CapStar Financial Holdings, Inc.

Good morning, everyone, and welcome to Capstar Financial Holdings Third Quarter 2021 Earnings Conference Call. Hosting the call today from Capstar are Tim Schultz, President and Chief Executive Officer, Dennis Duncan, Chief Financial Officer, and Christine Schultz, Chief Credit Policy Officer. Please note that today's call is being recorded. Replay of the call and the earnings release and presentation materials will be available on the Investor Relations page of the company's website at capstarbank.com. During this presentation, we may make comments which constitute forward-looking statements within the meaning of the Federal Securities Law. All forward-looking statements are subject to risks and uncertainties and are other factors that may cause the actual results and the performance or achievements of CAPSTAR to differ materially from those expressed or implied by such forward-looking statements. Listeners are cautioned not to place any reliance on forward-looking statements. A more detailed description of this and other risks, uncertainties, and factors are contained in CAPSTAR's public filings with the Securities and Exchange Commission. Except as otherwise required by applicable law, CAPSTAR disclaims any obligation to update or revise any forward-looking statements made during this presentation. We'd also refer you to page two of the presentation slide for disclaimers regarding forward-looking statements, non-GAAP financial measures, and other information. With that, I will now turn the presentation over to Tim Schultz, CAPSTAR's President and Chief Executive Officer.

Good morning, and thank you for participating on our call. We appreciate the opportunity to review our results with you. In the third quarter, we reported earnings per share of 59 cents and an annualized return on average tangible equity of 16.28%. our ROTCE is on top of a CET1 ratio that is now essentially 14%. I'm especially proud this quarter. As you walk down the income statement, every single aspect of the bank executed, which is evidenced by the positive trends of our four key drivers in our pre-tax, pre-provisioned asset ratio, a stabilized net interest margin excluding PPP, loan growth, strong performance in deposit service charges in each of our specialty banking businesses, expense discipline as we become a more productivity-driven company, and focus management of our tax expenses. I just can't say enough about our team. Equally exciting, we announced our expansion into Chattanooga with the addition of nine highly skilled banking professionals who are leaders in that market. As we've communicated, one of our four strategic focuses the past 24 months is putting our excess equity to work. Our preference is to invest in the following order. First, organically, such as Knoxville and now Chattanooga. Second, acquisitions, such as Athens, Manchester, and Waynesboro. Third, opportunistic buybacks. And fourth, dividends. Each play roles in our available tools, but we have terrific investment opportunities in our core business that will remain our priority. Chattanooga is a fabulous market and one of three in Tennessee whose population and household income growth are faster than national averages. Capstar is blessed to operate in one of the best states across our nation to do business and live, and now Capstar is located in the three fastest growing markets. We have included a slide to share a little bit about Chattanooga. It is a great destination if you've not visited, with one of the nation's first aquariums, Rock City, where you can see seven states on a clear day, the Chattanooga Choo Choo Hotel, and as we've illustrated, it is home to an important aspect of the southern lifestyle, the moon pie. This is a strong team led by Brian Paris and six of his former teammates. They've worked together a long time and are extremely connected in the market. They are a true team, a dream team. We provided some of what we feel the strategic and financial rationale are. While there are a lot of variables, we feel that this will have a meaningful impact on our financials over the next five years. Of course, it comes with startup costs, but the level of work and risk compared to an acquisition is uncomparable. Before turning it over to Dennis, I'll share that we have similar conversations underway in three additional markets, and the response is very positive. Highly skilled employees are looking for the next bank as their sell or become larger to the extent they feel it is harder to serve their customer or no longer as fun. Capstar's capabilities, size, responsiveness, and flexibility are proving attractive. In the case of Chattanooga, They actually reached out to us earlier this summer, as is becoming a more frequent occurrence. Dennis, I'll now turn it over to you to cover the financial results for the quarter.

Thank you, Tim, and good morning, everyone. On slide 11 of our deck, you'll see that our net interest income was $23 million for the quarter, consistent with the second quarter. The net interest margin was 3.12% for the quarter, down 14 basis points primarily due to record levels of deposits and slightly less loan PPP fees in the third quarter. Our adjusted NIM remains stable at 336 for the quarter. The adjusted NIM includes the impact of excess deposits, which adversely impacted the margin by 40 basis points, and PPP loan forgiveness fees, which favorably impacted the NIM by 16 basis points. Net interest income continued to benefit in the quarter from a shift of our earning assets into additional investments as well as continued strong loan growth. On slide 12, our average deposits of $2.7 billion for the quarter were at a record level. Average DDA and now deposits were also at record levels for the quarter and increased $88 million from the second quarter. Our core markets continued to hold large levels of deposits consistent with with the prior several quarters. Deposit costs continued to decline in the third quarter and were two basis points lower as we continued to lower deposit rates and benefit from higher non-interest bearing deposits. Our excess balances are continuing to be strategically addressed through pricing opportunities, focusing on our loan growth, including hiring new bankers, purchases within the investment portfolio, and runoff of higher priced deposits. On slide 13, total loans less PPP were at record levels at quarter end and grew 42 million or 9.4% annualized in the third quarter. We continued to build out the Knoxville market, added some additional bankers in Middle and East Tennessee, and continued to strengthen our loan pipelines. Our loan pipelines continue at record levels and remain strong across all of our markets. Total PPP loans were $64 million at the end of the quarter, down $46 million from the second quarter. Total unearned PPP fees at the end of the quarter totaled $2.2 million. Our loan yields remained strong and were 4.41% for the quarter, with loan coupons up six basis points in the quarter to 4.03%. On slide 14... Non-interest income was extremely strong in the third quarter with record levels of revenue in deposit service charges, interchange and debit transaction fees, and wealth management. Trinet had a tremendous quarter with almost $2 million in revenue. SBA had a nice quarter with $911,000 in fees. And mortgage revenues were also up for the quarter and continued to see healthy spreads offset slightly by volumes. Slide 15 shows our non-interest expenses, which were $18.4 million for the quarter, which resulted in an operating efficiency ratio of 53.06%. Our core bank, which excludes mortgage, efficiency ratio was 50.58%, which is a record. Within salaries and employee benefits, incentive expenses were increased during the quarter for mortgage and other incentive comp plans, So even with these increased incentives during the quarter, our efficiency ratio was at a record low. With that, Chris, I'll turn it over to you to discuss our credit position.