CapStar Financial Holdings, Inc.
Q3 2017 Earnings Call Transcript

Published: 16 Oct 2017

[Operator:]

Good afternoon, ladies and gentlemen and welcome to CapStar Financial Holdings Third 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 earlier today 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 the 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. Good afternoon everyone and thank you for joining us for our third quarter 2017 earnings call. As we recorded this morning, CapStar earned net income of $4.4 million or $0.35 per share on a fully diluted basis for the three months ended September 30, 2017 compared to net income of $2.1 million or $0.20 per share for the three months ended September 30, 2016. During our earnings call for the second quarter, I commented that our intention was to capitalize on the momentum created by our operating and financial results. We believe our third quarter results demonstrate our positive momentum toward this goal. If you have the presentation deck in front of you, I direct your attention to page four, so that I may share with you some of the drivers of this performance. Our vision for CapStar is to be a high-performing financial institution known for sound, profitable, growth. In the context of soundness, nonperforming assets to loans plus OREO totaled 32 basis points and we had no charge-offs. Additionally, we received $1.9 million recovery on a healthcare loan which was charged off in the second quarter of this year. Third quarter profitability resulted in record quarterly earnings of $4.4 million and return on average assets of 1.28%. The net interest margin improved by 11 basis points to 3.26%, positively impacted by repricing on our variable rate loan book. Comparing the third quarter 2017 to the same period in 2016, average loans grew 8%. Excluding the healthcare loan book which I’ll discuss in more detail in a moment, average loans grew 13%. Our bankers continue to deepen relationships with customers as indicated by 27% growth in average DDA balances during the quarter. Research recently conducted by Greenwich Associates further validates the strength and effectiveness of our bankers. We have received excellent customer satisfaction marks highlighted by the ease of doing business, our banker responsiveness and proactively providing solid financial advice to our customers, and significantly treasury management and other deposit service charges increased 54% over the same timeframe. I would now like to ask Rob to discuss the summary financial results for the third quarter.

[Rob Anderson:]

Thank you, Claire and good afternoon everyone. As Claire mentioned, the CapStar team delivered record earnings of $4.4 million or $0.35 earnings per share on a fully diluted basis in the third quarter. Additionally, the earnings produced a 1.28% ROAA and we saw expansion in our net interest margin for the quarter. As you look at the balance sheet, you will see our growth for the quarter was lower than our previous guidance but on a year-to-date basis it is in line with our guidance. Loans grew on average 8% for the quarter and 15% on a year-to-date basis. Deposits shrank for the third quarter but we did grow our transaction accounts 8% for the quarter and 18% on a year-to-date basis. This performance continued to demonstrate our ability to attract, retain and deepen our relationships with our clients. As we move to the income statement, we saw growth in both our net interest income and our noninterest income. We booked a negative provision number this quarter as we experienced a decline in our loan book on a period-end basis. Expenses were relatively flat with prior year and we experienced higher than normal operating leverage, which allowed more earnings to drop to the bottom line. Additionally, our effective tax rate came in lower with benefits from the new accounting guidance around stock compensation. We will discuss this in more detail in a bit. Let me turn it back to Claire for a deeper dive into our asset quality and loan growth.

[Claire Tucker:]

Thank you, Rob. I draw your attention to page six. You will note that we continued to maintain healthy levels of reserves to total loans, specifically the allowance for loan and lease losses was 1.45% for the third quarter. The ratio of non-performing assets to loans plus OREO was flat quarter-to-quarter at 32 basis points, notably at a low point over the quarters depicted in the chart. Similarly, the ratio of criticized and classified loans to total growth loans improved slightly to 2.6% in total. Having said that, we made adjustments to certain qualitative measures in our ALLL model during the quarter to reflect our assessment at a macro level of the current geopolitical environment, a dynamic healthcare legislative environment, and an evolving interest rate scenario. Consistent with our model, the calculated allowance was 1.45% for the quarter, as Rob mentioned, due to a decline in our loan portfolio in the quarter, a negative provision of $200,000 is put. Moving to page seven. Comparing third quarter 2017 to third quarter 2016, average loan growth was 8%. Both our commercial and industrial, and retail teams generated solid production during the quarter. It is important to note the capacity for loan growth that exists in our unfunded commitments. At the end of the third quarter, unfunded commitments totaled $454 million. We have pointed out previously that our loan portfolio will note reflect straight line growth every quarter due to the nature of our business model. For example, in the non-owner occupied commercial real-estate book, we will fund the project until completion at which point the borrower typically looks to the permanent market for long-term financing. We experienced pay-offs on multiple projects in the third quarter that essentially offset funding on new projects. In prior quarters, we have shared with you our ongoing refinement of the healthcare strategy. This is done in concert with our strong team of bankers, as well as the healthcare advisory council that was formed last year. As a reminder, this advisory council is populated with CEOs from local healthcare companies. They have been tremendous resources to facilitate our view into what is happening in terms of regulatory and legislative issues in the healthcare space. Our healthcare team evaluated many financing opportunities during the quarter, but declined a large percentage due to structure, leverage or financial performance at the underlying companies, consistent with our underlying strategy in this sector. Effectively, the team is pivoting a bit, so it will take a few quarters to rebuild. This client segment was also impacted by payoff on several loans that were refinanced by more aggressive lenders in the FINCO space. In the chart at the bottom right section of the page, I will point out that there was some noise in the CRE loan category due to a reclassification of TriNet loans from held for investment to held for sale during the second quarter of 2017. This resulted in a difference of $24 million on average loans between the quarters. Moving to page eight of the slide presentation, there are several charts related to our loan participation. As we have pointed out previously, these loans are not transactions purchased from a syndication desk where there is no relationship with the client. Conversely, we have direct calling efforts on these companies and have developed non-credit depository relationships with many. The goal is to continually cultivate the depth of the relationships with these clients. In the upper left hand chart, you will note that loan participations have declined to $264 million or 27% of growth loans. Importantly, we continue to increase the number of loan relationships in which we are the lead lender or arranger. Transactions that we lead have increased by 39% since the fourth quarter of 2015. We have also broken down loan participations by line of business on the bottom right hand side of the page so that you have further visibility. Although we continue to provide you with this detail, the important takeaway is that we choose to engage as co-lenders as a means of managing concentration by sharing credit exposure with other banks that you are familiar with that operate in our primary markets. Rob, I will turn it over to you to continue with further details relative to the financial results.

[Rob Anderson:]

Okay. Thank you, Claire. On our loan yield, we expanded our loan yield 26 basis points in the third quarter, predominantly driven by the repricing of our variable rate loans. Additionally, we experienced an increase in loan fees for the quarter but much of this 8 basis-point benefit was due to the accelerated amortization that the loan fees would pay off. This is the second quarter in a row that we have experienced loan yields above our portfolio average. This quarter, the loan yield on new loan production was 4.87% and last quarter it was 4.47%. This trend should help support our loan yields in the coming quarters. Let’s move to our deposits. Our overall deposit book shrank this quarter but with lower loan balances and our desire to increase our loan-to-deposit ratio, we don’t view this as a negative. As stated earlier, we did grow our DDA balances, which is a stickiest relationship product and demonstrates that more clients are bringing their primary operating account over to us. DDA balances grew 14% on a sequential basis and 27% year-over-year. As it relates to our deposit cost, we expect our deposit cost to increase whenever the FOMC raises rates or when market expectations of rate increases are high. As you can see by the graph on the upper right hand side of the page, we held our deposit cost to a 23% beta during the past 100 basis-point increase in the Fed funds movement. We do expect this beta to increase slightly with future rate hikes but our game plan is to lag any increases and to hold cost down through mix improvement. Let’s move to our margin. Our net interest margin expanded 11 basis points for the quarter, driven primarily with repricing of our variable rate loan book. Additionally, the increase in loan fees helped drive this improvement but the majority of the fee benefit was due to elevated payoffs and the acceleration of fees. The repricing of some of our deposits and our FHLB bonds worked against us to some degree but our overall assets repriced more than our liabilities, demonstrating our asset sensitivity. This is the second quarter in a row in which we have operated with our loan-to-deposit ratio at the upper end of our guidance and we expect this trend to continue. We believe we can hold our margin around this level near-term, given the encouraging yield on our new loan production and a probability of future rate increase. Again, 65% of our loan book is variable rate in nature and predominantly tied to one month LIBOR. Let’s move to our noninterest income. Our noninterest income to average assets was 98 basis points for the quarter, which matches a record we recorded last year. First, we had a 54% increase in our treasury management and other deposit service charge line. This increase is being driven by the full implementation of our largest treasury management client to-date. Next, you’ll notice our TriNet business has steadily increased our production and loan sales since we acquired the team last fall. With $32 million of TriNet loans on our books at quarter end, we are poised for future loan sales of similar magnitude. Traditionally, the third quarter is the strongest quarter of the year for mortgage. The premium on mortgage loans sold in the quarter was stronger than our year-to-date average. Let’s move on to expenses. Our overall expense base was just under $8.5 million and was slightly higher than Q2 but flat to prior year. Our efficiency ratio came in at 59.6% and better than our previously guided range. As you may recall, our expense base is running a little lighter than normal as we are booking a lower incentive accrual with this year’s performance. Having said this, you should expect the fourth quarter to be in a similar range as this past quarter and then bump up in 2018. Looking at the individual line items, salaries and employee benefits increased from Q2 due to a couple of new hires, the cost to acquire those individuals and increased incentive expense associated with our TriNet loan sale. Data processing and software expense increased during the periods presented due to an increase in the volume and transactions and implementation of new software in our mortgage business. Professional fees decreased during the period presented, primarily due to fees associated with going public in 2016 and our change in external audit firms for 2017. The increase in equipment expense for each period is related to increase in cost of our managing our IT network. Regulatory fees increased primarily due to the change in the FDIC’s assessment methodology. So, let’s talk about our tax rate. In Q3, our effective tax rate came in lower than what we had booked in prior quarters and prior years. First, with the large credit charge-off in the second quarter, we are booking to a lower overall effective tax rate as our year-to-date taxable income is lower. Next, related to the new accounting standard for stock compensation, we continue to recognize tax benefits as options and warrants are exercised. This lowered our effective tax rate to 25.5% for Q3. As we look into 2018, we will be coming up on our 10-year anniversary, and many of the original organizers and leaders within our company will have options and organizer warrants expiring. Assuming these, our exercise before they expire in Q4 of 2018, we will experience a larger than normal run-rate benefit on our tax line. We provided you with a sensitive analysis, so you can see the magnitude of the benefit with stock price fluctuations. What we don’t have clear visibility on is when the individuals holding these securities will decide to exercise, but we do expect they will occur in 2018. Let’s move on to capital. With record earnings and some stock options being exercised in Q3, all of our capital ratios increased from Q2. I know you have a lot of questions, so let me turn it back to Claire for some closing comments.

[Claire Tucker:]

Thanks, Rob. To reiterate our stated strategy, we remain committed to delivering sound, profitable, growth. Reported net income of $4.4 million or $0.35 per share represents a record quarter. With a focus on all of our shareholders, we are committed to consistently delivering strong financial results throughout the company. Overall asset quality metrics are trending positively. More detail is provided in the historical financial information in the appendix of the earnings deck. I have previously referenced positive results from the market survey recently completed by Greenwich Associates. The bottom line is that CapStar Bank is a well regarded in terms of customer satisfaction and specifically are cited for ease of doing business, responsiveness and proactively providing advice to our clients. We believe that these attributes will be additive to our stated goal of increasing market share of our franchise through organic growth. The 27% increase in average DDA balances is a meaningful indicator of the relationships that our bankers have developed. We remain committed to delivering sustainable return on average assets of 1% by the end of 2018. And finally, we are appreciative of your continued investment and interest in CapStar. Operator, we are now ready to open the line for questions from participants on the call. Thank you.

[Operator:]

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

[Catherine Mealor:]

Hi. Good afternoon. My first question is on credit. And so, I just wanted to follow up with one of the comments you made Claire, about the reserve build that you had this quarter. And so, to be clear, the reserve build that we saw with all qualitative, were there any specific credit in which you saw deterioration that you think warranted additional provisioning or it was really just kind of a broad, qualitative boost to the reserve, given all this -- items that you mentioned?

[Claire Tucker:]

Yes. Great question, Catherine. You know that our nonperforming assets to total loans was flat, our criticized and classified loans were flat quarter-to-quarter. So, I think that reinforces the fact that we really were looking at it from a macro level. I think everything you read in terms of the geopolitical environment, the uncertainty around the healthcare legislation and regulatory environment, interest rate trending were sufficient enough to cause us to use our model and the qualitative assessment components as we develop the ALLL. So, I would say it was all but the qualitative.

[Catherine Mealor:]

And would you envision continuing to build the reserve from here or do you think it’s more of just kind of keeping it now at elevated level, given that?

[Claire Tucker:]

That’s a great question as well, Catherine. And what I would say is that we will -- every quarter, we evaluate our ALLL. We have a very sophisticated model. I would anticipate that as we go through that process, we will continue to look at the items that I outlined in terms of the macro scenario. And as those elements, either improve or have more certainty around them, I could see us beginning to pull that reserve back down.

[Catherine Mealor:]

Okay. And then, maybe one follow-up on loan growth. How we should think about growth rate moving forward. I mean, you’ve historically been in kind of mid-teens growth that’s been slow over the past couple of quarters for a lot of different reasons. But, is it -- do you -- is your goal to get back to that mid-teens pace or do you feel like going forward, this may be a little bit of a slower growth rate as your target but with greater profitability within that slower growth rate?

[Claire Tucker:]

I would -- there is a lot of questions, let me see if I can answer them in order there, Catherine. You noted that we have had slower loan growth in last the last couple of quarters and for explainable, understandable reasons, most recently the payoff on some of our CRE projects as well as what I would call the refinement of our healthcare strategy. We remain committed a low-to-mid-teens growth rate going forward, but I will also point out to you, as you well know, it’s never going to be a straight line growth just by the nature of our business model, but I do feel confident in the low to middle double digit growth on an ongoing basis.

[Operator:]

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

[Stephen Scouten:]

Maybe just following up on Catherine’s question around loan growth. Can you give a little color about the level of pay-offs relative to maybe production levels this quarter? I mean I guess my real question is, were production levels similar to the maybe 1Q level, which was maybe the last quarter of higher growth that we’ve seen or what has that been trending likely?

[Rob Anderson:]

What I would say is that first of all, the front door production was a little lower than normal; and then, the backdoor, the pay-offs and the pay-downs were higher than normal. The payoffs and pay-downs came in healthcare, and CRE were the main spots for that.

[Stephen Scouten:]

Okay. And what kind of gives you guys the confidence I guess that those paid down levels will subside somewhat and that kind of front door, as you said Rob, production level will be able to increase in the coming quarters?

[Claire Tucker:]

Stephen , I would say a couple of things. One, as I look at our commercial real estate book, you know how that cycle, those projects come on, fund up, get paid-off. And we’ve got a good level of commitments that we’re working on right now as well as some others that are unfunded that I believe will allow us to replace that portfolio. I would also point to the unfunded commitment level of $454 million; it is a lower usage percentage right now, so at about 68%, 67%; it’s been running about 70 or 72. What that signifies to me is that we have multiple areas within the various lines of business that I believe will effectively support the growth going forward.

[Stephen Scouten:]

Okay, that’s really helpful. Thanks. And maybe thinking about the loan yields and the NIM, the last two quarters, you’ve seen some pretty significant jumps in the new loan production yields. I think Rob you mentioned 4.87 this past quarter. What has changed there? Are you guys just haven’t demand higher pricing, has pricing across your market shifted, is it composition changes, what’s kind of driving that move that we’ve seen?

[Rob Anderson:]

Yes. There is a couple of things on that Stephen. Certainly, the rate increases that we saw recently in the past two quarters, I mean in the second quarter, we saw our loan yield bump up to 4.47. For the second quarter that was above our portfolio yield that was predominantly due to repricing of our variable rate loan book. Again, we just saw in this past quarter and third quarter, our loans move on new production to 4.87. So, we are seeing a little bit richer yield on new loan production. So, as I said on the call, we do believe that we can hold our NIM going forward for a couple of reasons. One is, just the new loan production yields that we are getting and then the increase in our portfolio that’s moving up with the rate increases. And then, certainly, we intend to run our loan-to-deposit ratio as we discussed and kind of talked to you about even last year that we’ve move that up and that’s kind of a nice range where we have it today.

[Stephen Scouten:]

Okay. So, I guess two follow-ups to that may be. So, it sounds like that 4.87 yield is something you feel is sustainable. And then two, on that loan-to-deposit ratio you mentioned, are you guys kind of maxed out there now at 97% including the held for sale?

[Rob Anderson:]

Yes. You might see it go up to close to a 100% but I think that’s getting to the level where we would start feeling a little uncomfortable. Just going back to your comment on the 4.87, certainly, I think that’s nice on loan production. But what I would say is that we have seen a trend in the past two quarters, the loan yields on new productions above our portfolio average. So, if next -- we’re 4.55 overall, we’ll see where it lands. But certainly, it’s a good trend to see, new loan production higher than portfolio average.

[Claire Tucker:]

Stephen, the thing I would add to that too is that we’re continuing to see some really effective growth in our DDA and money market with some of our retail line of business, our personal banking, private banking I should say line of business; healthcare has had a really strong run at some good deposit generation on the relationship side. So, I believe we will be able to stay on the pace in terms of funding all the growth that we have.

[Operator:]

Thank you. And our next question comes from the line of Daniel Cardenas with Raymond James. Your line is now open.

[Daniel Cardenas:]

Hey. Good afternoon, guys. Just a quick question on the margin. What benefit if any, did it have from the recapture of interest on the loan that you guys got to pay back on?

[Rob Anderson:]

Yes. So, the NIM, we had loan fees of about 3 basis points overall from an increase from the prior quarter. I would say about 2 basis points of that 3 is basically due to the amortization or the acceleration of the amortization of the loan fees with payoffs and pay-downs; it’s probably going to total right around $120,000.

[Claire Tucker:]

But I think his question was around the recovery…

[Rob Anderson:]

I am sorry. So Daniel, yes, no, we didn’t have anything in the recovery that related to -- in the margin. That was all in our allowance. The $1.9 million recovery is in the allowance, there is no benefit into the margin.

[Daniel Cardenas:]

No recapture of interest or anything like that on the margin so that…

[Rob Anderson:]

That’s correct.

[Daniel Cardenas:]

…3.26 number we saw is pretty much a core number, which you think is sustainable. And is it possible that we could see some additional yield increase, just given the timing of the June rate hike. Could we see a little bit more kind of bleed into the fourth quarter or is that pretty much all said and done?

[Rob Anderson:]

No, I’d say that’s certainly possible. I mean, it’s usually full quarter before we see kind of our loan book cycle through all the different contracts that we have, so that’s certainly possible.

[Daniel Cardenas:]

Okay. And then maybe some color around the deposit pricing side right now. What are you seeing from competitors? Are you beginning to see a pickup on deposit pricing pressures or is the market still relative rational?

[Claire Tucker:]

No, in fact, I would say, it’s probably more irrational on the liability side or the deposit side. There is an intense fight in Nashville for core deposits. What I would say is that our deposits went down this quarter, but we don’t view that as a negative. We want to be very selective in our pricing and how we gather deposits. We said we are a relationship oriented bank and I think that is pretty telling in terms of our DDA growth this past quarter. And we are able to shrink some of the -- more of the rate-sensitive type deposits that are with us. But, certainly from a competitive standpoint, it’s a -- I would say highly competitive in Nashville for deposits right now.

[Daniel Cardenas:]

And does that kind of bleed over to the public funds as well or not necessarily so?

[Rob Anderson:]

I would say, yes, certainly in the public funds arena, but you have a lot of banks that are either coming in from out of town and trying to gain a foot hold, some that are just trying to get market share, and the pricing on deposits are pretty tough right now. And it’s in all arenas.

[Daniel Cardenas:]

Okay. Then I would imagine just kind of given the new competition that’s coming into the Nashville market, wouldn’t that necessarily then play the same for the yields on your arena in assets, wouldn’t we see some pressure on those, given people are jacking for market share right now?

[Claire Tucker:]

We’ve always seen that type of pressure, certainly on the C&I side, it’s highly competitive. We’re focusing on sound, profitable growth and we’re relationship bank and we’re going to bank relationships and not transactions. So, certainly, you’re seeing it on both sides. But when you get full relationship, we can demonstrate profitability for our organization.

[Daniel Cardenas:]

Okay. And last question for me here, Rob. I missed your comments on the efficiency ratio. Were you saying that you expect the efficiency ratio to remain relatively stable on a linked quarter basis or were you talking noninterest expenses?

[Rob Anderson:]

On the efficiency -- speaking to the expense base, I think near-term, it will be around the 8, 8.5 level and then that can move up in 2018. What we did say is that we’re going to manage to an efficiency ratio between the mid to low 60s by the end of 2018. I think that near-term, it could be around 8.5 level. I think you can see that move up in 2018 as we continue to make progress on new hires et cetera.

[Daniel Cardenas:]

Okay. And then, do you care to make a stab at tax rate that we should be modeling in for you guys?

[Rob Anderson:]

I’m not going to make a stab at the rate. I certainly wanted to provide some transparency to you guys in terms of what’s going to happen 2018 as we come upon our 10th anniversary. We have a lot of original organizers and executives that have options and warrants expiring. We tried to give you a sensitivity in terms of the dollar amount that could fluctuate. So, I think you could probably model that out. But certainly, I think it’s going to be closer to our current quarter through the year. It can be lumpy depending upon when he these individuals exercise. But, I think our current quarter is more indicative of mid 30s or lower 30% ratio going forward.

[Operator:]

[Operator Instructions] Our next question comes from the line of Laurie Hunsicker with Compass Point. Your line is now open.

[Laurie Hunsicker:]

Good afternoon, Claire and Rob. I just wanted to say, really, really nice quarter. Can you help us think about -- and I know Catherine and Stephen both asked this, but I’m just trying to understand with respect to loan growth, how we should think about how you are getting to that low to mid teens growth rate? And I realized you have had some reworking of how you have been doing the healthcare and we have seen a decline, but I’m just looking here March to June down, June to September down. I mean if we are looking and I get that it’s lumpy if we are looking to get to that low to mid teens growth rate that implies that you are going to finish the year around numbers with about $1.1 billion in loan. Is that possible?

[Rob Anderson:]

No, it wouldn’t be. Not including the -- just the held for investment. I don’t think it’s going to be that way. I think what we would guide to is on the loan growth is low -- or I’m sorry, high to mid double digit. So, anything around 10% up to about 15%. What we are trying to do is be selective. I think Claire mentioned we are doing a little bit of pivoting on the healthcare side of the house; that could take a quarter or two to demonstrate our growth but overall, we are going into the low to mid double digits.

[Claire Tucker:]

And Laurie, I look at it over a little bit longer horizon than just the next quarter. Again, I think we talked about some of those commercial real estate projects, with respect to healthcare we have reconstituted much of that team over the last 12 months. I think we have got an excellent, excellent team of bankers in the healthcare group. And I’m really looking to them to have some nice loan growth. When you recalibrate the way that we’ve done, sometimes it takes a little bit of time to build your momentum back up. So, if I look again at the unfunded commitments, I think we will see some increased usage there. We saw good growth in our core C&I -- and when I say core C&I, I’m talking about exclusive of healthcare as well as our retail book is sticking up nicely. So, I think there are couple of opportunities there for us.

[Laurie Hunsicker:]

And then just on the line item of healthcare. And I’m just looking at slide eight, but maybe you can help me think about this sort of apples to apple here. Your total healthcare including the commercial real estate piece as of June was 188, and as of March it was what? 172 is that right?

[Rob Anderson:]

Yes, 172.

[Laurie Hunsicker:]

172, and then the commercial real estate piece as of June was $11 million. Do you have that as of September?

[Claire Tucker:]

The commercial real estate within the healthcare book is roughly the same.

[Laurie Hunsicker:]

Roughly the same, okay. And then the SNC piece, the 129 went down sharply, went down to 107. Is that going to be something that you continue to let lead off and line with pivoting on how you are thinking about healthcare?

[Chris Tietz:]

Laurie, this is Chris. The SNC piece is actually $91 million within that, and then there is another -- the difference between that and 107 is the non-SNC portion.

[Laurie Hunsicker:]

Okay, that’s more like the club or something like that?

[Chris Tietz:]

Well, that’s correct.

[Laurie Hunsicker:]

Okay.

[Claire Tucker:]

And just to be clear, just by definition, the SNC is going to be three banks or more. So, we often times look at -- I mean, it could be a club deal but the SNC is just because we get three local banks in it.

[Laurie Hunsicker:]

Right, I guess I’m just thinking also more broadly that anything that’s sort of your participant co-lender, majority of that is SNC. Of your 91 million, how much of that is in Nashville?

[Rob Anderson:]

Let me come at it in different way if I could. If we start with 172 million for growth healthcare, a 130 of that is in our defined market. I can’t tell you specifically what’s in Nashville but of that then it would split down into half and half roughly between SNC and on-SNC.

[Laurie Hunsicker:]

And then, just to go back to again reserving. And I realize that there is a lot of moving parts this quarter with respect to recovery, but as we we’re thinking about the normalized loan loss provision going forward and normalized reserves, what is your goal in terms of where that reserves to loan ratio would be as we fast forward a year out? And I realize there’s moving parts with Washington and everything else. But in other words, you’ve jumped around a lot. And I guess in terms of thinking about modeling, it would be helpful to know how you are thinking about that as a goal, even if it’s just the range?

[Claire Tucker:]

Well, I think Laurie going back to how we got to the 144, I think that’s more macro types of issues. We’ve historically been running the ALLL at around 120 to 124 on new production.

[Laurie Hunsicker:]

Okay, perfect. Okay. And then, the 1.9 million recovery that was off of the $11 million loan that you charged off originally this year. Is that correct?

[Claire Tucker:]

That’s correct.

[Laurie Hunsicker:]

Okay. Is there anything else potentially covering from that coming back from that loan?

[Claire Tucker:]

Well, as I said in prior quarters, we will continue to pursue collateral or other sources of payment -- repayment that we have on that or any other credit that we might have a loss on, so I would say the efforts are ongoing on that front.

[Laurie Hunsicker:]

Okay. And then to the extent that you’ve got a recovery, would you let that all drop to the bottom line or would you do something in terms of reserve building or you are just not sure?

[Claire Tucker:]

Well, that’s really sort of a hypothetical. So, what I can speak to is what we’ve done this past quarter with respect to our allowance methodology.

[Laurie Hunsicker:]

And just going back, Rob, to something that you said to Daniel, the higher pay-offs. You said, including amortization was a 120,000 with the net interest income. Is that correct?

[Rob Anderson:]

Yes. So, if you think about the acceleration of the amortization of the fees, if you’re looking for more of a run rate on a normalized level, we probably had a $120,000 of -- maybe a little bit higher than normal payoffs and pay-downs in the -- associated with the fees in the fee line. So, we certainly benefited from that this quarter, short-term benefit, longer term paying on those payoffs and pay-downs.

[Laurie Hunsicker:]

Okay, good. And then, Claire, more macro, at one point you had talked about potentially looking for acquisitions. Obviously your stock price is very high; it’s stronger acquisition currency. How do you think about that now, how are you sitting in terms of potentially looking for other potential acquisitions?

[Claire Tucker:]

So, I think your point is well made Laurie that with the stock price that we have that’s certainly broad. You’ll see opportunities that we have for M&A activity, what I’ve said historically is the core focus of our bankers on a day in and day out basis is to continue to grow the bank organically. We believe we’ve got some good opportunities there. With that said, we also think there’s some merits to considering some strategic opportunities. And I’ve outlined for you before, something that could improve our cost of funds or higher yielding loan products or a non-interest income play. So, again, with the stock price certainly will provide us a valuable currency that will enhance those discussions.

[Laurie Hunsicker:]

Okay. And then just lastly, any comments or color you can share with us regarding Gaylon Lawrence and potentially how his strategy is fitting, how you’re looking going forward?

[Claire Tucker:]

Well, it’s -- that’s speculation and we’re really not going to comment on speculation. We’re aware of his filing and his purchase of the stock. We are focused on just operating the bank every day and trying to benefit all of our shareholders through solid performance.

[Operator:]

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

[Tyler Stafford:]

Hey. Good afternoon, guys. Hey, just a couple of last questions from me, rest have been asked and answered. Rob, first one on the gain on some margin of the mortgage business. Last quarter, you talked about that expanding kind of going forward which did this quarter to 1.60 or so. Is this an appropriate level in terms of pricing out of those sales that you’re expecting to get, this 1.60 level from here?

[Rob Anderson:]

That’s probably at the higher end of the range that we’ve been at Tyler. Certainly we look at the mix on some of that which drives it. So it depends on the origination mix as well. But certainly that’s probably on the upper end. So, from a conservative standpoint, I’d back it down a little bit.

[Tyler Stafford:]

Okay. And then, sticking with fee income, the TriNet business obviously had a nice quarter. Any color you can share with us on how to think about that business in terms of contribution going forward?

[Rob Anderson:]

Sure. I think what we’ve talked to you about the TriNet business is that was a team we acquired last fall and what we said is that we’re going to crawl before we walk, walk before we run. And I think if you look at the sequential quarters that demonstrate some improvement. Certainly, this quarter was a very nice quarter. We have nice loan sale with decent premium. What I think going forward is that, that could bounce around a little bit and it depends upon a number of factors. But I wouldn’t get too far ahead of yourselves on that line. I think given the third quarter’s performance is a strong indication, we do have about $32 million on our balance sheet. So, we would anticipate quarterly sales, but it will depend upon a number of factors on the size and magnitude of those.

[Tyler Stafford:]

And I may have missed this in the release and the presentation. But did you guys disclose how much you sold this quarter out of TriNet?

[Rob Anderson:]

No, we did not.

[Tyler Stafford:]

Okay.

[Claire Tucker:]

And we don’t disclose that fact.

[Tyler Stafford:]

Okay. And then last one from me just in terms of the profitability goal for 4Q 2018, next year at 1%. In relation how we should be thinking that and going back to the earlier questions about the tax rate, is this kind of 25%, 26% level, the appropriate level that we should be thinking about in terms of you guys reaching that 1% ROI goal?

[Rob Anderson:]

Yes. In short, Tyler, I think it is. Certainly, the mission for a bank is always been to be a high performing financial institution. And reaching that 1% threshold this quarter has been an important milestone for us. I think if you look back even as far back as last year at our IPO, we said we had a number of levers that we pull to reach that 1% number. I think we’ve done some of that and I still think that we have some room to go. But going forward, I think you should expect us to be at or near the 1% more consistently. And it does take into account the tax benefit with the ASU piece for next year as well.

[Operator:]

Thank you. We do have a follow-up question from the line of Daniel Cardenas with Raymond James. Your line is now open.

[Daniel Cardenas:]

Hi, guys. Just one quick follow-up question. I think, Claire, you mentioned that you were seeing lower usage on that $458 million of unfunded commitments. Could you maybe give us some color as to why you think there has been a decrease in the usage levels?

[Claire Tucker:]

Well, a couple of things on that Daniel. I think one is that we’ve had some good production, new commitments if you look at those numbers that are out there that the total commitments are actually up, I’m trying to get back to my page. Since the end of last year, we’re flat for last quarter, but I think some of it will be in the CRE projects that I referenced that we’ve gotten some commitments on that we believe we’ll see some funding going up.

[Operator:]

Thank you. And I’m showing no further questions at this time. So I would like to return the call to Claire Tucker for any closing remarks.

[Claire Tucker:]

Okay. Well, thanks to all of you for participating in the call today. As we’ve said many times today, we’re very excited about the profitability that we were able to achieve this quarter. We’re committed to staying on this trend line to really deliver solid performance to all of our shareholders. We’re very appreciative of the continued support that you all have and certainly if there is any follow up questions that anyone has please feel free to reach out to Rob or me at anytime. Thank you.

[Operator:]

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