CapStar Financial Holdings, Inc.

Good morning, ladies and gentlemen, and welcome to Capstar Financial Holdings' third quarter 2020 earnings conference call. Hosting the call today from Capstar are team schools, president and chief executive officer, Dennis Duncan, chief financial officer, and three seats, chief credit officer. Please note that today's call is being recorded and will be made available for replay on Capstar's website. Please note that Capstar's earnings release, the presentation materials that will be referred to in this call, and the Form 8K that Capstar filed with SEC are available on the SEC's website at www.sec.gov and the investor relations page of Capstar's website at www.ir.capstarbank.com. Also, during this presentation, CAPSTAR may make certain comments that constitute forward-looking statements within the meaning of the Federal Security Law. Forward-looking statements reflect CAPSTAR's current views with respect to, among other things, future events and its financial performance. Forward-looking statements are not historical facts and are based upon CAPSTAR's expectations, estimates, and projections as of today. Accordingly, forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, and uncertainties, many of which are difficult to predict and beyond CAPSAR's control. Actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements which only speak as of today. except as otherwise required by law, CAPSTER disclaims any obligations to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise. In addition, this presentation may include certain non-GAAP financial measures. The risks, assumptions, and uncertainties impacting forward-looking statements and the presentation of non-GAAP financial measures and a reconciliation of the non-GAAP measures with the most directly comparable GAAP measures are included in the earnings release and the presentation materials referred to in this call. Finally, CAPSTOR is not responsible for and does not edit nor guarantee the accuracy of its earnings, teleconference transcripts, provided by the third quarter. The ONV authorized live and archived webcast and transcripts are located on CAPSTAR's website. With that, I'm now going to turn the presentation over to Dean Schultz, CAPSTAR's President and Chief Executive Officer.

Good morning, and thank you, everybody, for participating on our call. We had an outstanding quarter, and we appreciate the opportunity to review it with you. If everyone will begin on page three, I will discuss the highlights of our quarter. Dennis and Chris will then briefly cover key trends, and thereafter, I will close by providing an overview of an exciting formal initiative we are embarking on to improve our operational and financial performance. In third quarter, we reported operating earnings per share of 43 cents, pre-tax pre-provisioned assets of 1.86%, and return on average tangible common equity of 13.76%. This quarter we had two sizable items which we do not expect to recur on a frequent basis. First, a $1.9 million expense related to previously terminated swaps. These swaps were terminated at a loss several years ago and the expense has been amortized over time as the related hedged funding remained in place. A significant portion of the funding matured since June 30 and the remaining funding will be maturing over the next nine months. The remaining funding is above current market rates and no longer needed with our excess liquidity. Thereby, we have made the decision that we will not renew the funding as it will save Capstar approximately $100,000 a year. This decision will eliminate the non-cash amortization expense that was occurring and move the company to its core underlying earnings run rate. Second, we sold two branches at a gain to book value that came with the Athens federal acquisition, which were not operating at the time of that transaction. Adjusting for these two items, our earnings per share was 48 cents, pre-tax pre-provisioned assets, 2.06%, and return on average tangible common equity, 15.49%. Like all banks, this quarter had a number of nuances, such as our mortgage results, PPP, excess deposits, and the effect of our FCB acquisition that affects certain common performance ratios. We have a tremendous mortgage operation, and while we are very proud of their results, we also are proud of the continued improvements across the underlying core bank. We know mortgage is not sustainable at the current level long-term, as this quarter they contributed an unbelievable 16 cents per share to our earnings. However, our mortgage business is built on purchase money transactions, and that combined with the strength of Nashville should allow them to continue to be a meaningful contributor into the future. Subtracting 100% of mortgage from the 48 cents of the adjusted operating earnings per share I just referenced places the core bank's contribution at 32 cents per share. That is with 8 cents of provision expense. This equates to a pre-tax, pre-provisioned assets of 1.65 percent and an efficiency ratio of 55.6 percent. We are pleased with this result as historically Capstar's consolidated pre-tax, pre-provisioned assets has been 140 to 150 percent and efficiency ratio 60 to 65%. As I will discuss in closing, over time, we strive long term for these to be 1.8% plus and 55% or lower. From a growth standpoint, we were also pleased with the increases in revenue per share with and without mortgage. We had growth in deposits and late period growth in loans. Lime utilization is down nearly 50 million since March 31. Additionally, we continue to lower our shared national credits, which are down to about 75 million, or 4% of total loans, from a high of 22% just a few years ago, creating a higher quality balance sheet. In addition to mortgage, we had a nice fee income contribution from growth and deposit service charges, our SBA team, and FCB. Through expense discipline, strong operating leverage led to improvement in our efficiency ratio. Chris is going to provide insights into our credit metrics and outlook, but I will point out our past dues, classified assets, and net charge-offs remain at very low levels, and we continue to see gradual improvements in economic activity. Of note, a key metric we and others are monitoring during this period is deferral percentage. As Chris will discuss further, we have worked closely with our customers, more often than not, strengthening our position as we agree to deferrals. One thing we've noted this quarter as other banks have released earnings is deferrals are being reported differently. Our definition of a deferral is where we have agreed to allow a borrower to not pay principal or not pay principal and interest regardless if we receive concessions. This does not appear to be a consistent application across other banks. I mention this as I know it is natural to compare ratios among banks. With that, I'll turn it over to Dennis.

Thank you, Tim, and good morning, everyone. On slide seven of our deck, our net interest income of $19.7 million for the quarter reflects a continued increase over the past three quarters. We closed the FCB acquisition on July 1st, which accounted for some of this increase. The net interest margin was 2.72% for the quarter and was impacted by several items in the quarter, which Tim has mentioned. First, we continued to hold excess deposits on our balance sheet which adversely affected the net interest margin by 42 basis points in the quarter. In addition, we recognized $1.9 million of expense related to the swaps, which impacted the quarter net interest margin by 26 basis points. Finally, our second quarter sub-debt issuance, while improving our capital ratios, lowered the net interest margin by 5 basis points. Adjusting for these items, our net interest margin for the third quarter was 3.4% and relatively stable from the past couple of quarters. On slide 8, deposits increased $617 million over the second quarter. $442 million of balances came over with the acquisition of FCB, while legacy deposits grew by approximately $174 million for the quarter. Our deposit costs declined 20 basis points excluding the acceleration of the swap loss, and we further lowered deposit rates across the board late in the third quarter, which will provide benefit in the fourth quarter. Our excess balances are being strategically addressed through a four-pronged strategy, including continued pricing opportunities, a focus on loan growth, purchases within our investment portfolio, and the potential runoff of higher-priced deposits. On slide nine, our average loans were 2.1 billion for the quarter, an increase of 326 million. 289 million of those balances came over with the acquisition of FCB, but we also saw line utilization decline during the quarter to 45.8%, and our ending period loans increased 17.5 million, or roughly 3.7 annualized. We are working diligently within Capstar to improve our capabilities regarding loan growth with a new Knoxville team, expansion into Rutherford and Williamson counties with the FCB acquisition, significant wins with PPP non-customers, and strong and continuing growing loan pipelines. Our loan yield for the quarter was 4.47% relatively stable with the prior quarter. On slide 10, our net income Our non-interest income continued to be strong for the quarter with record levels of revenue in mortgage and SBA. The combination with FCB provided increased deposit service charges of over $400,000 for the quarter. As we discussed previously, we recorded a gain of $394,000 in connection with the sale of two dormant branches acquired back in 2018 with the Athens Federal Acquisition. On slide 11. we provide additional information regarding the record quarter in our mortgage business. Increased volumes and margins drove the increase in revenue for the quarter. On slide 12, our operating non-interest expenses were $20.2 million for the quarter, which resulted in an improved efficiency ratio, which Tim mentioned, due to our strong mortgage results and the benefit of the FCB acquisitions. Examining our core banking results, excluding mortgage and the swap loss, we experienced strong operating leverage for the quarter with revenues growing over three times our expenses. With that, I will turn it over to Chris Teets, who will drill down a bit more into our credit position.