Capstar Financial Holdings, Inc. (CSTR) Q3 2019 Earnings Call Transcript

Capstar Financial Holdings, Inc. (CSTR)
Q3 2019 Earnings Call
Oct 25, 2019, 9:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to CapStar Financial Holdings third-quarter 2019 earnings conference call. Hosting the call today from CapStar are Tim Schools, president and chief executive officer; Rob Anderson, chief financial officer and chief administrative officer; and Chris Tietz, chief credit officer, CapStar Bank. Please note that today's call is being recorded and will be made available for replay on CapStar's website. Please note that CapStar's earning release, the presentation materials that will be referred to in this call and the Form 8-K that CapStar filed with the SEC are available on the SEC's website at www.sec.gov and the Investor Relations page of CapStar's website at www.ir.capstarbank.com.

Also, during this presentation, CapStar may make certain comments that constitute forward-looking statements within the meaning of the federal security 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 that are based upon CapStar's expectations, estimates and projections as of today. Accordingly, forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties, many of which are difficult to predict and beyond CapStar's control.

Actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of today. Except as otherwise required by law, CapStar disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, this presentation may include certain non-GAAP financial measures.

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

Tim Schools, CapStar's president and chief executive officer.

Tim Schools -- President and Chief Executive Officer

Good morning. Thank you each of you that are investing time to listen to our call this morning and follow our company. Since joining in late May, I've spent a great deal of time getting to know our team, the underpinnings of our operational and financial performance and have met with most of our large customers in both East and Middle Tennessee. We have an outstanding company led by well-respected bankers and support staff positioned in two of the most vibrant and growing regions in the southeast.

In each of these regions, we are blessed to have many of the leading operating companies and real estate investors as our customers. Meeting individually with these customers, the feedback is consistent. CapStar differentiates itself in our markets through four factors. It's ease of doing business, flexibility, responsiveness and customer service, with many customers stating we are the best bank in town and that they have ever had.

I've also had an opportunity to meet with many of our current investors and potential investors. We appreciate your support. With your support, a great foundation has been built, which I feel has as much potential as any bank in the southeast. However, we recognize our historical returns to shareholders to date have not kept pace with market averages or expectations.

That will be a key focus of mine and our team as we move forward. This fall, as we work to put our 2020 and outer year plans together, some of my key focuses will be: number one, to improve the profitability, earnings consistency and growth; and number two, to rebuild confidence in our credit quality, which has been outstanding since inception outside of two sizable individual losses. I would like to see us develop a leading sales culture operating with disciplined pricing, credit and efficiency. Our goal will be to build on the great foundation before us and continue to operate a company we can all be proud of.

To support this, we will be instituting shareholder ownership guidelines from my executive team, and I will be working with our board to ensure executive incentives are tied to metrics that are aligned with shareholder value creation. Turning to our results this quarter on Page 4. We had a solid quarter with earnings of $0.36 and a return on assets of 1.31%. Performance was led by continued strengths in mortgage and our Tri-Net business.

Our credit metrics remain outstanding, and we are pleased with our deposit growth as that is one of the single biggest opportunities in our company. We recognize these businesses and credit can be cyclical, so we will be working to strengthen the potential for balance sheet growth and work to improve our net interest margin, which like many others in the industry, faces some challenges in the near term. We are also very pleased with our East Tennessee operation, which is concluding its first year. Where it is often common to have runoff of some business in the first year, we actually are up in deposits and flat in loans.

Additionally, we have had nominal voluntary turnover. We are very proud of all of our CapStar teammates across the company for making this a success and look forward to their impact on our company. Another exciting accomplishment this quarter was assisting a founding and our largest shareholder exit their investment due to the conclusion of their fund. We worked diligently where we could support them, and a key focus was also the support of all of our other remaining shareholders.

By all measures, it was a success for all shareholders. Essentially, over a couple day period, nearly 9% of our company traded hands, with the resulting stock price and ongoing liquidity increasing. We are very grateful for their longtime support as an investor and to our new investors who helped make this happen. I'll now turn it over to Rob Anderson for a more detailed review of our financial performance in the quarter.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Thank you, Tim, and good morning, everyone. Let me pick up on the deposit slide as Tim has covered many of our highlights, and you can see our operating metrics on Page 6. Average deposit balances grew 6.3% on an annualized basis from the second quarter, and more importantly, we grew the right type of deposits. DDA balances were up 25.1%, and interest-bearing checking accounts or NOW accounts were up 51.3%.

Our correspondent banking group is driving the bulk of this increase. As you may recall, our correspondent banking group banks around 50 financial institutions and typically has a mix of both DDA and NOW accounts to support their business needs. As a data point, our corresponding group has approximately $265 million in deposits and roughly $61 million is in DDA and over $200 million is in NOW or money market accounts. In total, the correspondent banking deposits were up approximately $100 million from a year ago.

You'll also notice that time deposits are down sharply. This is a conscientious effort to move our balance sheet to a more neutral position. As CDs have matured, we are being very careful on pricing to reduce the length of our deposit book. We have $88 million of CDs that we will reprice over the next six months at a weighted average rate of 2.03%.

Another $83 million at an average rate of 2.10% will reprice over the next six to 12 months. This is 56% of our CD book that we will have opportunity to reprice within the next year. As you can see on the chart on the lower left, the overall cost of our deposits did not move down significantly this quarter with Federal Reserve rate cuts. Pricing peaked in July and then came down further by September.

We do expect a more meaningful decrease in our deposit rates in Q4 as rates were reset later in the quarter. So let's move on to loan growth. Average loan balances decreased 6.3% on an annualized basis and is predominantly attributed to payoffs and paydowns late in the quarter. We discussed the possibility of muted loan growth on our last call, so this should not be a surprise.

We are seeing payoffs in commercial real estate with some large projects getting refinanced into the permanent market at very low long-term rates. Valuations remain high in Nashville, so we are also seeing projects sell to buyer sooner than anticipated in both commercial real estate and some in our core C&I that are predominantly backed by private equity firms. Although our loans declined, a number of opportunities that we considered but passed on has increased as our bankers maintained discipline in terms of pricing and requested deal structure. We intend to continue this tactic as we focus on those opportunities that are more consistent with our principles of sound, profitable growth.

We have been talking for some time about the type of client relationship we want on our balance sheet. In short, we want full relationships with operating companies and the owners and operators of those companies. We also want end market relationships where we can fully support our clients' banking needs. This means we have passed on some opportunities that are not full relationship, are out of market or do not fit within our stated strategy.

As renewals have come around, we are being more selective. A data point demonstrating this selectivity is our end market loans versus out-of-market loans. As you can see on the chart on the lower left, our out-of-market loans are down from the prior year and relatively flat to the prior quarter. At this stage of the business cycle, we believe this selectivity will help us maintain credit quality going forward.

So with that, let's move on to loan yields. Overall loan yield was 5.48% and up 4 basis points from the prior quarter. With the two FOMC rate cuts and the change in LIBOR, our variable rate loans repriced and cost us 9 basis points from the second quarter. However, we received an additional 12 basis points of loan fees with the immediate recognition of the amortizing loan fees with those early payoffs I just discussed.

The yields on new loan production have been above our portfolio average for the last four quarters, which should help offset declines in our variable rate loans should we have further rate cuts from the Federal Reserve. And to further mitigate the impact of falling rates, we're continuing to work with our sales force to emphasize fixed rate loans and to implement floors on our variable rate loan production whenever possible. So let's see how all this impacted our margin. Net interest margin decreased 2 basis points to 3.66%.

And although there are some moving parts, it can be summarized as follows: We brought in a number of quality deposits in the quarter, and while we would have liked to put those deposits to good use on the loan side, we experienced loan payoffs late in the quarter resulting in more cash on the balance sheet. We also had slightly lower investments than prior quarter with a lower yield. As prepayments pick up on our security book, the yield on our security portfolio dropped slightly. Additionally, 6% of our securities portfolio is variable rate in nature.

More importantly is what are we doing to protect our margin in the face of declining rates. First, we will be more aggressive in our deposit pricing, especially with rate-sensitive clients when the Fed cuts rates. With our loan-to-deposit ratio at 84%, we believe we have ample opportunity to push deposit rates lower in Q4. Additionally, we'll be looking to shorten the duration of our CD book.

We mentioned the amount and rates paid on maturing CDs on the previous slide. As a reminder, we have an opportunity to reprice 56% of our CD book within the next year. We are also encouraging more fixed rate lending with the sales force and requiring floors on variable rate loans whenever possible. Having said all this, we do feel we are susceptible, at least in the short term, to more margin compression.

We have 55% of our loan book that's variable rate in nature and predominantly indexed to one-month LIBOR or to prime. One of the major contributors of keeping our margin relatively stable this quarter was the loan fees associated with the loan payoffs, and those can be lumpy and episodic in nature. So until we can move the balance sheet to a more neutral position, we do expect further rate compression. With that, let's talk about credit quality.

The reserve of $12.8 million is 91 basis points to our period end loans, and that is up from 85 basis points when we closed the deal with Athens in the fourth quarter of last year. We have $4 million fair value mark remaining on the Athens book, and when combined with our reserve, would equate to a 1.19% reserve to loans. As it relates to CECL, we have chosen to delay implementation until 2023 since we are eligible to be a smaller reporting company. Although not on the chart, we have small recovery this quarter, and our NPAs to assets remain at a low level.

We did have an uptick in our special mention bucket, but this is attributed to a real estate secured credit with no loss expectation. Although we have a number of other asset quality metrics in our press release, I can say that the team is working hard to demonstrate an improved credit profile, and we are pleased with asset quality this year. So let's move on to noninterest income. Noninterest income to average assets was 1.34% for the quarter.

Treasury management and other deposit service charges were down slightly from the prior quarter, but we saw our clients choosing to pay their treasury management fees with deposit balances versus fees in the quarter. This also reconciles back to our growth in deposits for the quarter. Tri-Net continues to do well in this rate environment and is where we -- within the guidance we provided you on our last call. With the drop in interest rates, mortgage is another business that continues to do well.

Purchase origination volume versus refinance volume split moved down from 80-20 last quarter to 50-50 this quarter. Additionally, we originated $179 million during the quarter, which is up $43 million from the prior quarter and $52 million from the prior year. Other fee businesses were up as well for the quarter, and with a pretty straightforward story on our fee line, let's move on to expenses. The efficiency ratio for the quarter was just over 64% and a bit elevated from our previous guidance.

We booked a higher incentive accrual for the quarter, which is predominantly centered around our mortgage and Tri-Net businesses. In addition, we eliminated a few positions, which trigger $172,000 of severance expense. This resulted just under $1 million of personnel expense reduction on an annual ongoing basis. This will either translate into ongoing expense savings or be reinvested into new revenue producers.

Our preference will be to reinvest these dollars into stronger frontline revenue producers. We did receive a small bank assessment credit from the FDIC, which helped us by approximately $200,000, and we expect to have an additional credit in the fourth quarter. Additionally, we'll still -- we are still working through the conversion of a key IT provider, which is causing us to run $100,000 worth of double IT expenses as we bring on one vendor and drop off the other. With that color, let's move on to capital.

As Tim mentioned, Corsair Capital, which was one of our founding shareholders, exited the stock in September. I'd personally like to thank Corsair for the trust and partnership through the years as they are great shareholders and partners. In summary, Corsair Capital sold approximately 1.5 million shares in September, and this included the conversion of the preferred shares and nonvoting common into voting common shares. As Tim mentioned, CapStar purchased 129,000 shares or $2 million of the stock, and we have $9 million remaining under our current share repurchase authorization.

As a reminder, select members of management and board purchased approximately $3.5 million from Corsair as well. As you can see by the chart, all of our capital ratios increased for the quarter and are above well-capitalized guidelines. With that, let me turn it back to Tim for some closing comments.

Tim Schools -- President and Chief Executive Officer

Thanks, Rob. We are optimistic about our future. We are focused on making progress and are excited about the opportunities we have to improve our revenue and processes to make us more efficient. Our markets are exhibiting strong underlying economic activity, and CapStar is well positioned with a great team to build upon our foundation.

This concludes our prepared remarks, and I'd now like to turn it over to the operator to open it for questions.

Questions & Answers:

Operator

[Operator instructions] Our first question or comment comes from the line of Stephen Scouten from Sandler O'Neill. Your line is open.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Hey, good morning, everyone.

Tim Schools -- President and Chief Executive Officer

Morning, Stephen.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

I'm curious on the loan yields, the new loan yields, in particular, which you've kept above your average, which is really impressive. I just wanted to see if you could give any more color about how you've been able to do that. I mean, I think a lot of the companies I've heard from this quarter just talked about huge competitive pressures and moved as much as 50 basis points quarter over quarter in new loan yields with the move into five years. So can you talk a little bit about that? And maybe the composition of fixed versus floating within that as well.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. First of all, I would say, we're being much more selective with some of our clients. Certainly, on the structure, we are seeing things that I would characterize as being late in the cycle behavior, whether it's loosening of guarantees, loosening of covenants. But pricing, we're also being careful on what we put on the balance sheet.

I would say it's probably about 70-30, 70% variable still, 30% fixed, with a good mix across the board of C&I and on -- a little bit on CRE. We did have payoffs in both of those buckets, so it kind of masked the production. But both of those engines are working fine.

Tim Schools -- President and Chief Executive Officer

Stephen, I also think that Athens has contributed where -- I don't want to say a less competitive market but probably maybe more rational competitors. And so they've been a nice addition on pricing discipline.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. Yes, that makes sense, Tim. And what did they contribute, those East Tennessee markets? I think you said loans have stayed relatively flat since the acquisition. But what did they contribute in the quarter to the loan originations maybe or production overall, if you have that number?

Tim Schools -- President and Chief Executive Officer

I do not. I don't know, Chris, if you have that.

Chris Tietz -- Chief Credit Officer

It's single-digit millions.

Tim Schools -- President and Chief Executive Officer

Yes. So they obviously have normal principal amortization and paydowns and payoffs, so they have replacement as well. But they -- I think they -- it's a good market and that there certainly is competition but not as hypercompetitive. And just historically, they've got very good pricing discipline.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Yes. OK. Great. And then if I'm thinking about loan growth from here moving forward and maybe even average earning asset growth more specifically, if I'm hearing you guys correctly, it feels like you're going to continue to focus more on kind of relationship production, probably smaller loan sizes to some degree than what has been seen in the past.

I'm wondering, one, how that impacts your healthcare book, the size of that moving forward; and again, how that impacts the average earning asset balances kind of from here over the next maybe two to three quarters in particular.

Tim Schools -- President and Chief Executive Officer

Yes. Good question. I don't think it's smaller loans. I think that there's a little bit of misnomer here.

I think that this bank, unfortunately, had two losses that happen to be larger loans and unsecured. But I think we're going after all the similar-sized loans. We would prefer for them to be in the state of Tennessee or close to Tennessee. We prefer for the majority of them to be collateralized with guarantees.

That's not going to always happen. So I think the only real mix shift would be in the healthcare book where a lot of that was -- I hate to say a lot, but a material portion of that would be outside of Tennessee, a material portion would be large and a good portion of that would be unsecured without guarantees. I think that's the major change. But we want to target what a lot of other people do.

We want to target great operating companies that have long histories and stable businesses with good operators and get their working line of credit, their equipment, their operating building, bank to owners. And if they expand to other regions, follow them to those regions. Secondarily, investor real estate. We've got one of the best people on our team in the state, Lee Hunter, and do really well at that.

So I would say similar sizes. I think on the growth, I really studied that because I think when you start a company, and this is a company that's only about 11 years old, it goes through phases. And I think it stalled the last two or three years if you look at the sort of organic loan growth. And I don't think it's any one factor.

I think some is the economy with payoffs. I think some, we need to look at our producers and production. I think some is we have been shrinking the healthcare. So I don't think it's any one factor.

But I'd like to get it where it's what I just described, and let's target to try and get back to at least a sort of 6% to 8% balance sheet growth, appropriately priced with good credit and then manage our expenses.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. But in the nearest term, I guess, you would see, especially with the move down we saw in end-of-period loans through this most recent quarter, we should see probably some pressure on average earning assets, at least --

Tim Schools -- President and Chief Executive Officer

Yes. I'm talking holistically. Yes, I agree with you. I agree with you.

And what we're seeing -- I mean I said it last call, it's happened again this call. There's two -- I don't want to say it's unique to the industry, but I think it is a little bit unique to most banks that I've seen here on what's happening right now. One, in all the markets I've been in, one of the neat things about Nashville is it has a lively private equity community. And it's a really neat thing about our community.

And what it does, I think it provides you good loan opportunities that have good credit risk because you know the equity investor that's going in there. The trade-off on that, Stephen, what I'm learning, the average life of that relationship is a lot shorter. So when a PE firm goes in, that company is going to have a liquidity event in four or five years. Whereas every other bank I've been at, when you look at an operating company that's owned by a family or a group of investors, that thing is in business for 100 years.

So that loan may mature and they'll renew with you. So it's a little bit of a faster relationship turnover when you've got exposure to private equity firms. Number two, our commercial real estate is very high quality, extremely high quality. And some of those borrowers have access to the institutional markets.

The only bank I've been at that really had that was SouthTrust, which was a $50 billion bank, where we would do a loan and at some point, it would go to Protective Life or to Torchmark. So those are two unique aspects in addition to finding production. I think that presents maybe versus some other banks some shorter average lives on relationships that we need to overcome.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. That's very helpful. Maybe one last little clarifying question. On the new CD rates, I think you talked about maybe 2.03%, some stuff was running off in the next six months, then 2.10%.

Where are new CD rates coming on relative to those -- to that runoff?

Tim Schools -- President and Chief Executive Officer

What we're going to do and -- is we -- in our monthly pricing committee, we're putting heightened discipline around all deposit pricing and really monitoring market rates, tracking about 10 competitors in Middle Tennessee and East Tennessee, and we're going to target to price our CDs 25 to 40 basis points below the match borrowing rate from the FHLB. So each month, we'll look at the six-month, one-year, two-year, three-year bullet borrowing rate at FHLB and price that accordingly to make sure we're making a profit on CDs. Historically -- that's what banks do historically, and that's generally a range that you can raise CDs at. So I don't have those rates right in front of me, I apologize, but you could look that up.

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Sure. All right, guys. Thank you.

Operator

Our next question or comment comes from the line of Catherine Mealor from KBW. Your line is open.

Catherine Mealor -- KBW -- Analyst

Thanks. Good morning. Wanted to go back to the loan yield roll-forward chart that you have on Slide 9. And Rob, you talked about how the repricing of variable rate loans impacted loan yield by about 9 basis points this quarter.

Is that a fair kind of measure? I mean, I guess you think about this past quarter with the move in LIBOR, you kind of got the impact of those, the July and the September cut. So is that a fair assessment of what loan yields should do kind of per two cuts? Or is there -- or will it be more than that moving forward for any reason?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. The loans are certainly contractual. We have a number of them that are repriced monthly, some repriced quarterly. But LIBOR moves down typically in advance of anticipated rate cuts from the Fed.

So you have that going throughout. But I think that's indicative of what we could see with rate cuts and LIBOR movement. So as I said, Catherine, 55% of our book is variable rate. We've been talking about moving to a more neutral position from an interest rate risk position.

But I think near term, given LIBOR is moving down, that you can expect those variable rates to move down as well.

Tim Schools -- President and Chief Executive Officer

And I do think, Catherine, on that chart on Page 9, it is important, we're pleased our margin was basically flat this quarter, but we're also aware that some of that was due to the prepayment in loans and the expedition of the fees. So the loan yield would have been lower and our margin would have also been lower in line with some of the other banks.

Catherine Mealor -- KBW -- Analyst

Yes. No, I would think just the amount of repricing would actually -- it felt low to me just given the amount of variable rate loan that you have in the minimum LIBOR that we had. So is that -- that was for my question.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. But you also have a number that's on -- tied to prime. And then you got the September 1, which was mid. So we'll probably see a little bit more impact to that late or September rate cut on our prime book in the fourth quarter.

Tim Schools -- President and Chief Executive Officer

And I have to go back and look at June 30 numbers, but my suspicion is that LIBOR probably -- the people have been calling for rate cuts earlier this year. My suspicion is that LIBOR had come down a great deal by June 30. So a lot of our loans probably had priced down during second quarter as well.

Catherine Mealor -- KBW -- Analyst

Yes. Good point. Good point. OK.

That's really helpful. And then on expenses, I appreciate all the color, all the puts and takes there. Can you help us think more broadly about the efficiency ratio and targets that you have there? And maybe are there any other expense levers that you have that you can pull to get that efficiency ratio lower even in the face of a lower margin?

Tim Schools -- President and Chief Executive Officer

Yes. I think there's a lot. And -- but that's one -- I think I may have commented on the call at the end of second quarter, that's something that you need precision. You can't come in and just go ax things.

But I'll give you one example, and this has happened at every company I've been at. And you don't know where you're going to find it. So health insurance. Health insurance is a fast rising cost.

We were fortunate this year that our insurance agent -- we used Blue Cross Blue Shield as the underwriter, but our agent came back with, shocked me, a proposal to only go up 3%. That's a pretty low increase. Nevertheless, I said, let's put it up to bid with others. And we came back in bidding it out.

Blue Cross heard we were bidding it out, and they came back and said, hey, tell them we'll actually go down 5%. So we went -- just by simply taking an extra month and not signing that contract, we went and got from a 3% increase to a 5% decrease, a $200,000, and that's going to be $0.01 per share next year. So that was a simple month. I mean we easily could have just said, let's -- 3% sounds great, let's sign on a new loan.

So you just have to have the discipline. And that's why I want to get the stock ownership guidelines, not that our team wasn't always thinking like that, but the more stock we all own, we'll think like owners and like it's our home and ask those tough questions. We also -- as Rob mentioned, we lowered salary expense $1 million, several great outstanding teammates and friends but that -- strategically, the roles were not as strategic in our operation today. So we released those funds, and we'll be looking to -- they either go permanently into cost savings, which would be about $0.04 or $0.05 a share, or would be reinvested into revenue producers.

Catherine Mealor -- KBW -- Analyst

Got it. And then with the stock ownership guidelines, will you put out financial target maybe on the next call as we move into 2020 and to show what specific profitability targets for growth or whatever those metrics are that you're targeting?

Tim Schools -- President and Chief Executive Officer

Absolutely. I think they need to evolve a little bit because I think this is my fifth month. But in general, I want to run a great bank like Citi -- and this is a great bank. But I'm saying financially.

Because financially, we've got to get our financial performance to, say, Citi Holding in West Virginia, South State Bank in South Carolina, Southern First in South Carolina. And I think we're a long way there, but there are areas we could improve. We need to strengthen our pre-tax pre-provision so that when we -- so that we're not hitting our ROA by having no credit. We need to eventually get to where we hit our ROA and can absorb some credit.

And so -- but yes, I'll continue to lay that out and -- time lines. The next question will be once you do that, what's your time line, and that's hard to determine. When you're running a company, it takes time. But I think we have an outstanding foundation.

I think we have more growth prospects than most banks and just excited to get started.

Catherine Mealor -- KBW -- Analyst

Great. That's very helpful. Thanks. Great quarter.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Thank you.

Tim Schools -- President and Chief Executive Officer

Thanks, Catherine.

Operator

Our next question or comment comes from the line of Jennifer Demba from SunTrust. Your line is open.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good morning, everyone.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Hey, good morning, Jennifer, and thank you for initiating coverage on us this quarter. We appreciate that.

Chris Tietz -- Chief Credit Officer

Good morning, Jennifer.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Oh, great. Two questions. You said you may be reinvesting those personnel costs into new hires. What kind of capacity would you have? How many people would you be thinking about hiring, if that was the case? And then secondly, your credit is great.

Can you just give us some -- and you talked about the special mention loan you don't expect a loss on. Are you seeing any cracks in any sectors in your portfolio at all? We've seen credit costs start to sort of normalize for the industry this year, I guess.

Tim Schools -- President and Chief Executive Officer

So I'll take the first one, and I'll let Chris Tietz handle the second one. On the revenue producers, specifically related to those funds, that probably would be four to five people. However, I don't want to be a copycat. I'm learning more about Pinnacle since I'm here in Nashville.

They're an outstanding company. I've always heard great things. We're not trying to copycat, but I love their mantra, that you hire athletes when they are available. So specific to those funds, I think that would be four to five people that would make that expense neutral but you get revenue.

But we want to become offensive minded, a sales organization and we want to look for great producers when they're out there.

Chris Tietz -- Chief Credit Officer

Yes. Jennifer, this is Chris. Relating to your second question on credit. First of all, what Rob referenced was that the change quarter to quarter in special mention was related to a commercial real estate credit that we don't anticipate a loss in.

And again, I'll highlight that in the commercial real estate sector, the last analysis I did in our large credits, we generally have about 33% cash equity on a weighted average basis across our CRE portfolio, and that's a credit that falls in that buckets and that's why we don't anticipate loss and we anticipate it getting refinanced. In general, we're not seeing pervasive trends in one sector versus another. When something gets onto special mention, we've shown track record and propensity over the last two to three years to work out about 40% to 55% over the next 12 to 18 months. And we don't see anything different occurring in the portfolio that we have right now.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

Our next question or comment comes from the line of Tyler Stafford from Stephens. Your line is open.

Tyler Stafford -- Stephens Inc. -- Analyst

Hey, good morning, guys.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Good morning, Tyler.

Tyler Stafford -- Stephens Inc. -- Analyst

Hey, I wanted to go back to the margin and the loan fees that you mentioned earlier. So obviously, that was a boost to the overall margin this quarter. If that reverses back and then kind of the full impact from the September cut, just can you size up the margin expectations for the fourth quarter, just given your earlier comment about some fairly sizable reductions on the deposit cost side as well?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. What I would say is we probably would've been in line with some of the other companies that you're seeing in the relative drop in the margin. It would probably be anywhere from 5 to 10 basis points with the recent rate cuts. We'd probably be more normalized without those prepayments and the fees in there.

Tim Schools -- President and Chief Executive Officer

We certainly anticipate the margin to come down in fourth quarter. Sort of hard to precisely get the exact right now as it comes to the system, Tyler. A good portion of the loan fees has been in. On the deposit side, a lot of the deposit changes actually weren't made until effective October 1.

So I think all in all, it should be down. But we hope we do have some relief on the deposit side, and we're going to be working diligently to improve our deposit mix as well.

Tyler Stafford -- Stephens Inc. -- Analyst

OK. Understood. And then either maybe for Tim or Chris, just expectations for Tri-Net fees at this point here in the near term.

Tim Schools -- President and Chief Executive Officer

Actually, I'll comment and Chris knows the specifics. But I tell you what, Tri-Net, that's an interesting one. It -- I guess it's somewhat cyclical like a mortgage company. But Chris does such a great job, Chris Barham does a fantastic job.

And you just wonder could that not be expanded. And they've worked great on volume. They've really worked great on improving the yields we get on each sale. There's great demands from banks all over the country.

He has a great following. So my understanding is we -- Chris has the numbers, but we had a good pipeline already at the end of 9/30 that was really close to closing. So we have all that to come through, as well as stuff he'll do this quarter. So Chris, would you like to continue?

Chris Tietz -- Chief Credit Officer

Yes. We don't want to raise expectations over last quarter, Tyler. It's a different rate environment than it was [Inaudible]. Still expect to have -- we still have good demand for the product, but we're not going to guide you to a higher level at this point.

Tyler Stafford -- Stephens Inc. -- Analyst

OK. All right. Understood. I guess it's been a year, maybe longer now since you guys brought over the SBA team.

I'm just curious kind of how that team is tracking at this point and kind of -- I don't think we see the numbers on our side. So just update on kind of the profitability and revenue from the SBA team.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes, Tyler. It's Rob. We've been very pleased with the team. The fees that we originate and then sell to government-guaranteed portion is buried within other.

If you look on that line item from last year, it's been picking up fairly steadily. There's a number of things in there, but the SBA fees are within that line. So from all measures, that team has a good pipeline of deals. They have balances on the books right now.

They -- and we had some loans that were sold in the second -- or third quarter and second quarter, and we anticipate some in the fourth quarter as well. So the team's met expectations, they're doing well, and we are looking to continue to grow on that line item.

Tim Schools -- President and Chief Executive Officer

And we're really excited about them, Tyler. I think it's a very professional group. They really know what they're doing. I think our core -- I want to see us return our focus to our core Middle Tennessee and East Tennessee markets where we're best-in-class in those markets.

And I think we have a number of these initiatives, and they're all outstanding, but it takes time. You've got the Tri-Net. You've got the SBA. You've got the healthcare banking.

And I think at times, it then brings lack of focus on your core hometown, Middle Tennessee, East Tennessee. So we've got to get that growing, and I'd love to see those grow 6% to 8%. And then I think all of these businesses can just be additive on top of that.

Tyler Stafford -- Stephens Inc. -- Analyst

Got it. OK. And then just one more, Tim, on the insider ownership guidelines that you mentioned earlier. So the proxy actually says that you guys have specific insider ownership guidelines for executive officers and the board.

But the details weren't provided. I guess are you just saying what's in place today is too low or insufficient and you want to take those hurdles up? Or is the proxy wrong and it's actually there's nothing in place now?

Tim Schools -- President and Chief Executive Officer

Yes. I've sort of rearranged the executive team. So it's making sure that the executive team I've put in place that we're all aware we're going to own stock, relook at the levels. I'm actually in the middle of a project now.

We're reviewing all of the incentive plans to see what we want to edit and change for next year. But it's really related to a new sort of leadership structure I've put in place.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

And Tyler, I would just say, it's a small difference, but to your point, the proxy would be specific to named executive officers, which are typically three. I think Tim is talking about a little bit broader subset.

Tyler Stafford -- Stephens Inc. -- Analyst

OK. Tim, just in terms of the leadership structure that you just mentioned, is it -- can you comment on what changes you've made so far in terms of kind of putting a new team together?

Tim Schools -- President and Chief Executive Officer

Yes. It's really hard to sort of describe changes because there was -- the unfortunate -- the company has been through a lot in the last 12 months with the passing of Dan and then myself working with Claire. So when someone passes away, that was sort of rejuggling of just letting things settle for a year. But I can't really speak to the changes.

But what we have in place are very traditional. And I don't have it right in front of me, so I may have the number wrong. But I've created a market president for Middle Tennessee. That job did not exist because I really -- this is probably our biggest opportunity.

We are in one of the top two or three metro areas in America. So we need to kill it. And so we have an executive reporting to me that's over the Middle Tennessee market president. We already had the East Tennessee market president, which is the incumbent from Athens.

These -- the businesses, healthcare banking, Tri-Net, correspondent banking, I put them under a specialty banking unit. And then we have mortgage. So we have four revenue executives, very focused, two in our core markets, in specialty banking and then mortgage. And then we have the required sort of administration personnel, CFO, Chief Credit Officer, Operations IT, just the normal.

So there's about six or seven of us.

Tyler Stafford -- Stephens Inc. -- Analyst

OK, OK. Great. And I appreciate all the details. That's great.

Thanks.

Tim Schools -- President and Chief Executive Officer

Thanks.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Thanks, Tyler.

Operator

Thank you. [Operator instructions] Our next question or comment comes from the line of Laurie Hunsicker from Compass Point. Your line is open.

Laurie Hunsicker -- Compass Point -- Analyst

Yes. Hi. Thanks. Tim and Rob, good morning.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Hey, good morning.

Tim Schools -- President and Chief Executive Officer

Good morning, Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

I wanted to go back to your comments to Tyler around the 5 to 10 basis point margin reduction and was hoping maybe you could give us some actual numbers as far as what was the prepay income that was in this quarter and last quarter. And then also, if you have the dollars on actual accretion income.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. The dollars on the actual accretion income, it's on Page 9. It's about 13 basis points. My guess is that, looking at my controller right now, it's probably around a little over $500,000, would probably be my guess, but we can do the math for you.

And then on the 5 to 10 basis points, I mean, again, I just want to emphasize, the prepayments that we had on the loan side triggered acceleration of loan fees. Without that, I think we would've been down 5 to 10 basis points. And I can do the math for you and get that back to you. But --

Laurie Hunsicker -- Compass Point -- Analyst

So I think you probably had around $250,000 or so of prepay fees? Is that right?

Tim Schools -- President and Chief Executive Officer

I don't think we have that in front of us.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. We don't have in front of me. Let me get back to you.

Laurie Hunsicker -- Compass Point -- Analyst

OK. All right. But that was about 5 basis points. OK.

No, that's helpful. And then also you mentioned that effective October 1, you had some deposit pricing reset. Can you help us think about how much that was and then what the delta pickup in basis point?

Tim Schools -- President and Chief Executive Officer

I don't want to give any forecast on that. But basically, we've got almost a quarter of our deposits are in sort of individually priced, individually negotiated arrangements with customers. And so it takes time to go and call them and work their rate down. And so that effort ensued twice in the third quarter, one on the first reduction, one on the second reduction.

And so a lot of those were not input or agreed to or administered until October 1. So I don't have a way to size that for you. I just want to point out that there is a good piece that -- I'd be conservative and probably say that the margin without those loan fees would have gone down 10%. And then the question is any changes in LIBOR or additional repricing that wasn't in that weighted average and then what from the deposits can offset that.

And I think there will be a good amount of offset, but I don't think we're unusual than any other banks that I'm seeing on margin decline right now.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then how should we be thinking about correspondent deposits going forward? How are you approaching that?

Tim Schools -- President and Chief Executive Officer

That group is doing great. That group --- Rob, I don't know if you hear back from Karen or --

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

We had a number of new customers. We typically have three to five new what I'd call settlement customers where we actively get their operating account. Sometimes we do start the relationship with the NOW account and work into a DDA settlement-type account. But typically, we'll have three to five new banks per year.

The corresponding group has been meeting expectations. That -- those balances in there are sort of a function of also all those 50 banks that we bank and how their book is doing. So sometimes, those balances today, I would say, are elevated and could be seasonal. Certainly, just on an annual basis, we typically see cash buildup in the first quarter, and then with tax season, it usually goes down in the second and third, and they start picking up in the fourth.

So I think where we ended in the third quarter is certainly a high watermark for that group. But certainly, the group has been doing well and continues to pick up new clients every year.

Tim Schools -- President and Chief Executive Officer

Yes. And talking to the team, they had great third quarter. And they mentioned they have a couple that are going to come online in fourth quarter, and it's neat. They bring in basically the Fed account which, I would say, if you map that to FHLB match funding, you're not making a lot of money on that, but it comes with their DDA.

And so when you look at the blended value of the relationship, it is value added to what you could borrow at. With all that said, we need a deposit strategy. I would say, most banks, it's a lot easier to find loans or at least it's -- I wouldn't say it's easier. But it's quicker.

It's probably more interesting. But we really can improve our deposit side as probably a lot of banks can. And what I'd point to is there was a bank here that Reliant acquired. It's a contiguous county to downtown Nashville, and that bank was just acquired or announced 45 days ago or so.

They had a cost of deposits, I believe, of 0.77%. It was founded 20 years ago. We're 11 years old. I will just say 140.

So there's a real opportunity out there. There are deposits out there. So correspondent is great, but there's a lot of other vehicles we should and need to go find.

Laurie Hunsicker -- Compass Point -- Analyst

OK. That's helpful. Great. And then if we can just jump over to credit, your credit is looking great.

Backing in off of Page 11, it looks like your substandard loans are $9.9 million or so, down from $12.6 million last quarter. Can you share with us which categories improved? And then also can you share with us just what are the balances there?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Sure. So in the substandard loans, which is really the non-impaired loans, it's about $9.7 million in total. About $3.6 million is in commercial real estate, $1.8 million about consumer real estate and $4.2 million in C&I, Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

OK. That's great. OK. And then just last question here.

Generally, can you help us think about how you are approaching shared national credits going forward? How that plays into your business strategy? I know you mentioned more of an end market focus. But can you help us think about where you want to see that portfolio as a percentage of loans and how you're thinking about growing both that and healthcare? And certainly, I realize that some of your SNCs are healthcare. But if you can just share with us more broadly how you're approaching that strategy.

Tim Schools -- President and Chief Executive Officer

Yes. I'm going to give you an answer, and then the next question is going to be what's the timing. And I'm a marathon, not a sprint person. I personally don't see why a bank in two of the best markets in the southeast needs a single shared national credit.

I think we should have more opportunities than we can even put on our balance sheet and we should have great selectivity. We're not there yet. So to me, it's -- I would describe it to somebody today, if you're all watching the World Series and if you're a baseball fan. Pickle is when you leave first base and you're caught between first and second.

I'd like to get us to where we have the luxury that we can select between so many credits across Tennessee that we don't need that, but we're not there yet. And so it's a bridge to get there. And the second thing I'll say is all shared national credits, the majority of shared national credits are what you envision of shared national credits. It's Verizon.

It's Simon Malls. It's whatever. Huge banks, you can go buy a piece. There also are very local credits that are defined as shared national credits just because it meets the number of banks that are in it.

And so I don't know that it will ever be 0. But -- and so -- hope that answers your question. I'd love to get to where we are so filled up that it's local relationship stuff. A few of them may be defined as shared national credits, but that's simply because they're in Tennessee and they've got five or six banks or whatever and it qualifies for that.

Laurie Hunsicker -- Compass Point -- Analyst

Great. That's helpful. Thank you.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

And real quick on that. The reason is, one, you get deposits. You get fee income. You get collateral.

You get personal guarantees. And they tend to be thicker margins because shared national credits are very efficient, very thinly priced, variable rate, low to no collateral, no guarantees, no deposits for the most part.

Laurie Hunsicker -- Compass Point -- Analyst

Great. Thank you for taking my questions.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Sure. Thank you.

Operator

I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

Tim Schools -- President and Chief Executive Officer

That covers it. Thank you so much for everybody who calls in. We appreciate your support. We're going to work hard.

There's a few small near-term challenges, but there's a lot of great things going on here and everybody is working hard. So, we'll talk to you, I guess, in January. Thank you.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Thank you.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

Tim Schools -- President and Chief Executive Officer

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Stephen Scouten -- Sandler O'Neill + Partners, L.P. -- Analyst

Chris Tietz -- Chief Credit Officer

Catherine Mealor -- KBW -- Analyst

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Tyler Stafford -- Stephens Inc. -- Analyst

Laurie Hunsicker -- Compass Point -- Analyst

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