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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 June 30, 2023

OR

☐ 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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $1.00 par value per share

 

CSTR

 

Nasdaq Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

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 August 4, 2023

Common Stock, par value $1.00 per share

 

20,824,484

 

 

 

 

 

CAPSTAR FINANCIAL HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

Item

 

 

Page

 

 

 

 

PART I – FINANCIAL INFORMATION

 

4

 

 

 

 

Item 1.

Financial Statements

 

4

 

 

 

 

 

Consolidated Balance Sheets

 

4

 

 

 

 

 

Consolidated Statements of Income

 

5

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

6

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity

 

7

 

 

 

 

 

Consolidated Statements of Cash Flows

 

8

 

 

 

 

 

Notes to Consolidated Financial Statements

 

9

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

33

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

46

 

 

 

Item 4.

Controls and Procedures

 

46

 

 

 

PART II – OTHER INFORMATION

 

47

 

 

 

 

Item 1.

Legal Proceedings

 

47

Item 1A.

Risk Factors

 

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

47

 

 

 

 

Item 6.

Exhibits

 

48

 

 

 

 

SIGNATURES

 

49

 

 

 

2

 

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, statements relating to the Company’s assets, business, cash flows, condition (financial or otherwise), credit quality, financial performance, liquidity, short and long-term performance goals, prospects, results of operations, strategic initiatives, the benefits, cost and synergies of completed acquisitions or dispositions, and the timing, benefits, costs and synergies of future acquisitions, disposition and other growth opportunities. 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,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “roadmap,” “goal,” “target,” “would,” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. Forward-looking statements express only management's beliefs regarding future results or events and are subject to inherent uncertainty, risks and changes in circumstances, many of which are outside of management's control. Uncertainty, risks, changes in circumstances and other factors could cause the Company's actual results to differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ from those discussed in such forward-looking statements include, but are not limited to: (1) difficulty attracting and retaining highly-effective employees; (2) our ability to successfully execute our business plan; (3) difficulty growing or sustaining deposit and loan balances; (4) changes in consumer preferences, spending and borrowing habits, and demand for our products and services; (5) negative economic and political conditions that adversely affect the general economy, especially in the communities and markets in which we conduct our business, the banking sector, housing prices, the real estate market, the job market, consumer confidence, the financial condition of our borrowers and consumer spending habits, which may affect, among other things, the levels of non-performing assets, charge-offs and provision expense; (6) credit risk, including the risk that negative credit quality trends may lead to a deterioration of asset quality, risk that our allowance for credit losses may not be sufficient to absorb actual losses in our loan portfolio, and risk from concentrations within our loan portfolio; (7) market risk, including interest rate and liquidity risk; (8) operational risk, including cybersecurity risk and risk of fraud, data processing system failures, and network breaches; (9) increased competition, including competition from non-bank financial institutions; (10) changes in regulations, laws, taxes, government policies, monetary policies and accounting policies affecting bank holding companies and their subsidiaries; (11) regulatory enforcement actions and adverse legal actions; and (12) other economic, competitive, technological, operational, governmental, regulatory, and market factors affecting our operations. The foregoing factors should not be construed as exhaustive and should be read in conjunction with the section entitled “Risk Factors” included in this Report. 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. Forward-looking statements made herein reflect management's expectations as of the date such statements are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made.

The foregoing factors should not be construed as exhaustive and should be read in conjunction with the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) and in future reports that we file with the Securities and Exchange Commission. 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.

 

3

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Balance Sheets

(In thousands, except share data)

 

 

June 30, 2023

 

 

December 31, 2022

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

29,112

 

 

$

25,280

 

Interest-bearing deposits in financial institutions

 

 

139,714

 

 

 

105,558

 

Federal funds sold

 

 

1,883

 

 

 

4,467

 

Total cash and cash equivalents

 

 

170,709

 

 

 

135,305

 

Securities available-for-sale, at fair value net of allowance for credit losses of $2,000 and $0 at June 30, 2023 and December 31, 2022, respectively

 

 

373,262

 

 

 

396,416

 

Securities held-to-maturity, fair value of $0 and $1,240 at June 30, 2023 and December 31, 2022, respectively

 

 

—

 

 

 

1,240

 

Loans held for sale, includes $28,121 and $12,636 measured at fair value at June 30, 2023 and December 31, 2022, respectively

 

 

48,895

 

 

 

44,708

 

Loans held for investment

 

 

2,358,928

 

 

 

2,312,798

 

Less allowance for credit losses on loans

 

 

(25,524

)

 

 

(23,806

)

Loans, net

 

 

2,333,404

 

 

 

2,288,992

 

Premises and equipment, net

 

 

23,203

 

 

 

24,855

 

Restricted equity securities

 

 

16,130

 

 

 

16,632

 

Accrued interest receivable

 

 

11,117

 

 

 

10,511

 

Goodwill and other intangibles

 

 

45,317

 

 

 

46,069

 

Other real estate owned, net

 

 

11

 

 

 

—

 

Other assets

 

 

156,968

 

 

 

152,441

 

Total assets

 

$

3,179,016

 

 

$

3,117,169

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

 

$

414,828

 

 

$

512,076

 

Interest-bearing

 

 

872,882

 

 

 

749,857

 

Savings and money market accounts

 

 

571,117

 

 

 

709,190

 

Time

 

 

851,932

 

 

 

708,696

 

Total deposits

 

 

2,710,759

 

 

 

2,679,819

 

Federal Home Loan Bank advances

 

 

50,000

 

 

 

15,000

 

Subordinated notes

 

 

29,733

 

 

 

29,666

 

Other liabilities

 

 

41,059

 

 

 

38,502

 

Total liabilities

 

 

2,831,551

 

 

 

2,762,987

 

Shareholders’ equity:

 

 

 

 

 

 

Common stock, voting, $1 par value; 25,000,000 shares authorized; 20,884,492 and
   21,714,380 shares issued and outstanding at June 30, 2023 and December 31,
   2022, respectively

 

 

20,884

 

 

 

21,714

 

Additional paid-in capital

 

 

228,705

 

 

 

240,863

 

Retained earnings

 

 

148,036

 

 

 

141,657

 

Accumulated other comprehensive loss, net of tax

 

 

(50,160

)

 

 

(50,052

)

Total shareholders’ equity

 

 

347,465

 

 

 

354,182

 

Total liabilities and shareholders’ equity

 

$

3,179,016

 

 

$

3,117,169

 

 

See accompanying notes to consolidated financial statements (unaudited).

4

 

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Income (Unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

34,815

 

 

$

23,775

 

 

$

66,774

 

 

$

44,141

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

2,025

 

 

 

1,922

 

 

 

3,976

 

 

 

3,677

 

Tax-exempt

 

 

308

 

 

 

319

 

 

 

622

 

 

 

644

 

Federal funds sold

 

 

68

 

 

 

14

 

 

 

123

 

 

 

24

 

Restricted equity securities

 

 

248

 

 

 

173

 

 

 

488

 

 

 

329

 

Interest-bearing deposits in financial institutions

 

 

1,823

 

 

 

286

 

 

 

3,087

 

 

 

458

 

Total interest income

 

 

39,287

 

 

 

26,489

 

 

 

75,070

 

 

 

49,273

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

4,474

 

 

 

638

 

 

 

7,420

 

 

 

1,074

 

Savings and money market accounts

 

 

3,254

 

 

 

467

 

 

 

6,513

 

 

 

797

 

Time deposits

 

 

7,363

 

 

 

454

 

 

 

12,936

 

 

 

938

 

Federal Home Loan Bank advances

 

 

1,231

 

 

 

96

 

 

 

1,623

 

 

 

96

 

Subordinated notes

 

 

394

 

 

 

394

 

 

 

788

 

 

 

788

 

Total interest expense

 

 

16,716

 

 

 

2,049

 

 

 

29,280

 

 

 

3,693

 

Net interest income

 

 

22,571

 

 

 

24,440

 

 

 

45,790

 

 

 

45,580

 

Provision for credit losses:

 

 

 

 

 

 

 

 

 

 

 

 

Provision for credit losses on loans

 

 

519

 

 

 

843

 

 

 

570

 

 

 

59

 

Provision for credit losses on available-for-sale securities

 

 

—

 

 

 

—

 

 

 

2,000

 

 

 

—

 

Recovery of provision for credit losses on unfunded commitments

 

 

(497

)

 

 

—

 

 

 

(106

)

 

 

—

 

Total provision for credit losses

 

 

22

 

 

 

843

 

 

 

2,464

 

 

 

59

 

Net interest income after provision for credit losses

 

 

22,549

 

 

 

23,597

 

 

 

43,326

 

 

 

45,521

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Deposit service charges

 

 

1,264

 

 

 

1,182

 

 

 

2,632

 

 

 

2,324

 

Interchange and debit card transaction fees

 

 

1,060

 

 

 

1,336

 

 

 

2,098

 

 

 

2,558

 

Mortgage banking

 

 

955

 

 

 

1,705

 

 

 

2,248

 

 

 

3,671

 

Tri-Net

 

 

27

 

 

 

(73

)

 

 

27

 

 

 

2,098

 

Wealth management

 

 

426

 

 

 

459

 

 

 

800

 

 

 

899

 

SBA lending

 

 

977

 

 

 

273

 

 

 

2,068

 

 

 

494

 

Net gain on sale of securities

 

 

—

 

 

 

—

 

 

 

5

 

 

 

—

 

Other noninterest income

 

 

1,503

 

 

 

994

 

 

 

2,609

 

 

 

2,921

 

Total noninterest income

 

 

6,212

 

 

 

5,876

 

 

 

12,487

 

 

 

14,965

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,533

 

 

 

9,209

 

 

 

20,874

 

 

 

19,478

 

Data processing and software

 

 

3,294

 

 

 

2,847

 

 

 

6,505

 

 

 

5,494

 

Occupancy

 

 

1,097

 

 

 

1,076

 

 

 

2,290

 

 

 

2,174

 

Equipment

 

 

674

 

 

 

783

 

 

 

1,496

 

 

 

1,492

 

Professional services

 

 

899

 

 

 

506

 

 

 

1,687

 

 

 

1,185

 

Regulatory fees

 

 

419

 

 

 

265

 

 

 

832

 

 

 

545

 

Amortization of intangibles

 

 

368

 

 

 

430

 

 

 

752

 

 

 

876

 

Other noninterest expense

 

 

1,888

 

 

 

1,959

 

 

 

3,790

 

 

 

3,566

 

Total noninterest expense

 

 

19,172

 

 

 

17,075

 

 

 

38,226

 

 

 

34,810

 

Income before income taxes

 

 

9,589

 

 

 

12,398

 

 

 

17,587

 

 

 

25,676

 

Income tax expense

 

 

1,785

 

 

 

2,426

 

 

 

3,337

 

 

 

5,031

 

Net income

 

$

7,804

 

 

$

9,972

 

 

$

14,250

 

 

$

20,645

 

Per share information:

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share of common stock

 

$

0.37

 

 

$

0.45

 

 

$

0.67

 

 

$

0.93

 

Diluted net income per share of common stock

 

$

0.37

 

 

$

0.45

 

 

$

0.67

 

 

$

0.93

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

21,065,115

 

 

 

22,022,109

 

 

 

21,311,691

 

 

 

22,109,737

 

Diluted

 

 

21,107,457

 

 

 

22,074,260

 

 

 

21,349,972

 

 

 

22,163,954

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

5

 

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Net income

 

$

7,804

 

 

$

9,972

 

 

$

14,250

 

 

$

20,645

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses arising during the period

 

 

(8,530

)

 

 

(18,890

)

 

 

(149

)

 

 

(45,970

)

Reclassification adjustment for gains included in
   net income

 

 

—

 

 

 

—