CapStar Financial Earnings 2020-09-30

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

cstr-10q_20200930.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________.

Commission File Number: 001-37886

CAPSTAR FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Tennessee	81-1527911
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1201 Demonbreun Street, Suite 700 Nashville, Tennessee (Address of principal executive offices)	37203 (zip code)

(615) 732-6400

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☐	Accelerated Filer	☒
Non-Accelerated Filer	☐	Smaller Reporting Company	☒
		Emerging Growth Company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

		Shares outstanding as of October 30, 2020
Common Stock, par value $1.00 per share		21,945,314

CAPSTAR FINANCIAL HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

Item		Page

PART I – FINANCIAL INFORMATION			5

Item 1.	Consolidated Financial Statements	5

	Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019	5

	Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2020 and 2019	6

	Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2020 and 2019	7

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the nine months ended September 30, 2020 and 2019	8

	Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2020 and 2019	10

	Notes to Consolidated Financial Statements (Unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	48

Item 4.	Controls and Procedures	48

PART II – OTHER INFORMATION			49

Item 1.	Legal Proceedings	49

Item 1A.	Risk Factors	49

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 6.	Exhibits	51

SIGNATURES			52

TERMINOLOGY

The terms “we,” “our,” “us,” “CapStar,” “the Company,” “CSTR” and “CapStar Financial” that appear in this Quarterly Report on Form 10-Q (this “Report”) refer to CapStar Financial Holdings, Inc. and its wholly-owned subsidiary, CapStar Bank, which we sometimes refer to as “CapStar Bank,” “our bank subsidiary,” “the Bank” and “our Bank”.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “aspire,” “roadmap,” “achieve,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “goal,” “target,” “would,” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates and projections will be achieved. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict and that are beyond our control. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date of this Report, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

The COVID-19 pandemic is adversely affecting us, our customers, employees, and third-party service providers, and the ultimate extent of the impacts on our business, including on our credit quality, business operations and liquidity, as well as its impact on general economic and financial market conditions, is uncertain. Continued deterioration in general business and economic conditions, or turbulence in domestic or global financial markets could adversely affect CapStar’s revenues and the values of our assets and liabilities, reduce the availability of funding, affect credit quality, and increase stock price volatility. The Company may not capitalize on opportunities to enhance market share in certain markets and the Company’s services may not be generally accepted in new markets; the ability of the Company to meet expectations regarding the benefits, costs, synergies and financial and operational impact of the FCB Corporation (“FCB”) and the Bank of Waynesboro (“BOW”) mergers; reputational risks and the reaction of shareholders, customers, employees or other constituents of the Company to the FCB and BOW mergers; the acceptance by customers of FCB and BOW of the Company’s products and services; the possibility that the FCB and BOW merger integrations will be more expensive or take more time to complete than anticipated; economic conditions (including interest rate environment, government economic and monetary policies, the strength of global financial markets and inflation and deflation) that impact the financial services industry as a whole and/or our business; the concentration of our business in our Target Market and the effect of changes in the economic, political and environmental conditions on this market; increased competition in the financial services industry, locally, regionally or nationally, which may adversely affect pricing and the other terms offered to our clients; an increase in the cost of deposits, loss of deposits or a change in the deposit mix, which could increase our cost of funding; an increase in the costs of capital, which could negatively affect our ability to borrow funds, successfully raise additional capital or participate in strategic acquisition opportunities; our dependence on our management team and board of directors and changes in our management and board composition; our reputation in the community; our ability to execute our strategy to achieve our loan, ROAA and efficiency ratio goals, hire seasoned bankers, and achieve deposit growth through organic growth and strategic acquisitions; credit risks related to the size of our borrowers and our ability to adequately identify, assess and limit our credit risk; our concentration of large loans to a small number of borrowers as well as geographic concentrations located within our Target Market; the significant portion of our loan portfolio that originated during the past two years and therefore may less reliably predict future collectability than older loans; the adequacy of reserves (including our allowance for loan losses) and the appropriateness of our methodology for calculating such reserves; non-performing loans and leases; non-performing assets; charge-offs, non-accruals, troubled debt restructurings, impairments and other credit-related issues; adverse trends in the healthcare service industry, which is an integral component of our Target Market’s economy and which could adversely affect the business operations of certain of our key borrowers; our management of risks inherent in our commercial real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of our collateral and our ability to sell collateral upon any foreclosure; our inability to realize operating efficiencies and tax savings from the implementation of our strategic plan; governmental legislation and regulation, including changes in the nature and timing of the adoption and effectiveness of new requirements under the Dodd-Frank Act of 2010, as amended, the Tax Cuts and Jobs Act of 2017, as amended, Basel guidelines, capital requirements, accounting regulation or standards and other applicable laws and regulations; the loss of large depositor relationships, which could force us to fund our business through more expensive and less stable sources; operational and liquidity risks

associated with our business, including liquidity risks inherent in correspondent banking; volatility in interest rates and our overall management of interest rate risk, including managing the sensitivity of our interest-earning assets and interest-bearing liabilities to interest rates, and the impact to our earnings from a change in interest rates; the potential for our Bank’s regulatory lending limits and other factors related to our size to restrict our growth and prevent us from effectively implementing our business strategy; strategic acquisitions we may undertake to achieve our goals; the sufficiency of our capital, including sources of capital and the extent to which we may be required to raise additional capital to meet our goals; fluctuations in the fair value of our investment securities that are beyond our control; deterioration in the fiscal position of the U.S. government and downgrades in Treasury and federal agency securities; potential exposure to fraud, negligence, computer theft and cyber-crime; the adequacy of our risk management framework; our dependence on our information technology and telecommunications systems and the potential for any systems failures or interruptions; threats to and breaches of our information technology systems and data security, including cyber-attacks; our dependence upon outside third parties for the processing and handling of our records and data; our ability to adapt to technological change; the financial soundness of other financial institutions; our exposure to environmental liability risk associated with our lending activities; our engagement in derivative transactions; our involvement from time to time in legal proceedings and examinations and remedial actions by regulators; our involvement from time to time in litigation or other proceedings instituted by or against shareholders, customers, employees or third parties and the cost of legal fees associated with such litigation or proceedings; the susceptibility of our market to natural disasters and acts of God; and the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting.

The foregoing factors should not be construed as exhaustive and should be read in conjunction with those factors that are detailed from time to time in the Company’s periodic and current reports filed with the Securities and Exchange Commission (the “SEC”), including those factors included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 under the heading “Item 1A. Risk Factors” and in the Company’s Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date of this Report, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Balance Sheets

(Dollars in thousands, except share data)

	September 30, 2020
	(unaudited)			December 31, 2019
Assets
Cash and due from banks	$	39,917		$	17,726
Interest-bearing deposits in financial institutions		416,008			83,368
Federal funds sold		—			175
Total cash and cash equivalents		455,925			101,269
Securities available-for-sale, at fair value		308,337			213,129
Securities held-to-maturity, fair value of $2,526 and $3,411 at September 30, 2020 and December 31, 2019, respectively		2,413			3,313
Loans held for sale, includes $112,002 and $30,740 measured at fair value at September 30, 2020 and December 31, 2019, respectively		198,603			168,222
Loans		1,906,603			1,420,102
Less allowance for loan losses		(23,167	)		(12,604	)
Loans, net		1,883,436			1,407,498
Premises and equipment, net		27,728			19,184
Restricted equity securities		13,625			13,689
Accrued interest receivable		9,814			5,792
Goodwill		41,068			37,510
Core deposit intangible, net		9,154			6,883
Other real estate owned, net		171			1,044
Other assets		74,074			59,668
Total assets	$	3,024,348		$	2,037,201
Liabilities and Shareholders’ Equity
Deposits:
Non interest-bearing	$	716,707		$	312,096
Interest-bearing		791,601			607,211
Savings and money market accounts		604,495			506,692
Time		504,739			303,452
Total deposits		2,617,542			1,729,451
Federal Home Loan Bank advances		10,000			10,000
Subordinated notes		29,418			—
Other liabilities		33,493			24,704
Total liabilities		2,690,453			1,764,155
Shareholders’ equity:
Common stock, voting, $1 par value; 25,000,000 shares authorized; 21,947,805 and 18,361,922 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively		21,948			18,362
Additional paid-in capital		246,847			207,083
Retained earnings		58,296			46,218
Accumulated other comprehensive income, net of income tax		6,804			1,383
Total shareholders’ equity		333,895			273,046
Total liabilities and shareholders’ equity	$	3,024,348		$	2,037,201

See accompanying notes to consolidated financial statements (unaudited).

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except share data)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2020		2019			2020		2019
Interest income:
Loans, including fees	$	22,796	$	21,005		$	61,620	$	62,596
Securities:
Taxable		1,193		1,028			3,465		3,540
Tax-exempt		343		354			975		1,093
Federal funds sold		—		1			—		26
Restricted equity securities		139		183			421		584
Interest-bearing deposits in financial institutions		171		645			640		1,502
Total interest income		24,642		23,216			67,121		69,341
Interest expense:
Interest-bearing deposits		640		2,102			3,371		5,523
Savings and money market accounts		2,537		1,944			4,819		5,445
Time deposits		1,299		1,887			4,197		5,917
Federal funds purchased		—		—			—		4
Securities sold under agreements to repurchase		—		—			—		5
Federal Home Loan Bank advances		116		127			348		1,281
Subordinated notes		394		—			394		—
Total interest expense		4,986		6,060			13,129		18,175
Net interest income		19,656		17,156			53,992		51,166
Provision for loan losses		2,119		(125	)		11,295		761
Net interest income after provision for loan losses		17,537		17,281			42,697		50,405
Noninterest income:
Treasury management and other deposit service charges		1,064		788			2,531		2,399
Net gain (loss) on sale of securities		34		—			74		(108	)
Tri-Net fees		668		847			2,528		2,511
Mortgage banking income		9,686		2,679			19,063		7,151
Wealth management fees		382		379			1,162		1,018
Interchange and debit card transaction fees		936		754			2,389		2,323
Other noninterest income		2,034		1,341			3,753		3,261
Total noninterest income		14,804		6,788			31,500		18,555
Noninterest expense:
Salaries and employee benefits		12,949		9,229			33,256		26,224
Data processing and software		2,353		1,790			6,317		5,126
Professional fees		638		528			1,854		1,571
Occupancy		999		858			2,615		2,550
Equipment		864		1,012			2,295		2,890
Regulatory fees		397		18			893		564
Merger related expenses		2,548		187			3,286		2,491
Amortization of intangibles		539		408			1,300		1,258
Other operating		1,452		1,501			4,067		4,054
Total noninterest expense		22,739		15,531			55,883		46,728
Income before income taxes		9,602		8,538			18,314		22,232
Income tax expense		2,115		2,072			3,299		5,231
Net income	$	7,487	$	6,466		$	15,015	$	17,001
Per share information:
Basic net income per share of common stock	$	0.34	$	0.36		$	0.77	$	0.96
Diluted net income per share of common stock	$	0.34	$	0.35		$	0.77	$	0.91
Weighted average shares outstanding:
Basic		21,948,579		17,741,778

Price	15.07	EPS	1
Shares	19	P/E	17
MCap	281	P/FCF	-5
Net Debt	-154	EBIT	44
TEV	127	TEV/EBIT	3
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-09-30	Filed 2020-11-05
10-Q	2020-06-30	Filed 2020-08-06
10-Q	2020-03-31	Filed 2020-05-08
10-K	2019-12-31	Filed 2020-03-06
10-Q	2019-09-30	Filed 2019-11-06
10-Q	2019-06-30	Filed 2019-08-07
10-Q	2019-03-31	Filed 2019-05-01
10-K	2018-12-31	Filed 2019-03-15
10-Q	2018-09-30	Filed 2018-11-08
10-Q	2018-06-30	Filed 2018-07-31
10-Q	2018-03-31	Filed 2018-05-02
10-K	2017-12-31	Filed 2018-03-08
10-Q	2017-09-30	Filed 2017-10-18
10-Q	2017-06-30	Filed 2017-07-31
10-Q	2017-03-31	Filed 2017-05-03
10-K	2016-12-31	Filed 2017-03-13
10-Q	2016-09-30	Filed 2016-11-08

8-K	2020-10-22	Earnings, Regulation FD, Exhibits
8-K	2020-09-21	Officers, Regulation FD, Exhibits
8-K	2020-07-24	Other Events, Exhibits
8-K	2020-07-23	Earnings, Regulation FD, Exhibits
8-K	2020-07-01	M&A, Other Events, Exhibits
8-K	2020-06-29	Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K	2020-06-16
8-K	2020-05-04
8-K	2020-04-28
8-K	2020-04-27
8-K	2020-04-24
8-K	2020-04-24
8-K	2020-03-10
8-K	2020-01-23
8-K	2020-01-23
8-K	2020-01-23
8-K	2019-12-04
8-K	2019-10-24
8-K	2019-10-24
8-K	2019-09-12
8-K	2019-09-09
8-K	2019-09-05
8-K	2019-07-25
8-K	2019-06-05
8-K	2019-05-13
8-K	2019-04-25
8-K	2019-04-25
8-K	2019-04-24
8-K	2019-02-19
8-K	2019-02-01
8-K	2019-01-24
8-K	2018-12-28
8-K	2018-12-21
8-K	2018-11-06
8-K	2018-10-24
8-K	2018-10-24
8-K	2018-10-01
8-K	2018-09-13
8-K	2018-08-29
8-K	2018-07-26
8-K	2018-06-11
8-K	2018-06-11
8-K	2018-04-26
8-K	2018-04-26
8-K	2018-01-25

EX-31.1	cstr-ex311_9.htm
EX-31.2	cstr-ex312_8.htm
EX-32.1	cstr-ex321_6.htm
EX-32.2	cstr-ex322_7.htm

CSTR 10Q Quarterly Report

CapStar Financial Earnings 2020-09-30