CapStar Financial Holdings, Inc. (NASDAQ:CSTR) Q4 2022 Earnings Conference Call January 20, 2023 11:30 AM ET
Company Participants
Tim Schools – President and CEO
Mike Fowler – CFO
Chris Tietz – Chief Credit Policy Officer, Executive VP of Specialty Bank
Conference Call Participants
Brett Rabatin – Hovde Group
Graham Dick – Piper Sandler
Kevin Fitzsimmons – D.A. Davidson
Feddie Strickland –
Operator
Good morning, everyone, and welcome to CapStar Financial Holdings Fourth Quarter 2022 Earnings Conference Call. Hosting the call today from CapStar are Tim Schools, President and Chief Executive Officer; Mike Fowler, Chief Financial Officer; Chris Tietz, Chief Credit Policy Officer, Executive VP of Specialty Bank.
Please note that today’s call is being recorded. Replay of the call and the earnings release and presentation materials will be available on the Investor Relations page of the company’s website at capstarbank.com.
During the presentation, we may make comments, which constitute forward-looking statements within the meaning of the federal security laws. All forward-looking statements are subject to risks and uncertainties and other factors that may cause the actual results and 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 filing 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.
Tim Schools
Okay, thank you, sir.
Good morning, and thank you for participating on our call. We appreciate your interest in CapStar. We’re pleased with our results for 2022 and the quarter. We reported earnings per share of $1.77 and our return-on-equity of 10.7%, strong loan growth NIM expansion disciplined expense control and low-credit costs each contributed. In line with our capital allocation efforts we also returned a record $17.9 million to shareholders through dividends and share repurchases. What is significant is within the annual numbers we had $2.7 million of loss related to mortgage and the wire loss, and TriNet was breakeven.
We’re in a complex operating environment, but our mortgage and TriNet divisions are outstanding businesses that have strong earnings power in the right markets. As we mentioned last quarter, we had two operational losses of which one for 732,000 was fully recovered this quarter. We remain optimistic that we will have a recovery also related to the wire later this year.
As an aside, I will mention the FBI, the TBI and the Cleveland Tennessee Police Department have identified the fraudster and have put out a national indictment which is unusual as they typically are limited to 500 miles. The TBI also intends to add the individual to the Tennessee top 10 most wanted list. In contacting our core FIS, this individual’s online credentials showed up across their operating system attempting to penetrate other banks. He also attempted to defraud another Tennessee Bank a few weeks after us. Assuredly, he is part of a larger network and he is trying to impact a number of banks.
In the third quarter, we reported $0.47 per share and a return on equity of a 11.8%. As noted, our earnings included the recovery of 732,000 related to one of the operational errors. It is subject to appeal but our Counsel feels it is more likely than not that the opinion will remain favorable to CapStar. The appeal process could continue through year-end.
Loan growth for the quarter remained strong at 11.1% average and 8.6% in the period linked-quarter annualized when you exclude the TriNet balances that we moved this summer and our holding in loans held for investment. Our markets remain strong although lending has begun to slow due to the impact of higher rates. As a bank, we are being cautious with the uncertain economic and funding outlook having pulled back on CRE last summer tightening some underwriting criteria and maintaining our discipline on loan spreads.
We have a strong loan engine an advantageous markets that continue to be in a conservative nature. Our credit metrics remained strong which Chris Tietz will cover later. We have three past dues we are addressing, two of which have been problem loans for a while. We are performing active portfolio management with higher rates to identify customers early who might become a problem now or in a slowing economy.
As we communicated last summer depositors became very aggressive in the second quarter of 2022 and that continues today. One of the biggest competitors to date has been the U.S. Treasury and Treasuries were individuals have pulled money from banks into treasuries. We are working hard to offer competitive rates and products to maintain and attract new depositors while not cannibalizing the portfolio. It is as challenging as I have seen it.
More recently, banks have stepped up to wholesale prices on their deposits and you face a situation that you either have to match or lose the relationship. We hope this will slow as the Fed slows but margin pressure will likely continue in the near-term through the first half of 2023.
Until then deposit rates will continue to rise, we will work hard to get as much offset as we can on the loan side. Some of the specific actions we’re taking related to deposits include, we are monitoring competitor bank rates in our markets and their specials. To-date it appears our betas are in line or a little lower than our local competition. We are proactively discussing each customer request that comes to the table. We’re requiring the primary deposit relationship on all new loans. We are calling on all relationships where a deposit was not obtained historically. We’re calling on all customers for accounts that they might have elsewhere.
Lastly, we’ve changed our incentive plan to require a certain level of funding percentage to loans for each banker in market. Our highest paying category has always been deposits and specifically DDA. This will also ensure our great staff our outstanding bankers and not just outstanding lenders, encouraging them to call on deposit only customers as much or more as borrowers.
As it relates to fees, mortgage volumes remain at historical lows nationally. We have a tremendous mortgage company and team and are monitoring local and national markets. We reduced staff in the third quarter and have an opportunity to evaluate that further.
Again, we have a strong division and do not want to be shortsighted but it is something we are discussing. TriNet was paused in third quarter 2022 due to the unusual rate environment. We will be testing a limited pool in the first half of 2023 with a different rate structure and risk protocols. We do not have a tolerance for further losses. So volumes might be lower, but we want to ensure we have a gain on sale.
We’re very excited about our new SBA expansion. From my experience, SBA is something you should really be committed to or not do it. CapStar has had a limited investment to-date and demonstrated some success overtime. In fourth quarter 2022, we were approached by a top 10 team that elected to join us. Overtime, we are planning that they can generate $2 million plus of quarterly gain on sale. There are three other revenue components that Chris will discuss later but that is the most visible component.
In the past, we’ve cited $16.5 million as our non-mortgage expense noninterest expense range. Recently, we’ve been running under that and this team adds another approximate 800,000 a quarter of noninterest expense to include commissions that would go with their revenues.
Lastly, we’ve worked hard to put CapStar’s capital to use in a productive manner. By entering new markets and growing loans, increasing our dividend and buying back stock. We renewed our buyback this week albeit at a lower level of $10 million. We feel that is prudent with the uncertainties with the economy at the moment and we’ll continue to evaluate as the year progresses.
Now I will turn it over to Mike for more details on the margin and other items.
Mike Fowler
All right. Thank you, Tim and good morning everyone.
So on Page 5 a few quick comments on financial results for the quarter. We reported net income of $10.3 million, $0.47 a share. As Tim noted Q4 results do include a 700,000 recovery related to one of the two third quarter operational losses. Total revenue was $31.2 million in Q4. That is up $2.4 million versus Q3. So recall that Q3 did include $2.1 million of realized and unrealized losses related to selling or transferring to held investment the remaining TriNet loans, which were in held for sale.
Expenses were $16.3 million for the quarter. They were down $1.3 million versus the prior quarter. But again, as Tim noted, recall that the prior quarter did include $2.2 million of operational losses, partly offset by an $800,000 voluntary executive bonus reversal.
On Page 6, I’d just point out a few metrics. So we did report pretax pre-provision as a percent of assets of 1.86%. We reported return on assets of 1.31% and reported return on tangible equity of 13.6%. And we will go through Chris will review the credit metrics obviously later in the presentation.
On Page 7 in terms of net interest income and net interest margin after rising materially in the second quarter and the third quarter where we benefited modestly from Fed hikes and remixing the asset shifting excess cash into loans as Tim noted, the fourth quarter net interest margin 344 was down 6 basis points versus the third quarter primarily due to two factors on the deposit side.
One was a mix shift into higher cost categories and one of customer funds, which we’ll talk about on the next slide. And number two is additional deposit pressure from increases in customers seeking alternatives but also from an increased an increasingly competitive local deposit market.
And I would say some of that is from local competitors locally based competitors within our footprint. I’ve been surprised somewhat to see more aggressive pricing both on promotions and on an exception basis from a much larger regional players and from some very large national players, haven’t seen that until recently.
Overall, our deposit beta increased to about 40% in Q4. And as Tim alluded to we have seen NIM pressure later in the quarter. And that does suggest likely near term NIM pressure in the next one to two quarters.
On Page 8 in terms of deposits, total deposits were roughly flat. I would say in terms of deposit pricing, we have seen our betas and as Tim said, we actively monitor competitor pricing through S&P. We monitor standard rates, we monitor promotional rates and we monitor exception rates through what we’re hearing from our bankers. And we certainly as we’ve seen in prior cycles and as we expected we have seen betas increase the deeper, the Fed has gone into their Fed hiking cycle.
In terms of balances, we did see customer balances decline this quarter by $156 million. We saw about $60 million in our correspondent banking division, as our correspondent bank clients are deploying our excess liquidity but we also saw $97 million in other bank customer balances decline. We offset that this quarter with $160 million in broker deposits. And from a price from a cost standpoint as you can see on the chart our deposit costs rose 58 basis points to an average of 1.2%.
If we look at Page 9, in terms of loan growth and loan yields, we continue to have solid loan growth. The bar chart on the left is our reported loan balances. The first forward the Tim referred to in terms of our held-for-investment loan growth that is excluding the TriNet transfer from its removing TriNet loans that we have had in held-for-investment. Normally, those are in held for sale. So we did remove the TriNet impact from the 11.1 average growth and the 8.6%, end-of-period, without excluding those, you can do the math the period-end is a little bit under 4% without adjusting for TriNet.
We continue to see strong loan production. It is down a bit from last quarter I believe that we’re continuing to see solid loan production $150 million in Q4. And the pipeline remains strong across our markets, commercial pipeline $450 million. As we’ve said on the last call and I know we’re hearing more of this in the industry, we are being more disciplined and somewhat limiting our loan growth maintaining disciplined pricing which I would say we’ve seen more challenges on the deposit side from a pricing standpoint, we’ve seen I would say the summary expects the flip side of that on the loan side middle of last year when the Fed was hiking 75 basis points, every meeting ratio going up sharply along the curve, as we mentioned on earlier calls we were remaining disciplined, but seeing more competitive pricing that hadn’t caught up to where market rates have gone.
I think with the Fed slowing and the yield curve flattening and inverting, we’re seeing competitive pricing more in line with where the markets are I think giving us more comfort and ability to achieve our targeted spread on the loan side.
Our loan yield did increase this quarter 41 basis points and we did achieve in terms of originations for the quarter match-funded spread against wholesale funding against home loan funding 2.39% as of the time of funding.
On Page 10 related to non-interest income mortgage revenue as you know has been down sharply from a year ago, with the increase in mortgage rates. We do believe at this point mortgage revenue reflects limited volume in-line with national trends. Margins however, have started to rebound and are returning to what we view as more normal levels.
As Tim mentioned, TriNet which we had announced previously, we had paused and third quarter that remained paused through the fourth quarter. But as Tim said, we are now testing a limited pool in the first quarter, as he said, we have no appetite for additional losses, and these are originated to sell, we’re cautiously optimistic that our testing will be successful and will lead to potentially further expansion of that business, but SBA lending revenue, as Tim said, very excited about that. Chris will talk about that more in a few minutes.
You certainly see the results the recent SBA expansion in terms of fourth quarter revenue, where fourth quarter SBA lending revenue is up a little bit under a $1.5 million up about 900,000 from last quarter.
Turning to Page 11, and non-interest expenses adjusting for — well again we reported $16.6 million that includes the recovery that Tim had mentioned of 700,000 operational loss from Q3. That is down from $17.9 million last quarter. But recall as Tim mentioned, last quarter did include $2.2 million of operational losses and partially offset by 800,000 voluntary executive bonus reversal.
A good part of the increase in adjusted expenses versus last quarter is the additional SBA or costs related to the additional SBA hires, which again are very excited about and I will turn over to Chris to discuss now.
Chris Tietz
Great, thank you, Mike.
Turning to Page 12, we are excited to announce additions to our SBA team under the leadership of its newly appointed Director, Marc Gilson. Marc is assembling a team of seasoned professionals that I have been impressed with in every interaction. This team generally comes from high production SBA lenders with volumes writing them in the top-tier of national lenders. Their primary target is the origination of SBA 7A loans generally with a 75% government guarantee where we will intend to sell the guaranteed portion for a fee.
As shown in the chart on Page 12, while we are pleased with the historical trend in growth in the SBA Group, we felt that it had potential for more. Please note that of the $2.5 million in SBA net fees for 2022 over half of this was earned in the fourth quarter. While net interest income will change with variable-rate pricing we believe that the fourth quarter provides good insight into near term expectations for fee growth.
Last quarter, we provided guidance to you of $750 to $1 million in fees for the fourth quarter. With the addition of this new team, we were able to exceed that guidance at $1.4 million for the quarter. Having said that, we believe that the near-term average will be in the $1 million to $1.5 million range per quarter on a growth trajectory to $2 million per quarter as the team settles in and gains cadence and efficiency in their process.
In addition, we continue to recruit new business development officers coming from efficient well-run lenders demonstrating long term credit loss experience below the SBA averages. Execution is the key in this arena to be sure we maintain the SBA guarantee. We believe that we must have strong investment in revenue production, robust underwriting and approval support and a strong and seasoned servicing team. With this in mind we believe our strategy is sound, with the goal of staffing our team with seasoned SBA lenders but we are also adding the oversight of an SBA specific post-closing loan review by an external accounting firm to mitigate execution risk and to hold us accountable to strong expectations.
Now turning to risk management. On Page 14, we are pleased with continued improvement in our overall level of criticized and classified loans having achieved a 50% reduction for the year from 2.64% of loans at December 31, 2021, to 1.31% of loans at December 31, 2022, and that reflects a 27% reduction for the fourth quarter.
Of note, approximately 60% of the criticized and classified loans outstanding at year end 2021, we paid-off or upgraded in the course of 2022. We are encouraged by this improvement in overall asset quality. There are some data points relating to the level of impaired and doubtful loans and past dues that warrants some additional insight. First, let me remind you of the evolution of problem loans, often they start exhibiting red flags with us either through identification of borrower operating results, giving us pause for concern or delinquency or a combination of both.
Upon identification of concern such borrowers will generally be rated special mention and may migrate up or down from there overtime. Once a loan migrates to substandard, as I’ve indicated in prior quarters calls it often takes 18 to 24 months to resolve the situation. Approximately 38 of the 41 basis points in impaired loans are in three borrowing relationships in active workout status. These loans are impaired and have been subjected to impairment review with approximately $700,000 in specific reserves applied to the account to account for potential loss.
These three impaired relationships also account for 41 of the 50 basis points in past dues. Despite the negative migration in that small number of credits, we remain encouraged with overall asset quality for the following reasons. The improving trend in special mention and substandard loans is a favorable leading indicator for future asset quality in the near-term. With each of these two categories, at 25 basis points and 65 basis points respectively, they represent historically low levels, which buffers us against the impact of potential deterioration in uncertain economic times.
Adjusting for these three relationships in active workout past dues would be an exceptionally good 9 basis points continuing a favorable trend from prior quarters. So let me step into the three relationships I’ve mentioned. The total of these three relationships is approximately $8.9 million. All of this $8.9 million approximately $5 million is a single relationship where the primary collateral is real estate. This relationship came to us through an acquired institution. The remaining two loans totaled $4.9 million and our SBA guaranteed transactions originated in 2020 with $3 million of SBA guarantees retained on our balance sheet, mitigating us against risk of loss.
Subjecting these three loans to impairment reserve or review, we have accounted for $700,000 of potential loss in a specific reserve accounted for in our provision of $1.5 million for the fourth quarter.
Turning to Page 15 with the impairment of the loans previously discussed, our provision expense of $1.5 million takes us to 113 basis points at 12.31 including fair value marks. As you know, like others, we adopted CECL on January 1. Our general guidance is that the impact of the conversion to us is in line with other banks as to the expectation for direction of change in the allowance for credit losses under CECL in coming periods we would expect it to be driven by macroeconomic conditions with modifiers based on the direction of risk in our own portfolio assessment from period-to-period.
With that, I’ll turn it back to Tim.
Tim Schools
Okay, thank you. Thank you, Chris.
I’m really proud of our team and look forward to 2023. Since the onset of the pandemic the environment continues to bring new challenges and we continue to work hard to address each one and improve the bank along the way.
That concludes our presentation and we are happy to answer any questions. We appreciate your support.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question comes from Brett Rabatin from Hovde Group. Your line is now open.
Brett Rabatin
Hi, good morning guys. Appreciate taking the question. Wanted to start-off with the margin and just your expectations for the first half of the year. And if you had the December margin that would be helpful. And then just maybe thinking about the spread of 2.39%, that seems a little lighter than what I think you would have been the case you be comfortable with previously. Just want to make sure I understood if that was primarily on the lending side that you’re not being able to accelerate the yields as fast or if that’s just deposits or such so more expensive. Thanks.
Tim Schools
So, I’ll start on the loan spread first and I’ll let Mike talk about the margin. And good question. Thank you for the question. You can sort of just do it on a napkin or an excel. But if you take a 200 basis points spread, right, and then you got to multiply, just take $1 million and multiply it by 2% you’re assuming that is your spread minus your FTP cost. If you’re going to assign some level of credit expense, some level of operating expense and then taxes today at 20%, to me you really want to get a 200 basis point spread. I mean there’s times where other banks I remember when I was in Memphis there was competitors that would do large churches over there at 110 basis point spread.
If you think about that, if you’re going to have operating expenses, commissions, expenses and taxes you’re not going to get a 125 ROA. So it’s just been a rough rule of thumb for me, Brett, in my career that on the commercial side, I try and get my teams to do a minimum of 200, sometimes we don’t.
Last if you go back to the fall of 2021, I think that fourth quarter our commercial spreads were 250 basis points from my memory in that range. As we enter the spring of 2022, you might remember me mentioning that we have extreme discipline and probably too much. And we wanted to hold tight at that and as rates went up, banks did not move their market rates to match the underlying rise and FHLB sort of base rates.
So the rates we put on the spreads, we put on the first half of last year I think from memory, we’re in the 170 range. And so, I’m actually pleased that this quarter was 239 again I think that would be great in a normal operating environment, so I’m glad to see that we need to keep trying to get as much as we can. I saw someone put out a note on home bank in Arkansas, I don’t follow them that their new production was at 7.1%. And they talked about how they were trying to make up some of it on the loan side, we need to do that as well and our deposit strategies, but I am pleased with the 239.
Now I will turn it over to Mike to talk about the margin and I think that December is a good question.
Mike Fowler
Right. So thank you, appreciate the question. So our margin in December at compressed to about 335. We did see deposit pricing pressure pick up late in the quarter. And we saw the beta related to Fed moves pickup in the quarter. We are hopeful that some of that is competing with banks that are sort of getting ahead of the Fed’s next move from a pricing standpoint. But we clearly saw deposit pricing pressure on an exception basis. And if promotion basis pick up late in the quarter.
And one thing I would say in terms of margin as Tim said, we’ve always targeted on the loan side is spread over home loan match-funded, the home loan. When rates were at historic lows it was very difficult to get much spread on the deposit side, even with deposit pricing, getting more aggressive we are getting more spread on the deposit side to contribute to the margin than we did when rates were at historic lows.
Even the wholesale rates, we’ve been tapping which have been brokered not home loan, add to a year they’ve ranged 30, 40, 50 basis points below match funded wholesale home loan and our deposit pricing, we are trying to be flexible in terms of responding to competitor offers and competitor exception rates to retain profitable customers and to potentially attract broad relationships we will never go really to or above our wholesale alternatives.
So even if more aggressive deposit pricing, we are still getting reasonably attractive spreads on the deposit side, the less so than a little bit earlier in the year.
Brett Rabatin
Okay. That’s helpful. And then wanted to just turn to the SBA business and wanted to make sure I understood the pace of the improvement to the $2 million quarterly number, what that might look like and then I’ve heard some banks say that they are less optimistic on SBA, in the current environment. And so I just wanted to make sure I understood the decision to the bulk of it and just what the expectations might be from a credit perspective.
Chris Tietz
Sure, Brett, this is Chris. A couple of things that I’d note. If you compare SBA over time, this is a period like every other fee business where margins have been under pressure, okay? Alone that guaranteed portion that you could sell for 10% to 12% are premium, say a year or two years ago might go for something around 8% premium or less. And I suspect that impacts the expectations of some of these lenders out there in the space and so on.
So as to the trajectory for growth, I think it will be fairly rapid. I am optimistic that we will be at that run-rate that I mentioned of about $2 million by the end of the year, but I think that we need another quarter or two to settle in at current levels before we push the envelope on that.
Tim Schools
And Brett, I might add that, I mean, we understand we’re running a public company and there’s different mandates from different investors and we want to build a great company and we want to build an institution to last, and so this is one of those that as we continue to improve our performance this actually came to us, we didn’t go seeking for it. And so you have to evaluate it as an investment and I would say we don’t want to do anything that’s not profitable or accretive to our value, but look at we don’t pretend to think will be Live Oak, but look at the great institution, they’ve built with this product over time.
So spreads and different things will come and go. These are people that we referenced and checked and very great reputations, they’ve done it a long time from top 10 SBA units and so we’re going to — we want to go fast, and we want to go slow, right? We want to generate the earnings, but we also want to do it the right way where we’ve got a quality business and it continues to build the brand of CapStar and make it a well-rounded financial institution.
Brett Rabatin
Okay, that’s great. If I could sneak in one last one Chris, just on CECL, you mentioned the implementation, and I think 3Q I think your reserve on CRE was 85 basis points. With CECL it seems like we could see some rebuilding of reserves for the industry assuming using Moody’s model et cetera. So Chris, wanted to hear if you anticipate of kind of a building of reserve levels and somewhat of an uncertain environment from current the 1.03%. Thanks.
Chris Tietz
Well I think, yes, it’s hard to answer that. What I would say is that, CECL is so heavily tied to national macroeconomic trends and that has been the most resilient and predictable kind of indicator of loss overtime. So, I mean we have the opportunity to modify that based on qualitative criteria. You mentioned commercial real estate, for instance, specifically again, I’ll remind you that our underwriting model for commercial real estate has and continues to be a high equity model, which we believe mitigates us against anomalies in the business cycle and cyclical risks from higher rates and lower valuations.
I don’t know if that answers your question, but that’s probably about the best guidance that.
Tim Schools
Could I add maybe to what he is asking. And we have Jeff Moody here, our Controller as well, so correct me if I get off track here, but we are adopting as of January 1, and of valuing the — and evaluating the banks that have adopted previously the — I don’t know the correct term. But the adjustment for seesaw appears to be in line with what other banks have had when they’ve adopted. And I think that – reserves tend to go up, but I don’t – I think that’s more from the adoption of CECL I don’t think it’s anything due to the environment for the current economy, and I think investors should expect something in the range to what other banks have had when they adopt it.
And then I’m not an expert on it, but as the macro environment changes one way or the other, that will determine your question Brett, but nothing I would say, nothing more so and Jeff, please correct me. I think nothing more so than normal adoption levels that maybe we’ve seen from other companies.
Jeffrey Moody
Correct.
Tim Schools
Okay, he is confirming that.
Brett Rabatin
Okay, that’s really helpful. Thanks for all the color, guys.
Operator
Thank you. And one moment for our next question. And our next question comes from Graham Dick from Piper Sandler. Your line is now open.
Graham Dick
Hi, good morning guys.
Tim Schools
Good morning, Graham.
Graham Dick
Just wanted to circle back to the margin conversation quickly as you mentioned that at December margin at 3.35% and betas accelerating during the month? When you guys look to the beginning of this year I guess 1Q and maybe into 2Q, a little bit would you expect the margin to be about that 3.35% level or above it or size of large kind – how you’ll see it trending in the near term?
Tim Schools
Well – I mean – this is Tim, I apologize as a conservative person. I would follow recent trends I would love to be able to promise to you that it was going up and we want it to go up as much as anybody, and we’re going to we’ve been working very hard and we’re going to continue working hard, as you know, this is a sort of a macro and industry item and it’s challenging. So we’re going to work hard.
We’ve been tempering our loan growth and really focusing on pricing to main spread and then and we’re going to be working extra hard on those projects that I mentioned to you. So I don’t have an answer to give you as a conservative person. I think that we’re probably viewing that will be probably that level or slightly down and we’re hoping that that as the Fed slows its rate increases hopefully this the next six months.
Hopefully that will slow banks from raising and some level of calm as Mike said, hopefully, some of these banks are getting ahead to the next increase. But I wouldn’t want to lead you otherwise I’m under-promise and over-deliver kind of person and it’s a challenging operating environment right now on the deposit side.
Graham Dick
Okay, that’s helpful. And I guess, specifically on the loan side, you mentioned home bank getting 7.1% just wondering what you guys are seeing on new production today that’s in the pipeline and what you can expect to see hit the balance sheet this year in terms of loan yield and then also I guess if you could share what your pricing wholesale or brokered CDs at right now that would be helpful as well?
Tim Schools
Okay, so we’ll start with, I’ll ask Kevin Lambert, who is here who is our Chief Credit Officer, he may pitch in on not a specific deal, but just general, maybe 5.20%, 5.25% kind of rates you’re seeing Kevin. And then maybe Mike can pitch in on brokered CDs so, Kevin.
Kevin Lambert
On the – as far as the rates go – we’ll probably – you have seen rates that range in the 6% to 7% and higher kind of range.
Mike Fowler
All right and yes Kevin and on the brokerage side. I would say looking at pricing as of Monday we have been issuing really generally out to about nine months. So I would say nine month rates right now, we’d be issuing around 4.65% all in six months, we would be issuing around 4.50% to 4.55%. Three months around 4.30%. And again, each week we compare the curve on our out – on our brokered to home loan, we also compare it looking at – Fed funds futures.
So, where those are suggesting rolling overnight home loan borrowings will be over the course of the year. And we’re trying to be very prudent in terms of tapping the most cost effective source to do that and broker continues to be yes right now six month about 45 basis points under our home loan about 20 under where fed’s funds futures are. So that hopefully gives you a sense for the current wholesale pricing we’re looking at.
Graham Dick
Definitely, that’s very helpful. And I guess, just one quick one on expenses. I just wanted to know what the mortgage banking unit expense was this quarter?
Tim Schools
Our teammate, Glen Rhodes is here I believe it was around $1.5 million, is that approximate approximately $1.5 million Graham. And again – I think our gentleman that runs that he is tremendous. I think this was the lowest gain on sale, he may have had in history and he’s a real pro and it’s just that’s an issue as I’m sure you’re hearing from other banks, they’re just limited to no volume.
And fortunately the spreads came back – for the volume you get, but there is additional, we’re actually interviewing a person we’ve interviewed her twice this week from another mortgage company that got laid-off in town. The big companies are doing that and there is a potential – of maybe some further reductions. We did reduce about $400,000 on operating expense, but it’s a balance of again.
We really have an outstanding mortgage company, it’s not a monoline that we blew up for the – when I say blew up expand we didn’t expand it for the refi environment it’s really a purchase money high-quality shop in metro Nashville. And hate to damage that for short-term earnings, but we’ll continue to monitor it with Hart Weatherford and with Chris Tietz.
Chris Tietz
Yes and Graham, I’ll point out that we view March and April as being important kind of watershed periods to gauge where we see the rest of the year going we are seeing a pickup in applications, of course, rates have come down margins on the gain on sale have gone up at this point, we’re encouraged by the application volumes, the declining rates.
The resilience incumbent in the quality and quantity of housing demand in our markets particularly Middle Tennessee, where we’re really – have historically been a top five kind of mortgage originator for the market.
Graham Dick
Okay, great, that’s all very helpful, thanks guys.
Tim Schools
Okay, thank you.
Operator
And thank you. And one moment for our next question. And our next question comes from Kevin Fitzsimmons from D.A. Davidson. Your line is now open.
Kevin Fitzsimmons
Hi, good afternoon, everyone.
Tim Schools
Hi Kevin.
Kevin Fitzsimmons
So appreciate all the information here and we’ve talked a lot about margin, but if we look at dollars of NII are we likely in the first half of the year if loan growth is more limited. So overall balance sheet growth is more limited and the margins under pressure is that likely – that dollars of NII will be flat to down in the first half of the year and maybe – and are you hopeful it goes from goes to flat to up in the back half of the year?
Mike Fowler
Well, definitely on the backside and on the first side. I’d like to see that you know I think one issue, is just managing just overall liquidity and the quality of the balance sheet. You know the – in the fourth quarter Mike mentioned our correspondent division, other banks are having the same issue. So there is, pros and cons to correspondent balances because they are having issues too with customers. And so our correspondent balance is we’re about half the decline.
We had some customer decline CapStar historically had some really large metro Nashville. I don’t want to call it hot money, but more rate sensitive money and that’s some of what has been leaving. So I would say, Kevin from Tim’s perspective, what I would love to happened as I hope the correspondent sort of settles down, one strategy, I didn’t mention when I listed them as we do have a new correspondent banker that – I announced previously.
He was the top correspondent banker at First Horizon. I don’t want to scare you he actually had $700 million in deposits in his portfolio. So we’re going to be working with him hopefully, we can stem and grow correspondent hopefully the core customer deposits. You know that the larger more rate sensitive may be have fled and definitely second half to your question, but I would love to see in the first half, we’re we can begin to add deposits.
It may come at a thinner spread, where maybe we can outgrow some of this on NII, even though it hurts margin a little bit, that would be the goal. Want to monitor the trends of fourth quarter to make sure there’s, not further customer declines.
Kevin Fitzsimmons
Okay, that’s helpful. And that’s kind of leads into my next question that I was going to ask you about loan-to-deposit ratio here is about 86% given your outlook for loan growth and what you just said about deposits, is it seems like the goal is mostly fund loan growth with deposits. But obviously deposit side is larger.
Tim Schools
Keep in mind — keep in mind, you know that’s sort of public reporting or regulatory reporting that our loan to customer deposit ratio is probably more 90%, 95%. When you report deposits, especially in this environment for our bank and others, brokered CDs are reported in deposits. So when you look at that chart in our PowerPoint of the loan-to-deposit ratio in the 80 range, that’s with the benefit of $150 million or so of brokered CDs already. So I would say our core if you want to call it that our core loan-to-deposit ratio is probably around 95% or so, right now.
Kevin Fitzsimmons
Where do you want that to be Tim, where are you comfortable with. with that being.
Tim Schools
That loan-to-deposit ratio?
Kevin Fitzsimmons
Yes.
Tim Schools
I think in that range. You know, back when we first met when I was at SouthTrust, I’m pretty sure our loan-to-deposit ratio was 115 or 120 and I’d have to go back, that’s how banks used to run back then. I don’t think that’s well-thought-out today, so we generally have from memory our Board approved policy for wholesale funding is 25% of assets. And so obviously, the best balance sheets in America are banks that are 100% customer loans and 100% customer-funded.
So I think up to 95% to a 100% customer-funded. And then have availability on that 25%. And right now we’re using some of that 25%. So as I said, the customers and the 95% range and we do have that. So I think in this environment, you’re going to use some wholesale. I think you are going to use some brokered CDs, especially with our type bank and balance sheet, but I really look forward our team has done anything we’ve asked them to do and I’m actually looking forward to getting involved myself this spring and trying to get correspondent going with Chuck on our new guy. And hopefully, the most rate-sensitive has slowed and we start to get some traction.
On that same topic, Kevin, just because we forgot to bring it up I know it’s unrelated, but talking about the best balance sheet of customer on both sides, this is sort of irrelevant to today’s discussion that we showed our Board this quarter. CapStar shared national credits this quarter. I think our 0.3% of our loans, which we’ve really turned the loan side to a customer balance sheet and that would be my goal on the deposit side, long term.
Kevin Fitzsimmons
Great point. Thanks very much, Tim.
Tim Schools
Thank you, Kevin,
Operator
And thank you. And one moment for our next question, please. And our next question comes from Feddie Strickland from Janney —
Feddie Strickland
Hi good morning.
Tim Schools
Hi, Feddie.
Feddie Strickland
Just want to go back to expenses for a second and make sure I understand the expense guide. If I back out that $1.5 million in mortgage expenses from the fourth quarter numbers. I think I get about $15.9 million, $16 million in the fourth quarter of 2022 is kind of the core bank expenses and that’s actually down a little bit in the quarter? But your guidance seems to imply expenses ex mortgage are going to rise to $17.4 million on a quarterly basis. Are we going to see that all occur starting in the first quarter or is that sort of an average quarterly rate for the year? And just – if you average all the quarters together, that’s what you’ll yet?
Tim Schools
First of all, good job and good math because that’s pretty much what we came up with. So yes, so CapStar to me is a little unusual versus some of the other banks that we’ve got these fee businesses. And so sometimes – it’s frustrating even internally to get your arms around it because I’m used to maybe just a bigger steadier balance sheet – and more of the fees on the deposit service charges which are steady.
So that’s why in the past we’ve said, hey, $16.5 million. I mean we don’t want to – I don’t want to be ultraconservative, but also I want to under-promise and over deliver. So we’ve generally been under that $16.5 million a little bit. I know there were some questions after third quarter. But that’s generally what we came up with in fourth quarter is that we’ve continued to operate under that range that we put out there when you reverse the recovery in fourth quarter, we also got about $15.8 million.
If you put $1.5 million on that, it’s like you said remember there’ll be the $800,000 additional for the SBA. And then remember in first quarter FICA comes back. So that is a number that comes back in. And secondly, fourth quarter didn’t have any executive incentive accrual because we had backed out $600,000 or $800,000 in third quarter and then did not do any in fourth quarter. So I can get with you offline, but you generally are on track Feddie, but just keep in mind you’ve added back the recovery, you’ve got FICA tax coming back.
I think the executive accrual runs when is it $200,000 or $250,000 a quarter. It’s about $250,000 a quarter Feddie for the executive loan that wasn’t enforced. So you’ve got the $15.8 million, you had $800,000, you’ve got FICA and then you got the $250,000 that sort of gets you to your core and then you’ve got the $1.5 million of mortgage on it which that doesn’t really have a lot of variable in it. There’s some. Not far underneath that would be the core run rate just to run the business that again we could continue to look at throughout the year if it stays slow.
Feddie Strickland
Got you. And I guess on mortgage, if that’s a little better, the expenses will be a little higher, but the revenue will be a little higher because you’ll have better gain on sale you know?
Tim Schools
Correct, correct. That’s absolutely – excuse me, I got a frog in my throat. That’s exactly correct that and – if you look at fourth quarter, I think there was $600,000 perhaps in fees on mortgage. So there’d be some commission in that number and so forth. But you are correct that if that went up and you would get associated revenue same thing with SBA. The number I gave you of the $800,000, that does have some commissions sort of for the $1.5 million level. But if it went up to $2 million, $2.5 million, $3 million there would be additional revenues for that expense.
Feddie Strickland
Got it. And then just one last one from me just more broadly speaking, when you’re talking about internal investment, is that going to be focused more on augmenting your existing markets or are you considering further expansion in new markets either with an IPO or team left out or what have you?
Tim Schools
Well, I would say before this rate environment, like if we go back to whenever fourth quarter of ’21 or last December, my view to the management team and our Board is we have enough right now. And we’ve done – this was a fabulous company that had a lot of positive aspects to it and perhaps we’ve changed the strategic direction a little bit. We’ve maybe changed the culture a little more towards performance and it was a great company to start with, but profitability was a little lower, growth was a little slower. So wanted to do these investments and I think they’ve worked.
I don’t think we covered it specifically but Chattanooga and Knoxville today are almost $500 million banks. They are bigger than Athens and FCB. I think Athens we may have bought for $100 million and FCB, we may have bought for $80 million handed out shares, so that’s almost $500 million bank that we didn’t handout shares on.
So I think we have enough. I would have said that before the rate environment. And my goal really would be to continue to maximize those markets and maybe look for bankers in those markets, but we already have a great team. We don’t need a lot more bankers and so we’ve got a wonderful team in those markets and they we need to keep getting customers like they’ve done with that $500 million. And really fund it and get the deposit side, that’s the emphasis even before the rate environment.
SBA I don’t know if somebody came with a new line-of-business today, we have enough going on with our core markets and our current fee businesses. I don’t think we would step into a new fee business. This was really that we were already in SBA. I think we’ve had some wins, but it was sort of here and there and we thought this would really solidify what we are attempting to do.
Feddie Strickland
Got it. Thanks Tim. Appreciate the color.
Tim Schools
Okay, thank you, Feddie.
Operator
And thank you. And we have a follow-up question. One moment please. And a follow-up question comes from Brett Rabatin from Hovde Group. Your line is now open.
Brett Rabatin
Hi guys. Just one quick follow-up. You talked about the competition in the markets and clearly you had two players. I think, trying to get ahead of the curve for this year in terms of growing our deposit base by being aggressive. And so you can make an argument that those two suppliers in particular did some of the heavy lifting in 4Q as opposed to doing it in 1Q and 2Q. And so you could say, well, maybe, maybe the linked-quarter changes and pressures on the funding slowed from the pace in the fourth quarter particularly in Middle Tennessee or you could make an argument for that anyway. I’m just wanted to get your perspective on that thesis and what you’re seeing maybe today versus in December on competition. Thanks.
Tim Schools
Well, I’ll comment first and then Mike can comment. I’ll just say first of all, we’ve got outstanding competitors in Nashville and Tennessee and I think everybody does a great job, and so I think, everybody is fighting through this, the same way. I think you could make an argument to that. I think it goes back to Kevin Fitzsimmons. You know, if I can see that attrition is facing are slowing down, I would be for the same thing. I know it’s not what we all want or I want long-term, but I think you know we are a great bank or the third or fourth largest bank in the state and have a long future. And you are in this for the long-term, but I think there is markets where it’s not the goal isn’t to have the nice margin, it’s to have growth in earnings and a good ROA and ROE.
So, I think they’re doing a good strategy. I don’t follow all of their exact balance sheets. But we have seen that I’m not sure if that’s what they were doing or I think it’s more what Kevin was asking earlier. I think they’re just sort of ploughing through it and saying in the short-term environment we’re going to grow NII and it’s going to cost us to do it. And overtime that will set allows and I’m hopeful we can get there in the first half of the year.
Mike Fowler
Yes, thank you, Tim. And I would add to that I think I might have mentioned, I might have touched on this a little bit earlier and discussing the margin. Again, hard to predict but I did mention to your point that we have seen competitor pricing including from, I think some of the banks you had in mind more aggressive, we don’t know to what extent that may be, I mean we’ve seen banks in our markets that are trying to get ahead and deal with their liquidity challenges. I don’t know to what extent the rates we’re competing with might be getting ahead of the next Fed move. We hope that is the case. And — but we don’t know so that is certainly a possibility. We hope to see that and which would give us some potential upside in Q1.
But as Tim said, I think we want to be conservative and cautious in any outlook we provide, so I would say, time will tell. We are monitoring conditions really day by day. We have very active dialog with people in the field on what they’re seeing. And so we do hope that the rates that we’ve been competing with will slow.
Brett Rabatin
Okay, that’s helpful appreciate it. Thanks guys.
Operator
And thank you. And I’m showing no further questions. I would now like to turn the call back over to Tim Schools for closing remarks.
Tim Schools
Okay, this concludes the call and we appreciate everybody taking time out of their day today to listen and speak with us. Have a good weekend.
Operator
This concludes today’s conference call. Thank you for participating. You may now disconnect.
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