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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)
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Tennessee |
81-1527911 |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
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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:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
Common Stock, $1.00 par value per share |
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CSTR |
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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.
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Large Accelerated Filer |
☐ |
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Accelerated Filer |
☒ |
Non-Accelerated Filer |
☐ |
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Smaller Reporting Company |
☐ |
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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.
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Shares outstanding as of May 3, 2022 |
Common Stock, par value $1.00 per share |
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22,066,073 |
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CAPSTAR FINANCIAL HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
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)
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March 31, 2022 |
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(unaudited) |
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December 31, 2021 |
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Assets |
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Cash and due from banks |
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$ |
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 |
|
|
( |
