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Capstar Financial Holdings, Inc. (CSTR) Q2 2019 Earnings Call Transcript

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Capstar Financial Holdings, Inc. (NASDAQ: CSTR)
Q2 2019 Earnings Call
Jul 26, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen, and welcome to CapStar Financial Holdings second-quarter 2019 earnings conference call. Hosting the call today from CapStar are Claire Tucker, chief executive officer; Tim Schools, president; Rob Anderson, chief financial officer and chief administrative officer; and Chris Tietz, chief credit officer of CapStar Bank. Please note that today's call is being recorded and will be made available for replay on CapStar's website. Please note that CapStar's earnings release, the presentation materials that will be referred to in this call, and the Form 8-K that Capstar filed with SEC 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 security 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 risk, 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 any 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 risk, assumptions and uncertainties impacting the forward-looking statements and the presentation of non-GAAP financial measures and the 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 accuracy of its earnings teleconference transcripts provided by third parties. The only authorized live archived webcast and transcription are located on Capstar's website. With that, I'm now going to turn the presentation over to Ms.

Claire Tucker, Capstar's chief executive officer.

Claire Tucker -- Chief Executive Officer

Thank you, operator. First of all, we appreciate each of you participating in our second-quarter 2019 earnings call. Before we begin a discussion of the quarter's results, I would like to introduce and welcome Tim Schools, the new CEO of CapStar. Many of you already know Tim from his prior banking experiences.

Our plan is to get him out on the road to meet key investors and equity analysts over the next several months. We have good news to report on many fronts. I continue to be very pleased with the collaborative relationships that have developed between the Middle and East Tennessee teams since our partnership occurred, all with the primary focus on delivering exceptional customer experiences with our bank. If you have the presentation deck in front of you, I direct your attention to Page 4 so that I may share with you some of the drivers of performance in the second quarter, which are reflective of our stated strategy of sound, profitable growth.

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Certainly, the benefits of our partnership with Athens Federal are materializing in the financial performance. Additionally, the investments that we made in noninterest income drivers, including Farmington Financial and Tri-Net are contributing significant revenues. Operating earnings per share totaled $0.38, which includes $0.04 for implementation of a hedging program for residential mortgage loans originated with the intent to sell. Excluding this, we are reporting 17.2% year-over-year growth in EPS.

Rob will provide more detail on our mortgage hedging program in a few minutes. Operating return on average assets was 1.4%, and return on average tangible equity was 13.05%. We are particularly pleased with the double-digit growth in average deposits of 22.7% over the first quarter of '19. Core noninterest-bearing and NOW accounts have had double-digit growth as our bankers continued to expand relationships.

Additionally, we generated record noninterest income in both Tri-Net, which just reached the $0.5 billion mark in closed loans under the CapStar banner, as well as our residential mortgage unit during the quarter, resulting in noninterest income to average assets of 1.41%. Finally, while our loan growth may appear low on the surface, we have stated that one of our goals was to do more business in market versus out of market, and we are progressing on that front. Excluding loans from Athens, our in-market loan growth was 10.3% from prior year, and importantly, criticized and classified loans continue to be at low levels. Moving on to Page 5.

I want to share with you some major recognition that CapStar has received recently in the local and national marketplaces. First, in both Middle and East Tennessee, CapStar was recognized by the local media as top workplaces for 2019. This recognition was based upon surveys completed by our employee base regarding their views on CapStar is a great place to work. Capstar also earned a Bauer 5-star rating from Bauer Financial based on capital adequacy, asset quality, profitability, and liquidity.

CapStar was awarded preferred lending program status from the Office of Credit Risk Management, which is a division of the Small Business Administration. Effectively, this designation will enable our team to move more quickly in the approval process for SBA credit request from our customers and prospects and distinguish us in responsiveness versus the competition. And lastly, CapStar is a Greenwich Customer Excellence Leader in the United States commercial small business banking, recognizing our leadership in the increasingly important field of the customer experience. Turning to Page 6.

We have outlined some of the key operating measures that highlight our sound profitable growth principles. We will get into more detail on these in just a minute. I will now ask Rob to provide more detail around our financial performance.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Thank you, Claire, and good morning, everyone. You may have noticed that we've reorganized some of our standard slides, and we wanted to put our deposit slide closer to the front. For some time now, our team has been talking internally about how high-performing banks are built and sustained over a long period of time. At each turn of these discussions, building out a deposit base full of core low-cost deposits is at the top of our list.

While we have not yet reached the desired outcome, placing the storyline sooner in our prepared remarks is symbolic on how we do this priority. So let's see how we did for the quarter. On average, our deposit balances grew 22.7% on an annualized basis over the prior quarter. If you prefer to see our point-to-point growth, the chart on the bottom right shows the growth on an end-of-period basis.

Excluding day one deposits from our partnership with Athens, organic average deposit growth was 11.9% from the prior year. While deposit costs continued to increase this quarter, we remain focused on balancing the need for core deposit growth with the challenge of keeping our deposit costs in check. So let's move on to loan growth. You recall from our first quarter call, I said loan growth would be a challenge near term due to a number of payoffs and pay downs.

These payoffs and pay downs are not due to dissatisfaction with CapStar, but more typically, because CRE projects are going to permanent financing sooner or being sold outright. We're also seeing healthcare and C&I loans refinanced by nonbank lenders or paid off with the sale of businesses. In terms of results, average loan growth was 2.1% annualized from the first quarter and down 7.4% on an EOP basis. While we did experience a number of payoffs and pay downs, the majority of them occurred with out-of-market borrowers.

We have stated that one of our goals was to do more business in market versus out of market, and we are progressing on that front. If you look at the chart on the lower left, you can see our out-of-market loans have declined to $78 million or 5% of our total loans on an EOP basis. The resulting in-market loan growth was 10.3% from the prior year, excluding the loans from Athens. So on the surface, our growth was a bit disappointing, but the mix shift underneath the headline is encouraging, and we believe in-market loan growth is more aligned to our operating principles than out of market.

So let's move on to credit quality. This has been a bright spot for us this year as net charge-offs have totaled only 1 basis point year to date. Additionally, our criticized and classified loans remained low at 2.1%. While this is slightly elevated from the prior two periods, the increase of approximately $5 million is viewed as normal fluctuation spread over a number of transactions and not linked to one loan.

In general, our criticized and classified loans have a profile that is much better secured on those than prior periods. Each of these loans has a borrower-specific action plan to address the inherent weakness, and this plan is reviewed monthly and updated as needed. As noted in the lower right graph, the ratio of NPAs to assets remains low at 12 basis points. As noted in the upper left, our current allowance for loan losses is 90 basis points, and if we add in the $4.4 million or 30 basis for the fair value mark on acquired loans, it roughly equates to a 120 reserve.

Finally, while not noted in the slide, the ratio of allowance to nonperforming loans is 894%. This is an improvement from the first quarter when it was 757%. This information was included in last night's press release. In summary and to continue with our primary emphasis on soundness, we continue to be pleased with these core credit metrics.

We also remind you that as our capital has grown from prior years, we have not increased our health lending limits, and believe that our internal systems and disciplines will continue to support our goal of delivering sound asset quality and a more predictable loss experience over time. So let's move on to loan yields. The loan yield for the quarter was 5.44%, and down 5 basis points from the prior quarter. As you can see by the chart on the lower right, purchase accounting accretion decreased 2 bps, loan volume mix with the decrease in one-month LIBOR decreased 2 bps, and loan fees decreased a basis point.

The yield curve continues to move lower. And the chart on the lower left is reflective of this movement. Yields on new loan production were 5.55% in the quarter and slightly lower than the prior quarter. Although the last three quarters of yields on new loan production has been above our portfolio average, the trend is indicative of a market moving lower in concert with the lower yield curve.

So let's see how this impacts our margin, and then we can discuss how we are positioned for a lower rate environment. Our net interest margin was 3.68%, down 7 basis points from the prior quarter. The components that drove this movement are outlined in the bottom left chart. In short, we were able to grow deposits, although at a higher cost.

This contributed to 14 basis points to the decline. With the increase in deposits, we were able to do two things. First, we extended credit to our clients and new borrowers, both our average loans held for investment and our average loans held for sale increased in the quarter. The increase in balances helped our margin 7 basis points, but we gave back 4 basis points with lower yields.

Next, we paid down our borrowings, which was priced at wholesale rates and that also helped our margin 9 basis points. Last, we repositioned $45 million of our investment securities portfolio and the decline in balances costs us 5 basis points. So with that, let's talk about our balance-sheet position in light of the current rate environment. For some time, we have told you that we are an asset-sensitive bank.

With the acquisition of Athens, we have become less asset-sensitive, and the mix of our loan book has changed over the past year. The chart on the upper left shows this dynamic with our variable rate loans decreasing to 56% of our total loan book. If you look at the chart on the lower left in the various banks interest rate risk position on 3/31, we are not showing outsized risk when compared to others. As you know, the forward rate curve is predicting rates to decrease, and some of you are modeling anywhere from two to four rate cuts from the Fed over the next 12 months.

We are not alone in this camp and believe rates will be lower very soon, and hence, have taken the following actions in the second quarter. First, we are emphasizing fixed rate lending with our sales force. We also restructured $45 million of our securities during the quarter, lowering our floating rate allocation of securities portfolio to 6%, and extended our duration slightly to three and a half years, which by all measures is still fairly short. We unwound 20 million notional fixed to floating rate interest rate swaps, lowered rates on time deposits and shortened duration of wholesale liabilities to under three months.

Relationship managers are proactively meeting with clients on opportunities to optimize deposit costs with potential rate cuts. So let's move on to our noninterest income. Our noninterest income to average assets was 1.41%, and was a bright spot for the quarter. Treasury management and deposit service charges continues to demonstrate growth.

As we have stated in the past, our commercial clients can pay their treasury management fees and deposit balances or in hard charges or fees. This quarter, we saw more deposit balances and fees and explained the smaller growth in fees versus the growth in deposits relative to the prior quarter. We have already discussed the work we did on the investment portfolio, but we did recognize a small loss on this reposition. We have talked about the new rate environment and how this will negatively impact the net interest margin for us and the overall banking sector.

However, the next two line items in our fee businesses will actually benefit from a lower rate environment. China had a record quarter, which is on top of a record we saw in the first quarter. With rates going down and loan growth getting tougher for some institutions, we are seeing pricing widened for these high-quality loans. And with $52 million of Tri-Net loans on our balance sheet at quarter end, means we expect the third quarter to be strong, as well.

With lower interest rates, we are seeing more refinance volume, along with a very robust purchase volume in our local markets, especially in Nashville. For those of you who have not been keeping up with Nashville, the recent jobs announcements from the likes of Amazon, Alliancebernstein, Mitsubishi, and others, will keep our mortgage group busy regardless of fluctuations in interest rates. Additionally, during the second quarter, we moved from primary selling residential mortgage loans on a best efforts basis to mandatory delivery. With this change, we are locking in the forward pipeline and recording our mortgage loans held for sale at fair value.

This change is more in line with more sophisticated larger mortgage operations. Additionally, the impact of this change favorably impacted our earnings for the quarter by $912,000 or $0.04 earnings per share. Excluding this amount, our noninterest income to average assets would have been 1.22%. The takeaway from all this is that with lower rates, we will face margin pressure going forward, but we also have diversity in our revenue streams that will benefit with the change in rates.

We expect our fee businesses to help offset the margin pressure to keep our earnings momentum going forward. So let's move on to expenses. Our operating noninterest expenses came in at $14.8 million with an operating efficiency ratio of 61%. Looking at the individual line items, our compensation expense is up slightly.

You will notice, our FTE count is up one and although Tim Schools, our new CEO, is the obvious hire, we did have FTE movement below this number with some FTE coming out from Est Tennessee and the backfill of some open roles. Moving on, the majority of the increase from the first quarter is really on two line items: data processing and software and on the equipment line item. Within these numbers, we have $50,000 of onetime expenses, $100,000 a bubble expenses as we are changing out an IT vendor, and there are some double costs, while one vendor is ramping up, and the other vendor is ramping down. We upgraded equipment in East Tennessee to make sure our associates have the tools necessary to execute for our clients.

And we did put in some new modules that enhances our overall core platform to better serve our clients. So with this said, you should expect our overall expense run rate to be down some in the coming quarters, and specifically, in the two line items just noted. Again, our goal, as previously stated, has been to trend our efficiency ratio down to the low 60s by the end of the year. As it relates to our merger expenses, we have all but wrap this up, and going forward, we believe this line item to be negligible, if not zero from here on now.

So let's move on to capital. All of our capital ratios improved from the prior quarter and remain above well-capitalized regulatory guidelines. With robust capital levels and a stock valuation that we feel is very attractive, we repurchased 219,600 CapStar shares in the quarter. On a year-to-date basis, we have repurchased $5.8 million of our $8 million stock buyback that we announced in December.

Additionally, I'll remind you that the dividend was increased from $0.04 to $0.05 and paid in the quarter. With that, let me turn it back to Claire for some closing comments.

Claire Tucker -- Chief Executive Officer

Thank you, Rob. I now direct your attention to Page 16 of the investor deck. CapStar's strategy remains one of sound profitable growth. We believe that the financial results that we reported Thursday afternoon and the clean loan portfolio as demonstrated in our credit metrics are reflective of this strategy.

We continue to build out a client-centric model, committed to serving local consumers, small and medium-sized businesses, their owners and employees in our target markets. I've been particularly pleased with the connectivity and shared goal of all of our associates to deliver an unparalleled customer experience, strong financial results for our shareholders, and meaningful outreach in each of the communities in which we operate. Our bankers across the franchise are focused on expanding our market share through further penetration of existing customer business, as well as attracting new business through prospect activities. Importantly, we are improving our ability to grow stable, low-cost deposits.

We believe that these strategies will support the enhancement of a consistent and stable earnings franchise. The recognition for customer excellence that CapStar received from Greenwich Associates is consistent with our goal of differentiating our bank from our competition. We're excited about the diversification East Tennessee provides to our balance sheet and our revenue streams and believe legacy CapStar treasury management and SBA product offerings continue to be very well received by our new East Tennessee customers. We believe that this will continue to provide opportunities for increasing market share through organic growth.

Maintenance of a sound credit profile remains core to our strategy. Although loan growth was muted in the second quarter of 2019, the level of transactions that we've considered but passed on has increased as our bankers maintained discipline in terms of pricing and requested deal structure. We intend to continue this tactic as we focus on pursuit of those opportunities that are consistent with our soundness principles and bring full relationships to CapStar. And as we've noticed -- noted in previous calls, we will continue to explore strategically aligned and financially attractive M&A opportunities that have the potential of enhancing our core franchise and building shareholder value.

We are very appreciative of the investment that many of you on this call have made in CapStar and your continued support of our company. Operator, we're now ready to open the lines for questions from participants on the call. Thank you.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Catherine Mealor with KBW.

Catherine Mealor -- KBW -- Analyst

Thanks. Good morning.

Claire Tucker -- Chief Executive Officer

Good morning, Catherine.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Good morning, Catherine.

Catherine Mealor -- KBW -- Analyst

I'm going to start with the margin, and Rob you gave a lot of great information on some of the moving pieces within that. One follow-up question is just kind of thinking big picture about rate cuts. Clearly, you've got a lot of levers to help offset further NIM pressure, but you're still -- this quarter, and I guess, we're now below your previous NIM guidance, which I don't think you -- I think you've taken the guidance out of the deck, which is fine, but now we're kind of below that. So as we think about the margin from here, is it more about just all of these -- everything that you laid out kind of keep the margin more stable to prevent further contraction? Or do you still feel like with rate cuts, you still have some downward pressure in your margin from here? Thanks.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yeah. Sure, Catherine. So one, I mean, LIBOR has already moved down, and in advance of the anticipated Fed cut for July. So like many other banks, we're expecting those rates to go lower, the Fed to cut in July, and probably further than that.

So we took a lot of actions in the second quarter to reposition the balance sheet some. We're still asset-sensitive to a certain extent, but we don't show outsized risk. I think if the Fed does cut, we would expect our margin to continue to compress, and we're going to do a number of things to help mitigate that. So one is we have about $250 million in our correspondent banking business.

That's at 100% beta. So that really is -- reflects with the Fed. So when the Fed cuts, we know that that deposit book will reprice with the Fed. The second piece is really going to be contingent on our ability to work with our sales force and their customers on probably more rate-sensitive customers.

We typically modeled in a 60% beta on our deposit book. I think if you went back to the last rate cycle and on the slide deck, if you calculated that. We're actually below that. So on a rate down, I would guide you to a 60% beta.

But I think the headline is, we would anticipate our margin to continue to drop some. And we're looking at other ways to mitigate that drop and be less asset-sensitive, and to work on our deposit piece, and -- but also, also fee businesses to help offset that and to help boost our profitability overall. So it's going to be a challenge for us and all the other banks out there.

Claire Tucker -- Chief Executive Officer

Catherine, I would just add to what Rob said and really reinforce, we're focused on profitability for the company. And there's different ways to get at that. We're pleased that we've got the noninterest income sources of revenue that Rob has mentioned, particularly Tri-Net and the mortgage, but we're also seeing some good traction in East Tennessee with some of our treasury offering. So while we're certainly balance sheet-dependent in terms of the major income streams, we feel pretty good about the diversification that we brought to the table with our noninterest revenue sources.

Catherine Mealor -- KBW -- Analyst

Great. No, that's really helpful. And then maybe turning to the loan growth. Can you just give us any color around what's in that out-of-market book that you've disclosed this quarter? And I'm assuming that's mostly healthcare SNCs.

So one, is that true? And then two, where do you hope to get that book down to, call it, over the next year or so?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yeah. So our healthcare book, actually, which was in the C&I line item, that actually decreased about $28 million. It's down to $142 million at 6/30. And of that $142 million you have about $90 million of that is SNC.

Our total SNC book is about $125 million. Our whole point is to be grown more in market than out of market. So I think the takeaway on the loan growth piece is that our out-of-market has been reduced. We're doing more stuff in market.

We're doing less SNCs, and healthcare is down $28 million for those that view that as a more riskier lending profile.

Chris Tietz -- Chief Credit Officer

Yes. And Laurie, this is Chris. I'll also point out that two-thirds of our healthcare book roughly is in the Nashville market.

Catherine Mealor -- KBW -- Analyst

Thank you.

Claire Tucker -- Chief Executive Officer

And Catherine, the other thing is that, by definition, there are some loans that are core to us where we have full relationships that just by definition are identified as a SNC. But we think those, in fact, one of our largest treasury management clients is technically considered a SNC. But it is in market. We have the full treasury relationship.

So not all SNCs are bad SNCs, if you will.

Catherine Mealor -- KBW -- Analyst

Yeah, for sure. For sure. Great. Thanks for the color and great quarter.

Thanks.

Claire Tucker -- Chief Executive Officer

Thank you, Catherine.

Operator

Our next question comes from Laurie Hunsicker with Compass Point.

Laurie Hunsicker -- Compass Point -- Analyst

Yeah. Hi, good morning.

Claire Tucker -- Chief Executive Officer

Good morning, Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

Just wonder staying on healthcare for just a minute. So if we look at your book of $142 million, you said two-thirds of it are located in Nashville?

Chris Tietz -- Chief Credit Officer

That's right.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And what is sort of like the Greater Nashville, Tennessee component? Or is that all in that two-thirds number?

Chris Tietz -- Chief Credit Officer

In terms of the healthcare book, that is almost 99% is Nashville proper.

Laurie Hunsicker -- Compass Point -- Analyst

Oh, so sorry. So of the $142 million, 99% of that?

Chris Tietz -- Chief Credit Officer

No, no, I'm sorry, $84 million, roughly two-thirds is in the Nashville market. And so that's it, right there.

Laurie Hunsicker -- Compass Point -- Analyst

Got it. OK. Got it. OK.

And then can you just update us in terms of what your total substandard loans are at the moment? Last quarter, it was right around $10 million. And then within that component, what is substandard C&I, if you have it? And what is substandard healthcare, if you have it?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

OK. Yeah. So I think you're looking at maybe the nonimpaired substandard. So our total substandard is $16.3 million, so we cut it a little bit between impaired and nonimpaired.

The nonimpaired that you referenced, I think, was $9.9 million at 3/31, that moved up to $12.6 million, roughly $2.7 million of an increase.

Chris Tietz -- Chief Credit Officer

And I would point out, Laurie, that of that increase, it's spread over a handful of credits. They're not healthcare-related. The healthcare classified component hasn't increased quarter to quarter.

Laurie Hunsicker -- Compass Point -- Analyst

Got it. And what is that healthcare component?

Chris Tietz -- Chief Credit Officer

That's about one-third of the substandard loans.

Laurie Hunsicker -- Compass Point -- Analyst

It's one-third. OK. So it's one-third of the $12.6 million, also one-third of the $9.9 million?

Chris Tietz -- Chief Credit Officer

It would have been a little bit more than $9.9 million because you had -- it got diluted because it was a non-healthcare credit of about $2.6 million over 6 credits that got downgraded quarter to quarter.

Laurie Hunsicker -- Compass Point -- Analyst

OK. OK. OK, great. And then, I guess, just more broadly, as you think about your healthcare book and it's been running down, how are you thinking about that as we roll forward over the next six to twelve months? Where do you want to see that book going?

Claire Tucker -- Chief Executive Officer

So Laurie, we continue to believe that the healthcare business is a great line of business for CapStar. You've heard us say before that with Nashville considered a bit of a healthcare capital, you're probably seeing the healthcare family shrink. We think there are a lot of opportunities here. Chris referenced the proportion of our credits that are in this market.

We also have some great opportunities healthcare-wise over in East Tennessee market. So we are very much fans of the healthcare business. I think our leadership there is terrific. And the team that we have put together, we expect good things.

They've done a wonderful job of expanding their deposit base. They probably fund more of their loans than any of our businesses across -- our units across the company. They've done a really good job there, so we're very focused on continuing to grow that business.

Laurie Hunsicker -- Compass Point -- Analyst

OK. So at this point in time, you're not looking to wind it down further or sell any pieces. Is that correct?

Claire Tucker -- Chief Executive Officer

I would say that we're in a continued growth mode with healthcare just like we are with other components of our business model.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then just got a one -- oh, go ahead.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Laurie, I would just add that we're evaluating the profile of all the credits on an ongoing basis for risk. And overall, I would say what you should expect from us is more in market versus out of market, smaller local deals and deals that have relationship. So we're all about the relationship. So I think, overall, our SNC book is -- total SNC book, I think $125 million.

We're not looking to grow SNCs.

Tim Schools -- President

Hey, Laurie, this is Tim schools, and I'd echo what Rob said. I think if you reflect on United Community's release this week, Jefferson and Lynn stated, I think the number was, they have $98 million of SNCs in a 12 billion-dollar bank. And they cited, they were all in market in all relationship. So like Claire said, there are many that are classified as SNCs.

But -- and I think ours are largely that way. But we do have some that I would call are financial transactions. And so I don't think we want to do anything overnight. It was either you or Catherine that said, what do we want to do the next 12 months.

I don't know that I would put a date on it. But I think, again, I'm really focused on -- we do a great job in middle Tennessee and East Tennessee. I don't really see a need of why we need to do those ones that I call financial transactions. And so I think that, over time, you'll see it to come down modestly, and it would be more like Lynn and Jefferson described it because there's always going to be some book that's really good.

But we do a great job in Middle Tennessee and East Tennessee, and I think we can do even more. And when Rob says smaller, some people jump from a huge company to a coffee shop. We're not talking about going and all of a sudden changing the bank to a business banking model. I mean there's a lot of, what I call, commercial in the middle companies that have $5 million of revenue to $200 million in revenue, that many don't even borrow, and we need to go after them for deposits.

And then many in there borrow anywhere from $2 million to $8 million. So I think we can replace some of it over time.

Laurie Hunsicker -- Compass Point -- Analyst

OK. OK. That's helpful. OK.

And then just going over to your income statement. And Rob, certainly, you touched on this, the Tri-Net was amazing. How should we be thinking about Tri-Net fees for 2020?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yeah. I think this year has been a little bit more robust obviously than prior years. We've recorded two quarters of record numbers on that. So it would be hard to guide at this level or higher, Laurie.

But what I can say is that we're seeing a lot of increased demand from institutions for high-quality paper that, I think, for institutions that want to show loan growth. People have asked us, well why don't you guys hold this? And we've said, hey, this stuff is more out of market, and it's a good paper, and it's good originations, investment-grade tenants. There is a demand, and their people are willing to pay a premium for it. For 2020, I think at current levels or below would be where I would guide because it's just such a stronger uptick that I'd hate to guide any higher than that at this point.

We'll see how the second half goes. So...

Laurie Hunsicker -- Compass Point -- Analyst

So maybe $3.5 million, maybe $4 million, something like that?

Tim Schools -- President

Chris, can you comment just briefly for the group on, I mean, very high level. I'm not going to get in details. But two things that are recurring. You said that people almost preordering.

Can you describe that? The demand for this product.

Chris Tietz -- Chief Credit Officer

Yeah. The demand is strong. And what we're seeing is, because the demand is strong, we're able to get some higher margins. We've been able to work the transactions to get higher margins.

So part of it is volume-driven, part of it is margin-driven in terms of the premium that we get on sale. And either one of those could change with shifts in market demand or shifts in the curve. We're just going to have to manage that on a rate volume basis over time. Right now, demand is strong, and we continue to stick to our discipline of providing quality.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Any banks that purchases are actually trying to get in line sooner.

Chris Tietz -- Chief Credit Officer

That's correct, right.

Laurie Hunsicker -- Compass Point -- Analyst

OK. OK.

Chris Tietz -- Chief Credit Officer

And make sure, and what that means, Laurie, is we've shortened the duration on our balance sheet considerably.

Laurie Hunsicker -- Compass Point -- Analyst

Great. OK. But I mean just sort of thinking about how it plays through the income statement, I mean a $3.5 million to $4 million annual run rate, it's not out of the ballpark. Is that correct?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

That has been a little high domain. I mean if you just look at our numbers, I mean, $1 million this last quarter, $641,000, I mean, $1.6 million for half a year. You double that, that's a little over $3.2 million. And usually, the fourth quarter, a lot of institutions don't want to put loans on the books at the end of the year because that's a provision for it.

So the fourth quarter is typically a little bit smaller. So I'd caution a little bit on those numbers waves down a little bit.

Laurie Hunsicker -- Compass Point -- Analyst

That's helpful. Okay. And then on the expense side, obviously, lots of moving parts, Athens inserted in, are all of your cost saves on Athens realized at this point?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

I think we have a little bit left, you'll see. I think that on a run-rate basis, I think you're going to see the third and fourth quarter tick down from a dollar amount from where we are. I'm going to be cautious on that. We're always looking for good salespeople and hiring a solid talent.

We do expect ourselves to grow continuously. And to do that, we have to look for good talent. But there's a little bit left on the synergies.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then, obviously, you've got the different tech expenses, software equipment coming through. I mean, if we fast forward and just look at first quarter of 2020, where we're going to see a sort of clean noninterest expense run rate? Is it conceivable that you're running sort of low to mid $14 million?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

I think that's fair. And our goal is to get -- we think our bank can be in the low 60s, near term on an efficiency basis. So part of it is we're going to manage our growth. But I think those numbers that you stated are reasonable for modeling purposes.

Laurie Hunsicker -- Compass Point -- Analyst

OK, great. And then just two more questions. On tax rate, what should we be using there?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

I'd say anywhere from 23% to 24%. I mean it's going to ebb and flow a little bit. But I'd say, right around 23% is realistic.

Laurie Hunsicker -- Compass Point -- Analyst

OK, great. And then, Claire, I guess, last question to you. Obviously, you all have been really active in your buyback, which is great, but you're starting to come to the completion of your $8 million. So how should we be thinking about that? How are you thinking about that? Is that something that's likely to be refreshed and now is an ongoing part of capital management? Or how do you all think about that? Thanks.

Claire Tucker -- Chief Executive Officer

I think that's certainly part of our long-term capital management that we consider at the board level every time we meet. And I think that, among other things, that we will look at -- we want to make sure we're optimizing the use of our capital, and the board will continue to review that on a quarterly basis.

Laurie Hunsicker -- Compass Point -- Analyst

Great. Thank you. I'll leave it there.

Operator

Our next question comes from Daniel Cardenas with Raymond James.

Daniel Cardenas -- Raymond James -- Analyst

Good morning, guys.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Good morning, Dan.

Claire Tucker -- Chief Executive Officer

Good morning, Dan.

Daniel Cardenas -- Raymond James -- Analyst

So maybe a little bit of color as to how the loan pipelines look coming into 3Q. And expectations for growth in the second half of the year, just kind of given a focus on shrinking the out-of-area portfolio.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Sure. I think the near term third quarter, we're going to continue to see some payoffs. Nashville continues to be hot. We see a lot of commercial real estate projects that may be halfway done, but the pricing they're getting on the projects, it's being sold.

Businesses are being sold at nice prices. So I think going forward, I would say our loan growth is going to be muted, and I would expect commercial real estate to have some payoffs near term.

Daniel Cardenas -- Raymond James -- Analyst

And do you think that has the potential to kind of turn around in Q4? Or is that too soon to tell?

Tim Schools -- President

This is Tim. I think it's too soon to tell, but I don't think it's anything systemic. I mean what I've seen is, particularly in commercial real estate, those are great customer -- it's really the permanent market. The permanent markets, insurance companies and so forth are offering extremely low rates.

And I don't remember the exact transaction, but I know [Inaudible] came to me with a customer who had a rate at like 3%. And I don't remember the term, but it was to take out a long-term commercial project. And I think our rate on that deal was still really good relative to the market. I think it was 4.40%, 4.50%, but the customer got offered 3% long-term fixed rate.

And so there's times when you need to support your customer and say, hey, that's a great ready, you really need to take that. And so it's not a huge number, but we're facing some of that. There's good production that's happening, but that production is sort of offsetting that. But I don't think that's something that we see that we'd go for a really extended period.

Daniel Cardenas -- Raymond James -- Analyst

All right. And maybe an update on Athens, how that footprint is growing? And what have you seen on the run-off side? Is that kind of been in line with expectations better than worse?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yeah. The expectations have been great. We've got great partners in East Tennessee, and I'd like to give them a lot of recognition. We did the systems conversion, and there's always a little bumps in the road, but we have not had any major customer attrition balances to have held steady or in some cases, have grown.

And the teammates over there are doing a great job, and we're partnering very well. We've got treasury management business that's going on over there. I think part of the synergies that we kind of outlined upfront have done more cost, but we also kind of identified a number of revenue synergies that are working both ways. They had a title business that we didn't have in Middle Tennessee.

We got a treasury management platform in Middle Tennessee that East Tennessee did not. We had an SBA platform that now just had their preferred lending status. So we have a lot of revenue opportunities that we have an earmark to the market or when we announce the deal. But I think both sides are enthused about creating an institution that can grow.

And that's our expectations.

Daniel Cardenas -- Raymond James -- Analyst

And when do you think the revenue opportunities that your earmark will begin to bear fruit for you guys?

Claire Tucker -- Chief Executive Officer

Well, Daniel, this is Claire. I referenced a few minutes ago that we've already had three good wins on the treasury management side just in this last quarter, and we're in the process of getting those implemented. So I think to be able to do that in the midst of doing a core conversion is pretty remarkable. So I'm not going to size it for you, it's -- that would be a little premature.

But I do think that we've got some great opportunities there that will begin to materialize pretty quickly.

Daniel Cardenas -- Raymond James -- Analyst

OK. Great. And then last question for me on the M&A front, maybe an update as to how the environment looks like. Is there a lot of chatter going on in the marketplace?

Tim Schools -- President

This is Tim. I would say that -- I don't know if I'd use the word chatter, but there certainly is activity. And myself, just leaving a smaller organization, there's organizations that either the liquidity of their shareholders or succession planning or multiple fell out the compliance and the cost. I don't really view that as much as the issue.

I think it's shareholder liquidity in smaller companies, succession planning, or just really not having a growth strategy. So I would say it is active dialogue out there.

Daniel Cardenas -- Raymond James -- Analyst

All right. Great. I'll step back right there.

Claire Tucker -- Chief Executive Officer

Thank you, Daniel.

Operator

Our next question comes from Stephen Scouten with Sandler O'Neil.

Peter Ruiz -- Sandler O'Neill + Partners, L.P. -- Analyst

Hey, good morning, guys. It's actually Peter Ruiz on for Stephen.

Claire Tucker -- Chief Executive Officer

Hi, Peter.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Hi, Peter.

Peter Ruiz -- Sandler O'Neill + Partners, L.P. -- Analyst

Most of the questions have been answered, but just maybe following back up on the NIM and just kind of thinking about how the deposit cost play out. I appreciate that you guys are doing things to kind of mitigate the compression here going forward. But given the competition in Nashville, what do deposit cost overall kind of look like over the near term? I would assume they have to continue to creep higher.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Well, on the deposit cost, I would say, probably for the last six to eight weeks, it's calmed down a lot. I think our clients are expecting some rate cuts, and we're going to be actively dialoguing, especially with clients that are more rate sensitive about -- when we gave a rate increase with the Fed movement, they understand that a rate cut comes with a Fed cut. So it's going to largely depend on our ability to work with the sales force and then to work with our customers. And what I would say is that the best indication to give you is kind of how we did it on the rate-up environment.

If you looked at our deposit cost slide, I mean, we've told you guys from day one, we model the 60% beta on rates up, and I think we've done better than that. And then we're going to still model 60% beta on the way down. And that's the guidance I'd give to you, Peter.

Tim Schools -- President

I don't know that it's rate pressure on deposits per se, it's -- I think some of our cost, and I haven't had time to really break it down. A lot of the increase this quarter may not necessarily have been that the cost of our deposit products went up. It's just the marginal growth came in the higher cost categories. So did we grow in money market, and we grew in CD, since that brought the weighted average rate up.

But I think the actual competition and rate pressure has sort of settled down the last quarter or two. And I would say one thing, I mean, this doesn't go toward driving earnings, but I don't think it should be left out of site, just -- this company is certainly focused on deposits, but the strength was the loan machine. And even before I joined, there was a lot of great progress on deposits. And one of the things -- we've got Daniel Fox here, our treasurer today, it doesn't really show up is the quality of the deposit.

So this quarter, we have had a lot of pledged deposits. In this quarter, the deposit growth allowed us to reduce $45 million of wholesale funding that we had that was pledged to the state of Tennessee. So we want to work on the amount of deposits, the rate of deposits, but also the quality of the deposits to improve our liquidity ratio.

Peter Ruiz -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. Great. That's it for me. Thanks.

Claire Tucker -- Chief Executive Officer

Thank you, Peter.OperatorAnd I'm not showing any further questions at this time.

Tim Schools -- President

If there's no more questions, I know there's a lot of people on the phone here that have worked with Claire for a long time. So this is sort of the last quarter. She's not leaving the bank. She's going to be with us at least the next two years.

We're really excited about her helping out in business development and relationship management. So I know everybody on the phone is grateful for the time with Claire. I've only known her for 60 days, but I just want to thank -- she's done a great job of bringing me in. I know Rob, Chris feel the same way.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes, absolutely. Claire, it's been great working with you on these calls and hosting the calls. You've been a great partner, and I think this transition with Tim has been smooth. I'm glad we ended on a good quarter on your last call.

So I know you'll be around with us for a long time still, and we look forward to your new endeavor, and welcoming Tim aboard, as well.

Chris Tietz -- Chief Credit Officer

Thank you, all.

Claire Tucker -- Chief Executive Officer

Thanks to all of you participating today, and just give us a shout if you have other questions.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Claire Tucker -- Chief Executive Officer

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Catherine Mealor -- KBW -- Analyst

Chris Tietz -- Chief Credit Officer

Laurie Hunsicker -- Compass Point -- Analyst

Tim Schools -- President

Daniel Cardenas -- Raymond James -- Analyst

Peter Ruiz -- Sandler O'Neill + Partners, L.P. -- Analyst

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