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Edited Transcript of CSTR earnings conference call or presentation 26-Jan-18 2:30pm GMT

Q4 2017 CapStar Financial Holdings Inc Earnings Call

NASHVILLE Jan 30, 2018 (Thomson StreetEvents) -- Edited Transcript of Capstar Financial Holdings Inc earnings conference call or presentation Friday, January 26, 2018 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher G. Tietz

Capstar Financial Holdings, Inc. - Chief Credit Officer and Chief Credit Officer of Capstar Bank

* Claire W. Tucker

Capstar Financial Holdings, Inc. - CEO, President and Director

* Robert B. Anderson

Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank

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Conference Call Participants

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* Daniel Edward Cardenas

Raymond James & Associates, Inc., Research Division - Research Analyst

* Laurie Katherine Havener Hunsicker

Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst

* Nicholas Richard Grant

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst Assistant

* Stephen Kendall Scouten

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research

* Tyler Stafford

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to CapStar Financial Holdings' Fourth Quarter 2017 Earnings Conference Call. Hosting the call today from CapStar are Ms. Claire Tucker, President and Chief Executive Officer; Mr. Rob Anderson, Chief Financial Officer and Chief Administrative Officer; Mr. Dan Hogan, Chief Executive Officer, CapStar Bank; and Mr. Chris Tietz, Chief Credit Officer, CapStar Bank.

(Operator Instructions) Please note that today's call is being recorded and will be made available for replay on CapStar's website. (Operator Instructions)

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 this presentation, CapStar may make certain comments that constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements reflect CapStar's current views with respect to, among other things, future events and its financial performance. Forward-looking statements are not historical facts and are based upon CapStar's expectations, estimates and projections as of today. Accordingly, forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties, many of which are difficult to predict and beyond CapStar's control. Actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of today.

Except as otherwise required by law, CapStar disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.

In addition, this presentation may include certain non-GAAP financial measures. The risks, assumptions and uncertainties impacting forward-looking statements and the presentation of non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures are included in the earnings release and the presentation materials referred to in this call.

Finally, CapStar is not responsible for and does not edit nor guarantee the accuracy of its earnings teleconference transcripts provided by third parties. The only authorized live and archived webcast and transcripts are located on CapStar's website.

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

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [2]

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Thank you, operator. Good morning, everyone. Thank you for joining us for our Fourth Quarter 2017 Earnings Call.

As we reported Thursday afternoon, CapStar reported net income of $91,000 or $0.01 per share on a fully diluted basis for the 3 months ended December 31, 2017. As a result of the Tax Cuts and Jobs Act of 2017 that was signed into law in December, CapStar revalued its net deferred tax asset position, resulting in a onetime noncash charge of $3.6 million or $0.27 per share on a fully diluted basis. Reflecting this charge, adjusted net income was $3.7 million or $0.28 per share compared to net income of $2.9 million or $0.23 per share for the 3 months ended December 31, 2016.

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 this performance. Our vision for CapStar is to be a high-performing financial institution known for sound, profitable growth. Fourth quarter results demonstrating execution of this strategy are highlighted below. In the context of soundness, nonperforming assets to loans plus OREO declined 4 basis points to 28 basis points and we had net charge-offs of $372,000 predominantly related to a loan, for which a specific reserve was in place.

As I noted a moment ago, absent the DTA charge, fourth quarter profitability resulted in adjusted quarterly earnings of $3.7 million and return on average assets of 1.09%. The net interest margin was flat to the prior quarter at 3.26%, with loan yields down 1 basis point, deposit cost up 1 basis point and a nice pickup of 13 basis points in the investment portfolio.

In terms of growth, there are multiple achievements I would like to highlight for you. Average demand deposit accounts increased 30%, positively impacting both Treasury Management and deposit service charges. Wealth management assets under management crossed over the $100 million mark as our registered investment advisers continued to expand our relationships.

You may have noticed in our press release on Wednesday that we completed the hiring of an SBA team earlier this month. This is consistent with the M&A strategy that we have referenced before, in this case, adding a business line that is complementary to our core C&I business model and enhances our sources of noninterest income.

Additionally, we hired 3 new mortgage loan officers in our Farmington Financial Residential Mortgage business. They have hit the ground running and we expect them to be strong contributors to that fee income business in 2018. I will address loan growth at a high level, and then I will provide more color as we move through the deck.

Comparing the fourth quarter 2017 to the same period in 2016, average loans held for investment grew 2%. Excluding the Healthcare loan book, average loans grew 8% during that period. From the third quarter of 2017 to the fourth quarter 2017, loans declined 14%, predominantly impacted by payoffs in the commercial real estate segment as several construction projects were completed and paid off, we also experienced the decline in the Healthcare segment.

Our bankers continue to deepen relationships with our customers as indicated by growth in average DDA balances during the quarter. Greenwich Associates completed a customer experience evaluation during the fourth quarter, revealing some very positive trends and feedback. Several examples include client advocacy and willingness to recommend CapStar are well above industry norms. Our bankers are considered proactive in presenting new commercial solutions to their clients, and a majority of commercial clients consider CapStar to be their primary Treasury Management services provider.

Moving to Page 5, let's look at credit quality for a moment. You will note that we continue to maintain healthy levels of reserves to total loans, specifically the allowance for loan and lease losses was 1.45% for the fourth quarter. Due to the decline in our loan portfolio, a slight negative provision for loan losses was booked. The ratio of nonperforming assets to loans plus OREO declined 4 basis points to 28 basis points, notably at a low point over the quarters depicted in the chart. Similarly, the ratio of criticized and classified loans to total gross loans remained stable at 2.7%.

The final point I will make on this page relates to net charge-offs. During the quarter, we reported net charge-offs of $372,000, primarily attributable to a loan on which there was already a specific reserve.

Comparing fourth quarter 2017 to fourth quarter 2016, average loan growth was 2%. Excluding the Healthcare book, average loan growth was 8%. Comparing third quarter of '17 to fourth quarter '17, results generated a 14% decline. Our commercial real estate segment was impacted by payoffs of construction loans on projects that reached completion and were refinanced through permanent loan sources. We've pointed out previously that our loan portfolio will not reflect straight line growth every quarter due to the nature of commercial real estate construction business. Additionally, the commercial real estate market is hot, resulting in inflated property values in some areas. In several instances, our borrowers received unsolicited offers on their property and (technical difficulty) opted to sell and repay the debt. With these 2 categories, we were paid off on $41 million of loans during the quarter.

The commercial real estate team has closed multiple construction lines for new projects, so we expect funding to begin in the first quarter after borrower equity has been injected into the projects. Asset quality in this segment remains solid.

The second factor impacting growth was embedded in the Healthcare client segment where we experienced roughly $20 million in payoffs and pay downs, largely related to refinancing of debt by our borrowers in accordance with our request. As I have mentioned previously, with the development and implementation of the revised healthcare strategy, the team has pivoted and is rebuilding their pipeline. The sales cycle from prospect development to conversion -- to clients always varies and certainly will impact timing and momentum of loan growth. But with that said, they are certainly benefiting from the insights from our Healthcare Advisory committee, which is populated with well-heeled national-based healthcare executives. It is important to note also that the healthcare team has been very successful in developing depository and Treasury Management business with key clients.

Overall, our bankers continued to experience competitive pressure from new market entrants as well as nontraditional providers of financing at terms inconsistent with our profitability and soundness profile in many cases. Our observation is that the market remains very frothy, reflecting a slippage in discipline around pricing, covenants, leverage and general terms. CapStar is not in the business of growth for the sake of growth. Conversely, we are more focused on soundness and probability to drive positive results for our shareholders.

It is important to note the capacity for loan growth that exists in our unfunded commitments. At the end of the fourth quarter, unfunded commitments totaled $468 million. Additionally, the pipeline of loan opportunities has increased since the beginning of the fourth quarter.

With that, I'll turn it over to Rob, so he may review the summary financials for you.

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [3]

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Thank you, Claire, and good morning, everyone. As Claire mentioned, the CapStar team delivered adjusted net income of $3.7 million or $0.28 earnings per share on an adjusted fully diluted basis. Additionally, the earnings produced a 1.09% return on average assets and we saw expansion in our net interest margin for the quarter and on a year-to-date basis.

As you look at the balance sheet, you will see our growth for the quarter was lower than our previous guidance. But on a year-to-date basis, it still came in at the low end of our guidance. Loans grew, on average, 2% for the quarter and 11% on a year-to-date basis. Deposits shrank for the quarter, but we did grow our transaction accounts 11% for the quarter and 17% on a year-to-date basis. This performance continues to demonstrate our ability to attract, retain and deepen our relationships with our clients.

As we move to the income statement, we saw growth in our net interest income consistent with our loan growth. Noninterest income shrank for the quarter and on a year-to-date basis, mainly due to lower mortgage volume and loan fees. We booked a slight negative provision number this quarter as we experienced a decline in our loan book on a period-end basis. Expenses were contained relative to revenue growth and we experienced higher-than-normal operating leverage on a year-to-date basis.

The revaluation of our deferred tax asset with tax reform was $3.6 million. Adjusting this out of our numbers leaves our effective tax rate at 20% for the quarter and 16.4% on a year-to-date basis. Again, our effective tax rate benefited from the new accounting guidance on stock compensation transactions. More on this in a bit.

One metric beneficial to understanding our earnings power on a go-forward basis is our pretax preprovision income number, which grew 16% in 2017. This metric adjusts out the lumpy credit and noisy tax items we experienced this year.

Let's move on to our loan yields. Our loan yield was 4.54% for the quarter and down 1 basis point from the third quarter. Our variable rate loans repriced with the Fed rate increase in mid-December, but was offset with the slight change in mix and lower loan fees. We typically see a full repricing of our variable rate loan book 90 days post the Fed movement as loans contractually repriced throughout the quarter. As you can see by the chart on the lower left, our loan book is 64% variable rate in nature and predominantly tied to 1-month LIBOR. Any rate increases by the Fed should benefit the yield in our variable rate loan book.

So let's move to our deposits. Our deposit book shrank when compared to the prior quarter and prior year. However, we don't view this as a negative as we want to grow the right type of deposits and obtain an optimal loan-to-deposit ratio with a solid funding base. As you can see by the table on the bottom right, we grew DDA balances 28% over prior quarter and 30% over prior year. Our track record of managing our deposit book with low cost deposits has improved over time, evidenced by the chart on the lower left. In Q4 of 2014, 28% of our deposit book was in some form of checking account, either a DDA or a NOW account. In Q4 of 2017, the mix of our deposit book has shifted where 52% of our deposit book is in a checking account.

As it relates to our deposit cost, we expect our deposit cost to increase whenever the FOMC raises rates or when market expectations of a rate increase are high. As you can see by the graph on the upper right-hand side of the page, we held our deposit cost to a 19% beta during the past 125 basis point increase in the Fed funds rate. If we continue to grow our DDA at the pace we did this past year, then we should be able to manage our deposit beta to a reasonable level moving forward.

Let's move to our margin. Our net interest margin was 3.26% for the quarter and flat compared to prior quarter. Our variable rate loans repriced adding 1 basis point to our margin, but was offset by lower loan fees. The yields on our investment portfolio increased 13 basis points for the quarter and that helped to improve the margin by 2 basis points for the quarter. Our interest rate risk sensitivity report show that we have an asset-sensitive balance sheet. Therefore, should the Fed continue to raise rates in 2018, we would expect our net interest margin to expand slightly. The magnitude of the increase will be dependent on the number and timing of the rate hikes, the shape of the yield curve as well as our ability to manage a number of factors that could impact our loan yields and deposit costs. Again, 64% of our loan book is variable rate in nature and predominantly tied to 1-month LIBOR.

Let's move to our noninterest income. Our noninterest income to average assets was 82 basis points for the quarter and down from the third quarter and prior year. Mortgage was the main driver with origination volume lighter throughout 2017. Additionally, loan fees contributed to the decline as we saw less opportunity in our healthcare space. We also repositioned a small portion of the securities portfolio at year-end for a loss of $108,000. On a more positive note, we had a 38% increase in our Treasury Management and Other Deposit Service charge line. This demonstrates our ability to further penetrate our existing client base and provide them with a comprehensive financial solution.

Next, you'll notice our Tri-Net business, which produced over $1 million in fees in 2017. As you may recall, this was a business we entered into in the fourth quarter of 2016, and at that time, we told you one of our goals as a company was to expand our fee-related business and to be less capital and balance sheet dependent. By all internal standards, we believe this initiative has helped us in this endeavor. Additionally, as Claire mentioned earlier in the call, we hired an SBA team from a local competitor. The goal of this team is to further enhance our fee-related businesses and to deepen our product offering to small and medium-size businesses.

So let's move to expenses. Our overall expense base was $8.7 million and was slightly higher than Q3 and prior year. Our efficiency ratio came in at 65.6%. Salaries and employee benefits increased due to the new hires, the cost to acquire those individuals and an increase in our year-end incentive accrual. Data processing and software expense increased during the periods presented due to an increase in the volume of transactions and implementation of new software in our mortgage banking line of business. Going forward, we expect an increase in our expense base with the hiring of the new SBA team and mortgage loan officers.

So let's move on to taxes. As you may recall, we are coming up on our 10-year anniversary and many of the original investors and employees have options and warrants, which will expire in 2018. In Q4, our effective tax rate benefited as some of those options were exercised. Prior to the impact of tax reform, our effective tax rate was 20%. In 2018, our effective tax rate will benefit from the newly enacted tax reform, but will also benefit from the exercise of expiring options and warrants. Assuming these securities are exercised, we should experience an effective tax rate of 13% to 16% in 2018, dependent upon when they are exercised and at what stock price. Therefore, quarterly rates may differ some but the annual number should fall within this range.

I will touch quickly on our capital ratios, which are highlighted on Page 14. With a positive earnings and stock options being exercised in Q4, all of our capital ratios increased from Q3.

I know all of you are interested in our guidance for 2018, so let me spend some time laying out our expectations for 2018. Although we experienced low growth in the second half of 2017, we do expect high single to low double-digit loan growth in 2018. As stated earlier, our 2017 year-to-date average loan growth was 11% over 2016 and we would expect to be in a similar range in 2018. We expect our net charge-offs to range between 15 and 30 basis points. We have guided you to this range in the past, and if you remove the large credit we charged off in the second quarter of 2017, we would have landed at the lower end of this range this year. As stated earlier, we expect to continue to expand our noninterest income on fee-related businesses. The hiring of the SBA team should provide benefits that we didn't see in 2017. And we will continue to grow in our Treasury Management, Wealth and Tri-Net lines of business.

We have previously talked to you about our efficiency ratio and driving that towards the low 60s by the end of 2018. While we may be elevated near term with the hiring of new revenue producers, we expect to hit this target by the fourth quarter of 2018.

I already touched on our effective tax rate, so let's touch on our profitability aspirations. For some time, we have talked to you about our profitability profile for CapStar and consistently producing a 1% return on average assets. Absent the DTA revaluation impact, this is the second quarter in a row with an ROA exceeding 1%. CapStar is a shareholder-focused institution and improving our profitability profile has been and always will be a top goal. With tax reform and 2 interest rate increases in 2017, we are confident that reaching a 1% ROA is now more attainable on a consistent basis, especially by the fourth quarter of 2018. However, given the recent investments in new revenue producers and seasonally low mortgage revenue in Q1, we may be below this level near term.

With that, let me turn it back to Claire for some closing comments.

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [4]

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Thank you, Rob. To reiterate our stated strategy, we remain committed to delivering sound, profitable growth. Adjusted net income of $3.7 million or $0.28 per share represents a solid quarter of profitability. With focus on all our shareholders, we are committed to consistently delivering strong financial results throughout the company. We are pleased with the continued market penetration our bankers are achieving as demonstrated by the gains we posted and becoming the primary bank for clients.

As I referenced earlier, a study conducted by Greenwich Associates in the fall of 2017 revealed that the majority of our commercial clients consider CapStar to be their primary Treasury Management provider. We are also excited about the opportunities to grow organically through market share takeaway and creation of new business lines. The addition of the SBA team is a prime example of executing against this strategy. We view this as an opportunity to broaden our client base through prospect conversion as well as having a new alternative financing solution for our current clients.

As Rob noted in his comments, we remain committed to delivering a sustainable return on average assets of 1% by the end of the fourth quarter. We will continue to evaluate strategically and financially sound M&A opportunities to augment our franchise and our financial performance. We are appreciative of the investment that many of you on the call have made in CapStar and your continued support.

Operator, we are now ready to open the lines for questions from participants on the call. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Nick Grant with KBW.

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Nicholas Richard Grant, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst Assistant [2]

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So kind of with a little bit less loan growth than you guys had previously expected or a lower range, does that take any pressure off deposit betas and benefit the margin at the same time?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [3]

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Nick, it's Rob. It would a little bit. I mean, one of our main goals is always to grow our low-cost deposits regardless of what our loan book is doing. We need some core stable funding, but certainly if we have more growth, that's going to put a little bit more pressure on our funding cost as well.

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Nicholas Richard Grant, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst Assistant [4]

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Okay, great. And then maybe following up on the SBA team here. So can you give a little more color on the strategy of this unit? Would all of this be just end-market customers and would it be selling the entire guarantee piece? Or how would you guys be looking to run this business? And how fast does it take to ramp up?

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [5]

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Yes. Great question, Nick. Thanks for asking that. We're really, really excited about the addition of this team and expect to continue to expand it. We've talked with you previously about the importance of adding additional noninterest income fee sources as well as having a product line that's complementary to our existing commercial business. So with that said, we think we've got some great opportunities with the team. We will sell the government guaranteed portion, from which we will generate noninterest income. There'll be a portion of each individual loan that we would hold on the balance sheet. We think that gives us some real terrific opportunities to expand into the noncredit relationships with those underlying borrowers and by that I mean expanding the -- being able to build DDA relationships as well as gain their treasury management. It will be predominantly Middle Tennessee, to answer your question. The team has great experience. We're excited that -- they've been here just a couple of weeks and the pipeline is already extremely strong. We also think it's going to enable us to be introduced to some folks that we've not called on before, but also give us a tool to use with our existing commercial clients where they might have a little tougher deal that you couldn't underwrite on a traditional basis that makes more sense in one of the SBA type of products.

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Nicholas Richard Grant, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst Assistant [6]

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Okay, great. And then maybe one quick follow-up on that. As you continue with the exploration of M&A opportunities that you have on the slides and clear that on with your fee initiatives, do you -- kind of these deals like the SBA that add fees become more attractive relative to bank yields?

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [7]

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I think if you look at our history, we've been able to get into a couple of fee income businesses over the last several years that have really enhanced our performance and reduced the reliance on the balance sheet. Examples of those would be our Farmington Mortgage business that we bought in 2014 and the Tri-Net business that we initiated in the fall of 2016. So these are not capital-intensive businesses. They're great, diversified noninterest income sources. And so I think we'll continue to really pursue those types of opportunities a lot.

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Operator [8]

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And our next question comes from the line of Stephen Scouten with Sandler O'Neill.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [9]

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I was wondering if you could talk -- and I apologize, I've been hopping around on different calls if I missed some of this. I can always catch it up later. But can you talk a little bit about your loan pipeline maybe? And what gives you confidence around resuming kind of deposits in 2018? Any specifics that you're seeing that gives you that confidence? And then just kind of what your plans are for the healthcare book at this point given the last couple of quarters' runoff.

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [10]

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Let me sit back and take those in order, Stephen. The loan pipeline, I'll start with commercial real estate because that's the place where we had the most significant level of pay downs in the fourth quarter. As you know, the cycle on most commercial real estate projects is anywhere from a year to 2, 2.5 years just depending upon the complexity of the project. And so the -- in large part, the pay downs that we had in the fourth quarter in the commercial real estate arena were a result of either the project coming to completion and going to the permanent market or as I referenced earlier, sales of some properties where people just taking money off the table. Now with that said, all the while as these projects are going on, the commercial real estate team is developing new projects. And I'm very confident in the pipeline that they've built over the last 4 or 5 months. As you know, we require, in most cases, the equity on these projects to go into the project first before we begin our funding. And so we will begin to benefit from commitments that we closed in the third and fourth quarter that are now beginning to fund up. So we feel good about the commercial real estate sector. I think the healthcare team is building a very nice pipeline. We had about $20 million in pay downs on several of those credits during the fourth quarter, all of which were by design in accordance with the adjusted healthcare strategy. So we believe that they are on pace to have net new growth in 2018 probably in the low double digits going into the year. And then the core C&I team, I think, sort of steady as you go. And we feel pretty good about the pipeline that we've got there.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [11]

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Okay. That's really helpful. And then I guess if I can pivot over to the NIM. Kind of how do you guys think about, maybe Rob, the upside for each additional rate hike from here? I mean, you got 3 bps from loans, repricing is already in 4Q. So kind of as it pertains to the December hike, maybe how much do we have left? And how much do you anticipate? And how much lift could you see getting from each subsequent hike from here?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [12]

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Yes, that's a tricky question, Stephen. Certainly, 64% of the loan book is variable rate and tied to 1-month LIBOR as we've stated for a long time. So we do expect our loan book to reprice in the first quarter. Obviously, the rate increase was mid-December. And contractually, a lot of our loans have repricing dates throughout a quarter. So typically, it takes 90 days on the loan side. What I would say is that the area where we are intensely focused is around the deposit or the liability side. And what I would say through 2017, we've known for a long time that our funding needs to be improved and gaining low-cost, stable deposits will help us in that category. I would say Nashville is a highly competitive market for deposits. And I think the deposit side is where we're going to concentrate and where we could have some slippage. Now I'd go back and say, "Hey, look at our track record on the last 125 basis points of Fed movement and with that a 19% beta." We're modeling higher than that in our interest rate sensitivity reports, but that is going to be tricky. But we do expect the margin to increase with rate movement. So we'll see where it lands in the first quarter. And I'd also point maybe to what happened in the third quarter post the second quarter of this past year, you did see our margin move as indication of what to expect.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [13]

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Yes, fair point. No. That's helpful, Rob. And then -- and just as you touched on it -- maybe last one for me on the deposit side. How do you think about that today now, 88% loan-to-deposit ratio? But obviously, the loan book has been shrinking the last couple of quarters. So -- I mean, are there categories of higher-cost deposits that you still feel like you can allow to runoff? Or based on the growth you anticipate for 2018, are we actually moving in the other direction where you do have to kind of step into that competition in the Nashville market to make sure you can have adequate funding at a decent price?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [14]

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Yes, a couple of things that I would say on the deposit fees. First, on our loan-to-deposit ratio, if you included our held for sale, we'd be closer to the 95% range. And those are assets obviously that we have to fund with our deposits. So we're probably running -- if you include the held for sale right around the 95% ratio, which we feel is a strong loan-to-deposit ratio and where we probably feel comfortable. Can it move plus or minus 5 percentage points from that point? Yes. But the cost -- if we have high single digit to low double-digit and maintaining at 95%, means we're going to have to grow our deposits high single or low double digits. So I would say 2018, certainly, on the deposit side, we're going to have to grow in total. And certainly, mix change could be a portion of that, but we have our bankers surely selling on relationship. And that means getting their operating account and becoming our clients' primary bank. So that's how we focus on relationship with our clients. We feel that's the way we sell and that's the way we optimize the relationship for the client as well. So 2018, we'll certainly see positive deposit growth with our loan book.

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [15]

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Yes, let me add one thing to that, too, just to reinforce. We touched on it a moment ago, but we're particularly excited about the results of the most recent customer experience study that Greenwich Associates did. And specifically, I want to point you back to the fact that the majority of our commercial clients consider CapStar to be their primary Treasury Management bank. As you know, that translates to sticky deposits as well as nice fee income. So I think that really shows the momentum that we're able to capitalize on as we continue to expand the noninterest-bearing accounts and the full relationship.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [16]

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Got you. And just as a footnote, what's the balance of the correspondent deposits today?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [17]

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Balance on correspondent book was around $165 million.

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Operator [18]

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Our next question comes from the line of Daniel Cardenas with Raymond James.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [19]

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A couple of questions for you. As you look at your margin outlook, can you maybe give us a little bit of color as to how many rate hikes you guys have modeled in for 2018?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [20]

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Yes, the Fed is calling for 3. I've heard people talk about 4, I've heard people talk about 2. We're certainly looking at a minimum of 2, Daniel. I mean -- I think 2017, we had 2. So we typically budget and talk about a flat rate environment, and then we do scenario analysis with rate movements on multiple types of hikes and timings to see where we would shake out. But right now, we're expecting 2 hikes for next year.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [21]

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Okay, good. Good. And then maybe a little bit of color. I think you guys mentioned that the market looks a little bit frothy. Maybe a little color in terms of competitive pressures on both loan and deposits and where they're coming from. And whether or not specifically on the deposit side, have you seen a pickup in intensity on competition for deposits.

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [22]

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Daniel, I made the comment about it being frothy and it was in the context of the lending market. So let me take that and then Rob will address the deposits' frothiness or pressure on product -- pricing. I think we're seeing some new entrants into the market as well as some nontraditional lenders that are more comfortable, for example, with a 3-year interest-only period on a construction deal or really pricing off of LIBOR at very, very thin margins. Some of that is coming from existing banks that are protecting local relationships. But really, the frothiness I think is more from some of the new entrants into the market that are looking for a place to deploy their deposit -- excuse me, their funds or cash and they're doing so by lending it into -- whether it's a C&I, particularly the commercial real estate market. And what we've said, and I think you can see a bit is that we're going to maintain our discipline. Healthcare is a prime example of that, where we want to make sure that we're focused on the soundness on the profitability and not doing things that we think we'll regret, just given where we are in the business and economic cycle.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [23]

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And I guess with that -- I mean, is the competitive pressure is mostly on the pricing side or are you beginning to see structural weakness from competitors?

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [24]

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I think some of it's structural. Case in point is like the 3-year interest-only type of project that we believe is stretching the far end of the risk curve.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [25]

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And then, Rob, how about on the funding side?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [26]

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Yes, on the deposits, I mean, I would say we've had success in 2017 across the board. Specifically, in -- commercial and healthcare had a great year on the deposit side. So we're able to certainly penetrate some of our core existing clients there, offer Treasury Management and bring in some low-cost funding. Business banking has moved up in terms of their deposit gathering on the consumer side and on the private banking. I would say where we are being careful is a little bit on the correspondent side. I mean, previously that book was probably $200 million. It's around $160 million today. As you may know, that has 100% beta on it because we're acting as the Fed for our correspondent banks. We typically have shied away with some public funds that are maybe not core to our market here in Middle Tennessee. Other than that, we're seeing good growth from all aspects of our businesses and would expect that in 2018 as well.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [27]

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And you're pretty confident that you can grow the deposit base in like step with the loan growth without significantly impacting your margin?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [28]

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Well, that's going to be the challenge for sure. I mean, what I would say is our track record has been good over the -- and why we put the chart in the book from Q4 '17 (sic) [Q4 '14] to Q4 '17, we've been able to move our checking accounts whether it's a NOW or a DDA. And we need to continue that path. And as we grow our loan book this year, we need to make sure we hold our deposit betas and are working with our clients to demonstrate our value as a relationship bank.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [29]

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Fair enough. All right. And then last question for me on the operating expense side. With the addition of SBA lenders, how does that impact your operating expense number on a go-forward basis?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [30]

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Yes. So we're about $8.7 million for the quarter. I think you can see that inch up. We did have a number of hires actually in the fourth quarter. We added around 7 FTE, a few of those were certainly identified in Claire's comments on the mortgage loan officer who backfilled a few positions. But with the SBA team being recently hired, that's going to increase the run rate in 2018. I would expect that to move up. Again, we're trying to manage with our operating leverage. But what you can expect near term, certainly, like the efficiency ratio, I would say was more of a function of revenue this quarter with a little bit lighter mortgage. And that's certainly going to be the case in the first quarter. That's usually a seasonally lighter revenue quarter for us, but you can see the expense base move up from $8.7 million for those hires.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [31]

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Okay. And with the SBA lenders, they are not operating under any noncompete agreements, are they?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [32]

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No, they are not.

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Operator [33]

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Our next question comes from the line of Laurie Hunsicker with Compass Point.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [34]

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I just wanted to follow up where Daniel was going with expenses because I want to make sure that I have a handle on it. In 2018, you've got a jump from the stock-based incentive comp that returns. Is that correct?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [35]

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What do you mean? I'm sorry. Maybe not following what you're saying, Laurie.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [36]

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So you had -- well, round numbers I'd say, at least I thought. I thought you had $1 million that came out because you didn't hit certain hurdles. That was removed back in 2Q '17 when you had that large impair charge-off (inaudible) and to that...

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [37]

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Yes, I mean, incentive accrual is down. Is -- if that's what you're asking.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [38]

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Right. And so does that come back up into 2018?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [39]

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Yes, it would come back up and we would expect that to come back up as, one, the performance is there and we expect the performance to be there.

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [40]

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Yes, Laurie, there's great correlation to the performance of the company and how the incentive payments are made.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [41]

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Okay. And so from a tax windfall investment standpoint, if you were to quantify the dollar amount that you could see your noninterest expense line expand, what is that dollar?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [42]

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Noninterest expense for the tax piece, reinvestments?

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [43]

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Exactly. Right, exactly. So a lot of banks out there are saying, "Look, with this tax windfall, what we're doing is we're doing a reinvestment back into the business, salary raises, et cetera." Sometimes it's 0.5% of expenses, sometimes it's 1%, 2%. Do you all have a number on that? Have you quantified that?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [44]

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No, we have not. But I would say that we're always in the market for good, talented people like the SBA team that came available. We would have done that regardless of the tax piece. That's just the way we are looking at growing our business. So I would not attribute any expense increase associated with tax reform.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [45]

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Okay. Okay. And so then just to sort of fine-tune, again, where I think Daniel was going. If we look at the 7 FTEs that you just added plus the stock-based incentive comp, I mean, is it possible that we see that quarterly run rate? I realize there's a seasonality to this as well, obviously, depending on where mortgage banking is selling. But if that line is closer to somewhere between $9 million to $9.2 million a quarter, is that a good run rate? Am I thinking...

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [46]

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Yes, I think we could easily have a $9 million handle on our quarterly expense base going forward. And $9 million, $9.2 million could easily be there.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [47]

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Perfect, okay. And then secondly, I wanted to go over just to loans, the healthcare, where -- I know you give an average balance in your slide deck. But do you have a period end for that?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [48]

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Yes, we do. Let me grab that. Yes, it's $157 million, Laurie.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [49]

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$157 million, okay. And that was down from $172 million. Where do we expect that to go? So that's a pretty big job. Where do you think that goes this year? Does that hold flat or can you grow it?

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [50]

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Yes. So Laurie, great question. And I think the way I would answer that is the $20 million drop that we experienced in the fourth quarter, again, was attributable back to several of the clients that we opted to move away from. We also had some entrants into the market from some nonbank lenders. Now with that said, what our Healthcare team is positioned to do is in the low double-digit growth on a net basis. So their pipeline is good. We could still have 1 or 2 nonstrategic loans payoffs that might mute that in the short run, but our plan is to certainly regain our momentum there. And as I said, the pipeline is good for the business we're working on there. So intention, we remain very committed in the Healthcare sector. As I've said oftentimes, when you adjust your strategy, you have to pivot a bit. And the sales cycle in terms of prospecting and conversion of a prospect to a client can take a little bit of time. I think I said last quarter that -- I said both in the third and -- second and the third quarter, we would expect that it would take a couple of quarters for them to replenish that pipeline and see those go to closings and fundings. But Mark Mattson, who's our healthcare executive, is committed to the low double-digit growth in that book.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [51]

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That's perfect. Okay. Thanks for the color. Chris, question for you. The charge-off in the quarter related to one large loan. What loan was that?

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Christopher G. Tietz, Capstar Financial Holdings, Inc. - Chief Credit Officer and Chief Credit Officer of Capstar Bank [52]

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Well, I can't be very specific on that, but that's been one that we've been -- we haven't worked out for a few years. And it was one that we have previously provided detail on. So it had a specific reserve put against it 12, 18 months ago.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [53]

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So is this a healthcare loan?

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Christopher G. Tietz, Capstar Financial Holdings, Inc. - Chief Credit Officer and Chief Credit Officer of Capstar Bank [54]

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It was, yes.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [55]

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The healthcare, okay. Can you just remind us since you provided detail before, what was the balance originally and what was the reserves?

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Christopher G. Tietz, Capstar Financial Holdings, Inc. - Chief Credit Officer and Chief Credit Officer of Capstar Bank [56]

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Yes, the balance roughly was north of $4 million over the history of the credit. We impaired it. I'm going to say it would have been in Q3 or Q4 of '16. I'm sorry, I can't be more precise on that. But we've reduced it over the last year by about $700,000 and we believe that it will be close to resolution soon.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [57]

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Okay. I'm just looking -- so this is the $4.4 million, the prison healthcare loan or that's different?

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Christopher G. Tietz, Capstar Financial Holdings, Inc. - Chief Credit Officer and Chief Credit Officer of Capstar Bank [58]

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No, no, no. It...

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [59]

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That one was gone way last year...

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Christopher G. Tietz, Capstar Financial Holdings, Inc. - Chief Credit Officer and Chief Credit Officer of Capstar Bank [60]

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Yes, that was gone in Q1.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [61]

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Got it. Okay. Okay. That's helpful. Okay. And then just last question going back over the margin. What is your impact on margin from tax reform? Can you just quantify that?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [62]

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I wouldn't say -- I'm not sure I'm following on -- from the tax reform piece, negligible impact on our margin.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [63]

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Negligible, okay. Okay. And actually -- sorry, just jumping back over to healthcare for one moment. Had just one follow-up. Within the $157 million, how much of that was participation?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [64]

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Yes, let me get that here.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [65]

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Okay. And then maybe while you're looking for that, Claire and Chris and Rob, can you just help us think about how we should see loan loss provision shaping up for this year assuming there are no outside healthcare credits?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [66]

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Yes, it's $130 million on the healthcare piece on participation.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [67]

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$130 million.

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Christopher G. Tietz, Capstar Financial Holdings, Inc. - Chief Credit Officer and Chief Credit Officer of Capstar Bank [68]

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It's actually $93 million.

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [69]

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Yes, $93 million, I'm sorry.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [70]

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$93 million out of $137 million, okay, is participation. Okay, great.

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [71]

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Yes. And Laurie, you used the participation term, but I'll remind you that in most cases these are either club deals or deals that we've done with banks in our market that we can see out this window. There are some -- some of those that have bankers outside, but these are -- we look at that as a way to share credit risk in many cases. So I just wanted to point that out.

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Laurie Katherine Havener Hunsicker, Compass Point Research & Trading, LLC, Research Division - MD & Research Analyst [72]

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Perfect. Thanks. Okay. And then -- I mean, on your credit, certainly axing out the healthcare charge, credit is pristine. Your reserves to loans is high at $145 million. How should we think about that in terms of provision modeling?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [73]

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Yes. I'll take that one, Laurie. Certainly, we -- I think $120 million, $125 million for new growth, I think, would be a safe modeling assumption.

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Operator [74]

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And our next question comes from the line of Tyler Stafford with Stephens Inc.

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Tyler Stafford, Stephens Inc., Research Division - MD [75]

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You gave us the expense add from the SBA team. I'm just wondering how much, once these guys are fully up and running, we could see from a fee income pickup perspective?

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [76]

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Tyler, it's tough to say. We certainly built a business model around what our expectation is for that line of business. I don't want to get into too much detail on that just yet since they just now hit the ground running. But you can be assured that anytime we go into a business -- a new business line that we fleshed it out to make sure it's going to be very strong in terms of profitability. So I would say stay tuned and let's get a quarter under our belt before we get too precise on that.

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Tyler Stafford, Stephens Inc., Research Division - MD [77]

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Okay. That fair. Rob, I appreciate the 2018 tax rate outlook. I'm just wondering with the stock options and the warrants expiring this year, where that tax rate could increase or normalize to in 2019.

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [78]

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I think you could see that kind of go back up to the revised corporate tax rate, 21% to slightly under because we've had some other activities as well, but...

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Tyler Stafford, Stephens Inc., Research Division - MD [79]

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Okay. So barring any changes, it goes from 13% to 16% this year, back to 21% in '19?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [80]

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I think slightly under 21%, but it would go up for sure.

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Tyler Stafford, Stephens Inc., Research Division - MD [81]

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Yes. Okay. So on the ROA goal, I just want to be clear, does that include the 2 rate hikes that you mentioned earlier as you kind of look out to '18?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [82]

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What I'm saying on that and we've said this for some time, the 1% has been a goal of ours. And the past 2 quarters, we've hit 1%. Our goal is to consistently be at that. I think we've said in the comments that the first quarter is going to be pressurized due to seasonally low revenue plus the adds on the expenses for the new team until they hit their stride. But our expectation is that we're going to be above that. And if we get 2 rate hikes or if we don't get that, we're still going to have to get above that because I think we've guided there and we've got our plans. So we model both ways in terms of the rate sensitivity. If we get rate increases, I'd say we're above the 1%. Without it, I still think we're shooting for the goal of being at 1% in the fourth quarter.

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Tyler Stafford, Stephens Inc., Research Division - MD [83]

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Okay. And I guess just on the ROA goal, I was a little bit surprised that you didn't increase that 1% goal by the end of '18 despite the benefits of tax rates this year taking the tax rate down to the 13% to 16%. Is the major touch point on that just the hiring you guys have done and the expense side of the equation?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [84]

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I think that's a part of it, but I want to make sure that we get above the 1%. In the third quarter, I think we are well above the 1%. We are at like 1.09% this quarter. So the fact that we're above 1% and consistently above 1%, then we'll start talking about a new target and what that target will be. But let's make sure we have a track record of getting above the 1% before we start talking about how much above 1% and we set a new target. So that could come in the coming quarters as we feel more confident about it. But our goal is to be consistently above 1%. Whether that's 1.10%, 1.15%, we're not going to state at this point. It's above 1%.

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Tyler Stafford, Stephens Inc., Research Division - MD [85]

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Understood. Okay. And then just last one for me. Just to clarify, you mentioned the 11% average loan growth in '17 versus '16. Is the high single digits to low double-digit loan growth for this year the guidance? Is that on an end-of-period basis or an average for the year?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [86]

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That'll be on an average.

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Tyler Stafford, Stephens Inc., Research Division - MD [87]

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So I guess with 2017 loans much higher to start the year and then declining throughout the year, that would imply end-of-period growth in '18 well above that high single to low double. Is that right?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [88]

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Yes. It would be above that. I mean, what our goal is that at the end of the day, the year-to-date average is really driving our net interest income. So on a spot basis, that can move up and down daily. And I don't get hung up on spot balances too much. The fact is that our point-to-point growth in 2017 wasn't double-digit, but our year-to-date average was. So that drives our net interest income. That's where we're focused on. Certainly, we'd like to see our point-to-point be above that as well, but we focus on the year-to-date average and a quarterly average and monthly average.

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Tyler Stafford, Stephens Inc., Research Division - MD [89]

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Okay. I'm sorry to deliver this point. But the -- to get to a 10%, call it at the midpoint of your guidance, average loan growth '18 versus '17, that implies for me on an end-of-period basis over 30% end-of-period growth. Does that -- I just want to make sure -- I'm thinking about this because it is a big delta just given the low point ending '17 versus the high point starting '17?

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Robert B. Anderson, Capstar Financial Holdings, Inc. - CFO, Chief Administrative Officer and CFO & Chief Administrative Officer of Capstar Bank [90]

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Yes. No, you got a good point there. And our point is to grow our end-of-period balances. We'll be at double digits on our end-of-period balances.

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Operator [91]

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(Operator Instructions) And our next question is a follow-up from Daniel Cardenas with Raymond James.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [92]

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Just a couple of quick questions here. On the SBA businesses, is that a business model that can hit breakeven in year 1? Or is that going to take a little bit longer to get there than that?

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [93]

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Our expectation, Daniel, is that it would hit breakeven in '18. The variables that you have there are certainly around the incremental number of new revenue producers that we add to that team, new business development officers. So as you think about again the sales cycle, if we add someone midyear that could be a bit of a drag on '18, but we would hire those people because we believe that's the right thing to do in terms of expanding that line of business. But if you say, all other things equal, we expect to see breakeven this year.

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Daniel Edward Cardenas, Raymond James & Associates, Inc., Research Division - Research Analyst [94]

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Okay. Great. Great. And then just going back to the ROA target, is management compensation tied to you guys hitting that target in any way?

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [95]

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Absolutely.

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Operator [96]

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I'm showing no further questions at this time. I would now like to turn the call back to Ms. Claire Tucker, President and CEO of CapStar Financial Holdings for any closing remarks.

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Claire W. Tucker, Capstar Financial Holdings, Inc. - CEO, President and Director [97]

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Thank you, operator, and thanks to all of you who have joined the call, investors and analysts alike. We are, as always, very appreciative of all of our investors, all of our shareholders. We certainly have as a daily goal making sure that we're delivering financial results that will enure to everyone's benefit. So we're appreciative of that investment. We're appreciative of your time this morning. And certainly, if you have any follow-up questions, feel free to give Rob or me a call. With that, we'll close the call.

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Operator [98]

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