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Capstar Financial Holdings Inc (CSTR) Q4 2018 Earnings Conference Call Transcript

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Capstar Financial Holdings Inc  (NASDAQ: CSTR)
Q4 2018 Earnings Conference Call
Jan. 25, 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 Fourth Quarter 2018 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 and Mr. Chris Tietz, Chief Credit Officer, 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 the 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 the 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 it's 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 forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of today. Except 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 forward-looking statements and in the presentation of non-GAAP financial measures and reconciliation of non-GAAP measures to the most directly comparable GAAP measures are included in the earnings release and the presentation materials referred to in this call. Finally, CapStar is not responsible for and does not edit nor guarantee the accuracy of its earnings, teleconference, transcripts provided by third parties. The only authorized live and archived webcast and transcripts are located on CapStar's website.

With that, I am now turning the presentation over to Ms. Claire Tucker, CapStar's President and Chief Executive Officer.

Claire Tucker -- President, Chief Executive Officer & Director

Thank you, operator. Good morning, everyone. First of all, we appreciate each of you participating in our fourth quarter 2018 earnings call. We have good news to report on many fronts, including our successful closing of the Athens federal merger and solid progress on our integration.

As you know, we announced this partnership on June 11, 2018 and closed the transaction on October 1. 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 the performance in the fourth quarter, which are reflective of our stated strategy of sound profitable growth.

First of all, operating non-GAAP earnings per share totaled $0.33, which is an 18% increase over the fourth quarter 2017 EPS of $0.28. We generated loan growth of 13.9% in legacy CapStar from the fourth quarter of 2017. Operating, non-GAAP ROAA was 1.27% versus 1.09% for the fourth quarter 2017.

And the ratio of criticized, classified loans to gross loans was at a low level at 1.6% for legacy CapStar, 1.8% for the total company. This ratio is a leading indicator of asset quality for the entire loan portfolio.

And lastly as I mentioned, we closed on the acquisition of Athens Federal on October 1st and are on track with our synergies as well as our tangible book value earn back per share coming in less than four years.

Let me turn the discussion over to Rob. So that he may provide additional detail.

Laurie Hunsicker -- Compass Point -- Analyst

Thank you, Claire, and good morning, everyone. Page five demonstrates the power of our combination with Athens Federal. Last night we reported the following; diluted GAAP EPS of a negative $0.04, operating EPS of $0.33, an 18% increase over prior year, operating return on average assets of 1.27% and 18 basis point increase over prior year.

Our deposit cost decreased 10 basis points from the prior quarter to 1.12% reflecting the lower deposit cost with Athens and our net interest margin expanded 54 basis points from the prior quarter to 3.89%. We also were able to improve our operating leverage with added scale. Our efficiency ratio improved to 61.83% and this is before our cost synergies kick in later in 2019.

Let's move on loan growth. Excluding Athens loans, legacy CapStar EOP loans increased 13.9% from the fourth quarter '17, which is at the top end of the guidance we provided you throughout 2018. Athens added $349 million in loans on day one and provides further granularity and diversification through our loan book.

More specifically, the average loan size in the legacy Athens portfolio is a $106,000. As you can see by the charts, our quarterly average loan balance with above our ending held for investment loan balance, so we did experience several payoffs at year-end.

With that let me turn it back to Claire to talk about credit.

Claire Tucker -- President, Chief Executive Officer & Director

Thank you, Rob. Now let's move to Page 7 of the investor presentation and review the key credit metrics. We believe that the core credit metrics, which I will review in a moment, reflect a very clean loan portfolio. The trends of these credit metrics further substantiate our focus on soundness as a key principle.

In the top left graph, you will note that the current loan loss reserve of $12.1 million plus $5.2 million, which is the fair value mark on the acquired loans equates to 1.21% reserve to loans. This reserve is directionally aligned with improvement in credit quality and attributes of our criticized and classified loans.

In the lower left graph, you see the detail of our criticized classified loans over the past eight quarters. As I mentioned previously, for legacy CapStar, the ratio is low at 1.6%, inclusive of East Tennessee, the Athens franchise, criticized and classified loans, have a ratio of 1.8%. This level of criticized and classified loans is a leading indicator of asset quality in the company.

The ratio of nonperforming assets to loans plus OREO is at 21 basis points, including Athens and 6 basis points for legacy CapStar. This level compares favorably to Southeastern peer banks.

In our earnings release that was distributed last evening, we reported net charge-offs of $4.6 million during the quarter. As we shared with you last quarter, we had an impaired loan of $5.4 million on which we placed a specific reserve of $2.7 million in the third quarter. We now have charged this loan down to its liquidation value based upon a thorough impairment analysis.

In the past, we've spoken with you about our healthcare strategy and the pivot that we made in 2017. Looking back, prior to the pivot, we grew the loan portfolio too quickly in the wrong kind of ways. Specifically, we were extending credit and larger deal sizes, with enterprise value characteristics and outside our core trade territory.

As we look at the healthcare portfolio today, the average deal size half of what it was pre-pivot, the average risk rate has improved, the growth rate has slowed and our underwriting is more conservative, the charge-off that we took in the fourth quarter with a loan in the healthcare sector that was booked in 2015 pre-pivot. For the entire portfolio, the level of leverage loans has dropped by 50%. Including the East Tennessee or Athens portfolio, the level of leveraged loans is about 11%.

We have shared with you previously, the discipline that we practice around industry and sector concentrations for the entire loan portfolio, diving deeper for commercial real estate and healthcare. We believe the addition of the East Tennessee franchise to CapStar provides further granularity in terms of average loan size, diversity and sector.

It is also noteworthy that although our capital base increased with the addition of the East Tennessee franchise, house lending limits have remained the same. So in summary, we are pleased with the asset quality of the company as we move forward in 2019 and in coming years.

I'll now ask Rob to provide more detail around our financial performance.

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Thanks, Claire. The loan yield for the quarter was 5.49% and up 49 basis points from Q3. The biggest driver of our loan yield increase was adding in $349 million of Athens loans, which had a higher loan yield than legacy CapStar loan book. This added 17 basis points to our combined loan yield.

The yield on new loan production in the fourth quarter was 5.74%, which added 2 basis points to our overall loan yield. Purchase accounting loan accretion contributed 12 basis points or 400,000 for the quarter and we had one loan return to accrual status, which boosted our yield by 4 basis points. Finally, 57% of our loan portfolio is variable rate in nature and our overall balance sheet remains asset sensitive.

Let's move on to deposits. Excluding Athens deposits, Legacy CapStar EOP deposits grew 4.1 from fourth quarter '17. Athens added $404 million in deposits on day one and provides CapStar with a low cost, sticky deposit base.

Deposit cost decreased 10 basis points to 1.12%, reflecting the lower deposit cost in the Athens deposit book. The deposit beta for the quarter equates to a negative 40% as our cost went down 10 basis points as the Fed moved up 25 basis points.

Additionally, 46% of our old deposits are in some form of checking account either a DDA or NOW. So let's see how all this impacted our margin.

What's not to like about this page, anything that could happen good to the margin this quarter did in fact happen. We added in Athens balance sheet on October 1 and with it, our loan yield went up, our deposit cost went down, we added in purchase accounting with the deal and in mid-December we got a rate increase, which helped both legacy institutions as both banks ran asset sensitive balance sheets.

Additionally, as we mark the Athens balance sheet at close, we were able to slightly reposition the bond portfolio into some higher-yielding securities. This will position us well as we head into 2019.

So let's move on to our non-interest income. Our non-interest income to average assets was 1.31% with the impact of the Athens merger and BOLI proceeds. Excluding the BOLI proceeds, our non-interest income to average assets would have been 90 basis points. Treasury management and deposit service charges increased in the fourth quarter, reflects the impact of Athens consumer service charges on our deposits.

Tri-Net had a smaller sale this quarter, which is consistent with our messaging to you last quarter. Mortgage loan volumes and fees decreased from the third quarter due to seasonality, but also had thinner margins due to a stronger mix weighted to the jumbo market. So let's move on to expenses.

The partnership with Athens allows us to leverage an expense base over a larger balance sheet. Our operating efficiency ratio for the fourth quarter was 61.8%. This ratio excludes the $8.9 million of merger related charges and we had approximately $1 million of elevated personnel expense in the quarter, related to the acquisition cost of new hires, stock compensation expense, an elevated true-up of our incentive accrual and the relocation of our new high visibility branch in Williamson County.

By combining with Athens, we added over 100 FTEs and approximately $4 million in expenses. We also booked $442,000 worth of CDI expense in the quarter, which was not in the run rate of the legacy institutions. As we work through the merger, both sides will cautiously and diligently work through the combined expense base to capture our stated cost synergies.

So let me speak about the merger for a bit. As you can see on Page 13, we are progressing our way to a full integration with Athens. We have the systems integration set up for the second quarter and we anticipate our cost synergies to begin appearing in the third quarter. We have dedicated teams and third-party providers helping us along the way to ensure a smooth transition for our customers.

As discussed with you in June, we expected the combined entity to be a winning formula for our clients, our shareholders and the communities in which we serve. The fourth quarter provided some tangible results as the power of the combination and what it can deliver for these three constituent bases.

So let's turn the page and let me talk about that for a second. First the combination provides the benefits to each of our respective client basis. For Athens clients, we'll be bringing our commercial and private banking expertise to East Tennessee. This will include, treasury management products, a larger capital base to do bigger deals and SBA platform to help those clients who don't yet qualify for traditional credit and a strong private banking wealth management platform.

For our clients in Middle Tennessee, we have opportunities to leverage Athens title and consumer finance businesses. Although we make no revenue synergies -- no revenue synergies into the deal economics, both sides have worked in partnership to identify a handful of tangible and executable opportunities.

As it relates to our communities, I'll remind you about the $1.5 million charitable donation we made to the Athens foundation. On October 1 and effective with the close of the partnership, we made our first payment of $500,000 to the foundation and are excited of how these funds will help enrich the Athens community. This donation is sizable, meaningful and an indication of the importance we place in operating outside of Nashville.

As it relates to our shareholders, the fourth quarter is a good start. In short, we have created a $2 billion institution with a strong funding profile, growth prospects, a strong capital base and a profitability profile that will march us toward our goal of becoming a high performing bank.

As it relates to deal economics, we are pleased to say that we are on track or ahead of where we expected to be. Cost saves, IRR and our tangible book value earn back are all on track. As it relates to the initial dilution, you can see by the table at the bottom of the page, our tangible book value per share moved down with the issuance of 5.2 million shares for Athens and stands at $11.20 at year-end. This includes both our common and preferred shares.

So let's move on capital. Post acquisition, all of our capital ratios increased from the third quarter and are well above regulatory guidelines. I'll remind you of the $8 million stock buyback we announced in December and although we bought no shares back in the fourth quarter due to the timing of the announcement, you should expect us to be active in 2019, especially at the current stock price.

Additionally, we have declared a $0.04 dividend to all our common and preferred shareholders to be paid on February 25 for shareholders on record as of February 05. So let's talk about our expectations for 2019.

First, let me say that I can't recall a year in which we have been so well positioned to execute our strategy and financial plan for the coming year. Coming into 2019, we have very clean credit, growth prospects, our funding profile has been solidified with the partnership with Athens and we just posted a quarter with a 127 ROA. The team is energized and the economies in which we operate remain robust.

As you might have heard, Asurion is consolidating various offices in Nashville, accounting for 2,000 jobs, some of which are already here. Amazon announced 5,000 new jobs in Nashville and Alliance Bernstein announced more than 1,000 jobs. Ernst & Young recently announced 600 jobs, all coming to Nashville. With that as a backdrop and how it relates to guidance, we will maintain a high single to low double-digit loan growth for 2019.

You can expect our NIM to range between 3.70% and 3.90%. I believe our challenge will be managing our growth and maintaining our deposit cost at an acceptable beta. Our efficiency ratio should be in the mid to low '60s and then migrate down to the high '50s by year-end as we capture cost synergies associated with the Athens partnership.

As a reminder, we reload FICA in the first quarter and we are add in the cost of our new Brentwood branch. Additionally, we further expect to continue our pace of responsible hiring associated with gross -- growth. Our non-interest income should range between 80 and 110 basis points. Our goal has been to target a 1% fee level and with SBA and wealth still in its infancy stages, this goal is within reach.

We run our balance sheet to a 90% to 100% loan-to-deposit ratio. We should produce an ROAA within the 1.15% to 1.35% range. Our purchase accounting loan accretion should run an approximately $1 million in 2019 and our CDI expense should be at $1.7 million. Given our clean credit, we should have less than 25 basis points in net charge-offs in 2019 and our tax rate should come in around 23%.

So with that let me turn it back to Claire for some closing comments.

Claire Tucker -- President, Chief Executive Officer & Director

Thank you, Rob. CapStar's strategy remains one of sound profitable growth. We believe that the growth and profitability that we reported yesterday and the clean loan portfolio is demonstrated and our credit metrics going forward are reflective of this strategy.

Although we've posted solid legacy loan growth of 14% from the fourth quarter of 2017, the level of transactions that we have considered that passed on has increased as our bankers maintain 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. We are keenly focused on delivering a successful integration with our Athens partners and capturing the deal economics in terms of one-time cost and synergies.

I've been particularly pleased with the connectivity and shared goals 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.

The recognition for customer excellence that CapStar received from Greenwich Associates is consistent with our goal of differentiating our bank from our competition. Continued penetration of the customer wallet, an increase in primary bank status with more clients is front and center for all of our bankers. Our partners in East Tennessee are excited about the new product offerings, such as treasury management product suite and the SBA loan products.

Given the markets in which we operate, we believe that we have continued opportunities for increasing market share through organic growth. And we will continue to explore strategic and financially attractive M&A opportunities that have the potential of enhancing our core franchise and building shareholder value.

We are 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 and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Catherine Mealor of KBW. Your line is now open.

Catherine Mealor -- KBW -- Analyst

Thanks. Good morning.

Claire Tucker -- President, Chief Executive Officer & Director

Good morning, Cathy.

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Good morning.

Catherine Mealor -- KBW -- Analyst

I just wanted to start with the margin. So Rob, you moved through NIM guide up pretty substantially from your previous guide. So I guess question one is, I guess what happened -- does anything in particular happened this quarter that was a surprise to you versus what and kind of when did the quarter sink in? And then how does that -- how does that guide change or does it change if the Fed pauses from here? Thanks.

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Yes, sure, that's a good question, Catherine. Basically, we had a lot of positive attributes in the margin. When -- we are in the third quarter, we hadn't finalized the Mark on all the accounting for the acquisition. We've got that in. So we understand the purchase accounting impact. We did have one loan that returned to accrual from non-accrual.

But basically the Fed moved in December and that helps both banks as we ran asset balance -- both asset sensitive balance sheets. So I think our guidance is correct now going forward. If we get maybe -- 1 rate increase next year potentially 2, 6 to 9 months from now, I think we're well positioned for that.

So I would say the big pieces of that was adding in Athens and then I would also say on the deposit cost on both sides, on Legacy CapStar, we controlled our beta fairly well for the quarter and Athens did a great job with their deposit book as well. So adding that in really helped us. So that was a little bit of a surprise on that front.

Claire Tucker -- President, Chief Executive Officer & Director

I think Catherine, I would add to that, that as we looked at the combination to begin with, we always believed that combining Legacy CapStar with the East Tennessee franchise in Athens was going to be a great thing for us and we're just having closed in October, I'm really pleased with what the combination is showing that it can do for us.

Catherine Mealor -- KBW -- Analyst

Great and then if the does fed does pause, you don't get another fed hike, you feel like that range holds true and maybe so at the bottom end of the range?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

I think we'll be in the range and we'll see how it plays out. I think the risk there is that we still get customers looking for increases in their deposit cost and we don't see much on the loan side. The Nashville market is very competitive for funding. So want to give it a quarter or two, but that would be the risk Catherine.

Catherine Mealor -- KBW -- Analyst

Got it. Thanks. That's helpful, thank you. And then maybe one thing on credit, Claire, I appreciate all the commentary on the healthcare book. One follow-up on that is can you give us the current balance on the healthcare book and then is there a way to think about how much of that book is in dollars, pre-pivot and then post pivot?

Claire Tucker -- President, Chief Executive Officer & Director

Catherine. I'm going to ask Chris to respond to that. He's got all the detail right in front of him.

Catherine Mealor -- KBW -- Analyst

Great.

Chris Tietz -- CapStar Financial Holdings, Inc.

Yeah. Hi Catherine. How are you.

Catherine Mealor -- KBW -- Analyst

I am good. Thanks.

Chris Tietz -- CapStar Financial Holdings, Inc.

You know the healthcare book right now, is at about $156 million funded and there is -- I think the issue is, as you go back to the pre-pivot, post-pivot, we have burned off a lot of the pre-pivot assets that had intrinsic characteristics that would have given us pause for concern and that will be swapping to a profile that's more secured, better capitalized, lower leverage and so on and so forth. So I can't be specific about that right now. We've done the analysis. I'll just tell you, it's a pretty stark comparison.

Claire Tucker -- President, Chief Executive Officer & Director

And Catherine, I would add to that. If I go back and think about probably in 2016, 2017, the healthcare book was about $210 million, $220 million throughout the course of the last 24 months, if you will, 18 months. We had significant paydowns that were either a result of us choosing to exit specific credits, unitranche lenders coming in and offering terms and conditions that are not consistent with our book.

As an example, we ran that book down to about $137 million and so to Chris's point, I think a lot of that pre-pivot book has run off and then, we've begun to build it back up from the $137 million to the mid $150 million now.

Catherine Mealor -- KBW -- Analyst

Got it. So is it safe to say that it has something in the book?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

No. I don't think so. But what I would say I think in all frankness is that we pulled in very close to home. We pulled in too much more vanilla transaction profiles and chose to keep some of that pre-pivot book simply because they met those characteristics that we thought were important.

So I wouldn't build anything into that except to say that again, our criticized and classified loans historically reflected some of what we were working through and now they are at historic low levels.

Catherine Mealor -- KBW -- Analyst

Okay. And then one follow on, how much of that $156 million is on classified or criticized?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Yeah, it's $7 million.

Catherine Mealor -- KBW -- Analyst

Okay. Great. Thanks for the color.

Claire Tucker -- President, Chief Executive Officer & Director

Thank you.

Operator

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

Stephen Scouten -- Sandler O'Neill -- Analyst

Hey everyone, good morning.

Claire Tucker -- President, Chief Executive Officer & Director

Good morning, Stephen.

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Good morning, Stephen.

Stephen Scouten -- Sandler O'Neill -- Analyst

Rob, I appreciate some of the color around the NIM and the deposit betas, but can you -- do you have any specifics around what those Legacy CapStar deposit beta debated? How they reacted in the quarter or maybe kind of breaking out the 10 basis point move down in the funding cost, how much of that came from Athens versus the move in the core? Thanks.

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

So, if you recall just Legacy CapStar in the third quarter, it had about 1.22% cost of their deposits. We moved up approximately 10 to 12 basis points in the quarter on the legacy side. Athens had roughly a 47 basis point cost of their book and we moved up 2 basis points on Athens to 49 basis points.

So really the power of this is what we talked about all along and when we partnered with Athens is their low cost, sticky deposit book and helping us fund the balance sheet in a better way. So I think this is a winning combination and I think Nashville is going to be a little tougher around gathering and executing deposits and we'll look to some of our Athens partners to help us on that. So it's a good partnership all the way around.

Stephen Scouten -- Sandler O'Neill -- Analyst

Yeah, I appreciate it. And I know you said the risk point really on the NIM is probably the betas being maybe higher than you might anticipate, but if we don't get any rate hikes kind of doubling down on Catherine's question, if we don't get any rate hikes and we look at like a 2Q, 3Q kind of deposit beta for the combined company, is there a good range that we can think about on that through 2019?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Well, I mean certainly that's the risk. As we grow our loan book, we're going to have to fund that and it's going to be tricky. And I think you can expect the deposit cost to slightly pick up, but we will have to manage through that.

So I don't know if I've put a beta on that, but I wouldn't anticipate a rate increase in the first, what half of the year, perhaps six months from now, but I think that's going to be the challenge and we'll see where it lands in the first quarter.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay. Fair enough and on the Athens transaction, I'm curious just what's driving the timing of the 2Q systems conversion or if there is any potential for that to get moved up and maybe for the cost saves to be expedited in anyway?

Claire Tucker -- President, Chief Executive Officer & Director

I think we're pretty locked and loaded in terms of doing that conversion weekend of April 6. As you know, part of the driver of selecting the time is the availability of the teams on the core providers and that's the weekend that we've got built in. That's not very long.

My team in operations reminds me that's not very far out. So I can't see that being expedited at all, but we feel very comfortable that we're going to convert that weekend and then really begin to think more of the synergies come to bear.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay. Great. And then maybe lastly for me, just on kind of organic loan growth as we look into '19, Claire, you mentioned you guys are passing on a few more deals these days. Just given conservatism and wanted to find the right structure, it looked like end of period loan growth, back into it for fourth quarter was maybe around 2% give or take,

But how can we think about what's going to drive the pickup into '19 to hit your guidance? Is it booking more loan stronger originations or is it really slower pay paydowns or what's the push-pull between those kind of dynamics?

Claire Tucker -- President, Chief Executive Officer & Director

I think to describe it as a push-pull is great because as you know with our commercial real estate book, we have construction projects in there that we always want them to behave the way they're supposed to, which means they ramp up, draw down on their lines and then they're completed and they pay off.

So we'll continue to see, I think a strong level of payoffs. The other thing obviously in the national market that happens, particularly in our C&I book is there's some very attractive companies here that private equity groups have shown an interest in coming in and purchasing and paying off bank debt. So we're always battling that. It's good for our clients to be recognized and have payoffs or sell their companies, but it hurts in terms of pay-offs.

I think here we've got a good, strong group of bankers on the ground here adding the Athens team to it, I think it's going to help us. We'll have some opportunities for example, probably in the Cleveland market, in East Tennessee, where we've done some larger loans over there. Our hold level relative to Athens will allow us to keep more of those loans on the books instead of having to sell some participations, for example.

So, there'll be different levers that we're able to pull that I think will enable us to hit the -- at least the lower end of that guidance.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay. Really helpful. And congrats on a strong end of the year as we head into the next.

Claire Tucker -- President, Chief Executive Officer & Director

Thank you so much. We appreciate it.

Operator

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

Andrew Terrell -- Stephens, Inc -- Analyst

Hey, this is actually Andrew Terrell on for Tyler this morning. Good morning, everybody.

Claire Tucker -- President, Chief Executive Officer & Director

Good morning, Andrew.

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Good morning.

Andrew Terrell -- Stephens, Inc -- Analyst

Hey. So maybe just to go back to be the NIM range, I appreciate the color on the 3.70% to 3.90% range. Just to clarify, is this a GAAP basis or on a core NIM ex-purchase accounting?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

No it would include purchase accounting.

Andrew Terrell -- Stephens, Inc -- Analyst

Okay. Thanks. And then maybe just to move over to fee income, I'm trying to get to kind of a clean fee income run rate moving forward. So is there anything in the other fee income line item other than the $2 million BOLI benefit this quarter that was unusual?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

No, not significantly. I mean we're adding in Athens into that as well. It's unfortunately that the BOLI proceeds are attached to the death of Dan Hogan, the President of the bank, but other than that, everything is fairly normal in there.

Claire Tucker -- President, Chief Executive Officer & Director

Andrew, I would say just adding on what Rob was saying; you have to recognize that in that fourth quarter, Athens does have some good fee income sources that we've not had before through their title business for example and some mortgage businesses. So, I think those will help enhances going forward.

Andrew Terrell -- Stephens, Inc -- Analyst

Great, thank you. And then maybe just to move over to mortgage quickly, looks like the gain on sale margin held in relatively nicely compared to some peers. Was this just a component of higher mix of refi volumes or was there any impact of Athens coming through here?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Yeah, there is Athens in the numbers in terms of the mortgage stuff and I do believe we have some data points on mortgage in the back of the deck. We're predominantly purchased volume about 74% for the quarter and the fee on or the gain on the sale, I think ran about 156 basis points.

Andrew Terrell -- Stephens, Inc -- Analyst

Got it. That's it for me. Thanks for taking my questions guys.

Claire Tucker -- President, Chief Executive Officer & Director

Thank you.

Operator

Thank you. Our next question comes from Daniel Cardenas of Raymond James. Your line is now open.

Daniel Cardenas -- Raymond James -- Analyst

Hey good morning, guys.

Claire Tucker -- President, Chief Executive Officer & Director

Good morning, Daniel.

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Good morning.

Daniel Cardenas -- Raymond James -- Analyst

So kind of given your loan growth outlook and then integration efforts with Athens, maybe can you give us a quick update on how aggressive you could expect to be on your buyback activity given your $8 million announcement a few weeks back?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Yeah, I mean certainly at these prices, it looks attractive to us. I mean it's very painful to come in and see our bank trading at $1.35 price to tangible book value when comps of banks that make an ROA in this range are well above that. So I think you can see us be active especially at these pricing levels.

Daniel Cardenas -- Raymond James -- Analyst

Okay. And then maybe on the charge-off guidance that you gave for 2019, it seems to be absent Q4, seems to be a little bit higher than what we saw Q1 to Q3 of last year. What's kind of given you or is there anything kind of given you pause for concern to kind of project the charge-off in that, say 20 basis point to 25 basis point range?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

No. I think what I said is less than 25 basis points. I think previously, we've always guided from 15 basis points to 30 basis points. Certainly, we think with getting this credit behind us in the fourth quarter, our credit metrics are all at low levels and we feel good about the book and I'll let Chris talk about it, but there's nothing imminent on the horizon.

Chris Tietz -- CapStar Financial Holdings, Inc.

Yeah. if you look at the -- when we look at our criticized and classified loans we reported to you; one, they are at historically low level and historically, the vast majority 90% plus of our loss experience over 12 or 18 month period comes out of that book.

In addition, when you look at that book where we are right now, it consists primarily of substantially better secured transactions where we would have a low or relatively low loss expectation coming out of that. So that's our assessment of this right now and we'll continue to be transparent in our disclosures of criticized and classified loan levels quarter-to-quarter.

Claire Tucker -- President, Chief Executive Officer & Director

Daniel, I'd add to that, that we were in a net recovery position in the book most of the year and again my comment about the quick class levels being leading indicators causes me to feel very good. I think and the way we lay out the range is different than what we've done before.

Historically, as Rob said, it's been a range of 15 basis points to 30 basis point and I think by just taking it at less than 25 basis points, it could be at the very low end of that spectrum.

Daniel Cardenas -- Raymond James -- Analyst

Okay. Great. All right. My other questions have been asked and answered. Thanks guys.

Claire Tucker -- President, Chief Executive Officer & Director

Thank you, Daniel.

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Thanks Daniel.

Operator

Thank you. (Operator Instructions). Our next question comes from Laurie Hunsicker of Compass Point. Your line is now open.

Laurie Hunsicker -- Compass Point -- Analyst

Hi. Thanks. Good morning.

Claire Tucker -- President, Chief Executive Officer & Director

Good morning, Laurie.

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Good morning, Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

Just staying on credit, I just wanted to know a few things, if we could go back to the specific healthcare credit that comprise most of your charge-offs, can you give us a little color about what the size of that was?

Claire Tucker -- President, Chief Executive Officer & Director

Sure, Laurie. I think in my comments, I said that the loan was $5.4 million, we had in prior quarters, a specific reserve already assigned to that of $2.7 million. We did our liquidation analysis and charged it down to the value that we believe is appropriate.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And so what is the current carrying value right now?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Approximately $800,000.

Laurie Hunsicker -- Compass Point -- Analyst

800,000 OK. And so that's now appearing in your -- still in your non-performers. Is that correct?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

That residual balances, the whole thing was last quarter and I believe the prior quarter as well.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And what are your total healthcare non-performers?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

As far as non-performers that is -- it is in the healthcare space right now.

Claire Tucker -- President, Chief Executive Officer & Director

There are no others.

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Yeah.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And then of your $4.6 million in charge-off for the quarter, how much were healthcare?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

That -- it was that one credit.

Chris Tietz -- CapStar Financial Holdings, Inc.

Yeah. It was the entire credit.

Laurie Hunsicker -- Compass Point -- Analyst

Just that one credit. Okay.

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Correct.

Laurie Hunsicker -- Compass Point -- Analyst

That's helpful. Okay and then just around your comments on loan growth and sort of how we're thinking about it exclusive of this quarter, and your comments on charge-offs, if we're thinking annually of the loan loss provision run rate in the $3.5 to $4 million, is that a good run rate or is that too low?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Well, what I would say is the charge-off. I'd look at it in two pieces. So one, I think the charge-off guidance was less than 25 basis points and I think Chris has said, there's nothing imminent and we could be at the lower end of that range.

The second piece of the provision is for loan growth. We have typically guided you to of around 1.20% as a good modeling. I would say anywhere around 1.15% to 1.20% on new loan growth for provisioning is a good modeling assumption.

Laurie Hunsicker -- Compass Point -- Analyst

Perfect. Okay, that's helpful. Okay and then within margin guidance sits accretion income. The accretion income this quarter 12 basis points are backing into $525,000. What is the accretion dollar amount that you are using for full year '19?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Which is in there on Page 16, we said purchase accretion will be about roughly a $1 million.

Laurie Hunsicker -- Compass Point -- Analyst

$1 million. Okay, so OK, so round numbers to that 12 basis points is going to drop to maybe 3 basis points or 4 basis points of your margin?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Approximately, yeah. I mean, I think the loan accretion this quarter was $400,000 I mentioned.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. Sorry, I thought you said 12 basis points. I was into higher number. Okay. And so I guess, putting all those pieces together and you gave a very wide range on reported net interest margin, we're looking at core margin, how should we be thinking about core margin as we head into next quarter?

Is that something that you could actually see widen here?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Yeah, certainly, I mean, what I would say is the guidance includes the purchase accounting fees on the margin, which is roughly 9 basis points on the margin and on the loan yield, that was 12 basis points Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And do you have the dollar amount of your correspondent deposits?

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

I do have that, hang on, we're roughly about $150 million, I would say. I can get a more detailed number, but I'd say $150 million and my team is saying, that's on.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. Great, that's helpful. Okay and then -- and then just last question, Claire sort of bigger picture for you, as you mentioned M&A, how are you thinking about M&A versus buyback at these levels? And maybe also help us think about some of your forward M&A targets in terms of how you look at CapStar? How big you want to be asset sizes as we sort of look forward over the next two to three years? Thanks.

Claire Tucker -- President, Chief Executive Officer & Director

Great question. Couple of things, Laurie, we have four major criteria that we look at when we evaluate M&A opportunities. Those would include certainly just a scale number, you want to deal that's big enough to be worth the effort, if you will, but it also scales important because of what it does in terms of your operating efficiency. So that would be one.

Number two would be low-cost deposits. We'd like to see core DEA over 20% if you will, for example. So a sticky, low cost deposit base, which is one of the things that was very attractive for us on Athens.

Number three, would be a business or a bank that has other fee income attributes, not dissimilar to the acquisition we made in 2014 of Farmington Mortgage. And then fourth, would be a company or a bank or stand-alone company that might have a product that is complementary to the core bank. An example of that would be the lift out that we did at the SBA team back in January of 2018. So those four attributes are really the key drivers that we would consider.

As I mentioned, we believe got ample room to continue with organic growth, but we will consider strategically and financially attractive M&A as those come along. And I think to your question about the buyback, we have to evaluate the internal rates of return on alternative uses of our capital and really weigh those to see which one is most attractive and most beneficial for our shareholders?

Laurie Hunsicker -- Compass Point -- Analyst

Okay. Great. And then if you think about size, you're sitting at $2 billion today. How do you think about yourselves if we fast forward two to three years, how big would it appears to be?

Claire Tucker -- President, Chief Executive Officer & Director

Yes. Well, I think if you -- you all certainly do a lot of work as we do in terms of looking at various sizes in banks and trying to determine just by virtue of the pure financial metrics, where the sweet spot is for example and if you look at it in the context of being a high performing company, I would say a $3 billion to $5 billion bank would be a target for us in the -- over the next three, four, five years.

Great. Thank you for taking my questions.

Sure, thanks for your interest.

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Thanks, Laurie.

Andrew Terrell -- Stephens, Inc -- Analyst

thing you. And ladies and gentlemen, this does conclude our question-and-answer session. I would now like to turn the call back over to Ms. Claire Tucker for any closing remarks.

Claire Tucker -- President, Chief Executive Officer & Director

Thank you, operator. Once again, thanks to each of you for participating in the call. I know this is obviously earnings season for you and you've got a lot of other calls you could be and so forth. For those of you who are the analysts, we appreciate your time and attention and particularly for any of you on the call that are investors in CapStar, we are very appreciative of that investment and the confidence that you've demonstrated.

For those of you all who are considering an investment in CapStar, we certainly would welcome further dialog with you as well. We do believe that the company is well positioned for good 2019. As Rob said, we both believe that we are in the best position we've been to take the company forward and really continue to deliver the sound profitable growth that we promise. So with that, we will end the call and hope everyone has a good day.

Operator

Ladies and Gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

Duration: 48 minutes

Call participants:

Claire Tucker -- President, Chief Executive Officer & Director

Laurie Hunsicker -- Compass Point -- Analyst

Rob Anderson -- Chief Administrative Officer, Chief Financial Officer

Catherine Mealor -- KBW -- Analyst

Chris Tietz -- CapStar Financial Holdings, Inc.

Stephen Scouten -- Sandler O'Neill -- Analyst

Andrew Terrell -- Stephens, Inc -- Analyst

Daniel Cardenas -- Raymond James -- Analyst

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