationships and manage our deposit costs over a sustained period of time in a rising rate environment. Additionally, if you were to take the DDA out of the calculation and look strictly at the cost of our interest bearing liabilities over this time, it would equate to around 25% beta. Lastly, 50% of our deposit book is now in some form of checking account relationship with us. This demonstrates that we are continuing to achieve success in obtaining the operating accounts of our clients and becoming their primary bank. Now, let’s see how all this impacts the margin. Our net interest margin moved up 3 basis points to 3.15%. Our margin continues to benefit from the re-pricing of our variable rate loan book as well as yields on new loan production, which came on at higher yields than our overall portfolio yield. This benefit was partially offset by lower net loan fees, which I mentioned earlier was elevated in Q1 due to a large prepayment penalty and the increased costs associated with the re-pricing of our borrowings and deposits. Additionally, we had some slight balance sheet repositioning due to seasonally lower correspondent deposit balances, which were offset with borrowings. Let’s move to our non-interest income. Our fee businesses produced results that were above the first quarter and above prior year. Our treasury management and deposit service charges continues to show momentum and we have gradually increased our fees associated with wealth management. Mortgage was up from the first quarter due to the seasonal nature of the business, but down from prior year. Margins were lower in Q2 driven by the mix being more heavily weighted towards jumbos and selling some mortgages that had trade issues in the quarter. You should expect the margin on mortgage loans sold to gradually improve from Q2 levels. Perhaps, the standout for the quarter was in our TriNet business, we were able to execute a loan sale that produced $297,000 of fees of income for the quarter. As noted on the previous slides, we have $43 million of TriNet loans in held for sale which has received lots of interest from various parties. Let’s move on to our expenses. We had $8.2 million of non-interest expenses in the quarter, which were slightly lower from Q1. There are a number of puts and takes, so let me walk you through those. First, on the salary and benefits line, we are booking a lower incentive accrual with the credit charges we took this quarter. Our data processing and software expense moved up with the increased volumes and a new software platform in the mortgage line of business. Occupancy expense also moved up with our new headquarters location. And we experienced an increase in special asset expense associated with the credit charges which is in the other category. Lastly, our efficiency ratio is 62% and our expectation is that we will manage to the low to mid-60s for the rest of the year. Looking at our capital on Page 17, while our ratios took a hit this quarter due to the one charge-off, we are still well capitalized by regulatory standards and committed to maintaining this well capitalized status. I know you probably have some questions, so let me turn it back over to Claire to wrap up before Q&A.

[Claire Tucker:]

Thank you, Rob. We are obviously not satisfied with the bottom line results that we posted for the second quarter. CapStar’s strategy remains one of sound, profitable growth. Our credit processes and our risk management system [ph] include ongoing evaluation of our policies and practices to reflect our actual experience, the current and forecasted economic environment as well as legislative and regulatory changes. This is the case for all of our lines of business, but particularly as pertains to the healthcare sector, which is more vulnerable to these external forces. We shared with you some of the pertinent metrics to substantiate our belief that our overall asset quality metrics are improving. Our intention is to capitalize on the momentum created by our operating and financial results in the second quarter. Through our incentive plan design and incumbent goals, we will continue to drive performance throughout the company. I noted the results that we received from the Greenwich [ph] study, the excellent results achieved in customer satisfaction may be attributed to the professional and high performing bankers that we have on the CapStar team. We have wonderful opportunities to continue growing our franchise organically as we take away market share. We remain committed to delivering 1% return on average assets by the end of 2018. In conjunction with our annual multi-year strategic planning process, we have updated our roadmap to achieve this goal, which will be reviewed with our Board of Directors at the annual off-site planning meeting, which is coming up. And finally, we are very appreciative of your continued investment and interest in CapStar. Operator, we are now ready to open the lines for questions from participants on the call.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from the line of Catherine Mealor with KBW. Your line is now open.

[Catherine Mealor:]

Thanks. Good morning.

[Claire Tucker:]

Good morning, Catherine.

[Catherine Mealor:]

First question on the charge-off, the chare-off for the quarter were about $11 million. Can you just clarify how much of that $11 million came from the large relationship this quarter? And then what’s the difference between that and the $11 million?

[Rob Anderson:]

Yes. So, Catherine, it’s Rob. We had a $11.2 million of charge-offs, I believe and then $11 million came from the one credit.

[Catherine Mealor:]

Okay. So when you mentioned that it was a $9 million, could you reference it with a $9 million balance at the last quarter that includes…

[Rob Anderson:]

So, we had a $2 million specific reserve, so the entire charge-off was $11 million. We had $2 million on the reserve last quarter and then we took an additional $9 million charge-off this quarter, so total of $11 million on the credit for the charge-off.

[Catherine Mealor:]

Got it. Okay, that makes sense. Okay, thanks. And then on the loan growth, so appreciate that some of the flat loan growth was from the $43 million of China loans moving and then your SNIC portfolio was down a little bit. So, can you talk about any other strategies or kind of outlook for continued reduction either in the rest of your portfolio that could continue to impact or offset your origination volume that may put some pressure on forward growth from here or do you think this quarter was more of an anomaly and we should see a pickup in growth as we move through the back half of the year? Thanks.

[Claire Tucker:]

Yes, Catherine. Great question. I think that we remain confident that our bankers are going to be able to continue to grow the portfolio as you may – certainly are aware that the competition in the national market is pretty intense and we certainly want to preserve asset quality rather than competing on structure. We will compete on price from time-to-time. So, while I am confident about that, I think that we have got to be mindful of just the competition that’s in this market. We will continue to have movement within our CRE book as we fund up particular projects and they are completed and then go to the permanent market. So, those are just some of the dynamics that are part of our portfolio, but we believe our bankers are out there continually developing new relationships.

[Catherine Mealor:]

And do you feel like in light of this large credit that you issued with this quarter, will there be any kind of change to the risk management process or your appetite for doing the out-of-market healthcare lending from here?

[Claire Tucker:]

Yes, great question again, Catherine. Let me make a couple of comments on that. I believe that the last earnings call, we referenced the fact that couple of the loans that have caused some problems were originated couple of years ago. And as they became problematic, we took a deep dive. We took looks at what had been done properly, what we might have learned some lessons from. And so we have been in the process of continually refining the strategy not just for healthcare, but as we look at our core risk management and our underwriting. And I will give you an example just in terms of the geographic footprint, particularly in the healthcare area, we are very selective with private equity firms that we are dealing with and we are really placing a lot more emphasis on local and direct deals. I think that the internal data that we have, which shows that we are the originator, the lead bank on more and more of the credits that are originated. So, I think those things – those types of things certainly have been enhancements to our credit process. I would say specifically with respect to healthcare couple of things. We have added a very seasoned healthcare banker joined us during the second quarter. We really believe that further strengthens a great team in the healthcare group that we already have. We also during early 2016 formed a Healthcare Advisory Council that is populated with CEOs from local healthcare companies that we really use as a resource to help us have a window into what’s happening in terms of regulatory reimbursement legislative issues that might occur, coming out of Washington. Those are just couple of examples.

[Catherine Mealor:]

Okay, helpful. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Stephen Scouten with Sandler O’Neill. Your line is open.

[Stephen Scouten:]

Sorry about that. Can you hear me?

[Claire Tucker:]

Yes, good morning Stephen.

[Stephen Scouten:]

Hey, good morning. So, one follow-up on the healthcare credit and kind of your outlook overall, as you mentioned, I guess something around acquisition-based deals and a greater trepidation maybe there. This credit in particular in this behavioral deal, was this acquisition-related, is that was that comment is related to or was that just kind of overall risk that you are seeing in that sort of space?

[Claire Tucker:]

I think it’s more overall risk, Stephen, that was not really fundamental related to this particular credit.

[Stephen Scouten:]

Okay, great. And then as it pertains to other originated healthcare credits maybe by the same team of lenders or other similar vintages, are there any other things with those folks and the credits they originated, you have concern about as you look at it or particularly as it pertains to other EV-type relationships or do you feel pretty good about once you did that deep dive about what you are seeing across the rest of the portfolio?

[Claire Tucker:]

I feel good about what we are seeing across the rest of the portfolio. I think the team that we have in place today is strengthened as I mentioned with the new hire that we have had and some other movement that we have made within that group. So I am very confident with the talents that we have on board right now and the remaining portfolio that we have.

[Stephen Scouten:]

Okay, great. And then maybe thinking about this move you guys saw in the loan-to-deposit ratio here, I mean, obviously some of that like you mentioned was seasonal and there was this kind of move in average loans versus deposits and if you will. So I mean should we see that revert back down to maybe mid-to-high 80s next quarter? And what is the potential effect on the NIM as a result?

[Rob Anderson:]

Hey, Stephen, it’s Rob. As I mentioned, we do have a correspondent banking book. That book is roughly around $200 million. What happens typically is banks have an influx of liquidity and cash in the first quarter that peaks around tax time that flows out in the second quarter and then builds back up. So, we do anticipate that book to build back up. This year was a little bit more pronounced. We did talk to all of our correspondent banks. We are hearing from them that they are seeing a lot of loan growth themselves. And we do expect the liquidity to come back through those banks and into us. As it relates to the loan to deposits, I don’t think it will hover around the high 90s. We expect around the high 90s. We expect that to moderate. One of those strategies that we said is that we would tighten up our balance sheet over a period of time. So, I think that would be part of the strategy as well. We are looking at all deposits in terms of the relationship we have with them and our core intention is to grow stable low cost deposits, where we are the main primary bank and where we can have a primary relationship with them. So, we have been pretty selective on the deposit side and we will continue to do so.

[Stephen Scouten:]

Okay, great. And then as it pertains to NIM, the move-up you saw on loan yields was really nice this quarter. I guess, is there a way to quantify how much of that might have been, because C&I loans were relative – were down due to the healthcare move or is that higher than it would have been if you had a kind of a normal contribution between C&I and CRE or how can I think about that?

[Rob Anderson:]

Yes, there is certainly a little bit of a mix in there, because we have different yields on each of those portfolios, but 64% of our book is variable rate in nature and that did re-price as we kind of expected it to. We had a June rate increase in mid-June. So, we would expect some of that to flow through as our loan contracts re-price over the third quarter. But I am not necessarily sure I would point to large movements between the books, I think we are seeing some re-pricing and we expect re-pricing of our variable rate book as rates move.

[Stephen Scouten:]

Okay, great. And then so overall directional trend for the NIM, I mean would you still – I think maybe your guidance was like 3.15% to 3.20% for the year, is that still kind of what you are thinking or 3.15% to 3.25%, is that about accurate?

[Rob Anderson:]

Yes, Stephen. Certainly, the deposits are a challenge, I can tell you, that’s tough right now and there is – and I think I have given you some examples in the past in Nashville, the fight for deposits is pretty intense. So, we are looking at that very carefully and we are watching that, but what I would say is as long as we can control our costs, I think we did a fairly good job in the second quarter, but I am still guiding the NIM around the 3.15% level to 3.25% and we need to prove out that we have some asset sensitivity here. So, we have our work cut out for us as well as other banks in the market.

[Stephen Scouten:]

Definitely. Okay, thanks, Rob. Thanks, Claire. Appreciate the color.

[Claire Tucker:]

Thank you, Stephen.

[Operator:]

Thank you. And our next question comes from the line of Tyler Stafford with Stephens. Your line is open.

[Tyler Stafford:]

Last quarter, you guys seemed pretty confident around that mid-teens loan growth guidance. I am just curious with where balances shook out this quarter, is that what you still feel you can achieve this year?

[Claire Tucker:]

Yes, Tyler, it’s Claire. Yes, I think just based on the comments I made a few minutes ago, I think that we are still planning on and anticipate mid-teen growth, although as I mentioned it is pretty tough in the Nashville market right now and we are not going to sacrifice asset quality just to win a deal, but our bankers are aggressively out there calling. So, at this point, I remain confident that we will be in the low to mid-teens.

[Tyler Stafford:]

And do you look at that on a total basis or on an HFI-only basis when you think about that?

[Rob Anderson:]

Hey, Tyler, it’s Rob. We did have some movement of our TriNet loans out. If you looked at a point-to-point including all in the held-for-sale, we grew about 12%. We are about a $1.39 billion to about $1.70 billion on a point-to-point basis. As Claire mentioned, our focus is on sound profitable growth. So, we are not going to grow just for growth sakes, but it’s going to be choppy it’s not a linear 15% straight up every quarter. Previous quarters, we have had outside of the high-teens and there is going to be quarters where we are going to be on the lower end of that. As we mentioned also, certainly with a $11 million charge-off that impacts our ending balance. We move some stuff to held-for-sale. So, I would say, it could be a little choppy, but the guidance is still there. The market is still robust and we are going to benefit from the market and we are just going to play where we feel we have sound relationships.

[Claire Tucker:]

And Tyler, I would add to that just reinforce the behavior in our commercial real estate book. We have various projects that we will close. We will close a commitment and then require funding of the equity before we put the first dollar in and so then we see pickup in the loans outstanding as the project moves to completion. Then, we can have a drop-off, because that project is completed and goes to the permanent market. So, just by definition, the way the CRE book moves can cause some of that choppiness that Rob referenced. So, those loans are behaving the way that we want them to behave. Projects completed goes to market.

[Tyler Stafford:]

And then on credit in the past, you talked about how the portfolio is going to be lumpy from time-to-time, but overall the appropriate range to think about on charge-offs is around 25 basis points. Do you still think that’s appropriate from here?

[Claire Tucker:]

Tyler, I think if you exclude the charge-offs that we took, which is going to call some variation in that number. I think the core we still feel good about the 25 basis points.

[Tyler Stafford:]

Got it. And then last one from me, Claire, in your closing remarks, you mentioned the incentive plan. I am just wondering how the charge-off this quarter will impact on incentive compensation this year? Thanks.

[Claire Tucker:]

Yes, good question, Tyler. We have a couple of types of incentive plans certainly on the sales side. There are plans in place that measure the profitability of an individual book. The corporate plan, however, is tied to EPS growth in return on assets. So, from a corporate standpoint, there will not be an incentive plan that there is a plan there won’t be a payout because of the impact of this credit.

[Operator:]

Thank you. And our next question comes from the line of Laurie Hunsicker with Compass Point. Your line is now open.

[Laurie Hunsicker:]

Yes. Hi, good morning.

[Claire Tucker:]

Good morning, Laurie.

[Laurie Hunsicker:]

What is your total healthcare at quarter end?

[Rob Anderson:]

At quarter end it’s right around $177 million is the book.

[Laurie Hunsicker:]

Okay. And can you just remind us of that, how much is originated?

[Rob Anderson:]

Yes. Laurie, if you look at the healthcare book, $129 million is participations purchased.

[Laurie Hunsicker:]

Okay. And then just going back to this $11 million credit, just referring back I guess to Chris, your comments last quarter, you took a $2 million reserve saying that was going to be the bottom end of the range and then you anticipated a good probability of an outcome with no loss and obviously we went from no loss situation to a loss situation. And this is now your second C&I credit that’s basically gone to zero this year, so how do we get comfortable with the rest of this book?

[Claire Tucker:]

Yes, Laurie, it’s clear. I think based on the information that we had in the first quarter, we believe that the $2 million was appropriate. And then as I noted, some events transpired that caused that to change. I think with respect to the remaining part of that book, we have continued to evaluate not only the healthcare book, but the rest of the portfolio and the metrics that we see cause us to be confident back to Tyler’s comment around the 25 basis points charge-off.

[Rob Anderson:]

Well, Laurie, I will point out. The other credit that you referred to did not go to zero, there was a charge-off, but there was a substantial portion collected to the funded balance prior to the charge-off and the charge-off only represented 25% of the originated balance.

[Laurie Hunsicker:]

So, that one I had originally at $4.4 million?

[Rob Anderson:]

That’s correct.

[Laurie Hunsicker:]

Initially. And then it was down to $1.1 million balance and then you took a $1 million charge.

[Rob Anderson:]

That was what was collected after the charge.

[Laurie Hunsicker:]

That was what was collected after the charge, okay. So, let me ask you this on those two credits, were those participations or were those originated?

[Claire Tucker:]

Laurie, one was participation. It was the local company headquartered here in Nashville, but we were a participant in that credit. The second one was a direct loan that we made.

[Laurie Hunsicker:]

Okay. And then what percentage of your $177 million, is that a footprint? Maybe not – Rob just to go back to your comments for Tyler when you were talking about the point-to-point 12% annualized growth and you are including the available-for-sale person, which I appreciate. Is your guidance then or Claire, is your guidance then in the low-to-mid teens that includes point-to-point, that includes total plus available for sale. Is that how you are thinking about that in terms of loan growth? And I appreciate that, that number is going to move around, just so that we can track it. Are you thinking about total loans plus available for sale when you talk about loan growth?

[Rob Anderson:]

No, Laurie, it’s Rob. I would not say that I think it’s more about held for investment portfolio.

[Laurie Hunsicker:]

Okay Low to mid teens, okay.

[Rob Anderson:]

Yes. I don’t have this data on the healthcare out of market versus in, but overall about 85% of our loans are end-markets versus out of markets on the total portfolio and we can get more granular on healthcare for you as well. We’ll get back to you.

[Laurie Hunsicker:]

Okay. And then you mentioned you added two revenue producers in the second quarter, that one of them was a healthcare lender. What avenue was the other?

[Claire Tucker:]

The other individual was wealth management, a registered investment advisor that is working in the wealth management unit with the other part of our team.

[Laurie Hunsicker:]

Okay. And is there any thought with respect to your healthcare team of adding another credit person within the mix there or how are you thinking about that? Are you comfortable where you stand?

[Claire Tucker:]

The individual that we added to the team has a great background as both an originator and a credit officer. So, we believe that he adds really multifaceted strength to the team.

[Laurie Hunsicker:]

Okay. And where did he come from?

[Claire Tucker:]

He came from a large regional bank.

[Laurie Hunsicker:]

Okay, great. And then in your comments, you mentioned that your reserves to loans at 1.25%, was flat. I mean, I guess linked quarter it was 1.39% or was that operation just because of the $2 million that you referred to initially?

[Rob Anderson:]

Correct.

[Laurie Hunsicker:]

Okay. So when we think about your reserves to loans targets, round numbers that will bounce around the 1.25% level?

[Claire Tucker:]

That’s correct.

[Laurie Hunsicker:]

Okay.

[Claire Tucker:]

And your point is well made, Laurie. I think what I was trying to say is that we didn’t bleed it down below what our normal level has been. We try to stay in the – around the 1.20% level and we did not take it down lower than that. To absorb the loss, we wanted to make sure we held formal math.

[Laurie Hunsicker:]

Yes, perfect. Okay. And then just going back over to margin here, on a reported basis, which obviously your margin expanded 3 basis points, but if we think about the March quarter, again excluding the non-accruals that would have been closer to 3.19%, right, so you really had sort of 4 basis points of core contraction? Am I thinking about that the right way or….

[Rob Anderson:]

The loan that we had, the large one relationship has been on non-accruals in the first quarter. So, I would say our 3.15% is more of a normal rate for us.

[Laurie Hunsicker:]

In apples-to-apples, okay, okay.

[Rob Anderson:]

Yes.

[Laurie Hunsicker:]

Okay. Okay, great. And then last question, how should we be thinking about the tax rate in the back half of 2017?

[Rob Anderson:]

Yes, I think you can model anywhere from maybe 30% to 32% somewhere around that, it’s going to bump around with our – the new FASB on the ASU piece, but it will be around 30%, 32%.

[Laurie Hunsicker:]

Okay, great. Thanks. I will leave it there.

[Claire Tucker:]

Thank you, Laurie.

[Operator:]

Thank you. And our next question comes from the line of Robbie [indiscernible] with Bank Street Partners. Your line is now open.

[Unidentified Analyst:]

Hey, good morning. Thanks for taking my question. I just have one quick question for you, so you touched briefly on it, but I was just curious if you could expand a little bit about the branch network and any possibility as you see in expanding your branch network, like you said National is one of the hottest banking markets and I was wondering if you have any plans on how to keep up with that, whether it’s organic or inorganic growth?

[Claire Tucker:]

Robbie, the core foundation of CapStar has really been a branch-like strategy. We try to capitalize on the technology platform that we have in place and consequently probably 75% of our deposits come in electronically. With that said, we are always considering opportunities to improve our cost of funds and that could come in the form of a branch expansion or in strategic M&A that we might consider.

[Unidentified Analyst:]

Sure. Okay, great. Thank you. That’s all I have for you.

[Claire Tucker:]

Thank you. Appreciate your interest.

[Operator:]

Thank you. [Operator Instructions] And our next question is a follow-up from Tyler Stafford with Stephens. Your line is open.

[Tyler Stafford:]

Hey, just one more from me. I am working through my model trying to get to your 1% ROA by 4Q ‘18 and obviously TriNet had a nice quarter in the second quarter. What are you assuming for growth out of that business as I think about the next kind of six quarters?

[Rob Anderson:]

Hi, Tyler. It’s Rob. Certainly, we expect growth out of thee business. I think the team has done a great job. We have started out in the fall. We walk before we run. And I think the second quarter was a nice meaningful fee income. We got $43 million on the balance sheet, which is in a held-for-sale position. We have parties that have shown interest in that pool. And I think what you can expect is more loan sales out of that business, the size that can fluctuate from time-to-time.

[Tyler Stafford:]

Okay. And then just Claire, within your 1% ROA target in 4Q ‘18, do you have any interest rate assumptions in there?

[Rob Anderson:]

No, flat rates.

[Tyler Stafford:]

Got it. Thank you.

[Rob Anderson:]

Thanks, Tyler.

[Claire Tucker:]

Thanks, Tyler.

[Operator:]

Thank you. And I am showing no further questions at this time. I would now like to turn the call back to Ms. Claire Tucker, President and Chief Executive Officer for any closing remarks.

[Claire Tucker:]

Thank you, operator and thanks to all of you who joined us this morning. We appreciate your continued interest in CapStar. We appreciate your thoughtful questions of us. And I would say that to the extent that anyone has a follow-up question we certainly feel free to reach out to Rob or me directly. Operator, that’s all I have.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a great day.