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Capstar Financial Holdings, Inc. (CSTR)
Q1 2020 Earnings Call
Apr 28, 2020, 9:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, ladies and gentlemen, and welcome to CapStar Financial Holdings first-quarter 2020 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 earnings release, the presentation materials that will be referred to in this call and the Form 8-K that CapStar filed with the SEC are available on the SEC website at www.sec.gov, and the investor relations page of CapStar's website at www.ir.capstarbank.com.

Also during this presentation, CapStar may make certain comments that constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements reflect CapStar's current views with respect to, among other things, future events and its financial performance. Forward-looking statements are not historical facts and are based upon CapStar's expectations, estimates and projections as of today. Accordingly, forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties, many of which are difficult to predict and beyond CapStar's control.

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

The risks, assumptions and uncertainties impacting forward-looking statements and the presentation of non-GAAP financial measures and 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 for taking the time to participate in our call this morning. We look forward to updating you on our results, initial assessment of potential risks associated with the COVID-19 pandemic and outlook for opportunities at CapStar. While it is still early and the estimated impacts of the crisis range widely, CapStar is a quality organization, and we feel well positioned as we face the challenge before us.

While first quarter seemed so far ago, with all that has occurred since, we had an outstanding quarter. Building on my comments from the fourth-quarter call, CapStar has a number of opportunities to improve its core profitability and earnings consistency. I was pleased with the stability of our net interest margin, expense discipline and continued strong credit quality. Our mortgage and Tri-Net businesses also remained robust thus far in the first half of the year.

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All of these aspects have so much opportunity. In a second, Rob will highlight a few aspects of our first-quarter performance. We will keep it briefer than normal so that Chris Tietz can share our initial thoughts of potential credit risk in our portfolio and how we are going about monitoring and managing those. Before we address those topics, I'd like to acknowledge the tremendous efforts of all banks, and especially the CapStar team, over the last 45-or-so days.

At first glance, a bank does not appear on the level of first responders as our nation's health professionals. We are so fortunate that those have dedicated themselves to health and risked their and their own family's health to protect ours. However, as the crisis evolved, we all witnessed the important role the banking system plays in providing relief for loan payments, comforting clients on the safety of their deposits, dispersing relief funds such as PPP, on top of still running the bank for many, many organizations who are still operating. I look forward to sharing a few comments later of some of our successes during this period.

I will end by saying, I'm really proud of our industry and of CapStar. Banks often get a bad rap, and in some cases, well deserved, but it is so nice to see everyone working together to help everyone succeed. Rob, would you please take a minute and review our first-quarter financial highlights?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Sure. Thank you, Tim, and good morning, everyone. Today's presentation will be slightly different given the unprecedented circumstances, and we hope you and your family members are safe and healthy. First, I'd like to state that the underlying performance of the bank is strong and has been improving over time.

Our pre-tax preprovision earnings and return on those earnings are up over prior year and on a linked-quarter basis. Within the quarter, we reached new records, both on our total deposits and our DDA balances. Total deposits eclipsed 1.8 billion, and our DDA balances reached 443 million within the quarter, and those records have extended into April as noted on the page. While our average loan growth for the quarter was slightly down, our ending, or EOP loan growth spiked at the quarter end so we experienced growth late in the quarter.

Additionally, our Knoxville team is gaining traction with clients and currently has a nice pipeline of activity. One of the highlights that should not be overlooked for the quarter is our margin, which is up 1 basis point from the prior quarter. We took several initiatives on both sides of the balance sheet, including: lowering rates on over 400 million of deposit balances; emphasizing in-market, relationship-oriented, fixed-rate loans; increasing credit spreads to 250 to 400 basis points over FHLB versus our previous stance of 200 to 300 basis points; and implementing floors on all variable rate loans and Tri-Net fixed-rate loans. We continue with solid momentum in our fee businesses with solid postings from our mortgage and Tri-Net businesses.

The sales and pipelines remain in line or better than 2019 levels for both businesses. One opportunity that we have pointed out from time to time is our expense line, and we have felt we have an opportunity for improvement. We are creating a culture of accountability within the organization, and our efficiency ratio reflects a marked improvement over prior periods. We are implementing expense discipline throughout the enterprise to ensure our processes are proficient and evaluating how we can operate with an owner-operator mindset.

This is not to say we're being cheap, running on the rails or even increasing risk. This is simply taking an ownership mindset and applying it to how we operate. As an example of this, we are reviewing incentive plans for an alignment with shareholder value creation and have already changed a few for this coming year. Moving on to credit.

I would say we are entering this crisis from a position of strength, Chris will talk about that in a second. The first quarter had nominal net charge-offs, and our criticized and classified asset levels remained low and stable. As it relates to our loan loss reserve, I'll remind you that we were not required to implement CECL, so our reserve does not incorporate a lifetime loss expectation on the loan portfolio. We increased the reserve to 7.5 million for the quarter, which does include specific reserves of over $700,000 on a couple of loans.

All this equates to CapStar recording operating net income of 1.6 million for the quarter or $0.08 EPS on a fully diluted basis. We paid a $0.05 dividend in the quarter and announced a $0.05 per share dividend to common shareholders earlier this month on April 22nd, and we currently have no plans to change our stance on the dividend. We intend to maintain the dividend. Last and most importantly, we believe CapStar is entering this crisis from a position of strength.

We have significant on- and off-balance sheet liquidity, strong and improving pre-tax preprovision income, a healthy reserve for potential loan losses and in an uncertain time, above-average capital ratios, and we are nearing our close date with two of Tennessee's highest-performing banks. As you can see on the next page, our income statement reflects these comments with our operating revenue up 3.7% over prior year and 4.2% on a linked-quarter basis. This is driven by a relatively flat net interest income growth, with interest rates dropping in the second half of last year. We have spoken about our fee businesses and how those businesses are countercyclical to a low interest rate environment, and fees were up 24.1% over prior year and 10.9% sequentially.

Treasury management, mortgage and Tri-Net all had solid quarters. Expenses were low this quarter and a marked improvement from prior quarters. The decrease is coming predominantly from the salaries and benefits line. A few things are driving this decline.

As you may recall from the prior quarter, we had several early retirements in the fourth quarter, which took out approximately $600,000 in annual operating expenses, and we renegotiated our benefits package for 2020, which is also generating approximately $400,000 of annual savings. Additionally, we are accruing our incentives at 50% of target for the quarter. As it relates to our key performance metrics for the quarter, I'd like to highlight a couple with commentary. First, under soundness, you can see credit continued a path of below net charge-offs and a low and stable NPAs to loans.

We had 1 basis point of net charge-offs for the quarter. The reserve was increased 50 basis points to 1.39%, and our tangible common equity to tangible assets is at 11.43%. Under profitability, I would highlight our margin at 3.50%, efficiency ratio at 61.78% and our pre-tax preprovision ROA at 1.68%. Under growth, I would highlight deposits, up 9.3% over prior year at 1.736 billion; pre-tax preprovision income, 8.61 million, which is up 13.3% over prior year; and our tangible book value per share at $12.66, which is up 6.8% annualized over the prior quarter and up 9.6% from the prior year.

So with that, let me turn it back to Tim.

Tim Schools -- President and Chief Executive Officer

Thank you, Rob. I would now like to take a few minutes to discuss our preparedness in response to COVID-19. On Slide 10, this illustrates how we've mobilized and are managing the crisis. A pandemic oversight committee has met daily to discuss every changing aspect of our operations.

We've had an Internal Risk Committee, and we've had a Pandemic Credit Committee. In each of these efforts, we were supported by our external partners who continue to provide great guidance and a very experienced board of directors. CapStar is fortunate to have an extremely strong board with decades of multibillion-dollar banking experience, as well as other large complex operating experience. Our goal in these efforts was to: one, provide care for our employees and clients; two, protect the bank; and three, make CapStar shine.

Moving to the next slide. We performed marvelously. I have seen a number of banks report 50 to 75% of their nonbranch teams working remotely. Due to forward technology investments, 100% of CapStar's nonbranch employees have been working remotely for over a month.

It has been remarkable. We've not missed a beat, although many are clamoring to return to the office for the camaraderie. Importantly, CapStar was an early mover and leader on deferrals. Counseling with our regulators, we enacted full 90-day deferrals for all borrowers prior to others in any industry guidance because it was the right thing to do.

In times of heightened stress, we wanted to provide comfort to all of our customers that we care. About 20% of our customers elected deferrals. Some out of need, some to sleep better at night. We also have been a leader in PPP.

CapStar invested in an SBA team two years ago. While the ETran's system has proven a challenge for all banks due to the volume, CapStar invested in an additional system over this period, and it went live in a little more than a week. This allowed us to indirectly work with ETrans. In round one, we received about 1,000 applications and processed 670 for $164 million.

Yesterday alone, in round two, we processed another 861 loans for $72 million. Comparing round one to two, 10 to $20 billion Southeast banks, I saw a report, our number of loans and dollars are about 20% higher than each, adjusting for their size. Importantly, our deferral and PPP leadership not only helped people in the time of need, it has built loyalty and new relationships. We received so many calls from people saying their bank was not returning their messages.

In many cases, their accountants said, "Call CapStar." To be clear, we helped our customers and noncustomers and processed first-in, first-out, and several of these comments are highlighted in the presentation. Rob and Chris, if you could now walk through our thoughts around risk management?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Sure. Let me pick up on the liquidity slide. CapStar has plenty of on- and off-balance sheet tools to support the bank. First, let me note that these balances are as of April 17th, which should give you a good sense of activity and strength given the pandemic tension into the second quarter and past quarter end.

As noted earlier, deposits continued to climb as banks moved to cash, draw lines and stimulus checks were deposited from the federal government. As a point of reference, the day the stimulus checks were issued, our deposits increased by $100 million. As of 4/17, we had $227 million in cash, 153 million of unpledged securities and 171 million in the loans available to sell. You'll also note that we do not have a lot of wholesale funding, which we could easily access.

Internal ALCO guidelines limit our capacity to 15% of our total deposits. And as those deposits or as total deposits grow, that lever also grows. Also, one area that most consider as a lender of last resort, with perhaps a negative stigma attached to it, is the Fed discount window. And although we always had a borrowing arrangement in place, we are updating our loan collaterals that determine future borrowing capacity.

So with low liquidity risk, let's move on to capital. First, all capital ratios are above well capitalized guidelines and higher than a year ago. Our total risk-based capital is up 100 basis points at 13.64%, and our tangible common equity to tangible assets is up 112 basis points to 11.43%. Again, we paid a quarterly dividend of $0.05 per share in February, and we announced the same on April 22 for payment in the second quarter, and we have no plans to change our stance on the dividend.

As noted on the slide, we repurchased 147,800 shares during the quarter at an average price of $9.69 per share for a total of 1.4 million. And although we have temporarily discontinued repurchases, we still have 7.6 million under our current authorization. With that, let me turn it over to Chris to speak about the loan portfolio.

Chris Tietz -- Chief Credit Officer

Thank you, Rob. Turning to Slide 17. As we previously discussed, the pandemic creates an environment of economic uncertainty as we maneuver through unprecedented times. Having said that, we also note that CapStar enters this period of uncertainty from a starting place that includes good asset quality, resilient and diversified markets, as well as limited portfolio exposure in industries directly sensitive to the pandemic.

As I'll discuss in a minute, we also feel that our continued discipline in commercial real estate underwriting will further insulate us against shifts in market conditions on consumer behavior that may result from the pandemic. While Tim noted the market-leading position we took in offering a hassle-free, 90-day deferral to our customers, it's important to note that as of April 15th, only about 20% of our borrowers had opted into the deferral program. In general, we believe some customers opted in because their business had been impacted to some degree by the pandemic. However, as we hoped, others opted in simply as a tool to build liquidity in an uncertain environment.

Keep in mind that this offer was made by us in mid-March when there was considerably less -- there was considerably more uncertainty over where the pandemic might go. As the pandemic emerged, we noted borrowers increasing utilization in lines of credit. But subsequent to 3/31, we have seen utilization return to prior levels. In addition, we quickly evaluated our portfolio to assess potential impact on asset quality from the pandemic.

At about 11% of loans, we are pleased to note relatively low direct exposure in the sectors for lodging, recreation in restaurants, retail and senior living.As I said previously, we feel good about our credit quality metrics. Our primary leading indicator of credit issues in our -- is our level of criticized and classified loans. We hold ourselves responsible for internally rating our credits and have continued in our commitment to external validation of our risk rating disciplines and risk management protocols by engaging in three external loan reviews of our portfolio in 2019 and by recently completing an annual stress test exercise using a well-regarded external analytics firm. Because of the timing of this stress testing engagement, we were also able to expand its scope to anticipate potential pandemic impacts.

While we feel confident where we are,and have seen no deterioration in asset quality at March 31st due to the pandemic, we also know that no model exists to address the challenges of this unprecedented time and feel prudence is warranted in increasing our allowance for loan losses until we find equilibrium in the economy. So with that backdrop, turning to Slide 18. As I said, we believe that diversification offers strength and flexibility right now. 42% of the portfolio is either commercial and industrial or owner-occupied commercial real estate; 35% is investor real estate and or commercial construction; and 23% is spread across consumer product types, with about 80% of that subtotal being real estate secured.

As noted on the right, our classified and nonperforming asset ratios are at very low levels, expressed as a percentage of our strong capital position. And expressed as a percentage of loans, our criticized and classified levels are stable over the last two years and, we believe, represent top decile performance based on indications we are able to obtain from external resources. Turning to Slide 19. We are all sensitive to certain industries that have immediate and well-publicized impact from the pandemic, including retail, lodging, senior living and businesses engaged in recreation and or restaurants.

Retail will be discussed in three separate ways in my comments: direct loans we have to retailers; Tri-Net loans originated as held-for-sale that we make based on national chain retailers; and loans we make for retail, commercial real estate based first on the strength of the project owner and market characteristics where we place less emphasis on the actual retail tenant. Let me deal with the first two: direct loans to retailers and loans underwritten in our Tri-Net program based on retail tenants. We note that a substantial portion of our Tri-Net business is focused on financing properties leased by national chain retailers. As a reminder, Tri-Net is a business where we make loans to investors for properties where we place primary emphasis on long-term triple-net leases to national tenants with investment-grade characteristics.

While our minimum cash equity is 30% and we often obtain much more than that, our primary emphasis in underwriting is based on the retail tenant and their lease. While retail is an important focus of the business, we have resisted temptation to expand volume into big-box and discretionary retail tenants. Instead, our primary focus remains on essential service providers. As quoted in an article dated April 22nd in National Real Estate Investor, it is noted that net lease commercial real estate is faring well, and I quote, "For assets leased by essential service providers, the cap rates haven't changed." Because of the stable and resilient profile, we continue to have good demand for Tri-Net loans we originate and believe that this demand will continue despite the pandemic as the banks we sell Tri-Net loans to seek a flight to quality, represented by the assets we originate in this space.

Removing that $132 million of Tri-Net loans held for sale at March 31st, represented in the top graph, and taking it out to rerepresenting the portfolio allocation in the bottom graph, you can see we substantially reduced our direct exposure to the retail sector. This is separate from indirect exposure we have in the retail segment through our local market commercial real estate originations, but we will present that separately for reasons that I'll explain in a minute, and is not included in the cutouts on this page. With that in mind, let's specifically look at those four pandemic-sensitive industry concentration starting on line -- on Slide 20. At March 31st, we have 5.9% of our loans in the lodging segment.

Consistent with our overall disciplines in commercial real estate underwriting, you will note that these projects have very low leverage and a good history on debt service coverage. Given the nature of the pandemic's impact, excluding construction loans in process, which would not have been eligible for payment deferral, 53% of term loan borrowers in the lodging exposure opted in to our 90-day deferral offer. 100% of our lodging exposure is rated pass, and given the historical results and good debt service coverage, we believe that these borrowers will have resilience to withstand challenges that the pandemic poses in the future. There is a similar story on senior living, albeit with lower -- with much lower exposure, and only 45% of balances opting into the payment deferral program we offered.

While our senior living projects have stable operations, we are keenly aware of the inherent risk in this segment of our population that is served by these borrowers. In the senior living space, we have one project that is criticized for reasons related to an unusual weather event. This individual project's risk is mitigated by ownership that is part of a borrower group, whose revenues are diversified across multiple senior living facilities. Moving to Slide 21.

The category of recreation and restaurants includes the broad sector covering restaurants, the arts, entertainment and recreation. These aren't large categories to us, and we only have two criticized loans in the sector that account for a small portion of our overall criticized and classified loans. In this sector, there is a relatively low deferral rate, and the majority of exposure is secured by real estate. Similarly, our direct exposure to retailers is very low, with no criticized or classified loans and a very low deferral opt-in rate of less than 3%.

Moving to Slide 22. We'd like to share some important insights about the quality of our commercial real estate portfolio. Earlier in my comments, I highlighted our continued discipline in commercial real estate underwriting and risk selection. Unlike Tri-Net, where our primary emphasis is placed on the tenant and long-term lease, our core commercial real estate strategy is focused on end market seasoned project owners who are in a position to provide substantial cash equity.

We also focus on tenants, submarkets and property types, but our primary emphasis is placed on our relationship with the people, their experience and the cash equity that mitigates the indirect risk relating to tenant and or vacancy. As you will note on Slide 22, we do have indirect exposure into retail properties. But with our high cash equity discipline, there is substantial mitigation to the indirect risk relating to the tenant or shifts in market rent rates or occupancy. Therefore, we are presenting this as a separate subset to highlight that our strategy of targeting high cash equity project profiles converts to low loan-to-value ratios and attractive debt service coverage characteristics across the commercial real estate space, providing us and our borrowers considerable flexibility.

We also see this as a major driver to a 100% pass rating within our commercial real estate portfolio. And now, I'll turn it back over to Rob to lead you through the steps we are taking to address market uncertainty through our allowance for loan losses.

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Thank you, Chris. And as stated earlier, we are entering the crisis from a position of strength. The first quarter had nominal net charge-offs, and our criticized and classified assets remain at a low and stable level. As it relates to our loan loss reserve, I'll remind you that we were not required to implement CECL, so our reserve does not incorporate the lifetime loss expectation on the loan portfolio.

We did increase the reserve to 7.5 million for the quarter, and the bulk of that was related to the uncertainties around the pandemic. We also had $700,000 for two credits that have specific reserves. And if you add in the fair value mark of 3.2 million on our acquired loans, our effective reserve is at 1.61%. So with that, let me turn it back over to Tim for some closing comments.

Tim Schools -- President and Chief Executive Officer

Thank you, Chris and Rob. As you can see, we've put an awful lot of thought into this, and it's just begun. We've escalated monitoring, and we will be very proactive in working with weakening credits. On Slide 25, we have an update on the timing of our merger with FCB.

We're very excited about partnering with these two organizations. As we've previously stated, they usually rank in the top 10% performance-wise among Tennessee's 150-or-so banks, and each are over 115 years old. They will further our deposit focus and diversify our loan portfolio and revenue. In closing, I want to share how excited I am about our prospects at CapStar.

I've now been here three full quarters, and we have a quality organization with tremendous opportunities. On Slide 27, I've laid out our focused priorities. First, we are strong risk managers, but our near-term priority will be heightened risk management. We're going to work to continue to improve our pre-tax preprovision and intend to maintain our dividend.

Second, we have great opportunity to improve and stabilize our net interest margin and improve our efficiency. At American Savings Bank, which I led from 2007 through 2010, we improved our pre-tax preprovision to assets from a five-year historical average of about 1.3% to 2.35% over four years. It was achieved by margin improvement and efficiency. I do not know that we can achieve the same level here at CapStar as it is a different market, but I do see the same type of opportunities.

Third, the success of our deferral and PPP results, on top of our wonderful reputation in our markets, and we are in great markets, bodes well for the local market expansion. Combined with opportunities like our Knoxville investment and Athens and FCB partnerships, we have expanding growth opportunities. Lastly, those that know me know I am an advocate for shareholders and have a strong track record for improving shareholder returns. CapStar has accomplished a lot over its short 12 years, but our returns have lagged.

That is important to me and is one of my main priorities and something I take very seriously. That concludes our call, and we'll now be happy to take questions.

Questions & Answers:


[Operator instructions] Our first question comes from the line of Catherine Mealor with KBW. Your line is now open.

Catherine Mealor -- KBW -- Analyst

Thanks, good morning. I wanted to start first on the margin. And Rob, just wanted to see if you could give us a little bit of update on your outlook for the margin just given your asset sensitivity. You gave us a couple of data points, but I think maybe two questions within that is, one, you showed the repricing for variable loans were down about 17 bps this quarter, can you talk about what that looks like with the full impact of the rate cut next quarter? And then the second question would be on the deposit side, we saw really big DDA growth this quarter.

Could we view any of that as temporary? Or should we grow those DDA balances from this higher level?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Yes. Sure. Thanks, Catherine. First, let me talk on the deposit side.

The deposits actually have been a nice bright spot for us. Our deposit balances were up for the quarter. We gave some data points on the slide that those records on spot balances continued. And I saw the spot balances here this morning.

Both DDA are up over quarter end. So I think with the strong DDA balances and our deposit balances, that gives us an opportunity to be a little bit more selective as we go deeper into the quarter on pricing. On the loan side, we are going to see the full impact of that variable rate loan book reprice. As you know, we have loans that are contractually on the first of the month, last of the month, on first of the quarter, end of the quarter.

So it all varies. But typically, it takes close to 90 days to have that cycle through. I would say overall, you should expect near term that our margin will contract some. I think we have some tools to offset it with good deposit growth.

But certainly, with the PPP loans with a 1% yield carry on that that's going to impact it as well. And then as the SBA fees kick in probably in the second half of the year, our margin could come back strong as those loans were either forgiven or paid off probably six months down the road. But I would say near term, Catherine, we could probably see a little bit of contraction on the margin.

Tim Schools -- President and Chief Executive Officer

And Catherine, this is Tim. I'll just add I think it's a very challenging environment for us and for you to try and predict margins. I'll share that we get a daily balance sheet. Our DDA crossed 500 million yesterday.

So we had a record Friday, I think we had in the slides, of 489 million. Yesterday, it crossed 500 million. So, so many balances are moving in and out and the economy is unstable that I think, not trying to shy away from giving you direction, but I think it's a challenging quarter trying to understand all that's going on. I think you can take a position, like Rob said, on the loan side, on the deposit side, we're getting all this free money and what's the impact of that going to have.

And so I'll just share that that the deposits continue to be strong. And you also have the influence of the PPP coming in at a very low rate, which will, again, help on fees over time but hurt your margin in the short term.

Catherine Mealor -- KBW -- Analyst

Yes. That makes sense. Yes. It's a challenge to forecast that, for sure.

And then maybe just one follow-up question on your loan deferrals. At about 20%, it feels a little on the high side, but well, I'd say high, but many other banks are kind of at that same level. How do you think about or how would you think about our ability to think about deferrals as a leading indicator for credit stress? Or would you view the level of deferrals that you have as more of a statement of how proactive you were with your clients?

Tim Schools -- President and Chief Executive Officer

We took a very different approach. I think, I never thought of it like the way you all are thinking of it, as a sign of stress. We didn't take that approach. So we reached out to the Fed, I'd have to look at my calendar, the Fed and our accountants, Elliott Davis, probably it may have been March 14th or in that week.

And I just said, "Hey, I'm not certain where this is going. And we want to be a company that cares. And let's talk about the pros and cons of why wouldn't we just offer all customers 90-day full deferral. What does that hurt the bank in any way? What -- let's talk it through." And we worked with the -- our regulators, as well as our accountants, and we made a decision before really any bank I saw.

We actually got a write-up in the Tennessee and in the Nashville newspaper about sort of being proactive and being the first. So we never really thought about it in that angle. We'd have to break through and go pull financials to see which ones really were more -- again, we don't have a lot of criticized or classified or 90 days past due. We only did it to people that were less than 30 days past due.

So we didn't take that approach, and I think that it's just a mix of types. I certainly wouldn't view it that way for us. I was surprised how low it was since we offered it to all customers. Many banks came out and it was on a select basis, and you had to be underwritten, and you had to have it was done in need, more like you're talking about.

That was not our stance.

Chris Tietz -- Chief Credit Officer

Yes. And Catherine, this is Chris. I'll interject a couple of things. Keep in mind, when we were offering it, it was over a month ago when we -- when there was a lot of uncertainty, a lot of angst, of expectation or uncertain expectations in the marketplace.

I'll expand on Tim's comment just a bit, that all of our criticized and classified loans, only 25% of our criticized and classified borrowers opted into the program. And within our criticized and classified portfolio, those borrowers have almost received as much in aggregate in PPP funds as we have lent to them as a pool. So again, we don't see that as necessarily something that prompts concern. However, we will have escalated monitoring on those and a number of other credits as we maneuver through this period.

Catherine Mealor -- KBW -- Analyst

Very helpful. Understood. All right, thank you so much.

Chris Tietz -- Chief Credit Officer



Our next question comes from Stephen Scouten with Piper Sandler. Your line is now open.

Stephen Scouten -- Piper Sandler -- Analyst

Hey guys, how you all doing this morning? So I'm curious in terms of you outlined some of the specific sectors that people are more concerned within your presentation obviously. But I'm wondering, maybe specific areas where you tightened underwriting standards to date. And I know some competitors in your market have seen some weakness, specifically in the healthcare sector. I was wondering if you could remind us what your exposure is there and maybe the SNC balances as well.

Chris Tietz -- Chief Credit Officer

Yes. Again, this is Chris. The healthcare -- healthcare for us is still a diversified portion of the portfolio. The largest area of concentration we have within healthcare, which is down to about $130 million in terms of the legacy Nashville program, it remains in ambulatory surgery centers.

And so when we look at healthcare, while ambulatory surgery centers fall into the discretionary realm of pandemic response, our position is that they may be a beneficiary from this as hospitals work to get COVID patients out of in-line surgical space using those facilities. They have been a recipient of a number of government programs to maintain their liquidity and so on. And we believe that they continue to represent an important social need for the portfolio or for the community going forward.

Tim Schools -- President and Chief Executive Officer

Stephen, I'd say due to underwriting, one of the main things we did was we raised our desired credit spreads and loan floors. So whether it be at Tri-Net or internally, we've raised that bar. And that has significantly volume. And we're looking for the best credits.

And then No. 2, I would say it had already started before I got here, but we've taken a more proactive approach to focus on banking the state of Tennessee and 100 miles within any of our branches and less in reliance on participations. I think the company, at one point, SNCs may have been over 20%, and there was some reliance on whether it be shared national credits or participations from other banks. And if you went and talked to any of my teammates, they will tell you that I constantly preach, we shouldn't need a participation.

We should have so many loans that we're participating out. So I would say the two changes would be: we've raised our spreads, we've put floors in; and then secondly, we have very little focus on participations and shared national credits. I believe our shared national credits are approaching 5%, and I believe our HLTV is approaching 5%.

Stephen Scouten -- Piper Sandler -- Analyst

OK. Very helpful. And then thinking about the potential for line draws from here. I think you guys noted that they rose.

But then since quarter end, they've actually declined back maybe a couple of percent. But I'm curious on the 490 million or so that's unfunded today. How much of that can be drawn down without any additional oversight or review from the bank? Is that all of that? Or are there some kind of caveats and other covenants in there?

Chris Tietz -- Chief Credit Officer

Yes. Stephen, I will tell you, yes, there are borrowing bases in place. There are covenants that might put limitations in place. I would say I can't be specific to you.

It's not something that's easily tracked. However, I will tell you that a portion of it is available, a portion of it would not be. It's not something we're overly concerned by right now.

Stephen Scouten -- Piper Sandler -- Analyst

OK. Good. And then maybe just last thing for me. I'm wondering if you guys could opine a little bit just on the Nashville economy.

I know that's hard given where we are, and still not out of the woods yet. But just given the theoretical dependency on tourism and then healthcare sectors, I'm wondering if you could comment, just given the extreme strength of that market over the last couple of years and just where you think you stand today.

Tim Schools -- President and Chief Executive Officer

I think anything any of us would say would be speculative. I don't think any of us have any data, and it's early. What I'd say, I've only been here now a year, is obviously, whether it be from the NFL draft last year or the TV show or the music stars, it's the entertainment that I think hits the spotlight. But it's the state capital.

It has Vanderbilt here, it has Lipscomb here. I think it was AllianceBernstein moving here. Amazon is putting a facility here. I'm trying to think, I think it was Mitsubishi that announced, in the fall, they're moving their U.S.

headquarters to Franklin. So Middle Tennessee offers a lot more than the entertainment industry. It certainly will have an impact with people not traveling. But I think it's a dynamic market.

And there certainly are risks because there's growth and there's investment being made to meet all that need, but I just think it's preliminary for any of us to comment. So we'll have to wait and see. But it is a dynamic -- much more than the entertainment just here.

Stephen Scouten -- Piper Sandler -- Analyst

Yes, for sure. OK thanks guys, appreciate the input.

Tim Schools -- President and Chief Executive Officer

Thank you.


[Operator instructions] Our next question comes from Jennifer Demba with SunTrust. Your line is now open.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Good morning. Question on lease and expenses. Just curious about the mortgage pipeline as it stands right now, what you're seeing here in the second quarter. And also, is this expense run rate and good wins going looking out the next couple of quarters?

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Sure. Jennifer, it's Rob. First of all, I'll address the mortgage. Mortgage actually has probably one of the stronger pipelines I've seen.

I think the pipeline at the end of the quarter was around 130 million. Previously in the quarter, it was around 100. And I think at the end of February and then at the end of January, it was around 80 some. But that's all those numbers are up over prior year.

So mortgage is very strong. I think once we got past the dislocation that happened in the mortgage market, that's starting to settle down. So we're anticipating a consistent and strong performance from our mortgage group, certainly in the second quarter and for the year, absent any volatility that goes on within the market. On the expense side, I think the run rate that you see here is a good one for now.

It could be slightly up $200,000 above this. But this would be a good run rate. Again, our goal over time is to improve our efficiency ratio. Tim mentioned that.

I think we have opportunities to get that below 60% at some point. Part of that's revenue, part of that is expenses. But on the expense run rate, I think this quarter is a good indication of future quarters as well.

Tim Schools -- President and Chief Executive Officer

And Jennifer, what I'd add is at ASB, when we embarked on that, I think they're efficient. When I started there, their margin was 3.10%, and you can go pull it up, margin was 3.10%, I think the efficiency ratio was 70%. And when I left, the margin was about 4.10%, and the efficiency was about 55%. It took four years.

But it was hard to give a prediction to my board quarter to quarter. So when you embark on something like this, we posted a great number in the first quarter, that's certainly not a stabilized number. So I don't see any reason that it's going to shoot back up. But I also don't want to mislead you or whatever.

Until you get that all solidified, I think there's great opportunity over time to keep it in that range or maybe even work on it a little bit. I think with FCB coming in, you've got two more high-quality banks with a low efficiency ratio. I think that should bring us operating leverage and help us toward that goal also. I just foresee, based on multiple banks in my experience, we've got a great platform here that we should, over time, be able to enhance our margin a little bit, stabilize it a little bit and improve the efficiency.

I'd love to see the efficiency, as a step one, be in that 58 to 59%. Let's get that first, and then we can worry about any improvement from there later.

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

Thanks so much.

Tim Schools -- President and Chief Executive Officer

Sure, thank you.


I'm showing no further questions in queue at this time. I'd like to turn the call back to management for closing remarks.

Tim Schools -- President and Chief Executive Officer

Yes. I'll just say we appreciate your time this morning. It's a hectic period. We appreciate you following us and stay tuned, and we'll talk to you next quarter.

Thank you.


[Operator signoff]

Duration: 48 minutes

Call participants:

Tim Schools -- President and Chief Executive Officer

Rob Anderson -- Chief Financial Officer and Chief Administrative Officer

Chris Tietz -- Chief Credit Officer

Catherine Mealor -- KBW -- Analyst

Stephen Scouten -- Piper Sandler -- Analyst

Jennifer Demba -- SunTrust Robinson Humphrey -- Analyst

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