CapStar Financial Holdings, Inc.

good morning everyone and welcome to capstar financial holdings third quarter 2022 earnings conference call hosting the call today from capstar are tim schools president and chief executive officer mike fowler chief financial officer and chris teats 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 laws. All forward-looking statements are subject to risk and uncertainties and 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 undue reliance on forward-looking statements. A more detailed description of these and other risks, uncertainties, and factors are contained in CAPSTAR's public filings with the Securities and Exchange Commission. except that otherwise required by applicable law, CAPSTAR disclaims any obligation to update or revise any forward-looking statements made during this presentation. We would also refer you to page two of the presentation slides for disclaimers regarding forward-looking statements, non-GAAP financial measures, and other information. With that, I will now turn the presentation over to Tim Schools, CAPSTAR's President and Chief Executive Officer. Sir, please go ahead.

Okay, good morning, and thank you for participating on our call. We appreciate everybody's interest in Capstar, and I'm going to apologize ahead of time. I'm coming off of COVID-2 from about two weeks ago, so I'm congested a little bit, so I apologize for that. In the third quarter, we reported 37 cents per share. Our earnings included first a $2.1 million pre-tax loss related to the sale or markdown of our remaining tri-net balances. Trinet production was ceased in early July, and there's no further risk of loss on anything that has been produced to date. 900,000 of 2.3 million in losses incurred since second quarter are unrealized, and there's a high probability that that will be accreted back into earnings over time. It is uncertain at the moment as to if or when we will restart Trinet. Second, a $1.5 million pre-tax loss for wire fraud. We filed an insurance claim and are seeking a recovery. The FBI and our core system provider have tracked the IP address of the individual that is trying to perpetrate many banks, and our core system provider is seeing it showing up across their banks. We have and are reevaluating all processes and procedures to do everything in our power to prevent a similar situation in the future. Lastly, a $732,000 pre-tax operating loss on a depository account. I cannot get into the details at this time, but we and our council believe Capstar is in the right and we are pursuing a recovery. I take personal responsibility for these incidents. I inquired about stopping trying that production in May when I was made aware of the $200,000 unrealized loss we were going to take. At that time, I was informed everything going forward would be at par or better. With the volatility of the markets, I should have used better judgment and paused production until we had total clarity. While the other two involve fraud and questionable legal advice, we can and need to do better to prevent such incidents. To establish a culture of accountability, I voluntarily forfeited my 2022 bonus and in doing so, my executive team followed. This will total about $1 million for the year. We are a shareholder-oriented company and we recognize our shareholders deserve better. Additionally, we are performing at a high level and our employees deserve to earn as much incentive as possible. With our corporate incentive based on EPS, pre-tax, pre-provision to assets, and ROA, Lowering our incentive will assist them in getting more for the great results they are achieving. With that having been said, I'm excited at the high level our team is performing. Adjusted for these incidents, we earned 50 cents per share and a 139 ROA. Importantly, that is with our mortgage division contributing a third quarter net loss of $663,000. which equates to two cents per share loss and no contribution from Trinet. The pre-tax pre-provision to assets was 1.84% and the bank only excluding mortgage was 1.93%. As an aside, our mortgage division reduced annual operating expenses about $400,000 toward the end of the quarter. We have an outstanding mortgage division and believe it is a valuable piece of our franchise and will continue to be a positive contributor over the long term. When I joined three years ago, the pre-tax pre-provision to assets was about 1.45%, and I set a target of 1.8 to 2%. That was questioned at the time, and several people said it would be hard to do. We're proud of our improved profitability as well as the improved growth prospects we've created for Capstar. It is important for our pre-tax pre-provisioned assets to perform at a higher level, to generate competitive capital returns in good times, but also to have more earnings power for more challenging times, which bring higher credit costs. Before turning it over to Mike, I'll comment a little on current trends. First, we've added a second commercial relationship manager in Asheville, a fifth commercial relationship manager in Knoxville, and we added an additional correspondent banker all this quarter. Second, with the fast pace of rising rates and the level they are at now, loan demand is beginning to slow, and like most banks, we've tempered our interest in CRE and construction. During the quarter, adjusted for the tri-net loans that we transferred over, our average loan growth was 9.2%. With the quality of our sales team and the strength of our markets, it could have been much higher. However, with competitors not raising loan rates at the pace of market rates, an extremely challenging deposit environment, and the current economic uncertainty, I believe it is best to be patient and cautious at this time. Third, deposits are extremely competitive. You might recall last quarter, While other banks were commenting on anticipated deposit growth the remainder of the year, I expressed more caution. With rates having risen sharply, customers are aggressively shopping for the first time in years. Brokerage firms and U.S. Treasury rates offer a higher rate at the moment, which brings additional challenges. We have refined most metrics at Capstar, and deposits are really the last step we need to address. As a younger bank, Capstar was built on lending with less of a focus on funding. We've been working on balancing our culture, and I believe over time we have tremendous opportunity. Fourth, credit metrics remain very strong. Our criticized and classified loans improved again, with our largest substandard loan being upgraded to pass. Pass dues ticked up a little bit, and that is essentially due to two relationships of which one has been troubled for about two years. We feel we're in a strong position on both. The remainder of the increase included an unusual level of matured loans that were not renewed timely at quarter end and about $500,000 for three PPP loans for which we are fully secured. Mike, if you'd now please cover the financial highlights for the quarter.

Thank you, Tim, and good morning, everyone. So on page six, a few key performance highlights in terms of profitability. The net interest margin was 3.5% in the quarter, up nine basis points from last quarter, up 38 basis points from a year ago. Efficiency ratio, as reported, 61.5%. As Tim touched on earlier, adjusted for the three unusual items, the efficiency ratio for the quarter was 52.8%. Return on assets, as reported, 1.03%. Adjusting for the three unusual items, 1.39%. In terms of growth, we continue to have very solid loan growth, 9.2%. adjusted for the transfer of tri-net loans from held for sale into held for investment. Earnings per share, 0.37 cents a share. Adjusted for the unusual items, 50 cents a share. And tangible book value per share, excluding the impact of after-tax losses on the available for sale investment portfolio, was 16.5%. and 22 cents as of 9.30, up from 15.86 as of the last quarter, and up versus $14.59 as of a year ago. In terms of soundness, credit metrics, as Tim noted, remain solid for the quarter. We had two basis points of annualized charge-offs. We had 30 basis points of non-performing assets to loans. and we continue to run with very strong capital levels. On page seven, the net interest income of $25.6 million was an increase of $1.1 million versus last quarter. The margin of $3.50, up nine basis points, was driven by a combination of us redeploying cash into loans, and number two, modestly benefiting from the Fed's continued rate hikes. Based on our assumptions at this time, we don't see the margin being materially impacted by further Fed rate moves. We continue to see loan pricing headwinds as competitors catch up, to recent market rate increases. And we also, not surprisingly, at this point in the cycle, we have seen the last few months some increase in deposit pricing pressure. As Tim alluded to, early in the Fed, early Fed moves, we, like the industry, did not move deposit rates materially. But as the Fed moves deeper into the hiking cycle, as expected, our betas have increased as we've seen in our markets. We do continue to have very strong loan pipeline and production, which provide good opportunities for continued net interest income growth. On page eight, total deposits were roughly flat, down $5 million for the quarter. There was some movement within that. Correspondent balances declined $69 million on average, as many of our correspondent customers deployed their excess liquidity. We look forward to turning that around as we expand our correspondent business into new markets, leveraging the recent addition Tim mentioned of a seasoned correspondent banker. Our deposit costs for the quarter of 62 basis points was an increase of 39 basis points versus Q2. We continue to focus on discipline deposit pricing, trying to balance remaining competitive, retaining customers, attracting customers while also optimizing profitability. And we continue to actively target deposit growth, especially operating balances. On page nine, we continue to have strong production. The pipeline, the commercial pipeline remains above 500 million. We did have Average loan growth of $50 million for the quarter, adjusting for the movement of TriNet into health for investment. As Tim noted, we are limiting commercial real estate due to the economic outlook and to better align our loan and deposit growth. Our average loan yield increased 37 basis points versus the prior quarter. with an average spread versus match-funded home loan rates of 1.9% near our 2% or better target spread. On page 10, terms of non-interest income, we continue to see stable deposit and interchange revenue. In terms of mortgage, as you're seeing through the industry, with mortgage rates continuing to rise, hitting 7% for 30-year fixed rate mortgages or up 300 basis points versus a year ago. Mortgage revenue has been impacted by combination of higher market rates as well as limited supply of homes for sale in our markets. TRINET loss, Tim discussed. The $2.1 million loss related to sale and transfer of remaining TRINET loans into HELP for Investments. And contention consistent with their outlook on the last call. Our SBA team demonstrated solid progress this quarter. With fees in Q3 exceeding the sum from the first and the second quarters. And as Tim mentioned, we are very excited about the future with recent SBA hires. On page 11. Total expenses were up versus Q2 due to the $2.2 million operational losses Tim discussed for which we are pursuing potential recoveries. Adjusted for the operational losses and for management's voluntary bonus waiver, expenses are down $800,000 versus the prior quarter. strong expense discipline with adoption of a productivity mindset throughout the organization, and we continue to have an ongoing focus on efficiency opportunities. On page 12, actually, I will turn it over to Chris to discuss risk management.