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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, 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:

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 July 31, 2021

Common Stock, par value $1.00 per share

 

22,163,260

 

 

 

 

 


 

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 June 30, 2021 (Unaudited) and December 31, 2020

 

5

 

 

 

 

 

Consolidated Statements of Income (Unaudited) for the three and six months ended June 30, 2021 and 2020

 

6

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the three and six months ended June 30, 2021 and 2020

 

7

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the three and six months ended June 30, 2021 and 2020

 

8

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 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

 

44

 

 

 

 

Item 4.

Controls and Procedures

 

45

 

 

 

PART II – OTHER INFORMATION

 

46

 

 

 

 

Item 6.

Exhibits

 

46

 

 

 

 

SIGNATURES

 

47

 

 

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 (and variants of that virus) pandemic has adversely affected and continues to adversely affect 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. 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 markets 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

3


 

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 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

(In thousands, except share data)

 

 

June 30, 2021

 

 

 

 

 

 


(unaudited)

 

 

December 31, 2020

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

68,744

 

 

$

49,980

 

Interest-bearing deposits in financial institutions

 

 

360,623

 

 

 

227,459

 

Federal funds sold

 

 

19,900

 

 

 

 

Total cash and cash equivalents

 

 

449,267

 

 

 

277,439

 

Securities available-for-sale, at fair value

 

 

500,339

 

 

 

486,215

 

Securities held-to-maturity, fair value of $2,464 and $2,504 at
   June 30, 2021 and December 31, 2020, respectively

 

 

2,395

 

 

 

2,407

 

Loans held for sale, includes $69,940 and $97,303 measured
   at fair value at June 30, 2021 and December 31, 2020, respectively

 

 

148,251

 

 

 

179,669

 

Loans held for investment

 

 

1,907,820

 

 

 

1,891,019

 

Less allowance for loan losses

 

 

(22,754

)

 

 

(23,245

)

Loans, net

 

 

1,885,066

 

 

 

1,867,774

 

Premises and equipment, net

 

 

26,170

 

 

 

26,689

 

Restricted equity securities

 

 

14,720

 

 

 

15,562

 

Accrued interest receivable

 

 

7,823

 

 

 

8,771

 

Goodwill

 

 

41,068

 

 

 

41,068

 

Core deposit intangible, net

 

 

7,629

 

 

 

8,630

 

Other real estate owned, net

 

 

184

 

 

 

523

 

Other assets

 

 

129,478

 

 

 

72,259

 

Total assets

 

$

3,212,390

 

 

$

2,987,006

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

 

$

782,170

 

 

$

662,934

 

Interest-bearing

 

 

991,551

 

 

 

844,101

 

Savings and money market accounts

 

 

587,485

 

 

 

591,438

 

Time

 

 

418,988

 

 

 

469,528

 

Total deposits

 

 

2,780,194

 

 

 

2,568,001

 

Federal Home Loan Bank advances

 

 

 

 

 

10,000

 

Subordinated notes

 

 

29,487

 

 

 

29,423

 

Other liabilities

 

 

42,957

 

 

 

36,096

 

Total liabilities

 

 

2,852,638

 

 

 

2,643,520

 

Shareholders’ equity:

 

 

 

 

 

 

Common stock, voting, $1 par value; 25,000,000 shares authorized; 22,165,547 and
   
21,988,803 shares issued and outstanding at June 30, 2021 and December 31,
   2020, respectively

 

 

22,166

 

 

 

21,989

 

Additional paid-in capital

 

 

247,945

 

 

 

246,890

 

Retained earnings

 

 

87,560

 

 

 

66,879

 

Accumulated other comprehensive income, net of tax

 

 

2,081

 

 

 

7,728

 

Total shareholders’ equity

 

 

359,752

 

 

 

343,486

 

Total liabilities and shareholders’ equity

 

$

3,212,390

 

 

$

2,987,006

 

 

See accompanying notes to consolidated financial statements (unaudited).

5


 

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,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

22,572

 

 

$

19,086

 

 

$

44,586

 

 

$

38,823

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,640

 

 

 

1,096

 

 

 

3,244

 

 

 

2,272

 

Tax-exempt

 

 

356

 

 

 

312

 

 

 

722

 

 

 

633

 

Federal funds sold

 

 

3

 

 

 

 

 

 

3

 

 

 

 

Restricted equity securities

 

 

160

 

 

 

140

 

 

 

321

 

 

 

282

 

Interest-bearing deposits in financial institutions

 

 

101

 

 

 

107

 

 

 

234

 

 

 

469

 

Total interest income

 

 

24,832

 

 

 

20,741

 

 

 

49,110

 

 

 

42,479

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

 

379

 

 

 

831

 

 

 

826

 

 

 

2,732

 

Savings and money market accounts

 

 

295

 

 

 

731

 

 

 

608

 

 

 

2,283

 

Time deposits

 

 

732

 

 

 

1,416

 

 

 

1,663

 

 

 

2,897

 

Federal Home Loan Bank advances

 

 

 

 

 

88

 

 

 

12

 

 

 

231

 

Subordinated notes

 

 

394

 

 

 

 

 

 

788

 

 

 

 

Total interest expense

 

 

1,800

 

 

 

3,066

 

 

 

3,897

 

 

 

8,143

 

Net interest income

 

 

23,032

 

 

 

17,675

 

 

 

45,213

 

 

 

34,336

 

Provision for loan losses

 

 

(1,065

)

 

 

1,624

 

 

 

(415

)

 

 

9,177

 

Net interest income after provision for loan losses

 

 

24,097

 

 

 

16,051

 

 

 

45,628

 

 

 

25,159

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Deposit service charges

 

 

1,109

 

 

 

691

 

 

 

2,211

 

 

 

1,466

 

Interchange and debit card transaction fees

 

 

1,227

 

 

 

729

 

 

 

2,318

 

 

 

1,454

 

Mortgage banking

 

 

3,910

 

 

 

7,123

 

 

 

8,625

 

 

 

9,376

 

Tri-Net

 

 

1,536

 

 

 

1,260

 

 

 

2,679

 

 

 

1,860

 

Wealth management

 

 

471

 

 

 

374

 

 

 

931

 

 

 

781

 

SBA lending

 

 

377

 

 

 

13

 

 

 

870

 

 

 

49

 

Net gain (loss) on sale of securities

 

 

(13

)

 

 

13

 

 

 

13

 

 

 

40

 

Other noninterest income

 

 

1,266

 

 

 

620

 

 

 

2,250

 

 

 

1,671

 

Total noninterest income

 

 

9,883

 

 

 

10,823

 

 

 

19,897

 

 

 

16,697

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,803

 

 

 

12,305

 

 

 

20,229

 

 

 

20,307

 

Data processing and software

 

 

3,070

 

 

 

2,100

 

 

 

5,898

 

 

 

3,964

 

Occupancy

 

 

1,057

 

 

 

797

 

 

 

2,165

 

 

 

1,616

 

Equipment

 

 

980

 

 

 

680

 

 

 

1,880

 

 

 

1,431

 

Professional services

 

 

460

 

 

 

581

 

 

 

1,165

 

 

 

1,216

 

Regulatory fees

 

 

211

 

 

 

333

 

 

 

467

 

 

 

496

 

Acquisition related expenses

 

 

256

 

 

 

448

 

 

 

323

 

 

 

738

 

Amortization of intangibles

 

 

493

 

 

 

375

 

 

 

1,001

 

 

 

761

 

Other operating

 

 

1,750

 

 

 

1,315

 

 

 

3,364

 

 

 

2,616

 

Total noninterest expense

 

 

19,080

 

 

 

18,934

 

 

 

36,492

 

 

 

33,145

 

Income before income taxes

 

 

14,900

 

 

 

7,940

 

 

 

29,033

 

 

 

8,711

 

Income tax expense

 

 

2,824

 

 

 

1,759

 

 

 

5,927

 

 

 

1,184

 

Net income

 

$

12,076

 

 

$

6,181

 

 

$

23,106

 

 

$

7,527

 

Per share information:

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share of common stock

 

$

0.55

 

 

$

0.34

 

 

$

1.05

 

 

$

0.41

 

Diluted net income per share of common stock

 

$

0.54

 

 

$

0.34

 

 

$

1.04

 

 

$

0.41

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

22,133,759

 

 

 

18,307,083

 

 

 

22,089,874

 

 

 

18,349,998

 

Diluted

 

 

22,198,829

 

 

 

18,320,006

 

 

 

22,138,052

 

 

 

18,381,866

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

6


 

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net income

 

$

12,076

 

 

$

6,181

 

 

$

23,106

 

 

$

7,527

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) arising during the period

 

 

5,082

 

 

 

138

 

 

 

(7,626

)

 

 

4,341

 

Reclassification adjustment for losses (gains) included in
   net income

 

 

13

 

 

 

(13

)

 

 

(13

)

 

 

(40

)

Tax effect

 

 

(1,317

)

 

 

(23

)

 

 

1,992

 

 

 

(1,044

)

Net of tax

 

 

3,778

 

 

 

102

 

 

 

(5,647

)

 

 

3,257

 

Unrealized losses on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for losses included in
   net income

 

 

 

 

 

258

 

 

 

 

 

 

511

 

Tax effect

 

 

 

 

 

 

 

 

 

 

 

 

Net of tax

 

 

 

 

 

258

 

 

 

 

 

 

511

 

Other comprehensive income (loss)

 

 

3,778

 

 

 

360

 

 

 

(5,647

)

 

 

3,768

 

Comprehensive income

 

$

15,854

 

 

$

6,541

 

 

$

17,459

 

 

$

11,295

 

 

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 and per 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 (redemption) 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

Net issuance (redemption) of restricted common stock

 

(5,614)

 

(6)

 

7

 

  —

 

  —

 

1

Stock-based compensation expense

 

  —

 

  —

 

541

 

  —

 

  —

 

541

Common stock dividends declared ($0.05 per share)

 

  —

 

  —