CSTR - CapStar Reports Second Quarter 2022 Results

NASHVILLE, Tenn., July 21, 2022 (GLOBE NEWSWIRE) -- CapStar Financial Holdings, Inc. (“CapStar”) (NASDAQ:CSTR) today reported net income of $10.0 million or $0.45 per diluted share, for the quarter ended June 30, 2022, compared with net income of $10.7 million or $0.48 per diluted share, for the quarter ended March 31, 2022, and net income of $12.1 million or $0.54 per diluted share, for the quarter ended June 30, 2021. Annualized return on average assets and return on average equity for the quarter ended June 30, 2022 were 1.28 percent and 11.08 percent, respectively.

For the six months ended June 30, 2022, the Company reported net income of $20.6 million or $0.93 per diluted share, compared with $23.1 million or $1.04 per diluted share, for the same period of 2021. Year to date 2022 annualized return on average assets and return on average equity were 1.33 percent and 11.24 percent, respectively.

“CapStar’s associates delivered outstanding customer service and performance in the second quarter,” said Timothy K. Schools, CapStar President and Chief Executive Officer. “Each of our Four Key Drivers are progressing: 1) Outside of our specialty banking businesses, core bank revenue grew mid double digits compared to the prior year benefiting from robust loan growth, 2) our net interest margin expanded due to a favorable earning asset mix shift and modest benefit from rising rates, 3) we are working more productively, improving our efficiency ratio to 56%, and 4) net-charge offs were $0 and our past dues reached their second consecutive record low. Our positive results are attracting the attention of bankers seeking an environment where they and their customers can have a bigger voice. Last week, we were excited to announce additions to our Chattanooga and Nashville teams and entry into Asheville – our fourth dynamic metro market.”

“While rising rates benefited our core bank earnings, they slowed our mortgage and Tri-Net businesses. Mortgage results were near break-even. Tri-Net has been an outstanding business having contributed more than $25 million of revenue to CapStar over its life. However, Tri-Net did not produce a gain on sale during the quarter as the sharp increase in market rates and overall slowdown in demand reduced the value of Tri-Net’s funded loans. We are pursuing hedging strategies to mitigate this risk in the future. We expect each of these businesses to experience headwinds in the near-term until the rate environment stabilizes. We are proud of the strength of our earnings this quarter. We remain excited about the increasing contribution of our investments in new markets.”

Revenue

Total revenue, defined as net interest income plus noninterest income, was $30.3 million in the second quarter. This represents an increase of $0.1 million from the previous quarter. Net interest income and noninterest income totaled $24.4 million and $5.9 million, an increase of $3.3 million and a decrease of $3.2 million, respectively, from the first quarter of 2022. Rising interest rates and a positive mix shift in average earning assets contributed to the increase in net interest income, while noninterest income declined due to lower mortgage and Tri-Net division revenues and one-time BOLI income in the previous quarter.

Second quarter 2022 average earning assets remained flat at $2.90 billion compared to March 31, 2022 as strong loan growth was principally funded from cash. During the quarter, $106.9 million of Tri-Net loans were transferred from loans held for sale to loans held for investment. Excluding PPP balances and the Tri-Net transfer, average loans held for investment increased $98.1 million from the prior quarter, or 19.8 percent linked-quarter annualized. End of period loans held for investment, excluding PPP balances and the Tri-Net transfer, increased $85.9 million, or 16.9 percent linked-quarter annualized, including $47.5 million in loan production from the Company's recent Chattanooga expansion. The current commercial loan pipeline remains strong, exceeding $500 million and continues to present the Company a tremendous opportunity in combination with the recent Asheville, Chattanooga, and Nashville hires to leverage capital to grow revenue and earnings per share.

For the second quarter of 2022, the net interest margin increased 44 basis points from the prior quarter to 3.41 percent primarily resulting from continued increases in interest rates and the positive mix shift in average earning assets. While the Company is managing to a more neutral interest rate risk profile over time in order to enhance earnings consistency, net interest income is expected to continue to benefit modestly from rising rates in 2022.

The Company's average deposits totaled $2.66 billion in the second quarter of 2022, a $40.3 million decline from the first quarter of 2022. During the quarter, the Company experienced a $15.8 million reduction in higher cost average time deposits and $33.5 million decrease in average interest-bearing transaction accounts. These decreases were partially offset by a $9.4 million increase in average savings and money market deposits, creating an overall net decrease of $39.9 million in average interest-bearing deposits when compared to the first quarter of 2022. During the quarter, the Company’s lowest cost deposit category, noninterest bearing, improved 40 basis points to 27.3 percent of total average deposits as of June 30, 2022. Total deposit costs increased 4 basis points to 0.23 percent compared to 0.19 for the prior quarter. A key longer-term strategic initiative is to create a stronger deposit-led culture with an emphasis on lower cost relationship-based deposits.

Noninterest income during the quarter decreased $3.2 million from the first quarter ended March 31, 2022. This decrease was attributable to a $0.3 million decline in mortgage revenue, a $2.2 million decline in Tri-Net revenue and $0.9 million of one-time BOLI income recorded in the previous quarter. During the quarter, $106.9 million of Tri-Net loans were transferred from loans held for sale to loans held for investment to mitigate potential losses related to the adverse impact of rapidly rising interest rates on pricing and investor demand. The Company’s mortgage and Tri-Net divisions have been strong contributors in the past, but it is anticipated that they will continue to face challenges in the volatile rate environment.

Noninterest Expense and Operating Efficiency

Improving productivity and operating efficiency is a key focus of the Company. During the quarter, the Company continued to exhibit strong expense discipline. Noninterest expenses decreased $0.7 million from the first quarter of 2022 to $17.1 million in the second quarter of 2022. This decrease was primarily attributable to a decline in nonrecurring first quarter items and no mortgage incentive expense.

For the quarter ended June 30, 2022, the efficiency ratio was 56.32 percent, an improvement from 58.67 percent in the first quarter of 2022. Annualized noninterest expense as a percentage of average assets improved 9 basis points to 2.19 percent for the quarter ended June 30, 2022 compared to 2.28 percent for the quarter ended March 31, 2022. Assets per employee was $7.9 million as of June 30, 2022 compared to $8.0 million in the previous quarter. The continued discipline in productivity metrics demonstrates the Company's commitment to outstanding performance.

Asset Quality

Strong asset quality is a core tenant of the Company’s culture. Continued sound risk management and an improving economy led to continued low net charge-offs and strong credit metrics. Annualized net charge-offs to average loans for the three months ended June 30, 2022 were 0.00 percent. Past due loans as a percentage of total loans held for investment improved to a record 0.12 percent at June 30, 2022 compared to 0.17 percent at March 31, 2022. Within this amount, loans greater than 90 days past due totaled $0.5 million, or 0.02 percent of loans held for investment at June 30, 2022, an improvement from 0.05 percent at March 31, 2022. Non-performing assets to total loans and OREO improved to 0.11 percent at June 30, 2022 compared to 0.18 percent at March 31, 2022. Criticized and classified loans to total loans, which were elevated during the pandemic, continued to improve to 2.12 percent at June 30, 2022, a 37 basis point improvement from March 31, 2022.

The Company recorded a provision for loan losses of $0.8 million during the quarter as a result of continued strong loan growth. Due to improved credit trends, the allowance for loan losses plus the fair value mark on acquired loans to total loans, less PPP loans, declined 7 basis points to 1.09 percent at June 30, 2022 from 1.16 percent at March 31, 2022.

Income Tax Expense

The Company’s second quarter effective income tax rate remained flat at 19.6 percent when compared to the prior quarter ended March 31, 2022. The Company anticipates its effective tax rate for 2022 to be approximately 20 percent.

Capital

The Company continues to be well capitalized with tangible equity of $310.9 million at June 30, 2022. Tangible book value per share of common stock for the quarter ended June 30, 2022 was $14.17 compared to $14.49 and $14.03 for the quarters ended March 31, 2022 and June 30, 2021, respectively, with the change from March 31, 2022 being attributable to a decline in the value of the investment portfolio related to an increase in market interest rates, partially offset by ongoing earnings. Excluding the impact of after-tax gain or loss within the available for sale investment portfolio, tangible book value per share of common stock for the quarter ended June 30, 2022 was $15.86 compared to $15.53 and $14.02 for the quarters ended March 31, 2022 and June 30, 2021, respectively.

In the second quarter of 2022, the Company repurchased $5.4 million in common stock under its share repurchase program. The total remaining authorization for future purchases was $23.9 million as of June 30, 2022. The Plan will terminate on the earlier of the date on which the maximum authorized dollar amount of shares of common stock has been repurchased or January 31, 2023.

Dividend

On July 20, 2022, the Board of Directors of the Company approved a quarterly dividend of $0.10 per common share payable on August 24, 2022 to shareholders of record of CapStar’s common stock as of the close of business on August 10, 2022.

Conference Call and Webcast Information

CapStar will host a conference call and webcast at 9:00 a.m. Central Time on Friday, July 22, 2022. During the call, management will review the second quarter results and operational highlights. Interested parties may listen to the call by registering here to access the live call, including for participants who plan to ask a question during the call. A simultaneous webcast may be accessed on CapStar’s website at ir.capstarbank.com by clicking on “News & Events.” An archived version of the webcast will be available in the same location shortly after the live call has ended.

About CapStar Financial Holdings, Inc.

CapStar Financial Holdings, Inc. is a bank holding company headquartered in Nashville, Tennessee and operates primarily through its wholly owned subsidiary, CapStar Bank, a Tennessee-chartered state bank. CapStar Bank is a commercial bank that seeks to establish and maintain comprehensive relationships with its clients by delivering customized and creative banking solutions and superior client service. As of June 30, 2022, on a consolidated basis, CapStar had total assets of $3.1 billion, total loans of $2.2 billion, total deposits of $2.6 billion, and shareholders’ equity of $357.7 million. Visit www.capstarbank.com for more information.

NON-GAAP MEASURES

Certain releases include financial information determined by methods other than in accordance with generally accepted accounting principles (“GAAP”). This financial information may include certain operating performance measures, which exclude merger-related and other charges that are not considered part of recurring operations. Such measures may include: “Efficiency ratio – operating,” “Expenses – operating,” “Earnings per share – operating,” “Diluted earnings per share – operating,” “Tangible book value per share,” “Return on common equity – operating,” “Return on tangible common equity – operating,” “Return on assets – operating,” and “Tangible common equity to tangible assets.”

Management may include these non-GAAP measures because it believes these measures may provide useful supplemental information for evaluating CapStar’s underlying performance trends. Further, management uses these measures in managing and evaluating CapStar’s business and intends to refer to them in discussions about our operations and performance. Operating performance measures should be viewed in addition to, and not as an alternative to or substitute for, measures determined in accordance with GAAP, and are not necessarily comparable to non-GAAP measures that may be presented by other companies. To the extent applicable, reconciliations of these non-GAAP measures to the most directly comparable GAAP measures can be found in the ‘Non-GAAP Reconciliation Tables’ included in the exhibits to this presentation.

CAPSTAR FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Income (unaudited) (dollars in thousands, except share data)
Second quarter 2022 Earnings Release

This information is preliminary and based on CapStar data available at the time of this earnings release.

CAPSTAR FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Selected Quarterly Financial Data (unaudited) (dollars in thousands, except share data)
Second quarter 2022 Earnings Release

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*This metric is a non-GAAP financial measure. See Non-GAAP disclaimer in this earnings release and below for discussion and reconciliation to the most directly comparable GAAP financial measure.
This information is preliminary and based on CapStar data available at the time of this earnings release.

CAPSTAR FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Selected Quarterly Financial Data (unaudited) (dollars in thousands, except share data)
Second quarter 2022 Earnings Release

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This information is preliminary and based on CapStar data available at the time of this earnings release.

(1) Net Interest Margin, Securities yields, and Total interest-earning asset yields are calculated on a tax-equivalent basis.

CAPSTAR FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Analysis of Interest Income and Expense, Rates and Yields (unaudited) (dollars in thousands)
Second quarter 2022 Earnings Release