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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 March 31, 2021

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:

 

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 April 30, 2021

Common Stock, par value $1.00 per share

 

22,094,638

 

 

 

 

 

 


 

 

CAPSTAR FINANCIAL HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

Item

 

 

Page

 

 

 

 

PART I – FINANCIAL INFORMATION

 

5

 

 

 

 

Item 1.

Financial Statements

 

5

 

 

 

 

 

Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 2020

 

5

 

 

 

 

 

Consolidated Statements of Income (Unaudited) for the three months ended March 31, 2021 and 2020

 

6

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, 2021 and 2020

 

7

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the three months ended March 31, 2021 and 2020

 

8

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2021 and 2020

 

9

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

10

 

 

 

 

Item 2.

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

 

33

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

43

 

 

 

 

Item 4.

Controls and Procedures

 

43

 

 

 

PART II – OTHER INFORMATION

 

44

 

 

 

 

Item 6.

Exhibits

 

45

 

 

 

 

SIGNATURES

 

46

 

 

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. These forward-looking statements are not historical facts, and are based upon 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”) acquisitions; the possibility that any of the anticipated benefits, costs, synergies and financial and operational improvements of the FCB and BOW acquisitions will not be realized or will not be realized as expected; 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, return on average assets 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 to borrowers 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

3


 

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 the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 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.

 

4


 

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Balance Sheets

(Dollars in thousands, except share data)

 

 

March 31, 2021

 

 

 

 

 

 

 

(unaudited)

 

 

December 31, 2020

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

49,696

 

 

$

49,980

 

Interest-bearing deposits in financial institutions

 

 

340,869

 

 

 

227,459

 

Total cash and cash equivalents

 

 

390,565

 

 

 

277,439

 

Securities available-for-sale, at fair value

 

 

474,788

 

 

 

486,215

 

Securities held-to-maturity, fair value of $2,484 and $2,504 at

   March 31, 2021 and December 31, 2020, respectively

 

 

2,401

 

 

 

2,407

 

Loans held for sale, includes $96,228 and $97,303 measured

   at fair value at March 31, 2021 and December 31, 2020, respectively

 

 

162,269

 

 

 

179,669

 

Loans

 

 

1,941,078

 

 

 

1,891,019

 

Less allowance for loan losses

 

 

(23,877

)

 

 

(23,245

)

Loans, net

 

 

1,917,201

 

 

 

1,867,774

 

Premises and equipment, net

 

 

26,423

 

 

 

26,689

 

Restricted equity securities

 

 

14,993

 

 

 

15,562

 

Accrued interest receivable

 

 

8,567

 

 

 

8,771

 

Goodwill

 

 

41,068

 

 

 

41,068

 

Core deposit intangible, net

 

 

8,122

 

 

 

8,630

 

Other real estate owned, net

 

 

523

 

 

 

523

 

Other assets

 

 

103,537

 

 

 

72,259

 

Total assets

 

$

3,150,457

 

 

$

2,987,006

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

711,606

 

 

$

662,934

 

Interest-bearing

 

 

1,018,960

 

 

 

844,101

 

Savings and money market accounts

 

 

578,446

 

 

 

591,438

 

Time

 

 

442,189

 

 

 

469,528

 

Total deposits

 

 

2,751,201

 

 

 

2,568,001

 

Federal Home Loan Bank advances

 

 

 

 

 

10,000

 

Subordinated notes

 

 

29,455

 

 

 

29,423

 

Other liabilities

 

 

25,857

 

 

 

36,096

 

Total liabilities

 

 

2,806,513

 

 

 

2,643,520

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock, voting, $1 par value; 25,000,000 shares authorized; 22,089,873 and

   21,988,803 shares issued and outstanding at March 31, 2021 and December 31,

   2020, respectively

 

 

22,090

 

 

 

21,989

 

Additional paid-in capital

 

 

246,735

 

 

 

246,890

 

Retained earnings

 

 

76,816

 

 

 

66,879

 

Accumulated other comprehensive (loss) income, net of tax

 

 

(1,697

)

 

 

7,728

 

Total shareholders’ equity

 

 

343,944

 

 

 

343,486

 

Total liabilities and shareholders’ equity

 

$

3,150,457

 

 

$

2,987,006

 

 

See accompanying notes to consolidated financial statements (unaudited).

5


 

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Interest income:

 

 

 

 

 

 

 

 

Loans, including fees

 

$

22,014

 

 

$

19,738

 

Securities:

 

 

 

 

 

 

 

 

Taxable

 

 

1,596

 

 

 

1,174

 

Tax-exempt

 

 

373

 

 

 

321

 

Restricted equity securities

 

 

161

 

 

 

142

 

Interest-bearing deposits in financial institutions

 

 

134

 

 

 

363

 

Total interest income

 

 

24,278

 

 

 

21,738

 

Interest expense:

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

446

 

 

 

1,901

 

Savings and money market accounts

 

 

313

 

 

 

1,551

 

Time deposits

 

 

931

 

 

 

1,481

 

Federal Home Loan Bank advances

 

 

12

 

 

 

144

 

Subordinated notes

 

 

394

 

 

 

 

Total interest expense

 

 

2,096

 

 

 

5,077

 

Net interest income

 

 

22,182

 

 

 

16,661

 

Provision for loan losses

 

 

650

 

 

 

7,553

 

Net interest income after provision for loan losses

 

 

21,532

 

 

 

9,108

 

Noninterest income:

 

 

 

 

 

 

 

 

Deposit service charges

 

 

1,102

 

 

 

775

 

Interchange and debit card transaction fees

 

 

1,092

 

 

 

724

 

Mortgage banking

 

 

4,716

 

 

 

2,253

 

Tri-Net

 

 

1,143

 

 

 

599

 

Wealth management

 

 

459

 

 

 

407

 

SBA lending

 

 

492

 

 

 

35

 

Net gain on sale of securities

 

 

26

 

 

 

27

 

Other noninterest income

 

 

984

 

 

 

1,054

 

Total noninterest income

 

 

10,014

 

 

 

5,874

 

Noninterest expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,427

 

 

 

8,002

 

Data processing and software

 

 

2,827

 

 

 

1,864

 

Occupancy

 

 

1,108

 

 

 

820

 

Equipment

 

 

899

 

 

 

751

 

Professional services

 

 

704

 

 

 

636

 

Regulatory fees

 

 

257

 

 

 

163

 

Acquisition related expenses

 

 

67

 

 

 

290

 

Amortization of intangibles

 

 

508

 

 

 

386

 

Other operating

 

 

1,616

 

 

 

1,299

 

Total noninterest expense

 

 

17,413

 

 

 

14,211

 

Income before income taxes

 

 

14,133

 

 

 

771

 

Income tax expense (benefit)

 

 

3,103

 

 

 

(575

)

Net income

 

$

11,030

 

 

$

1,346

 

Per share information:

 

 

 

 

 

 

 

 

Basic net income per share of common stock

 

$

0.50

 

 

$

0.07

 

Diluted net income per share of common stock

 

$

0.50

 

 

$

0.07

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

22,045,501

 

 

 

18,392,913

 

Diluted

 

 

22,076,600

 

 

 

18,443,725

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

6


 

 

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Net income

 

$

11,030

 

 

$

1,346

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period

 

 

(12,708

)

 

 

4,203

 

Reclassification adjustment for gains included in

   net income

 

 

(26

)

 

 

(27

)

Tax effect

 

 

3,309

 

 

 

(1,021

)

Net of tax

 

 

(9,425

)

 

 

3,155

 

Unrealized losses on cash flow hedges:

 

 

 

 

 

 

 

 

Reclassification adjustment for losses included in

   net income

 

 

 

 

 

253

 

Tax effect

 

 

 

 

 

 

Net of tax

 

 

 

 

 

253

 

Other comprehensive (loss) income

 

 

(9,425

)

 

 

3,408

 

Comprehensive income

 

$

1,605

 

 

$

4,754

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements (unaudited).

7


 

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(Dollars in thousands, except share data)

 

 

 

Common Stock,

voting

 

 

Additional

paid-in

 

 

Retained

 

 

Accumulated

other

comprehensive

 

 

Total

shareholders’

 

 

 

Shares

 

 

Amount

 

 

capital

 

 

earnings

 

 

income (loss)

 

 

equity

 

Balance December 31, 2019

 

 

18,361,922

 

 

$

18,362

 

 

$

207,083

 

 

$

46,218

 

 

$

1,383

 

 

$

273,046

 

Net issuance of restricted common stock

 

 

73,098

 

 

 

73

 

 

 

(196

)

 

 

 

 

 

 

 

 

(123

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

360

 

 

 

 

 

 

 

 

 

360

 

Net exercise of common stock options

 

 

20,582

 

 

 

21

 

 

 

85

 

 

 

 

 

 

 

 

 

106

 

Repurchase of common stock

 

 

(147,800

)

 

 

(148

)

 

 

(1,289

)

 

 

 

 

 

 

 

 

(1,437

)

Common stock dividends declared ($0.05 per share)

 

 

 

 

 

 

 

 

 

 

 

(916

)

 

 

 

 

 

(916

)

Net income

 

 

 

 

 

 

 

 

 

 

 

1,346

 

 

 

 

 

 

1,346

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,408

 

 

 

3,408

 

Balance March 31, 2020

 

 

18,307,802

 

 

$

18,308

 

 

$

206,043

 

 

$

46,648

 

 

$

4,791

 

 

$

275,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2020

 

 

21,988,803

 

 

$

21,989

 

 

$

246,890

 

 

$

66,879

 

 

$

7,728

 

 

$

343,486

 

Net issuance of restricted common stock

 

 

117,962

 

 

 

118

 

 

 

(216

)

 

 

 

 

 

 

 

 

(98

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

349

 

 

 

 

 

 

 

 

 

349

 

Net exercise of common stock options

 

 

1,039

 

 

 

1

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

(17,931

)

 

 

(18

)

 

 

(287

)

 

 

 

 

 

 

 

 

(305

)

Common stock dividends declared ($0.05 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,093

)

 

 

 

 

 

(1,093

)

Net income

 

 

 

 

 

 

 

 

 

 

 

11,030

 

 

 

 

 

 

11,030

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,425

)

 

 

(9,425

)

Balance March 31, 2021

 

 

22,089,873

 

 

$

22,090

 

 

$

246,735

 

 

$

76,816

 

 

$

(1,697

)

 

$

343,944

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

8


 

 

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

11,030

 

 

$

1,346

 

Adjustments to reconcile net income to net cash

   provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

650

 

 

 

7,553

 

Accretion of discounts on acquired loans and deferred fees

 

 

(1,703

)

 

 

(297

)

Depreciation and amortization

 

 

867

 

 

 

681

 

Net amortization of premiums on investment securities

 

 

580

 

 

 

180

 

Net gain on sale of securities

 

 

(26

)

 

 

(27

)

Mortgage banking

 

 

(4,716

)

 

 

(2,253

)

Tri-Net

 

 

(1,143

)

 

 

(599

)

SBA lending

 

 

(492

)

 

 

(35

)

Net gain on sale of other real estate owned

 

 

(29

)

 

 

(37

)

Stock-based compensation

 

 

349

 

 

 

360