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CapStar Financial Holdings, Inc. Common Stock (NASDAQ:CSTR)
Q3 2017 Earnings Conference Call
Oct. 16, 2017, 4:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen and welcome to CapStar Financial Holdings Q3 2017 Earnings Conference call. Hosting the call today from CapStar are Ms. Claire Tucker, President and Chief Executive Officer; Mr. Rob Anderson, Chief Financial Officer and Chief Administrative Officer; Mr. Dan Hogan, Chief Executive Officer, CapStar Bank; and Mr. Chris Tietz, Chief Credit Officer, CapStar Bank.

If anyone should require assistance during this call, please press star then zero on your touch-tone telephone. Please note that today's call is being recorded and will be available for replay on CapStar's website. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation and instructions will be given at that time. Please note that CapStar's earnings release, the presentation materials that will be referred to in this call and the form 8-K that Capstar filed with the SEC earlier today are available on the SEC's website at www.sec.gov and the Investor Relations Page of CapStar's website at www.ir.capstarbank.com. Also during this presentation, CapStar may make certain comments that constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements reflect CapStar's current views with respect to among other things, future events and its financial performance. Forward-looking statements are not historical facts and are based upon CapStar's expectations, estimates and projections as of today.

Accordingly, forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties, many of which are difficult to predict and beyond CapStar's control. Actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which speak only as of today. Except as otherwise required by law, CapStar disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.

In addition, this presentation may include certain non-GAAP financial measures. The risks, assumptions and uncertainties impacting forward-looking statements and a presentation of non-GAAP financial measures and a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures are included in the earnings release and the presentation materials referred to in the call. Finally, Capstar is not responsible for and does not edit nor guarantee the accuracy of its earnings teleconference transcripts provided by third parties. The only authorized live and archived webcast and transcripts are located on CapStar's website. With that, I am now going to turn the presentation over to Ms. Claire Tucker, CapStar's President and Chief Executive Officer.

Claire Tucker -- Chief Executive Officer, President

Thank you, operator. Good afternoon, everyone, and thank you for joining us for our Third Quarter 2017 Earnings Call. As we reported this morning, CapStar earned net income of $4.4 million or $0.35 per share on a fully diluted basis for the three months ended September 30, 2017, compared to net income $2.1 million or $0.20 per share for the three months ended September 30, 2016. During our earnings call for the second quarter, I commented that our intention was to capitalize on the momentum created by our operating and financial results.

We believe our third quarter results demonstrate our positive momentum toward this goal. If you have the presentation deck in front of you, I direct your attention to Page four, so that I may share with you some of the drivers of this performance. Our vision for CapStar is to be a high-performing financial institution known for sound, profitable growth in the context of soundness, nonperforming assets to loans plus OREO totaled 32 basis points and we had no charge-offs. Additionally, we received a $1.9 million recovery on the Healthcare loan which was charged off in the second quarter of this year.

Third quarter profitability resulted in record quarterly earnings of $4.4 million and return on average assets 1.28%. The net interest margin improved by 11 basis points to 3.26%, positively impacted by repricing on our variable rate loan book. Comparing the third quarter 2017 to the same period in 2016, average loans grew 8% excluding the healthcare loan book, which I will discuss in more detail in a moment, average loan grew 13%. Our bankers continued to deepen relationships with customers as indicated by 27% rise in average DDA balances during the quarter.

Research recently conducted by Greenwich Associates further validates the strength and effectiveness of our bankers. We received excellent customer satisfaction marks, highlighted by the ease of doing business, our banker responsiveness and proactively providing solid financial advice to our customers and significantly treasury management and other deposit service charges increased 54% over the same time frame. I would now like to ask Rob to discuss the summary financial results for the third quarter.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Thank you, Claire, and good afternoon everyone. As Claire mentioned, the CapStar team delivered record earnings of $4.4 million or $0.35 earnings per share on a fully diluted basis in the third quarter. Additionally, the earnings produced a 1.28% ROAA and we saw expansion in our net interest margin for the quarter. As you look at the balance sheet, you will see our growth for the quarter was lower than our previous guidance, but on a year-to-date basis, it is in line with our guide.

Loans grew on average 8% for the quarter and 15% on a year-to-date basis. It shrank for the quarter, but we did grow our transaction accounts 8% for the quarter and 18% on a year-to-date basis. This performance continues to demonstrate our ability to attract, retain deep in our relationships with our clients. As we move to the income statement, we saw growth in both our net interest income and our noninterest income.

We booked a negative provision numbers this quarter as we experienced a decline in our loan book on a period-end basis. Expenses were relatively flat with prior year and we experienced higher than normal operating leverage, which allowed more earnings to drop the bottom line. Additionally, our effective tax rate came in lower with benefits from the new accounting guidance around stock compensation. We will just discuss this in more detail in a bit.

Let me turn it back to Claire for deeper dive into our asset quality and loan growth.

Claire Tucker -- Chief Executive Officer, President

Thank you, Rob. Drawing your attention to Page six, you will note that we continue to maintain healthy levels of reserves to total loans. Specifically, allowance for loan and lease losses was 1.45% in the third quarter. The ratio of nonperforming assets to loans plus OREO was flat quarter-to-quarter at 32 basis points, notably at a low point quarters depicted in the chart.

Similarly, the ratio of criticized and classified loans total gross line improved slightly to 2.6% in total. Having said that, we made adjustments to certain qualitative measures in our ALLL model during the quarter to reflect our assessment at a macro level of the current geopolitical environment, a dynamic Healthcare legislative environment and an evolving interest rate scenario. Consistent with our model, the calculated allowance was 1.45% for the quarter. As Rob mentioned, due to a decline in our loan portfolio in the quarter, negative provision of $200,000 was booked.

Moving to Page seven, comparing third quarter 2017 to third quarter 2016, average loan growth was 8%. Both our commercial, industrial and retail teams generated solid production during the quarter. It is important to note the capacity for a loan growth that exists in our unfunded commitments. At the end of the third quarter, unfunded commitments totaled $454 million.

We have pointed out previously that our loan portfolio will not reflect straight-line growth every quarter due to the nature of our business model. For example, in the nonowner-occupied commercial real estate book, we will fund a project until completion, at which point the borrower will typically look to the permanent market for a long-term financing. We experienced payoffs on multiple projects in the third quarter that essentially all that fundings on new projects. In prior quarters, we have shared with you our ongoing refinement of the Healthcare strategy.

This is done in concert with our strong team of bankers as well as the Healthcare Advisory Council that was formed last year. As a reminder, this advisory council is populated with CEOs from local Healthcare companies. They have been tremendous resources to facilitate our view into what is happening in terms of regulatory and legislative issues in the Healthcare space. Our healthcare team evaluated many financing opportunities during the quarter, during the quarter, but declined a large percentage due to structure, leverage or financial performance at the underlying companies, consistent with our underlying strategy in this sector.

Effectively, the team is pivoting a bit, so it will take a few quarters to rebuild. This client segment was also impacted by pale several loans that were refinanced by more aggressive lenders in the Central States. In the chart at the bottom right section of the page, I would point out that there was some noise in the CRE loan category due to a request Cation Tri-net loans from held for investment to held for sale during the second quarter of 2017. This resulted in a difference of $24 million on average loans between the quarters.

Moving to Page eight of the slide presentation. There are several charts related to our loan participation. As we have pointed out previously, these loans are not transactions purchased from a syndication desk where there is no relationship with the client. Conversely, we have direct calling efforts on these companies and have developed noncredit depository relationships with many.

The goal is to continually cultivate the depth of the relationship with these clients. In the upper left-hand chart, you will note that loan participations declined to $264 million or 27% of gross ones. Importantly, we continue to increase the number of loan relationships in which we are lead lender or arranger. Transactions that we lead have increased by 39% since the fourth quarter of 2015.We've also broken down loan to participation by line of business on the bottom right-hand side page because you have further visibility although we continue to provide you with this detail.

Important take way we choose to use to engage as co-lenders as a means of managing concentration by Sherry credit exposure with other banks that you are familiar with that operate in our primary market. Rob, I'll turn it over to you to continue with further detail relative to the financial results.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Okay, thank you, Claire. On our loan yield -- we expanded our loan yield 26 basis points in the third quarter, predominantly driven by the repricing of our variable rate loans. Additionally, we experienced an increase in loan fees for the quarter, but much of this 8 basis point benefit was due to the accelerated amortization of loan fees with payoffs. This is the second quarter in a row that we have experienced loan yields above our portfolio average.

This quarter, the loan yield on new loan production was 4.87% and last quarter it was 4.47%. This trend should help support our loan yield in the coming quarters. Let's move to our deposits. Our overall deposit book shrank this quarter, but with lower loan balances and our desire to increase our loan to deposit ratio, we don't view this as a negative.

As stated earlier, we did grow our DDA balances, which is the stickiest relationship product and demonstrates that more clients are bringing their primary operating account over to us. DDA balances grew 14% on a sequential basis and 27% year-over-year. As it relates to our deposit cost, we expect our deposit cost to increase whenever the FOMC raises rates or when market expectations of a rate increases are high. As you can see by the graph on the upper righthand side of the page, we held our deposit cost to a 23% beta during the past 100 basis point increase in the fed funds' movement.

We do expect this beta to increase slightly with future rate hikes, but our game plan is to lag any increases and to hold cost down through mix improvement. Let's move to our margin. Our net interest margin expanded 11 basis points for the quarter, driven primarily with repricing of our variable rate loan book. Additionally, the increase in loan fees helped drive this improvement, but the majority of the fee benefit was due to elevated payoffs and the acceleration of fees.

The repricing of some of our deposits and our FHLB borrowings works -- worked against us to some degree, but our overall assets repriced more than our liabilities, demonstrating our asset sensitivity. This is the second quarter in a row in which we have operated with our loan to deposit ratio at the upper end of our guidance and we expect this trend to continue. We believe we can hold our margin around this level near-term, given the encouraging yield on our new loan production and the probability of future rate increases. Again, 65% of our loan book is variable rate in nature and predominantly tied to 1-month LIBOR.Let's move to our noninterest income.

Our noninterest income to average assets was 98 basis point for the quarter, which matches a record we recorded last year. First, we had a 54% increase in our Treasury Management and Other Deposit Service charge line. This increase is being driven by the full implementation of our largest Treasury Management client to-date. Next, you will notice our Tri-Net business has steadily increased their production in loan sales since we acquired the team last fall.

With $32 million of Tri-Net loans on our books at quarter-end, we are poised for future loan sales of similar magnitudes. Traditionally, the third quarter is the strongest quarter of the year for Mortgage. The premium on Mortgage loans sold in the quarter was stronger than our year-to-date average. Let's move on to expenses.

Our overall expense base was just under $8.5 million and was slightly higher than Q2, but flat to prior year. Our efficiency ratio came in at 59.6% and better than our previously guided range. As you may recall, our expense base is running a little lighter than normal as we are booking a lower incentive accrual with this year's performance. Having said this, you should expect the fourth quarter to be in a similar range as this past quarter and then bump up in 2018.

Looking at the individual line items. Salaries and employee benefits increased from Q2 due to a couple of new hires, the cost to acquire those individuals and increased incentive expense associated with our Tri-Net loan sale. Data processing and software expense increased during the periods presented due to an increase in the volume of transactions and implementation of new software in our Mortgage business. Professional fees decreased during the periods presented, primarily due to fees associated with going public in 2016 and our change in external audit firms for 2017.

The increase in equipment expense for each period is related to increasing cost of our managing our IT network. Regulatory fees increased primarily due to the change in the FDIC's assessment methodology. So let's talk about our tax rate. In Q3, our effective tax rate came in lower than what we have booked in prior quarters and prior years.

First, with the large credit charge-off in the second quarter, we are booking to a lower overall effective tax rate as our year-to-date taxable income is lower. Next, related to the new accounting standard for stock compensation, we continue to recognize tax benefits as options and warrants are exercised. This lowered our effective tax rate to 25.5% for Q3.As we look into 2018, we'll be coming up on our 10-year anniversary and many of the original organizers and leaders within our company will have options and organizer warrants expiring. Assuming these are exercised before they expire in Q4 of 2018, we will experience a larger than normal run rate benefit on our tax line.

We provided you with a sensitivity analysis so you can see the magnitude of the with stock price fluctuations. What we don't have clear visibility on is when the individuals holding these securities will decide to exercise, but we do expect they will occur in 2018.Let's move on to the capital. With record earnings and some stock options being exercised in Q3, all of our capital ratios increased from Q2.I know you have a lot of questions, so let me turn it back to Claire for some closing comments

Claire Tucker -- Chief Executive Officer, President

Thanks, Rob. To reiterate our stated strategy, we remain committed to delivering sound, profitable growth. Reported net income of $4.4 million or $0.35 per share represents a record quarter. With a focus on all of our shareholders, we are committed to consistently delivering strong financial results throughout the company.

Overall, asset quality metrics are trending positively. More detail is provided in the historical financial information in the appendix of the earnings deck. I previously referenced positive results from the market survey recently completed by Greenwich Associates. The bottom line is that CapStar bankers are well-regarded in terms of customer satisfaction and specifically are cited for ease of doing business, responsiveness and proactively providing advice to our clients.

We believe that these attributes will be additive to our stated goal of increasing market share of our franchise through organic growth. The 27% increase in average DDA balances is a meaningful indicator of the relationships that our bankers have developed. We remain committed to delivering sustainable return on average assets of 1% by the end of 2018. And finally, we are appreciative of your continued investment and interest in CapStar.

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

Questions and Answers

Operator

Ladies and gentlemen, if you have a question at this time, please press star and then one on your touch-tone telephone. If your question has been answered, or if you want to remove yourself from the queue, please press the pound key. Our first question comes from a line of Catherine Mealor with KBW. Your line is now open.

Catherine Mealor -- KBW -- Analyst

Hi, good afternoon.

Claire Tucker -- Chief Executive Officer, President

Hi, Catherine.

Catherine Mealor -- KBW -- Analyst

I want to -- the first question is on credit. And so I'd just want to follow up with one of the comments you made clear about the reserve build that you had this quarter. And so to be clear, the reserve build that we saw was all quality. Were there any specific credits in which you saw deterioration that you think warranted the additional provisioning? Or it was really just kind of a broad, qualitative boost to the reserve, given all those items that you mentioned?

Yes. Great question, Catherine. You'll note that our nonperforming assets to total loans was flat. Our criticized and classified loans were flat quarter to quarter.

So I think that reinforces the fact that we really were looking at it from a macro level. I think everything you read in terms of the geopolitical environment, the uncertainty around the Healthcare legislation and regulatory environment, interest rate trending were sufficient enough to cause us to use our model in the qualitative assessment components as we develop the ALLL. So I would say it was all qualitative.

Okay. And would you envision continuing to build their reserve from here? Or do you think it's more of his kind of keeping a now this elevated level given that?

Claire Tucker -- Chief Executive Officer, President

That's a great question as well, Catherine. And what I would say is that we will -- every quarter, we evaluate our ALLL. We have a very sophisticated model. I would anticipate that as we go through that process, we'll continue to look at the items that I outlined in terms of the macro scenario.

And as those elements either improve or have more certainty around them, I could see us beginning to pull that reserve back down.

Catherine Mealor -- KBW -- Analyst

Okay. And then, maybe one follow-up on loan growth. How do you think we should think about growth rate moving forward? I mean, you've historically been in kind of mid-teens growth, that's been slower the past couple of quarters for a lot of different reasons. But is it -- do you -- is your goal to get back to that mid-teens pace? Or do you feel like, going forward, it's maybe a little bit of a slower growth rate of -- as your target, but with greater profitability within that slower growth rate?

Claire Tucker -- Chief Executive Officer, President

I would -- that's a lot of questions. I would see if I can answer them in order there, Catherine. You noted that we have had slower loan growth the last couple of quarters and for explainable, understandable reasons. Most recently, the payoff on some of our CRE projects as well as what I would call the refinement on our Healthcare strategy.

We remain committed to a low to mid-teens growth rate going forward. But I'll also point out to you, as you well know, it's never going to be a straight line growth just by the nature of our business model, but I do feel confident in the low to middle double-digit growth on an ongoing basis.

Catherine Mealor -- KBW -- Analyst

Okay, that's helpful. Alright, thank you.

Claire Tucker -- Chief Executive Officer, President

Thank you, Catherine.

Operator

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

Stephen Scouten -- Sandler O'Neill -- Analyst

Hi, guys. How are you all doing?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

We'd like -- Stephen, have you are?

Stephen Scouten -- Sandler O'Neill -- Analyst

And maybe just following up on Catherine's question around loan growth. Can you give a little color about the level of payoffs relative to maybe production level this quarter? And, I mean, I guess, my real question is, were production levels similar to the maybe 1Q level, which was maybe the last quarter of higher growth that we'd seen? Or what has that been trending like lately?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. Stephen, it's Rob. What I would say is that, first of all, the front door production was a little lower than normal. And then, the back door or the payoffs and the pay downs were higher than normal.

The payoffs and pay downs came in, in Healthcare and CRE were the main spots for that.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay. And what kind of gives you guys gives the confidence, I guess, that those pay down levels will subside somewhat and that kind of front door, as you said Rob, production level would be able to increase in the coming quarters?

Claire Tucker -- Chief Executive Officer, President

Stephen, I would say a couple of things. One, as I look at our commercial real estate book, you know how that cycles as projects come on, fund ups get paid off, and we've got a good level of commitments that we're working on right now as well as some others that are unfunded that I believe will allow us to replace that portfolio. I would also point to the unfunded commitment level of $454 million. It is a lower usage percentage right now.

It's at about 68%, 67% and it's been running about 70% or 72%. So what that signifies to me is that we have multiple areas within the various lines of business that I believe will effectively support the growth going forward.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay. That's really helpful. And maybe thinking about the loan yields and the NIM, the last 2 quarters, you've seen some pretty significant jumps in the new loan production yields. I think, Rob, you mentioned 4.87% this past quarter.

What has changed there? Are you guys just having demand higher pricing? Has pricing across your market shifted? Is it composition changes? What's kind of driving that move that we've seen?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. There's a couple of things on that, Stephen. Certainly, the rate increases that we saw recently in the past 2 quarters, I mean, in the second quarter, we saw our loan yield bump up to 4.47% for the second quarter. That was above our portfolio yield.

That was predominantly due to repricing of our variable rate loan book. Again, we just saw in this past quarter in the third quarter, our loans moved on new production with 4.87%. So we are seeing a little bit richer yield on new loan production. So as I said on the call, we do believe that we can hold our NIM going forward for a couple of reasons.

One is just the new loan production yields that we're getting and then the increase in our portfolio that's moving up with the rate increases. And then, certainly, we intend to run our loan to deposit ratio as we discussed and kind of talked to you about even last year that we had moved that up and that's at kind of a nice range where we have it today

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay. So, I guess, two follow-ups to that maybe. So it sounds like that 4.47% yield is something you feel is sustainable? And then, two, on that loan to deposit ratio you mentioned, are you guys kind of maxed out there now at 97%, including the held for sale?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. You might see it go up to close to 100%, but I think that's getting to the level where we would start feeling a little uncomfortable. Just going back to your comment on the 4.87%, certainly I think that's nice on new loan production, but what I would say is that we've seen a trend in the past 2 quarters of loan yields on new production above our portfolio average. So if next -- we're 4.55% overall, we'll see where it lands, but certainly, it's a good trend to see, new loan production higher than portfolio average.

So if next, you know what you know for 50, five overall, you know we'll see where it lands, but certainly, it's a good trend to see new loan production higher than portfolio average.

Claire Tucker -- Chief Executive Officer, President

The thing I would add to that too is that we're on-we're continuing to see some really effective our growth in our-our DDA and money market with some of our-our-our retail, a lot of business. Our personal banking, our private banking, I should say line of business, healthcare, Ted, a really strong run it some good deposit generation on the relationship side. So I believe will be able to, to stay on pace are in, in terms of funding all the growth that we have.

Stephen Scouten -- Sandler O'Neill -- Analyst

Great. Okay, thanks for all the color guys. Appreciate it.

Claire Tucker -- Chief Executive Officer, President

Sure. Thanks for your question.

Operator

Thank you. And our next question comes from the line of Daniel Cardenas with Raymond James. Your line is now open.

Daniel Cardenas -- Raymond James -- Analyst

Good afternoon, guys.

Claire Tucker -- Chief Executive Officer, President

Hi, Dan.

Daniel Cardenas -- Raymond James -- Analyst

Just a quick question on the margin. What benefits, if any, did it have from the recapture of interest on the loan that you guys got a payback on?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. So the NIM, we should have loan fees of about three basis points overall from an increase from the prior quarter. I would say about two basis points of that 3 is basically due to the amortization or the acceleration of the amortization of the loan fees with payoffs and pay downs. It's probably going to total right around $120,000.

Claire Tucker -- Chief Executive Officer, President

But I think his question was around the recovery.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

So, Daniel, yes -- no, we didn't have anything in the recovery that's related to -- in the margin. That was all in our allowance. The $1.9 million recovery is in the allowance. There's no benefit into the margin.

Daniel Cardenas -- Raymond James -- Analyst

No recapture of interest or anything like that on the margin? So that 3.26% that we saw is pretty much a core number, which you think is sustainable?

Rob Cardenas That's correct. yes.

Daniel Cardenas -- Raymond James -- Analyst

And is it possible that we could see some additional yield increase just given the timing of the June rate hike? Could we see a little bit more kind of bleed into the fourth quarter? Or is that pretty much all said and done?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

No. I said that's certainly possible. I mean, it's usually a full quarter before we see kind of our loan book cycle through all the different contracts that we have, so that's certainly possible.

Daniel Cardenas -- Raymond James -- Analyst

Okay. And then, maybe some color on the deposit pricing side right now. What are you seeing from competitors? Are you beginning to see a pickup on deposit pricing pressures? Or is the market still relatively rational?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

No. In fact, I would say it's probably more irrational on the liability side or the deposit side. There is an intense fight in Nashville for core deposits. What I would say is that our deposits went down this quarter, but we don't view that as a negative.

We want to be very selective in our pricing and how we gather deposits. We said we are a relationship-oriented bank and I think that is pretty telling in terms of our DDA growth this past quarter. And we are able to shrink some -- more of the rate-sensitive type deposits that are with us, but certainly, from a competitive standpoint, it's, I would say, highly competitive in Nashville for deposits right now.

Daniel Cardenas -- Raymond James -- Analyst

Great. And does that kind of bleed over to the public funds as well or not necessarily so?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

I would say yes, certainly, n the public funds arena, but you have a lot of banks that are either coming in from out of town and trying to gain a foothold, some that are just trying to get market share and the pricing on deposits are pretty tough right now and it's in all arenas.

Daniel Cardenas -- Raymond James -- Analyst

Then, I would imagine just kind of given the new competition that's coming to the Nashville market, wouldn't that necessarily then play the same for the yields on your in-assets? Wouldn't we see some pressure on those given people are jockeying for market share right now?

Claire Tucker -- Chief Executive Officer, President

We've always seen that type of pressure. Certainly, on the C&I side, it's highly competitive. What we're focusing on is sound, profitable growth and we're a relationship bank and we're going to bank relationships and not transactions. So certainly, you're seeing that on both sides, but when you get the full relationship, we can demonstrate profitability for our organization.

Daniel Cardenas -- Raymond James -- Analyst

Okay. And last question for me here, Rob. I missed your comments on the efficiency ratio. Were you saying that you expect the efficiency ratio to remain relatively stable on a linked quarter basis or were you talking noninterest expenses?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

On the efficient, yes, but speaking to the expense base, I think near-term it will be around the 8.85% level and then that can move up in 2018. What we did say is that we're going to manage to an efficiency ratio between the mid to low 60s by the end of '18. While I think that, near-term, it could be around the 8.85% level, I think you can see that move up in 2018 as we continue to make progress on new hires, et cetera.

Daniel Cardenas -- Raymond James -- Analyst

Okay, OK. And then now do you care to make a stab at the tax rate that we should be modeling in for you guys?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

You know, I'm not going to make a stab at the rate. I certainly wanted to provide some transparency to you guys in terms of what's going to happen in 2018 as we come upon our 10th anniversary. We have a lot of original organizers and executives that have options and warrants expiring. We tried to give you a sensitivity in terms of the dollar amount that could fluctuate so I think you could probably model that out, but certainly, I think it's going to be closer to our current quarter.

Through the year, it can be lumpy depending upon when these individuals exercise, but I think our current quarter is more indicative of mid-30s or lower 30% ratio going forward.

Daniel Cardenas -- Raymond James -- Analyst

Okay, great. Thanks, guys.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Thanks, Daniel.

Operator

Thank you. And once again ladies and gentlemen, if you have a question at this time, just press star. And then one next question comes in a line of Laurie Hunsicker with compass point. Your line is now open.

Laurie Hunsicker -- Compass Point -- Analyst

Yes. Hi, thanks. Good afternoon, Can help us think about, and I know Catherine and Stephen both asked this, but I'm just trying to understand, with respect to loan growth, how we should think about how you're getting to that low to mid-teens growth rate? And I realized you've had some reworking of how you've been doing the Healthcare and we've seen it decline, but I'm just looking here, March to June down, June to September down. I mean, if we're looking -- and I get that it's lumpy.

If we're looking to get to that low to mid-teens growth rate, that implies that you're going to finish the year-round numbers with about $1.1 billion in loans? Is that possible?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

You know, what we're trying to do is be selective about, thanks. Claire mentioned, you know, we're doing a little bit of permitting on the healthcare side of the house. You know, that could take a quarter to two, I demonstrate our growth, but overall we -- we're going into the low that said to mid double digits. What we're trying to do is be selective.

I think Claire mentioned, we're doing a little bit of pivoting on the Healthcare side of the house, that could take a quarter or 2 to demonstrate our growth. But overall, we're going into the low to mid-double digits.

Claire Tucker -- Chief Executive Officer, President

And Laurie, I'd look at it over a little bit longer horizon than just the next quarter. Again, I think we talked about some of the commercial real estate projects with respect to Healthcare. We have reconstituted much of that team over the last 12 months, and I think we got an excellent, excellent team of bankers in the Healthcare group and I'm really looking to them to have some nice loan growth. But when you recalibrate the way that we've done, sometimes it takes a little bit of time to build your momentum back up.

So -- then, if I look again at the unfunded commitments, I think we'll see some increased usage there. We saw good growth in our core C&I book. And when I say core C&I, I'm talking about the exclusive of Healthcare as well as our retail book is picking up nicely. So I think there are a couple of opportunities there for us.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, OK. And then, just on the line item of Healthcare, and I'm just looking at Slide 8, but maybe you can help me think about this sort of apples-to-apples here. Your total Healthcare, including the commercial real estate piece, as of June was $188 million and as of March, it was what, $172 million? Is that right?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes, $172 million.

Laurie Hunsicker -- Compass Point -- Analyst

$172 million. And then, the commercial real estate piece as of June was $11 million. Do you have that as of September?

Claire Tucker -- Chief Executive Officer, President

No. Commercial real estate within the Healthcare books roughly the same.

Laurie Hunsicker -- Compass Point -- Analyst

Roughly the same. Okay. And then, the SNC piece, the $129 million went down sharply. It went down to $107 million.

Is that going to be something that you continue to let the let bleed off in line with your pivoting on how you're thinking about Healthcare?

Christopher Tietz -- Chief Credit Officer

Yes. Laurie, this is Chris. The SNC piece is actually $91 million within that. And then, there's another -- the difference between that and the $107 million is the non-SNC portion.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, that's more like club or something like that?

Christopher Tietz -- Chief Credit Officer

Well, that's correct. Yes.

Claire Tucker -- Chief Executive Officer, President

Okay, and just to be clear, just by definition, the SNC is going to be three banks or more. So we oftentimes will look at -- I mean, it could be a club deal that's a SNC just because we got three local banks in it.

Laurie Hunsicker -- Compass Point -- Analyst

Right. I guess, I'm just thinking also more broadly the -- anything that's sort of your participant co-lender, majority of that is SNC. Of your $91 million, how much of that is in Nashville?

Christopher Tietz -- Chief Credit Officer

Well, let me come at it a different way, if I could. If we start with the $172 million for gross Healthcare, $130 million of that is in our defined market. I can't tell you specifically what's in Nashville, but of that -- then it would split down into half and half roughly between SNC and non-SNC.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. Okay. That's helpful. Okay.

And then, just to go back to, again, reserving, and I realize that there is a lot of moving parts this quarter with respect to recovery, but as we're thinking about a normalized loan loss provision going forward and normalized reserves, what is your goal in terms of where that reserves to loan ratio would be as we fast-forward the year out? And I realize there's moving parts with Washington and everything else, but in other words, you've jumped around a lot and, I guess, in terms of thinking about modeling, it would be helpful to know how you're thinking about that as a goal, even if it's just a range.

Claire Tucker -- Chief Executive Officer, President

Well, I think, Laurie, going back to how we got to the $144 million, I think that's more macro types of issues. We've historically been running the ALLL at around $120 million to $124 million on new production.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. Perfect. Okay. And then, the $1.9 million recovery, that was off of the $11 million loan that you charged off originally to 0, is that correct?

That's correct.

Claire Tucker -- Chief Executive Officer, President

Okay. Is there anything else potentially covering from not coming back from that loan?

Well, we -- as I've said in prior quarters, we will continue to pursue collateral or other sources of payment -- repayment that we have on that or any other credit that we might have a loss on. So I would say the efforts are ongoing on that front.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And then, to the extent that you've got a recovery, would you let that all drop to the bottom line or would you do something in terms of reserve building or you're just not sure?

Claire Tucker -- Chief Executive Officer, President

Well, that's really sort of hypothetical. So, again, what I can speak to is what we've done this past quarter with respect to our allowance methodology.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. Okay. And just going back, Rob, to something that you said to Daniel. The higher payoffs, you said, including amortization, was $120,000 within the net interest income.

Is that correct?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. So as you think about the acceleration of the amortization of the fees, if you're looking for more of a run rate on a normalized level, we probably had $120,000 of -- and maybe a little bit higher than normal payoffs and pay downs in the fees -- associated with the fees and the fee line. So yes, we certainly benefited from that this quarter. Short-term benefit, longer-term pain on those payoffs and pay downs.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. Okay. Good. And then, Claire, just more macro.

At one point, you had talked about potentially looking for acquisitions. Obviously, your stock price is very high. It's stronger acquisition currency. How do you think about that now? How are you sitting in terms of potentially looking for other potential acquisitions?

Claire Tucker -- Chief Executive Officer, President

Well, I think your point is well made, Laurie, that with the stock price that we have, that certainly broadens the opportunities that we have for M&A activity. What I've said historically is the core focus of our bankers on a day in and day out basis is to continue to grow the bank organically. We believe we've got some good opportunities there. With that said, we also think there's some merits to considering some strategic opportunities.

And I've outlined for you before something that could improve our cost of funds or a higher-yielding loan product or a noninterest income play. So, again, the stock price certainly will provide us a valuable currency that will enhance those discussions.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And then, just lastly, any comments or color you can share with us regarding Gaylon Lawrence and potentially how his strategy is fitting how you're looking going forward?

Claire Tucker -- Chief Executive Officer, President

Well, it's a -- that's speculation and we're really not going to comment on speculation. We're aware of his filing and his purchase of the stock. We are focused on just operating the bank every day and trying to benefit all of our shareholders through solid performance.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, great. Thank you very much for taking my question.

Claire Tucker -- Chief Executive Officer, President

Thank you, Laurie.

Operator

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

Tyler Stafford -- Stephens -- Analyst

Hi, good afternoon, guys. Just a couple of last questions for me. The rest have been asked and answered. Rob, first one on the gain on sale margin out of the Mortgage business.

Last quarter, you talked about that expanding kind of going forward, which it did this quarter to $160 million or so. Is this an appropriate level in terms of pricing out of those sale that you're expecting to get this $160 million level from here?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes, that's probably at the higher end of the range that we've been at, Tyler. Certainly, we look at the mix on some of that, which drives it. So it depends on the origination mix as well, but certainly, that's probably on the upper end. So from a conservative standpoint, I'd back it down a little bit.

Tyler Stafford -- Stephens -- Analyst

Okay. And then, sticking within fee income, the Tri-Net business obviously had a nice quarter. Any color you can share with us on how to think about that business in terms of contribution going forward?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Sure. Sure. I think what we've talked to you about the Tri-Net business is that was a team we acquired last fall. And what we said is that we're going to crawl before we walk, walk before we run.

And I think if you look at the sequential quarters, that demonstrates some improvement. Certainly, this quarter was a very nice quarter. We had nice loan sale with a decent premium. What I think going forward is that, that could bounce around a little bit and it depends upon a number of factors, but I wouldn't get too far ahead of yourselves on that line.

I think, given the third quarter's performance, is a strong indication. We do have about $32 million on our balance sheet. So we would anticipate quarterly sales, but it will depend upon a number of factors on the size and magnitude of those.

Tyler Stafford -- Stephens -- Analyst

And I may have missed this in the release and the presentation, but did you guys disclosed how much you sold this quarter out of Tri-Net?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

No, I would not, and we did not disclose that fact.

Tyler Stafford -- Stephens -- Analyst

Okay. And then, last one for me just in terms of the profitability goal 4Q '18, next year, the 1%, in relation to how we should be thinking about that and going back to the earlier questions about the tax rate. Is this kind of 25%, 26% level the appropriate level that we should be thinking about in terms of you guys reaching that 1% ROA goal?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. In short, Tyler, I think it is. Certainly, the mission for our bank has always been to be a high-performing financial institution and reaching that 1% threshold this quarter has been an important milestone for us. I think if you look back even as far back as last year at our IPO, we said we had a number of levers that we'd pull to reach that 1% number.

I think we've done some of that. I still think that we have some room to go. But going forward, I think you should expect this to be at or near the 1% more consistently and it does take into account the tax benefit with the ASU piece for next year as well.

Tyler Stafford -- Stephens -- Analyst

Okay, got it. Very helpful. Thanks, Rob.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Thanks, Tyler.

Operator

Thank you. Question from the line of Daniel Cardenas with Raymond James. Your line is now open.

Daniel Cardenas -- Raymond James -- Analyst

Yes. Just one quick follow-up question. I think, Claire, you mentioned that you were seeing lower usage on that $458 million of unfunded commitments. Can you maybe give us some color as to why you think there has been a decrease in the usage levels?

Claire Tucker -- Chief Executive Officer, President

Well, a couple of things on that, Daniel. I think one is that we've had some good production of new commitments. If you look at those numbers that are out there, the total commitments are actually -- I'm just trying to get back to my page. Since the end of last year, we're flat to last quarter, but I think some of it will be in the CRE projects that I referenced that we've gotten some commitments on that we believe we'll see some funding going up.

Daniel Cardenas -- Raymond James -- Analyst

Okay, right. Good, I guess. Thanks.

Operator

Thank you. I'm showing no further questions at this time. I'd like to return to this Claire Tucker for any closing remarks.

Claire Tucker -- Chief Executive Officer, President

Okay. Well, thanks to all of you for participating in the call today. As we've said many times today, we're very excited about the profitability that we were able to achieve this quarter. We're committed to staying on this trend line to really deliver solid performance to all of our shareholders.

We're very appreciative of the continued support that you all have. And certainly, if there are any follow-up questions that anyone has, please feel free to reach out to Rob or me at any time. Thank you.

Duration: 52 minutes

Call participants:

Claire Tucker -- Chief Executive Officer, President

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Catherine Mealor -- KBW -- Analyst

Stephen Scouten -- Sandler O'Neill -- Analyst

Daniel Cardenas -- Raymond James -- Analyst

Laurie Hunsicker -- Compass Point -- Analyst

Christopher Tietz -- Chief Credit Officer

Tyler Stafford -- Stephens -- Analyst

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