CapStar Financial Holdings, Inc. (NASDAQ:CSTR) Q3 2022 Earnings Conference Call October 21, 2022 10:00 AM ET
Company Participants
Tim Schools – President & CEO
Mike Fowler – CFO
Chris Tietz – Chief Credit Policy Officer
Conference Call Participants
Kevin Fitzsimmons – D.A. Davidson
Graham Dick – Piper Sandler
Catherine Mealor – KBW
Brett Rabatin – Hovde Group
Operator
Good morning, everyone, and welcome to CapStar Financial Holdings Third Quarter 2022 Earnings Conference Call. Hosting the call today from CapStar are Tim Schools, President and Chief Executive Officer; Mike Fowler, Chief Financial Officer; and Chris Tietz, Chief Credit Policy Officer. Please note that today’s call is being recorded. A replay of the call and the earnings release and presentation materials will be available on the Investor page of the company’s website at capstarbank.com.
During this presentation, we may make comments which constitute forward-looking statements within the meaning of the federal securities laws. All forward-looking statements are subject to risks and uncertainties, and other factors that may cause the actual results and the performance or achievements of CapStar to differ materially from those expressed or implied by such forward-looking statements.
Listeners are cautioned not to place undue reliance on forward-looking statements. A more detailed description of these and other risks, uncertainties, and factors are contained in CapStar’s public filings with the Securities and Exchange Commission. Except as otherwise required by applicable law, CapStar disclaims any obligation to update or revise any forward-looking statements made during this presentation. We would also refer you to Page 2 of the presentation slides for disclaimers regarding forward-looking statements, non-GAAP financial measures, and other information.
With that, I will now turn the presentation over to Tim Schools, CapStar’s President and Chief Executive Officer. Sir, please go ahead.
Tim Schools
Okay. Good morning, and thank you for participating on our call. We appreciate everybody’s interest in CapStar and I’m going to apologize ahead of time, I’m coming off of COVID too from about 2 weeks ago, so I’m congested a little bit. So I apologize for that.
In the third quarter, we reported $0.37 per share. Our earnings included: first, a $2.1 million pre-tax loss related to the sale or markdown of our remaining Tri-Net balances. Tri-Net production was seized in early July and there’s no further risk of loss on anything that has been produced to date. $900,000 of $2.3 million in losses incurred since second quarter are unrealized and there’s a high probability that will be accreted back into earnings over time. It is uncertain at the moment as to if or when we will restart Tri-Net.
Second, a $1.5 million pre-tax loss for wire fraud. We filed an insurance claim and are seeking a recovery. The FBI and our core system provider have tracked the IP address of the individual that is trying to perpetrate many banks, and our core system provider is seeing it showing up across their banks. We have and are reevaluating our processes and procedures to do everything in our power to prevent a similar situation in the future.
Lastly, a $732,000 pre-tax operating loss on a depository account. I cannot get into the details at the time — at this time, but we and our council believe CapStar is in the right and we are pursuing a recovery. I take personal responsibility for these incidents. I inquired about stopping Tri-Net production in May, when I was made aware of the $200,000 unrealized loss we were going to take. At that time, I was informed everything going forward would be at par or better.
With the volatility of the markets, I should have used better judgment and pause production until we had total clarity. While the other two involve fraud and questionable legal advice, we can and need to do better to prevent such incidents. To establish a culture of accountability, I voluntarily forfeited my 2022 bonus and in doing so my executive team followed, this will total about $1 million for the year.
We are a shareholder oriented company and we recognize our shareholders deserve better. Additionally, we’re performing at a high-level and our employees deserve to earn as much incentive as possible. With our corporate incentive based on EPS, pre-tax pre-provision to assets and ROA, lowering our incentive will assist them in getting more for the great results they are achieving.
With that having been said, I’m excited at the high-level our team is performing. Adjusted for these incidents, we earn $0.50 per share and a 139 ROA. Importantly, that is with our mortgage division contributing a second quarter — excuse me, a third quarter net loss of $663,176, which equates to $0.02 per share loss and no contribution from Tri-Net.
The pre-tax pre-provision to assets was 1.84% and the bank only excluding mortgage was 1.93%. As an aside, our mortgage division reduced annual operating expenses about $400,000 toward the end of the quarter. We have an outstanding mortgage division and believe it is a valuable piece of our franchise, and will continue to be a positive contributor over the long-term.
When I joined 3 years ago, the pre-tax pre-provision to assets was about 1.45% and I set a target of 1.8% to 2%. That was questioned at the time and several people said it would be hard to do. We are proud of our improved profitability as well as the improved growth prospects we’ve created for CapStar. It is important for our pre-tax pre-provisioned assets to perform at a higher level to generate competitive capital returns in good times, but also to have more earnings power for more challenging times, which bring higher credit costs.
Before turning it over to Mike, I’ll comment a little on current trends. First, we’ve added a second commercial relationship manager in Asheville, a fifth commercial relationship manager in Knoxville, and we added an additional correspondent banker all this quarter.
Second, with the fast pace of rising rates and the level they are at now, loan demand is beginning to slow. And like most banks, we’ve tempered our interest in CRE and construction. During the quarter, adjusted for the Tri-Net loans that we transferred over, our average loan growth was 9.2%. With the quality of our sales team and the strength of our markets, it could have been much higher. However, with competitors not raising loan rates at the pace of market rates in extremely challenging deposit environment, in the current economic uncertainty, I believe it is best to be patient and cautious at this time.
Third, deposits are extremely competitive. You might recall last quarter while other banks were commenting on anticipated deposit growth remainders of the year, I expressed more caution. With rates having risen sharply, customers are aggressively shopping for the first time in years. Brokerage firms and U.S Treasury rates offer a higher rate at the moment which brings additional challenges. We have refined most metrics at CapStar and deposits are really the last step we need to address. As a younger bank, CapStar was built on lending with less of a focus on funding. We’ve been working on balancing our culture and I believe over time, we have tremendous opportunity.
Fourth, credit metrics remain very strong. Our criticized and classified loans improved again, with our largest substandard loan being upgraded to past. Past dues ticked up a little bit and that is essentially due to two relationships of which one has been troubled for about 2 years. We feel we’re in a strong position on both. The remainder of the increase included an unusual level of matured loans that were not renewed, timely at quarter end, and about 500,000 for three PPP loans, for which we are fully secured.
Mike, if you’d now please cover the financial highlights for the quarter.
Mike Fowler
Thank you, Tim, and good morning, everyone. So on Page 6, a few key performance highlights. In terms of profitability, the net interest margin was 3.5% in the quarter, up 9 basis points from last quarter, up 38 basis points from a year ago. Efficiency ratio, as reported, 61.5%. As Tim touched on earlier, adjusted for the three unusual items, the efficiency ratio for the quarter was 52.8%. Return on assets, as reported, 1.03%, adjusting for the three unusual items 1.39%.
In terms of growth, we continued to have very solid loan growth, 9.2% adjusted for the transfer of Tri-Net loans from held-for-sale and to held-for-investment. Earnings per share $0.37 a share, adjusted for the unusual items $0.50 a share. And tangible book value per share, excluding the impact of after tax losses on the available for sale investment portfolio was $16.22 as of 9/30, up from $15.86 as of the last quarter, and up versus $14.59 as of a year ago.
In terms of soundness, credit metrics system noted remain solid. For the quarter, we had 2 basis points of annualized charge-offs; 30 basis points of nonperforming assets to loans and we continue to run with very strong capital levels.
On Page 7, the net interest income of $25.6 million was an increase of $1.1 million versus last quarter. The margin of 350, up 9 basis points was driven by a combination of us redeploying cash and to loans; and number two, modestly benefiting from the feds continued rate hikes.
Based on our assumptions at this time, we don’t see the margin being materially impacted by further rate move — further Fed rate moves. We continue to see loan pricing headwinds as competitors catch up to recent market rate increases. And we also not surprisingly at this point in the cycle, we have seen the last few months some increase in deposit pricing pressure.
As Tim alluded to, early in the Fed — early fed moves, we like the industry did not move deposit rates materially. But as the Fed moves deeper into the hiking cycle as expected, our betas have increased as we’ve seen in our markets. We do continue to have very strong loan pipeline and production which provide good opportunities for continued net interest income growth.
On Page 8, total deposits were roughly flat, down $5 million for the quarter. There was some movement within that. Corresponding balances declined $69 million on average as many of our correspondent customers deployed their excess liquidity.
We look forward to turning that around as we expand our correspondent business into new markets, leveraging the recent addition Tim mentioned of a season correspondent banker. The deposit costs for the quarter of 62 basis points was an increase of 39 basis points versus Q2. We continue to focus on disciplined deposit pricing, trying to balance remaining competitive, retaining customers, attracting customers while also optimizing profitability. And we continue to actively target deposit growth, especially operating balances.
On Page 9. We continue to have strong production, the pipeline, the commercial pipeline remains above $500 million. We did have average loan growth of $50 million for the quarter, adjusting for the movement of Tri-Net into held-for-investment. As Tim noted, we are limiting commercial real estate due to the economic outlooks and to better align our loan and deposit growth. Our average loan yields increased 37 basis points versus the prior quarter. With an average spread versus match funded home loan rates of 1.9%, near our 2% or better target spread.
On Page 10. In terms of noninterest income, we continue to see stable deposit and interchange revenue. In terms of mortgage as you’re seeing through the industry, with mortgage rates continuing to rise hitting 7%. For 30-year fixed rate mortgages are up 300 basis points versus a year ago. Mortgage revenue has been impacted by a combination of higher market rates as well as limited supply of homes for sale in our markets.
Tri-Net loss, Tim discussed, the $2.1 million loss related to sale and transfer of remaining Tri-Net loans and to held-for-investments and consistent with our outlook on the last call, our SBA team demonstrated solid progress this quarter with fees in Q3 exceeding the sum from the first and the second quarters. And as Tim mentioned, we are very excited about the future with recent SBA hires.
On Page 11. Total expenses were up versus Q2 due to the $2.2 million operational losses Tim discussed, for which we are pursuing potential recoveries. Adjusted for the operational losses and for management’s voluntary bonus waiver, expenses are down $800,000 versus the prior quarter. Strong expense discipline with adoption of a productivity mindset throughout the organization, and we continue to have an ongoing focus on efficiency opportunities.
On Page 12. Actually, I will turn it over to Chris to discuss risk management.
Chris Tietz
Right. Thank you, Mike. Turning to Page 13, let’s discuss asset quality. As noted in the upper left hand graph, overall asset quality is improving, with continued reductions in criticized and classified loan levels. Even with that improvement, there is migration reflected by increased past due and impaired loan levels. Since these two outcomes have some overlap and what drives them, let me give you some additional insight.
Of the $14.3 million in past dues noted in Q3, there is not a pervasive or systematic issue emerging. While we believe we could have improved this result with better administration of a few delinquent borrowers, more than half of the $14.3 million total relates to two separate borrowing relationships, totaling $8.3 million. Of this, $3.3 million is an SBA transaction with a 90% SBA guarantee. While delinquent and rated substandard, this borrower is not impaired. $5 million is represented by a single borrowing relationship that came with an acquired institution.
This loan is delinquent and accounts for the increase in impaired and doubtful loans component of the trend. This borrower has filed bankruptcy. Since the loan is secured by real estate with a low loan to value ratio enhanced by guarantor support, we believe there will not be loss as we work towards resolution. Of note, each of these relationships has been classified as substandard since last year, and subjected to our quarterly review of rated loans.
As we’ve noted in the past, substandard loans require more time and attention to work out, while our level of criticized and classified loans is low, we anticipate that these two relationships will continue to influence our reported delinquencies in coming months, while we endeavor to bring them to successful resolution.
Even with this migration within substandard grades, we still achieved an overall 15% reduction in our criticized and classified loans. We’re glad to have such good levels of criticized and classified loans as we enter a new period of uncertainty in the economy.
Moving on to losses. In the lower left hand graph, as a result of our evolution in recent years to a traditional community banking strategy, including pursuit of smaller and better secured borrower profiles, our annualized loss rates remain exceptionally low at 2 basis points.
Turning to Page 14, while drivers of overall asset quality are improved, we believe a provision to maintain the same level of allowance is prudent. As noted in the slide, despite improvements in the pandemic supplement and historical loss factors, the net provision is driven by loan growth and adjustment for qualitative factors relating to the current economic environment.
With this I’ll turn it back over to Tim.
Mike Fowler
Okay. Thanks, Chris.
Tim Schools
Thanks, Chris. I’m really proud of the strengthening of our core bank. We are well-positioned and are excited by the prospects of our team in the markets. The current environment brings certain challenges. We’re working through those and are optimistic there will also be some things that our improved position will allow us to capitalize on. That concludes our presentation, and we’re happy to answer any questions. Once again, thank you for your time, and we appreciate your support.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question will come from Kevin Fitzsimmons of D.A. Davidson. Your line is open.
Kevin Fitzsimmons
Hey, good morning, guys. Hope everyone is well.
Tim Schools
Hey, Kevin. Good morning.
Kevin Fitzsimmons
Good morning, Tim. So it sounds like you’re kind of signaling the margins probably going to be more stable, the loan growth is going to soften somewhat, deposits remain a challenge and the betas are accelerating. But I just wanted to take a step back and — how does all that net out with the ability to grow NII in your mind? Because I mean, I don’t disagree with that it’s probably prudent to be more careful and cautious on the loan growth front. But a lot of banks are putting up big percentage margin expansion, but I just want to get your view on actual dollars of NII and how we should view that trajectory going forward. Thanks.
Tim Schools
Yes, sure. Thanks, Kevin. And look, I’m just one perspective, and I don’t want to challenge or second guess what other banks or CEOs say. But as you know, we’ve known each other a long time, I’m a conservative cautious person. And deposits went down for many banks in the second quarter. And I know, on second quarter calls, many CEOs said, well, ours will go up the second half of the year. And my comments were much more cautious and I’ve also been cautious on the margin. When you look in 10-Qs and 10-Ks, there are a lot of assumptions that go into interest rate risk shocks. And you’re assuming that’s on a static balance sheet, so you’re not really assuming what growth might do.
But on a static balance sheet, right, you’re assuming what you think your betas are going to be, they may be, they may be better than that, they may be worse than that. You’re thinking about how customers might behave that have existing loans with you. And that’s a little easier, because contractually the fix will stay, and variable will go up. You don’t know that if those people have extra cash, they won’t pay some of those loans off, and you don’t get the upside in that yield.
On new production, when we’re doing our budgets, we assume certain spreads. And one of the things we’ve been saying at CapStar for the last three quarters is competitors have not raised loan rates to the pace of market rates. So new production is coming on at thinner spreads, forget the absolute yield. If you use a base rate of FHLB curve, again, third quarter last year, we got 250 basis points. That’s sort of what we target. And year-to-date, it’s been more 160 to 180. That’s not because what we wanted, other banks are not raising their prices.
And so — so it’s a whole — it’s very complex, and it’s not as easy. I mean, we’d all love it to work out exactly like our IRR tables, but it’s complex. So I don’t have an exact answer for you. But you’ve got the macro challenges. I don’t think CapStar’s challenges are any different than I’m seeing in the market and other banks. And I think it’s going to be a period. I think industry margins, while they have expanded the last two quarters, I think continued expansion is going to be tough.
I mean, we have depositors that call us, that love the bank, and say, hey, I can get a six month treasury at 4%. I hate to do this, but I need to take the money out for 6 months, I’m going to buy a 6-month treasury. I mean, it’s hard to raise the deposit account to 4% when competitors are doing loans at 5%. So I know that’s not the answer you want. But I do think that at a macro level, industry margin expansion, I would think would taper and not be as much or maybe be flat. And so then it’s going to come down, can you grow your balance sheet?
I really think today, we could grow quality loans today in this environment, probably 12% to 15%. And that’s with cutting back on being a little more conservative. The challenge is you got to find the funding to fund that. In a healthy environment, I think we’ve got the teams and markets, we could grow loans 20%.
So if you remember on the last call, in the back of our Investor Deck, we had sort of changed our outlook to hey, right now, maybe high single digits for loan growth, because we just think with the economic outlook and some of the funding challenges. So that’s very long winded, but I think you’re on track on the macro issues. And right now, at this point, I would still probably maintain the, the, you know, higher single-digit loan growth and deposit growth would be the outlook with a more stabilized margin not expanding more.
Kevin Fitzsimmons
Okay, great. That’s very helpful, Tim. And maybe just looking at credit, I know, we’re in a situation now where there’s — I appreciated all the detail on the past due nonperformers, but — and charge-offs remain historically low. But you mentioned how it’s prudent to provide the loan growth to keep the reserve where it is. But given the economic forecast, do you think, are we heading into a period where you may have to think about building that ratio versus just keeping it the same? Or do you feel your markets are vibrant enough and healthy enough that that’s not being called for at this time? Thanks.
Tim Schools
Well, that’s not a clear answer either, right? I mean, Being conservative, I think you would — if allowances are interesting, you don’t have a lot of leeway. There are qualitative factors that allow you to do some of that. But they’re so model driven now today, Kevin, and we’ll be migrating on January 1 to CECL. And that will change even a little bit more where I’m not the expert on it. We’ve got Jeff Moody, our Controller here and Mike, but that’s going to be driven more on unemployment rates.
And so even that is not really prospective, right? That’s actually something has to happen for unemployment rates to go up. So there’s room for qualitative factors. But I do think it’s a period just if you’re cautious that you probably want to set a little bit more aside, we don’t see any indicators right now other than common sense, rates are higher. So people with variable rate loans, their payments are higher. Fossil fuel prices are higher, so people are spending less, that’s just going to hurt basic operating companies. And what could that lead to?
So we’re just trying to be really cautious. We’ve got a great bank, we’re good underwriters. And we’re beginning to focus on not that we don’t always do that, but really strong almost like the pandemic portfolio management, what are those sectors or customers that could be more stressed? Work with them early and get up before that happens.
I will say on CECL, just in case someone doesn’t ask the question, that we’re finalizing that and we’re prepared for adoption on January 1. We’ve not disclosed any adjustment amount. So don’t want to do that publicly on a call. But I will say that our analysis looks like our adjustment will be in line with industry averages for what the one-time hit to book value has been, looks like it’s very reasonable within industry averages.
Kevin Fitzsimmons
Okay. Thank you, Tim. Appreciate it.
Tim Schools
Thank you, Kevin.
Operator
Thank you. [Operator Instructions] Our next question will come from Graham Dick of PSC. Your line is open.
Graham Dick
Hey, good morning, guys.
Tim Schools
Good morning, Graham.
Graham Dick
So I just wanted to touch back on the loan pricing you guys were talking about and just get a little more color on that. I’m just wondering what your longer term outlook is for this? Like, do you think these competitors will ever be compelled to lift their pricing? I mean, I don’t know if it’s excess liquidity, or what that’s allowing them to be so aggressive. But you have to think that I guess risk adjusted returns start to look pretty bad relative to what you can get even in the bond market. I’m just wondering what your longer term outlook is here. And then also, if they do adjust, say a few quarters down the line, if there could be any upside, I guess to net interest margin from there versus the current, I guess, range you guys were talking about?
Tim Schools
Yes, so good question. I think some of that’s already changing. I mean, it was worse in the first half of the year. And there’s whatever, 5,000 banks or something, there’s probably 60 that operate in Nashville. And not — they’re not all great banks, but some use more discipline than others, some have more sophistication than others. Not every bank has funds transfer pricing, and not every bank benchmarks that against the base rate, some just sort of use gut feel. And so, you always run into a competitor, that’s pretty loud [ph], but I think it’s starting to come up some. But we’re using discipline of which loans do we really want to do for those reasons, for profitability as well as for credit risk.
Down the road, there’s so many aspects, Graham, that go into calculating net interest margin that certainly would benefit the margin. That — if we were getting 250 spreads on all commercial loans, that would be an additive. But there’s also gives inputs, there’s other things that could go against that. So I hate — I would hate for you to take that in model, just that one factor would lead to that. But margins generally should be higher with higher rates, right? DDA are worth more. They were worth very little when rates are lower. So all things being equal, I think it would benefit. I was reading just a little bit this morning that I guess stocks were up early with short-term rates coming down. So I think if the curve had stayed higher and had some steepness that probably would benefit margins that — but that’s my thought right now.
Graham Dick
Okay, that’s helpful. And I just wanted to get a little more color on deposit costs. Can you give me any idea of what you guys have been seeing, I guess, on the recent rate hikes in terms of beta? Maybe just like, I don’t know, what you’re kind of expecting through the end of the year, as we head into 1Q on that?
Tim Schools
Yes, I’ll make a quick comment, then Mike can give you the details, because he manages that process. But just to explain what we do. And what I have seen at most banks is we subscribe to a service called RateWatch [ph], and they go shop, our bank as well as a lot of banks, you give them the competitors you want, you give them the market you want. So, we get a national report, a Knoxville report, Chattanooga report and so forth. We pick the competitors we want on there. And we get a weekly report of what those branches report they’re paying. And so we have a very disciplined process that meets every week. Our goal is to be sort of top third in our markets. We don’t want to be number one, we don’t want to be below average. And we actively monitor it the best we can and we look at base rates. And then we also have a sheet that shows all the specials. And so I’ll let Mike talk about maybe what he’s seeing, but I just want to make sure that he understood. And that’s a pretty standard process that any bank I’ve been in has done. But Mike, do you want to comment on what you’re seeing sort of on the ground?
Mike Fowler
Sure. So we are seeing, I guess I would say money markets, which are about 20% of our portfolio — deposit portfolio is where we’re seeing the most aggressive movement. Our assumptions there on average about 50% betas are interest checking, which is about a third of our portfolio, we assume 25% betas, roughly. And saving small balance, we assume around 15% to 20%. So we’ve seen those come up. But I think those are levels that that we feel we can certainly manage through this part of the cycle.
Graham Dick
Okay, great. That’s helpful. And then I’ve just got one more quick one here on SBA. Saw that you guys are looking at adding another team here. Just wondering what the revenue potential is there in terms of how it might be added to the 4Q range of I think you said [indiscernible], trying to gauge the size of that — there to potentially offset some of the softness in mortgage.
Chris Tietz
Yes, this is Chris. I don’t want to get too specific in guidance on that. Again, we — I believe last quarter indicated that we saw Q3 and Q4 of this year exceeding the aggregate we had for the first half of the year. We need to settle into our staffing before we start making predictions. I will say though, that our expectation over time, our goal over time, I should say is that we will be successful in our recruiting efforts. And we’ll build solidly on where we are right now with growth going forward. I want to be more cautious than that, because I can’t predict what I can’t control right now.
Graham Dick
Yes, understand. All right. Well, thank you guys.
Operator
Thank you. [Operator Instructions] Our next question will come from Catherine Mealor of KBW. Your line is open.
Catherine Mealor
Thanks. Good morning.
Tim Schools
Hey, Catherine.
Catherine Mealor
Just back to the earlier question just on kind of big picture profitability that Kevin was talking about, as I look at and you made some really important expense adjustments this quarter that kind of offset some of the headwinds. So I think those are great and really appreciated. But as we look at kind of the expense growth rate, or maybe the operating leverages to next year, so much I think of what was part of the thesis of your story was we had kind of this expense build with some of the hires that you brought on in entering a new market. And that was going to bring on higher revenue growth just because those teams were going to build too much in loans and that was going to be on a higher margin. So, I guess as you think about now a flatter margin and slower growth, are there — how do you kind of balance what the expenses look like over the next year? And is there anything you can do to that $16.5 million bank only expense guidance rate that you highlighted in your presentation.
Tim Schools
I think there’s always opportunity. I’ve mentioned before our core contract is in the spring of 2024. Everywhere I’ve been, there’s been material savings there. So to me, there’s always room on that. I think we’ve done a good job. I think when I came, the efficiency ratio was maybe 67% and now it’s 52%. So, I mean, this is one of these [indiscernible] that you wish in every environment, you could grow loans 20%, you could grow DDA 20%, you could have an efficiency ratio of 50% and the world would be perfect. And that’s just not reality. So I don’t think that we’re any different than we thought.
I think that over the next year, if we could grow in this environment, loans 8% to 10% and hold that at a margin close to where we’re at and grow expenses at, say, 2.5%, 3%. I think we’re already a company that right now is earning $0.50 this quarter with mortgage costing $0.02. If they just breakeven, we’d be at $0.52. So we’re really excited where we’re at. I don’t think we view that our thesis has changed at all. We’ve got much more diversified revenue. We’ve got more people that can contribute, all their expenses are already in our run rate. And so again, we’re being cautious in this environment and not being overly aggressive that if we can grow 8% to 10% and we’ve already got our expenses down, so let’s make sure we manage that and moderate the growth of it, we think we’ll have a great year.
Catherine Mealor
Got it. Yes, that’s super helpful. And then on kind of levels of profitability there, I know you had put out some [indiscernible] projects provision profitability targets earlier. In this kind of new environment, is there a target that you think is more reasonable to look for this year?
Tim Schools
There’s — companies are complex, because you don’t — I don’t know everything. I’m not aware of any large one-time other items this quarter plus or minus. I’m sure there’s 50,000 here or there that we got this quarter or this bill, but I don’t see why our current run rate on pre-tax pre-provision should change that much. I don’t think we’re going to have a lot more margin expansion from here. I don’t think it’s going to go down right now from here. I do think that banks that were asset sensitive, do need to start thinking about an 18 to 24 months if rates came down, everybody was all excited about the asset sensitivity. But that means they’ll go down also.
So — but in the current environment, I would hope, Catherine that now that we’ve gotten it in that, I don’t have my sheet right in front of me, but now that we’ve gotten it back to that 185 range or 195 excluding mortgage, I would hope we could hold it in that range and run a company like that. And charge-offs have been really low for a long time. It’s not realistic that they’ll stay this low. And that’s again, why we want that at 185 to 195, so that we can cover more charge-offs.
Maybe our ROA isn’t 139, maybe in that environment, it’s 115 or 120. So we’re just — we’re very pleased where we’re at. And again, I think if you were back to the year before COVID, or 2 years before COVID, we’ve now got the markets and bankers in that environment that I think things would grow 15%. But in a high rate environment and the Fed going up another 75 and depositors looking all over the place, I think it’s just time for a little more patience and cautious and it probably be high single digits.
Catherine Mealor
Great. Okay. Yes, I appreciate all that — all makes sense. And maybe we’ll follow-up just on the buyback. Any thoughts — your tone is more cautious, which I totally appreciate and make sense. But you still do have a lot of capital and your stock is cheap. So how do you kind of think about the buyback as a supplement in this environment?
Tim Schools
Yes, I mean, I’m a buyer, so I think it’s a price I definitely would buy it. There’s so many uses for cash, right? So one is, deposits aren’t strong. So I mean, we — it’s not into the world. I mean we could go take $5 million, $10 million, $15 million and buy stock, I think it would be a good economic decision. Right now that’s $5 million, $10 million, $15 million more of wholesale funding you’d have to get.
So part of it is, again, I’m personally kicking myself, I’ve got $130 million of Tri-Net on my books that I capped that not only where there’s some realized losses and unrealized losses that caused reserve and it took up $125 million of funding. Well, had I not done that I’d have $125 million more per core and market loan growth, also could take 15 million or 20 million of that and buy back stock. So just working through that I’m definitely a buyer of the stock here. And we’re just weighing our different priorities on utilizing the cash.
Catherine Mealor
All right. Thank you so much. That’s all I got.
Tim Schools
Hey, before you go, I just let you know that I actually got COVID at your college. So that was my present for visiting Parents Weekend.
Catherine Mealor
I bet it was [indiscernible].
Tim Schools
Yes, it was. All right. Thank you.
Catherine Mealor
Thank you. Thank you.
Operator
Thank you. [Operator Instructions] And our next question will come from Brett Rabatin of Hovde Group. Your line is open.
Brett Rabatin
Hey, guys, good morning.
Tim Schools
Good morning, Brett.
Brett Rabatin
I wanted to first ask on the assumption that the margin kind of flattens out from here. What is that assume I know that the positive beta is running around 40% at this point, and you’ve got some aggressive peers in middle Tennessee that have been growing at a rapid clip with their deposit rates that I see posted as well as some of their other non-maturity rates as well. What is the kind of the flattening of the margin assume for deposit betas going forward? Is that assume the continued acceleration or a flattening? What can you point to on that?
Mike Fowler
Yes. So, Brett this is Mike. I would say on that. We’re not assuming an acceleration of betas. I think we did say, betas accelerate from early and the Feds rate moves. But we’re assuming and optimistic that we can hold the betas that we have been seeing recently. So that would be probably overall for our liquid deposits about a 35% beta. I don’t have a blended beta factoring and CD rates, but on the liquid deposits around 35%. And we’re optimistic that we can manage with that.
There certainly are some banks in our markets that have been more aggressive, there are others that are not. So as we see opportunities for deposits, we are seeing instances where we are being more flexible to be competitive to retain relationships or attract new relationships. But we’re also seeing situations where pricing is much less aggressive. So it’s more mix than it was earlier this year. But again we think we can hold the betas that we’ve seen recently going forward near-term.
Brett Rabatin
Okay. And then this is obviously, Chris, was getting to talk on the calls again, as we prepare for whatever storm is JP — as Jamie Dimon [ph] said is coming. Is there anything that you guys are either seeing or looking at in terms of loan categories or things that you want to avoid going forward? Some people were concerned about office, hotels, et cetera. Any loan classes that you would think could be more impacted?
Tim Schools
Well, I’ll let Chris get into that because I presume, Chris, it’s a lot like we did the pandemic analysis, I would assume that would be the same categories. But a couple things, I’d say first of all, we’re a bank, we’re not perfect and I’m sure in a declining environment, we would have increased losses. I think we’re generally a strong credit culture and good underwriters. We had our loan review firm, which was the former BKD, now four of us here on site at our Board meeting Wednesday, they just completed two loan reviews. They’ve looked at 35% of the portfolio, they target 50% in the year. And generally, their view is positive on our portfolio and our underwriting.
The profile of the portfolio has changed a lot in the last 3 years. And as everyone knows, CapStar was more of a national lender and our shared national credits this quarter they’re now less than 1%. I don’t think we’ve done — I know, we haven’t done a shared national credit. There was a lot of participations on top of that, that weren’t even shared national credits with Pinnacle, FirstBank, Enterprise in St. Louis, Cadence in Houston. I don’t think we’ve done one of those in 2 years. So our profile is so different, that we’re more granular, we’re in more markets, they’re more secure, they’re more guaranteed. That mean that good customers won’t go bad.
But the last comment I’ll make on our profile is CapStar has been a bank even before myself, that’s never really done any material A&D, or a large level of builder finance. And so, Chris is more of an expert than I, but A&D and builder finance are two areas that tend to get hit hard in bad economies, we really aren’t exposed to that sector. And then, Chris, maybe talk about the sectors we have, like from the pandemic.
Chris Tietz
Sure.
Tim Schools
What are those sectors that are on your mind that you highlight.
Chris Tietz
Yes, Brett, it’s a good question and a little bit forward looking. So it’s really one guy’s opinion rather than something that I can empirically show. So first of all, stepping back to the big market, we have interestingly seen for the first time new projects that are failing to raise the equity requirements that we would have to underwrite them, okay? So these are projects that that’s a normal — that creates a normal break on construction and development activities. And I’m not talking in the residential space, I’m talking about in the commercial space.
But if you go into our response, that is we stay disciplined and we get more disciplined. As we’ve talked about for many quarters, going back even before the pandemic, our commercial real estate model is a high cash equity model period. We’ve stuck to that. If you go back to specific categories that would be deemed risk through — well, let me also step back. Of our commercial portfolio, commercial real estate portfolio, we only have 60 basis points of criticized or classified loans within that portfolio. It has been high performing for a very long time.
Areas of concern. Hotels, going back through the pandemic have performed exceptionally well for us, even during the pandemic. But we have not grown that category. If anything, we’ve shrunk it just a little bit. Multifamily continues to be a resilient component of our portfolio and of the economies in the markets that we deal in and we do have a concentration there. We also have some retail, but again we’re sticking to more of the triple net lease profile. A good portion of what we have in retail exposure comes through the Tri-Net program, which has a weighted average cash equity of 35% with long-term credit tenant national leases in place.
So we don’t — yes, there is concern over office, but that is mitigated again, primarily by the high cash equity that we have going into those transactions. And we believe that we can be resilient managing that over time. I don’t know if that answers your question, but I’ll give any more color that you might want in there.
Brett Rabatin
That’s very helpful, Chris. Appreciate it.
Chris Tietz
And Tim — I’m sorry, I didn’t address the one issue. We continue to be exceptionally conservative with acquisition and development activities. It’s just not something that we see as being long-term. The kind of risks that we can manage, particularly in this kind of environment. So we’ll continue to be conservative there, and with residential construction activities.
Tim Schools
And, Brett, let me give you one example and I don’t remember all the details. But in the last 2 weeks, two opportunities came before us. And one was what I hope and suspect would be a great long-term project. It was some kind of — I don’t want to say what market, but it was some kind of newer Kevin Lambert is here. Kevin, I don’t remember if it was a hotel or whatever, it was some kind of resort development, back construction. Pretty large cost to it. Do you remember generally the range, Kevin, on the cost? So it’s a large [indiscernible] construction resort kind of thing. And Kevin and I looked at it and said, I don’t really think we should be doing that right now in this environment. And then somebody called in and we’ve got a customer who moved two large operating companies to us where we’ve got cash management, deposits, loans. And that customer owns a warehouse, that they lease out to a large grocery store chain. So it’s — number one, it’s a proven customer we know, two existing operating companies. And then he’s got a warehouse that he leases out, that has had a proven tenant for a long time. So we did that one. So that’s an example of where we’re being very selective and very choosy. Even though the first one sounds like a great project and long-term probably has great prospects. We didn’t think it was great for this environment.
Brett Rabatin
Okay, that’s very helpful. I appreciate all the color on that. Just one last one. I think, Tim, when you got to CapStar, I think the first thing that was obvious as you needed to change the lending culture. And so I think that was kind of the first and foremost thing that you focused on. As we — as I think in the past few quarters, you probably realized that deposits were also something that you needed to be focused on as well. And I don’t know if you feel like you caught up to that from a culture perspective. But just wanted to hear maybe any thoughts around the deposit building culture at CapStar. And if you think you’ve gotten that to where it needs to be, or if maybe you still got some work to do with how the relationship, folks bring in deposits?
Tim Schools
Yes, ironically, I joined in May of ’19. And so the first 6 months, I can see Jerry Kings [ph] on this call here and listening. And he’s really one of the people that informed me the most and woke me up and he was been a great, I’m so glad he spoke up. And so the first 6 months I took — he challenged me to analyze the company, and what would it take to make it better, that came from Jerry King. And so actually, Brett, in the fall of ’19, I started a whole deposit project. I got peer incentive plans. We clearly were a national wholesale participant bank is what we were.
And so we laid out we needed to change that and we laid out funding actually at the same exact time. And we changed incentive plans, we started talking about it. And actually, I think we started to make some good initial progress. And then within 3 months, the pandemic started. And you turn to employee safety, your own personal safety, how do you run a bank remotely, I mean, just the next 18 months was total. How do you run a good company in that environment? And $300 million of excess deposits came in.
So I would say it’s not like — I mean, I don’t want to — I’m not trying to say that to say I found it, but we started talking about it probably in October of ’19. And I would say that both the disruption of the pandemic as well as you get comfortable with the $300 million, I mean that really turn to internally and from investors what can you do to lend that out. Well, that $300 million and all banks basically left, right. And so we’ve achieved everything we’ve set our mind out to do. And I would just say that it was not part of the original culture. Certainly they got deposits. I don’t want to say that. But it wasn’t a balanced approach.
Like Art Seaver has grown his bank and done a great job at Southern First for 30 years. And he hasn’t bought banks, and he’s found a way to fund his bank. I don’t think he’s been growing loans 20%. He’s found a way to grow loans to deposits 8% or 9% a year for a long time. And they’re a model just like us, they’re in urban markets, they have limited branches. So we’re really doing a lot of self reflecting and getting back to that. So I would say it’s very early. If it was a baseball game, it’s in the first three innings. And I’m very excited about what we can do. And I think we need to adapt incentive plans.
One example I’ll give you for everybody on the phone is there’s a customer in [indiscernible] on the Tennessee side, above Florence, Alabama. And we bought bank of Waynesboro down there, and we’ve got, say five branches. And one of our bankers went to high school with the person that owns this company. So that company had $10 million to $12 million of loans, depository needs, cash management and we were just confident that we would get that. I mean, we’ve got five — the small bank we bought wasn’t big enough to serve it. But we’ve got five locations. One of our bankers went to high school with their owner, we thought it was a slam dunk.
Service First flew there jet in there from Birmingham, and Service First got the relationship. They don’t have an office within 2 hours in there. And so I think, Brett, we need to change incentive plans, we need to change our mindset that we don’t have to have a branch right next to the customer. And we’ve got to get proactive and offensive about how can we go to those markets and set up a company. CapStar just wasn’t built that way. CapStar was — so we have a little bit of work to do there. But it shows it can be done.
Brett Rabatin
Okay, great. That’s good color. Thanks.
Tim Schools
Thanks, Brett.
Operator
Thank you. And that will end the Q&A session. I would now like to turn the conference back to Tim Schools, for closing remarks.
Tim Schools
Yes, again, that’s all we have. We appreciate your support. And we’re really pleased with our progress. And we look forward to talking to you, I guess it will — the next call will actually be 2023. So everybody have a good fall and a good holiday and we’ll talk to you then. Thank you.
Operator
This concludes today’s conference call. Thank you. Have a pleasant day and enjoy your weekend.
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