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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, 2022

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 May 3, 2022

Common Stock, par value $1.00 per share

 

22,066,073

 

 

 

 

 


 

CAPSTAR FINANCIAL HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

 

Item

 

 

Page

 

 

 

 

PART I – FINANCIAL INFORMATION

 

6

 

 

 

 

Item 1.

Financial Statements

 

6

 

 

 

 

 

Consolidated Balance Sheets

 

6

 

 

 

 

 

Consolidated Statements of Income

 

7

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

8

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity

 

9

 

 

 

 

 

Consolidated Statements of Cash Flows

 

10

 

 

 

 

 

Notes to Consolidated Financial Statements

 

11

 

 

 

 

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 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

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 continuing effects of the COVID-19 (and variants of that virus) pandemic upon us, our customers, employees, and third-party service providers, and the ultimate extent of the impacts of the pandemic on our business, including on our credit quality, business operations and liquidity, as well as its impact on general economic and financial market conditions;
deterioration in general business and economic conditions, or turbulence in domestic or global financial markets, which 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 inability to capitalize on opportunities to enhance market share in certain markets and the risk that the Company’s services may not be generally accepted in new markets;
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;
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

3


 

calculating such reserves;
non-performing loans, leases and other non-performing assets;
charge-offs, non-accruals, troubled debt restructurings, impairments and other credit-related issues;
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;
changes in secondary market conditions for underwriting or repurchase of secondary mortgages;
continued compliance and adherence to underwriting and servicing of Government Guaranteed Loans;
our inability to realize operating efficiencies and tax savings from the implementation of our strategic plan;
our ability to comply with existing and changing governmental legislation and regulation, including 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;
our ability to identify and thereafter consummate strategic acquisitions that may be necessary in order 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, 2021 (the “2021 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

4


 

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.

 

5


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Balance Sheets

(In thousands, except share data)

 

 

March 31, 2022

 

 

 

 

 

 

(unaudited)

 

 

December 31, 2021

 

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

53,291

 

 

$

48,202

 

Interest-bearing deposits in financial institutions

 

 

282,790

 

 

 

347,023

 

Federal funds sold

 

 

19,900

 

 

 

19,900

 

Total cash and cash equivalents

 

 

355,981

 

 

 

415,125

 

Securities available-for-sale, at fair value

 

 

460,558

 

 

 

459,396

 

Securities held-to-maturity, fair value of $1,791 and $1,830 at
   March 31, 2022 and December 31, 2021, respectively

 

 

1,775

 

 

 

1,782

 

Loans held for sale, includes $38,502 and $37,306 measured
   at fair value at March 31, 2022 and December 31, 2021, respectively

 

 

106,895

 

 

 

83,715

 

Loans held for investment

 

 

2,047,555

 

 

 

1,965,769

 

Less allowance for loan losses

 

 

(20,857

)

 

 

(21,698

)

Loans, net

 

 

2,026,698

 

 

 

1,944,071

 

Premises and equipment, net

 

 

25,464

 

 

 

25,727

 

Restricted equity securities

 

 

14,465

 

 

 

14,453

 

Accrued interest receivable

 

 

7,679

 

 

 

7,376

 

Goodwill

 

 

41,068

 

 

 

41,068

 

Core deposit intangible, net

 

 

6,245

 

 

 

6,691

 

Other real estate owned, net

 

 

178

 

 

 

266

 

Other assets

 

 

143,743

 

 

 

133,376

 

Total assets

 

$

3,190,749

 

 

$

3,133,046

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

 

$

702,172

 

 

$

725,171

 

Interest-bearing

 

 

1,025,858

 

 

 

944,605

 

Savings and money market accounts

 

 

673,314

 

 

 

641,456

 

Time

 

 

354,651

 

 

 

373,049

 

Total deposits

 

 

2,755,995

 

 

 

2,684,281

 

Subordinated notes

 

 

29,566

 

 

 

29,532

 

Other liabilities

 

 

36,271

 

 

 

39,139

 

Total liabilities

 

 

2,821,832

 

 

 

2,752,952

 

Shareholders’ equity:

 

 

 

 

 

 

Common stock, voting, $1 par value; 25,000,000 shares authorized; 22,195,071 and
   
22,166,129 shares issued and outstanding at March 31, 2022 and December 31,
   2021, respectively

 

 

22,195

 

 

 

22,166

 

Additional paid-in capital

 

 

248,214

 

 

 

248,709

 

Retained earnings

 

 

119,842

 

 

 

110,489

 

Accumulated other comprehensive loss, net of tax

 

 

(21,334

)

 

 

(1,270

)

Total shareholders’ equity

 

 

368,917

 

 

 

380,094

 

Total liabilities and shareholders’ equity

 

$

3,190,749

 

 

$

3,133,046

 

 

See accompanying notes to consolidated financial statements (unaudited).

6


 

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Income (Unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Interest income:

 

 

 

 

 

 

Loans, including fees

 

$

20,367

 

 

$

22,014

 

Securities:

 

 

 

 

 

 

Taxable

 

 

1,754

 

 

 

1,596

 

Tax-exempt

 

 

325

 

 

 

373

 

Federal funds sold

 

 

10

 

 

 

 

Restricted equity securities

 

 

156

 

 

 

161

 

Interest-bearing deposits in financial institutions

 

 

172

 

 

 

134

 

Total interest income

 

 

22,784

 

 

 

24,278

 

Interest expense:

 

 

 

 

 

 

Interest-bearing deposits

 

 

436

 

 

 

446

 

Savings and money market accounts

 

 

331

 

 

 

313

 

Time deposits

 

 

484

 

 

 

931

 

Federal Home Loan Bank advances

 

 

 

 

 

12

 

Subordinated notes

 

 

393

 

 

 

394

 

Total interest expense

 

 

1,644

 

 

 

2,096

 

Net interest income

 

 

21,140

 

 

 

22,182

 

Provision for loan losses

 

 

(784

)

 

 

650

 

Net interest income after provision for loan losses

 

 

21,924

 

 

 

21,532

 

Noninterest income:

 

 

 

 

 

 

Deposit service charges

 

 

1,142

 

 

 

1,102

 

Interchange and debit card transaction fees

 

 

1,222

 

 

 

1,092

 

Mortgage banking

 

 

1,966

 

 

 

4,716

 

Tri-Net

 

 

2,171

 

 

 

1,143

 

Wealth management

 

 

440

 

 

 

459

 

SBA lending

 

 

222

 

 

 

492

 

Net gain on sale of securities

 

 

 

 

 

26

 

Other noninterest income

 

 

1,926

 

 

 

984

 

Total noninterest income

 

 

9,089

 

 

 

10,014

 

Noninterest expense:

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,269

 

 

 

9,427

 

Data processing and software

 

 

2,647

 

 

 

2,827

 

Occupancy

 

 

1,099

 

 

 

1,108

 

Equipment

 

 

709

 

 

 

899

 

Professional services

 

 

679

 

 

 

704

 

Regulatory fees

 

 

280

 

 

 

257

 

Acquisition related expenses

 

 

 

 

 

67

 

Amortization of intangibles

 

 

446

 

 

 

508

 

Other noninterest expense

 

 

1,607

 

 

 

1,616

 

Total noninterest expense

 

 

17,736

 

 

 

17,413

 

Income before income taxes

 

 

13,277

 

 

 

14,133

 

Income tax expense

 

 

2,604

 

 

 

3,103

 

Net income

 

$

10,673

 

 

$

11,030

 

Per share information:

 

 

 

 

 

 

Basic net income per share of common stock

 

$

0.48

 

 

$

0.50

 

Diluted net income per share of common stock

 

$

0.48

 

 

$

0.50

 

Weighted average shares outstanding:

 

 

 

 

 

 

Basic

 

 

22,198,339

 

 

 

22,045,501

 

Diluted

 

 

22,254,644

 

 

 

22,076,600

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

7


 

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Net income

 

$

10,673

 

 

$

11,030

 

Other comprehensive loss:

 

 

 

 

 

 

Unrealized losses on securities available-for-sale:

 

 

 

 

 

 

Unrealized losses arising during the period

 

 

(27,081

)

 

 

(12,708

)

Reclassification adjustment for gains included in
   net income

 

 

 

 

 

(26

)

Tax Effect

 

 

7,017

 

 

 

3,309

 

Other comprehensive income (loss), net of tax

 

 

(20,064

)

 

 

(9,425

)

Comprehensive Income (Loss)

 

$

(9,391

)

 

$

1,605

 

 

See accompanying notes to consolidated financial statements (unaudited).

8


 

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(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, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2021

 

 

22,166,129

 

 

$

22,166

 

 

$

248,709

 

 

$

110,489

 

 

$

(1,270

)

 

$

380,094

 

Net issuance of restricted common stock

 

 

65,550

 

 

 

66

 

 

 

(153

)

 

 

 

 

 

 

 

 

(87

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

388

 

 

 

 

 

 

 

 

 

388

 

Repurchase of common stock

 

 

(36,608

)

 

 

(37

)

 

 

(730

)

 

 

 

 

 

 

 

 

(767

)

Common stock dividends declared ($0.06 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,320

)

 

 

 

 

 

(1,320

)

Net income

 

 

 

 

 

 

 

 

 

 

 

10,673

 

 

 

 

 

 

10,673

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,064

)

 

 

(20,064

)

Balance March 31, 2022

 

 

22,195,071

 

 

$

22,195

 

 

$

248,214

 

 

$

119,842

 

 

$

(21,334

)

 

$

368,917

 

 

See accompanying notes to consolidated financial statements (unaudited).

 

 

9


 

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

10,673

 

 

$

11,030

 

Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:

 

 

 

 

 

 

Provision for loan losses

 

 

(784

)

 

 

650

 

Accretion of discounts on acquired loans and deferred fees

 

 

364

 

 

 

(1,703

)

Depreciation and amortization

 

 

819

 

 

 

867

 

Net amortization of premiums on investment securities

 

 

527

 

 

 

580

 

Net gain on sale of securities

 

 

 

 

 

(26

)

Mortgage banking

 

 

(1,966

)

 

 

(