CapStar Financial (CSTR) 28 Jul 182018 Q2 Earnings call transcript

Good morning, ladies and gentlemen and welcome to CapStar Financial Holdings’ Second Quarter 2018 Earnings Conference Call. Hosting the call today from CapStar are Ms. Claire Tucker, President and Chief Executive Officer; Mr. Rob Anderson, Chief Financial Officer and Chief Administrative Officer; Mr. Dan Hogan, President and Chief Operating Officer, CapStar Bank; and Mr. Officer, Credit Chief Tietz, CapStar Bank. Chris that be made note today’s CapStar’s call will and recorded being available is website. Please for on replay will SEC’s that of www.ir.capstarbank.com. CapStar CapStar’s presentation with Relations the this Please page release, available filed www.sec.gov and be on and are that Investor the call, X-K that at in at referred CapStar’s Form note the website SEC to website earnings materials the the within the during that statements Also presentation, constitute laws. securities make CapStar of comments certain meaning this may federal the forward-looking

Forward-looking statements among and performance. reflect CapStar’s with respect current its other to, views events things, future financial

Forward-looking subject statements difficult the statements materially the different not facts risks, to forward-looking future statements. are projections and results and which uncertainties, CapStar’s upon and beyond of are of by Actual from be are expectations, assumptions estimates, CapStar’s Accordingly, historical of and implied may not forward-looking are today. and many as guarantees to based or to predict prove expressed are results performance control.

are otherwise as contained new reliance otherwise. only any Except future update statements not revise today. forward-looking presentation, CapStar this of as statements, of which as speak or You place by any on obligations to forward-looking disclaims a to or law, result in whether required undue information, cautioned events,

to of and in addition, presentation presentation presentation the reconciliation non-GAAP measures the non-GAAP this and statements and of the certain referred included a may impacting non-GAAP include uncertainties financial measures to In GAAP earnings forward-looking this directly measures the comparable call. assumptions measures. materials The the risks, financial are most release in and

With of Executive earnings and to authorized and edit by transcripts over Chief to not nor teleconference website. located is and that, responsible webcast does third-parties. CapStar for I am The CapStar’s guarantee going the Officer. President presentation turn are archived now CapStar’s Claire not the accuracy Ms. its on Finally, Tucker, only transcripts live provided and

ended CapStar income you or Thank per earnings everyone. $X.X good net reported X-K. second operator, for Thank afternoon you our share fully quarter XXXX the million joining of In Thursday call. for morning a share diluted us on $X.XX This a million released per on ended to June basis fully XX, basis months $X.X a three the or diluted the loss XX, net favorably loss $X.XX of June three for compares months XXXX. XXXX. for

Excluding pretax basis fully XXXX. diluted $XXX,XXX was a months income for three related merger the charges of per on share $X.XX ended June net XX,

the attention the you have page you with front presentation direct your may X share you some I drivers If of deck of this to of performance. that I in so

to Our financial profitable vision be institution sound known for CapStar is performing a growth. high for

demonstrate are quarter results execution this page. highlighted on of strategy and Second this

this charges excited the that Throughout We excluding merger about results GAAP we charges. merger results will our and our are between with results differentiate including presentation pending merger operating reflect Bancshares. Athens

X.XX%. margin XX.XX% X.X%. So in expenses, return the let's our equity $X.XX of look return equity per XX loan points diluted adjusting tangible the $XXX,XXX Net in and a was was average expanded from of basis result loan an XX.XX%, yields on loan was return Average tangible increase and year-over-year drivers We was for yield This basis the loan average $XXX the few ratio rate million a up on growing efficiency billion. were interest improvements merger financial a of for at prior provide performance fully assets will average X.XXX expanded repricing and growth diluted X.XX% our seven was investment of quarter offs fees. in held fueled on was $.XX, Rob ratio from results. non-GAAP importantly $XXX,XXX X.XX%, maintaining expanded net XX% on minutes of to by EPS the and share Treasury net quarter. was in fees resulting variable On assets X.XX%. and GAAP of delivered management average $XX,XXX the a The and quarter-over-quarter more were from year-to-date. earnings and margin quarter remains booked points return quarter. XX.XX% estate. fully for prior efficiency There related interest in multiple loans and detail adequate growth charge and but of net of was real our a growth for solid at The recovery credit commercial loan while lease in nicely allowance as metrics we basis losses remained

nice the SBA in to We the of line and average increase consistent increases credit at healthcare. commercial At top to This over to a initiative non-interest core growth strategy occurred estate C&I owner in client point that way estate for the real have enhances our is M&A loans to during complementary experienced team also we our all left billion C&I the people hired both X.XXX we adding of projects five this of page in balance that Growth for sheet direct quarter CapStar. reference I been client great occupied and will an core believe two transactions loan converting part quarter-over-quarter. except out X, with Unfunded funded from attention on the increased million has $XXX a of opportunity have that sources construction you investment has clip that potential business million relationships usage our held business and the the healthy provides is structure your C&I quadrant both metrics. build segments that growth. this within note aforementioned to The deposit Moving I as successful the XX% in C&I a of would commercial real of We've have model past quarters. first before, classification that our to Outstandings in of to are case business the income. loan segment. properties growing book loan alternative also for lines an represent commitments of these up. in market. target out and $XXX steady future

cash construction to lines. commercial initial with are equity As you construction that prior such projects structured our under draws injected we've previously is shared

continue loan done credit portfolio manage for and segmentations estate entire with healthcare further categories. the within We to the concentration real

entrants profitability function experience soundness managed terms guidelines nontraditional have of bank's based risk that are well that established all providers from continued bankers review profiles. to Overall competitive basis. of We new believe a financing the We being and our as with our sometimes quarterly capital a concentrations and are inconsistent pressure at market as on appropriately.

slippage general terms. CapStar remains pricing, not covenants, and in the that growth is reflecting intend in in observation leverage around X Our sake market adequate quarterly address very discipline credit business to the the of is left I growth based the we of a frothy CapStar. page quadrant maintain our structural which discipline. top quality we you'll note upon that believe Advancing X.XX% In at will for analysis. remains is the to ALLL for

comments. relatively quadrant into As both non-accrual points in I basis points to broken Oreo categories. of levels from to the during off charge loan substandard you special due bottom status. June The of mention in $XXX,XXX quarter to In This trends categories and XX the will levels his noted are note our lowest points. XX turn net moving We recovery the quality that for a plus to adequately remain for quarters movement and with the positive right we six over Rob these a X.XX%. XXXX. shown was XX, $XX,XXX for quarter With believe XX on low the I'll asset to their ALLL and one graph. basis net trends the of of at it we the increased at NPAs ago had remaining reserved quarter six loans moment for months ended basis that

was and of everyone. our On predominantly two but driven XX to loan can you X.XX%. Claire points yield morning The you moved Thank by good number a in X basis page factors quarter areas. up second see increase

rate our XX of basis increased. are expected First, contributed the repricing bearable points loans as and

loan is with loans higher basis SBA which come and traditional XX which points than a our C&I by predominantly fees new these. driven loans they coupon typically our carry increased Second,

you highlighted of this are quickly. SBA see this the to and joined may first beginning quarter team in of the As investment very that fruits the recall we year us we

the team's pipeline activity, of calling deals. book business date, with and to pleased future are We

by and predominately As nature the rate lower the us month tied see well Reserve chart interest on our you can XX% We to rates. in bearable left believe if Federal one continues LIBOR. should loan raise is serve book to the mix this

deposits. on let's So move to

deposit we in was help may pronounced. movement the was increases work overall This by topic few you now the rate levers magnified balances our and XX% the fixed deposit quarter notes past on all last costs have held cost which quarterly our This here. to more much beta. costs decline total the a our A however this which our in pushed understand higher. at DDA With

in has for Nashville intensified. competition First the deposits

We that competing area are retain to based aggressively. as business. new locally more as we institutions the well institutions seeing client have relationships up turn pay price for In the to are key exception business

Second, holding commercial on we are noticing less balance sheets. cash are our that clients their

their is rather work. not but are money So it function a that to accounts our clients of putting losing

in in of seasonality upwards balances for the usually the remainder typically mid-April second with around correspondent rebounding tax we a quarter before during year. Next hitting season our group banking year low some throughout the the

XX%, XX% groups banking recall between deposit and now book may split is approximately you DDA As million correspondent XXX our accounts.

play or margin. up to this let's continued for our on is to at at XX% end tighten factor sale another you coming here. move at XX% the deposit without And in if at So our held With loans for include the held to ratio the loans sale. quarter loan that then of

we seven benefit fees of nice In much quarter It of the see being deposit continue increases quarter. bearable which and the loans to repricing the was Our rate costs the our loan points short while net negated [indiscernible] that the margin interest book, increased X.XX%. to SBA for in differentiator. coupons increases from second our during basis

for is competition Just deposits loans. is the competition up heating as so for the

increases. match. shrink and deposits balance to future We the Nashville much side do in are willing here spreads compromises order a realize and job unlikely over of our that in asset continue competition rate on sheet pricing need down the for liability see to structure not we slow we're with forward to inherent LIBOR will on to sensitivity going to With better

talked help month with key about the us. one Bank will merger think be we able last Athens Federal this areas Community we is of As the to

So income. on non-interest move let's to

and income Our quarter $X.X to area XX million is like level would provide more expectations below go was assets. each I basis but the non-interest through to average to points for color. this our Overall

than This balances. up can given month hard over in any previous At management fees to have fees XX% we and side the this or in less clients we have cash with On book activity commercial the compensating holding more their seen prior quarter links accounts. our clients we our deposit paying quarter. us treasury past are back previous in the in clients and our year our quarter pay in charge

came fees flat down in from previous loan prior Our year quarter. to but

larger the performance that was know line first expectations, in quarter this Although expected. with was than

As stated from to previously be time. time lumpy can item line this

fees held Tri-Net Our expected came we at $XX for and million held as sale in quarter-end.

sale quarter. a Mortgage origination highlight; million a last XX% expected function in to $XX the I year In you'll lower look the be typically expect is So mortgage sized Two will lower quarter fees selling held volume a much number we fees of fully and would for dollars than first, things the than higher we have volumes sale quarter. what were appendix notice the at over loans in higher short we of held origination third carrying. we similar been which specific expect for but I the you quarter. at fully are up the end third if in was

move expenses. let's So our onto

got for will we've with with merger you as forward move expenses Athens. and of we we related First $XXX,XXX our those partnership expenses isolate

related quarter term you. items. Excluding the near you levels quarter guided for expect $X.X the that's In excluding expenses where and booked of can we've expenses merger consistent million and we related merger similar the last the to

we relates the this million score XX's similar low still to need the in year, achieving ratio are revenue of a to efficiency our the this an make efficiency in it committed As second ratio levels more of half quarter to expense remainder year we materialize. means the for the with $X.X of

Let's move to on taxes.

number were previous calls that milestone have anniversary organizer XX our had month. exercised this the in a With we mentioned options year in we and this As stock celebrated quarter. we of warrants

options For and to the a XXXX second had of rate quarter $XXX,XXX tax XX.X% warrants. of with we effective exercise benefit the a related

have we the in All which warrants been exercised quarter of of and year. expire now of this XXX,XXX have will stock the options remaining fourth

this at page you expire these can bottom we Assuming exercised are relative the remaining see a benefit table they before of the the have provided we year. all options of so have

the a smaller changes the would majority the noted stock I of As hit in expect in slide to on and to benefit benefit this with our extent fluctuates in QX. QX price.

capital. is to common on now about are and capitalized assets our move Capital Let's guidelines all tangible tangible equity to X.XX%. well at levels

you this forward. shareholders this quarterly level of and about quarter to attain will excited declared dividend to remind paid our shareholders a third step I we that will We're in and the our Additionally for levels sustain and strong dividend confident are ability quarter. it going this all about capital be

that turn some So to let comments. for me back it with Claire closing

I like XX the you progress Federal the on Community give to take [ph], announced to presentation Tennessee. partnership our where would Bank Athens on update deck I'll you with Thank page in Athens Rob. an you of

saves We believe are vision it across funding original adds and the diversity consistent at quarter transaction is the CapStar creating and in exceptional of the pace quarter geography. established community second financial of tangible and in our customer dominant and of service bank the an a the focus and deal including funding institution X% EPS the and We an We by earnings of merits and of expected dilution, our performing CapStar market potential base. expanded profitable profile. combination in profitability. enhance and accretion and with to combination This This double-digit EPS industry, anticipate for A base be business on in produce shareholder a with create on enhanced XXX% accretion, Athens creation economics creative financial plans State XX% its We key and our providing high the compelling, in value earlier remain believe phased with will confidence strong combination combination to mix, progressing deposit to value financially attractive our a the further Cost execute pro-forma confident support book common is share manageable product in thereafter. profile, earnings of a this fourth combined week that Tennessee the the draw XXXX. reported on market. with will Athens a solutions. institution in in and accretion XXXX XXXX. at position. enhanced ability consideration XX% share scale was XXXX primary highly terms an for attractiveness this capital in the offering, how deposit may Athens closing

recall previously M&A some are core our that these we've highlighted of that strategy. the to will You as items

of for we our translate development to sound, share remain to becoming deep wrap I've business the to provide strategy opportunities like primary would those for for presentation pursue the delivering takeaways, before that growing So discipline clients relationships. highlight growth, rather the up wallet. vision and our of with key bank and CapStar's focused on sake the profitable I will growth. not that in mentioned of our maintain opportunities we This are

of performance on quarter illustrative We're focused integration and Athens soundness. second capturing a focus keenly the our Our on requisite delivering successful synergies. is partners with our

alternative prime of client opportunity solid strategy. delivering Board goals non-interest reconfirm this evaluate established annual for strategic evaluate well sources with complete pursuit against through lift to continue SBA growth sound. held will our clients. of will this strategically this view conversion as outs of is solutions in opportunities financially Likewise this market share opportunities the our and our stated are as our of enhancing to through the we addition organic income. of Our offsite broaden At example and We team be The new to current bankers as our meeting executing we and of M&A takeaway a to opportunities an teams Directors August. of that of expand prospect base planning through will financing growth having

in to are of we Thank We Operator this of many the your investment lines call support on questions our ready on company. from you. now call. the continued are for of appreciative CapStar have participants you the that open and made

you. [Operator Thank Instructions].

Catherine Our of Mealor first question comes KBW. from

open. is line Your

Thanks, good morning.

Catherine. morning Good

Firstly about money there, of the I appreciate feels side, growth ask like given is all commentary parts the want to is on it it going DDA, the your I around most deposit like going of moving look that some of of rate now right in some your that and out the that your it feels With a has of in talk market savings forward? account expectations can national pricing market you for what that moving little about right for in deposits new current and and line. into now dynamic the type product like the that where

intensified. Sure Catherine, I past know quarter that has you would say this

As are I aggressively and have means trying what Nashville differentiate new they that attract their the said I we prepared have on which pricing. remarks entrants coming to into to would business that they call are

rates right not have they we now very heightened. that So we that above has institutions typically aggressive X% have be And wholesale are seen at around then are money. that aggressive typically as local and

a right now around market would X% say bit little money and I hanging So, higher. fed right funds is around

alco have that assume view beta you do to kind And you modeling sensitive? to what need yourself in your of still as [ph] asset

a that's and have our a in through beta that's of we modeling so and higher model little our Sure, there's our little on beaten pieces entire certainly pieces cycle. use But lower. we XX% of that deposit a book that this

we and not. XX% a our beta we quarter But past use this that's modeling. in Now did

and I last… one then Okay,

pricing able the at increase the deposit that debt rate XXXX our something and than in add the actual have about movement we've December What guess in more reprised a when too, sensitive is happened think I slower maintain if we've I'll so the to first benefited two rate deposits since last that and some in quarter our the Catherine you that are of of customers the lower that of some obviously, the been movement we becoming beta. with or pricing. driving to found competition that's

were following So, the occurred us catch quarter. in which delayed good a let's that during up that had say we Fed the increases we benefited and

catch you like moderate feel up Got will if the it you did quarter? the next and do betas

is what Rob about at to. beta I we're modeling XX% we've think been where said guided our probably

one little other you. this that just the us Okay, that Thanks. then on can of color bit that And a one on just non-accrual is helpful. one is NPS give you Thank quarter? increase moved

a Sure, is I'd books to. I think been four the be This several happy credit for that's on years. years,

We have been watching imagine. it you can time over as

point and If is QX specific lead reserve we had on that on, substandard that see some total now with to at do is out into you that maintain we've at a assed the X.XX. as look our that fact loans. credit that it what reserve we you QX know from a would you we This were the have numbers our able can based allowance we even shift I the to impaired specific the our

credit industry the what and in? was Okay

it a healthcare was that healthcare is deal It deal, ago. four was originated years

Okay, great.

I out, will think hop I thanks.

Thank you Catherine.

Our Compass Point. of Hunsicker from next comes Laurie question

Your line is open.

Yeah morning. thanks, good hi,

morning Laurie. Good

if a those where for things, cost on just the XXX deposits circle asking just have a I couple deposits, was clarify to the back quarter? of wondered million wanted on correspondent Catherine to the you you do could I

real that the that on do have grab we -- quick. Yes,

the the you don’t in could comparison you And it money looking quarter. markets, that markets would a that. talking the point Claire I'm around from that and prior that but to just correspondent mean helpful, specifically mean little know for us went are money talk about linked and the maybe was quarter a color there give costs then bit well in if data X.XX jumped campaign can of -- I you're quarter obviously for up some happened that X.XX, more had as while as a I maybe you Rob Catherine I you be looking for

any that. have from and I continue different Sure our relationships a say full normal to developing not bankers been campaign clients would able focus our on there that's is our do to with specific

that's think there. up shown pick $XX the million obviously I with

could to where as So, calling they for specific we hard a still a campaign flier certain see rate. good send opposed any out

we about this year directionally we money thinking idea that the should into be any on just half markets? head how the on the back Okay, of cost as

rate number big Boy, a say up GDP strong. going that's expect saw rates that We see what to piece overall, I We certainly fairly with you're of and increases to a as book. today increase XX% beta would the money you going on move was markets. do but model movement still our that to that's the up is

it hover So could around that.

points XXX blended going prior correspondent was overall XXX million your over Just back to cost up on points correspondent quarter. was banking and of around question, XX the our banking basis that basis

So it's again of mix and the in of accounts. the book the now more DDA a correspondent banking

move So, XX around that but bid XX was quarter. for [ph] of the can that on the last

helpful. that's Okay,

were Okay, talk run? line then can I to and how down they bit going item to just you seeing your China happened that be just we what quarter should first elevated, quarter, just I income expected was in you can know you the wonder linked and expect a said that, us remind why and you that about statement, over fees, little

an sale sale it's just had in typically basis basis. on a a quarter. on the in do we And flow not larger quarter a the first on sale so that we Yeah, first extra

December you fourth quarter the think the talked we the that probably side we low. April in I or high when but on was noted to on that probably was

you it So I in did. to those somewhere we come between in tried you to that know going tell and was

quarter this the our within say forward I just expectations was would I quarterly a quarter sale. going probably versus see certainly Laurie for elevated say was what would we've and similar it we'd something to first So, booked

perfect. that's Okay,

and should thinking growth annualized can if be about I your that? for was growth and of notes guided to the the how think and had rest Okay mid-teens correct, are then you loan onto we X% about help think loan year my you loans, us

for year We end since point been double-digits. we we so to the XXXX. end from would have to up at on high single-digits a last Yeah, we said the loans basis growing thought of point low guiding

would say guiding would is of high quarter double but a single-digits, month do to about Now from period digits. for the because guidance first this year we are probably above what X in XX so growth still we just the that we're I

we quarter-to-quarter either from point could double a from Now again this growth see very on digits. first payoffs high point But pay and the XXXX like single maybe strong bit and we little to quarter guided low past muted downs. for depending in quarter but December to December to

Laurie you looking point you're I you're too, for just growth I loan at on the is you'll model, about up look working and if would without but at if one that of were X. second notice we that the business thing XX% bottom talk your out healthcare page the know a fundamentals

XXXX that probably that the we entire obviously with think the important what's the shared doing some pivoting quarter the book downs adhere we're I also there. you strategy, we of while the important that to within had pay growth in of is think significant that We've obviously, we it's healthcare. third

come been Some come with of refinancing from aggressive companies that have lenders market. some in more that has sold, the have from

in really do are to said our what terms healthcare with we of the we sticking book. we discipline So would

there. hit low that Now we with a point that I think probably said,

some for are efforts see them a the that will very basis are in second the their paying I expect we year off about with loan the been on of We that's and place good net so solid will year. traction a their part team would the overall growth for that to contribute calling now. new pick from up confident and That

the helpful. how XQ? that question to And then quick think this benefit as way Is about probably is going quarter that XX%? the right plays be closer through we just taxes, to Okay, on is XX.X the for

that's Laurie. Yes, I think reasonable

then up that? the in back quarter something fourth XX-XX we go And like

majority high could the quarter control page. somewhere be individuals on don't I at highlighted timing our which benefit see little -- these a we stock the the it XX would and see XXX we've say will would a will exercise I end third between of because We options. think in the that think will the higher I but very little the quarter maybe fourth the be But

Alright great. another and until just still acquisition acquisition pending wait last going forward then and digested. or you're got would was and considering just around just how that this question, this comments your you but you've you're closed Okay, of maybe a thinking and potentially Claire retail current

make want heard to Just you sure I right?

I think be conversations takes going for or long banks of time Many to tail. that Yeah, have and financially CapStar. Laurie companies times we're sound always other these strategically can one that believe to a be period the with it would we having get of done

sound. Athens that while going So Bank continue and standpoint, can synergies not Athens to think we and they employee primary on achieving assimilating from that's one priority a conversations an being if we're with customer end is stop having financially working those be. But focus standpoint, we're because a up very to complimentary they obviously strategically from certainly are the my said we'll the that and

taking questions. thank Okay, you my for

Sure, for participating. thanks

to in with no would closing for to I back Instructions]. turn like Tucker remarks. the Claire queue questions [Operator call And further

and call to today. the were operator of Thank each participating you who in thanks you

and work you are We will tee appreciative so and we busy some in you to may investment of any with if is know Analysts a for very your calls interest a your in earnings the have lot you of Research CapStar I time to be this give would you us have. free to a up happy please subsequent with questions like with on question feel Rob shout me or that CapStar.

call good day everyone. have we and end So a will with that the operator

the all program great This and conclude conference. in you gentlemen, Ladies does disconnect. thank day. you a Everyone for today's participating have may and