CapStar Financial Holdings, Inc.

Good morning, everyone, and welcome to Capstar Financial Holdings' first quarter 2023 earnings conference call. Hosting the call today from Capstar are Tim Schools, President and Chief Executive Officer, Mike Fowler, Chief Financial Officer, and Kevin Lambert, Credit Chief Credit 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 will make comments which constitute forward-looking statements within the meaning of the federal securities laws. All forward-looking statements are subject to risks and uncertainties and other factors that may cause the actual results, and the performance and 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 as otherwise required by applicable law. Capstar disclaims any obligation to update or revise any forward-looking statements made during this presentation. We would like to also offer you, we also refer you to the page two of the presentation slides for disclaimers regarding forward-looking statements, non-GAAP financial measures, and other information. With that, I'll turn the presentation over to Tim Schools, CAPSTAR's President and Chief Executive Officer.

Okay, thank you, sir. Good morning, and thank you for participating on our call. In first quarter, we reported earnings per share of 30 cents and a return on equity of 7.41%. These results included a $2 million write-off equating to 7 cents per share of signature bank subordinated debt, which I will discuss in a minute, as well as $216,000 of loss equating to one cent per share related to our mortgage and tri-net divisions, which are valuable businesses, but whose volumes are impacted by current market rates. Additionally, our SBA division had $400,000 of fees equating to a penny and a half per share, which were deferred into early second quarter 23 due to delayed closings. I will also note we returned nearly $10 million to investors in first quarter through dividends and stock repurchases, as well as increased our dividend 10%. We have now increased Capstar's dividend 120% since early 2021. As everyone is aware, the industry has faced deposit challenges the past 12 months as market rates have risen at one of the fastest paces in history. I cited this and warned of the outlook in our second quarter 2022 earnings call when many banks were still communicating expectations of deposit growth. The fastest change in market rates in a long time has caused industry deposit outflows, migration within banks from non-interest bearing to higher yielding alternatives, and overall price competition. One of the biggest competitors the past year has been the U.S. Treasury, where customers, often in non-interest-bearing accounts, moved money to earn 4% to 5% in 6- and 12-month treasuries. In January, banks in our markets began to offer money market rates and 9- to 12-month CD rates approaching 5%. We've been disciplined trying to balance the repricing of our deposit portfolio while still trying to grow deposits by introducing brokered CDs. As a younger organization, Capstar's deposit franchise historically had a heavy emphasis on correspondent banking deposits in larger wealth management investment type accounts. Over recent years, we've worked hard to lessen their overall emphasis. While average customer deposits were down for the quarter, we are pleased our end of period customer deposits were up and stable following the Silicon Valley and signature events. Our team has worked hard to communicate with our depositors. Throughout the fall and into 2023, we've worked to reduce loan growth specifically by raising our expected spreads and curtailing commercial real estate loans which tend to have lower deposit opportunities. Despite these efforts, loan growth was up 7% annualized on an average basis and 16% annualized in the period in the first quarter of 2023. In each case, CNI and residential real estate loans led the growth with declines in non-multifamily commercial real estate. As noted, we've had a write-down this quarter or in first quarter of signature bank sub debt. I'd like to take a minute to discuss this and summarize our investments in these securities. When I joined Capstar in the summer of 2019, Capstar's balance sheet had significant wholesale type balances on each side of the balance sheet. Loan participations in HLT loans had at one point been in the 40 to 50% of loan range. and Capstar had had a loss of $10 million and $4 million on single individual credits. Outside of participations in HLT, Capstar loans had grown 3% a year the prior five years. At that time, we set out to transition Capstar to a Tennessee-based bank focused on relationships we would lead. As a bridge, we invested about $70 million into investment grade, liquid, more granular investments from $10 million plus non-secured, non-guaranteed participations that were often out of state as we developed loan capabilities. Today, we are proud that our SNICs are less than 1% of loans at $6 million. and other participations are $85 million and 4% of loans. 100% of those balances are in the state of Tennessee. Alongside this, we now also have $450 million of loans in Asheville, Chattanooga, and Knoxville, in which we lead and largely have collateralized and guaranteed positions. Unfortunately, signature resulted in a loss. As many of you are aware, Signature has had a stellar reputation for many years and was investment grade rated when we purchased it as well as at the beginning of this year. We've outlined the profile of our sub-debt portfolio in our investor slides as well as the underwriting criteria that was used to select these. We've recently performed a review of our remaining investments and feel good with our holdings at the current moment. Switching to non-interest income, we were pleased with the first full quarter of our SBA group. As I said previously, 400,000 of fees rolled into 2Q23, but they also generated another 350,000 of fees that require seasoning under the SBA before they can be sold, which will likely be in third quarter. So in total, their activity generated approximately $1.7 million in fees in the first quarter. This group has a lot of potential. Mortgage volumes increased in March and look good for April and May. The gain on sales spread also increased in the first quarter. If rates stay in the 6% to 6.5% range, we would expect similar volumes to the first quarter. Trinat closed and sold its first loan since August and early April at a premium and is working on its second. We are optimistic pricing might be settling down where we can return to some level of volume. Again, our mortgage and tri-net divisions in the first quarter had a net pre-tax loss of $216,000. Asset quality remains strong across our credit portfolio. Three relationships which had entered 90 days last quarter have entered forbearance agreements and are now current. Past dues this quarter are comprised of one significant relationship for which we are secured and have a personal guarantee. We're actively working with the customer. Later in the slides, Kevin Lambert will cover information related to our CRE portfolio, which we are actively monitoring and feel very good about. I'll now turn it over to Mike Fowler.

Good morning, and thank you everyone for joining All right on page page four a few brief comments on liquidity So we have a diverse source Sorry we have a diverse source on and off balance sheet liquidity totaling 1.6 billion dollars that represents 160% of our $1.3 billion of uninsured and uncollateralized deposits. So we have our securities portfolio remains a modest part of our balance sheet. 12% of assets. We continue to have strong capital levels. We have brokered CDs, as Tim mentioned. We have been tapping wholesale funding. We have brokered of about 370 million and 55 million of home loan borrowings. We have not yet accessed the Fed's new bank term funding program. We are certainly considering that, monitoring pricing, relative to other options, and I certainly tap that if the economics appear attractive. In terms of page five, our deposit portfolio growth, as Tim noted, we have seen stability and increase in our customer deposit balances over the course of the first quarter. Average versus Q4 was down, but as Tim noted, we've seen an increase from year end through 331. We continue to have a consistent focus on deposit growth, especially operating accounts. We continue to strive to balance being very competitive while also being disciplined on pricing on the deposit side. And as Tim said, we certainly continue to do that on the loan side. Post-SVB, We were very proactive, as Tim noted. Our bankers reached out to their largest customers and largest depositors, had discussions to ensure they were comfortable with our situation, our financial stability. We did see some movement, about $150 million in movement within our deposit portfolio into reciprocal deposits, a product that we've offered for many years that, as most of you know, will provide to the customer full FTSE insurance. We have a solid pipeline on the deposit side, and we continue to look for growth opportunities across our footprint. On the next page, I will actually skip page six on subnet. I think Tim covered all the key points there. On page eight, Regarding key financial results, EPS of 30 cents, net interest income was down modestly due to a 20 basis points decline in the margin related to deposit-related pricing pressure. Non-interest income is flat. We'll go into more detail on that in a minute. And expenses were up, and we will cover that in a minute as well. And then we have the $2.4 million provision As Tim noted, $2 million of that relates to our signature bank sub debt. I will go to page 10 and briefly comment on loan growth. Commercial loan pipeline has slowed due to a reduced market demand and to the cutback in CRE. Our current pipeline is about $220 million. We continue to focus on discipline pricing versus the match-funded home loan curve, and you can see our pricing on the chart in terms of average yields on Q1 originations, 6.8% on fixed rate loans, a higher 7.4% given the current inverted curve on variable rate loans, overall 7.1%. As Tim noted, we continue to strive to be disciplined on pricing on both sides of the balance sheet, and certainly given the increased pressure with deposit pricing, we continue to reiterate to the field the need to be achieving sufficient and attractive pricing on the loan side. Next page, 11 on the margin. Deposit costs increase 58 basis points versus Q4. If you look at the chart in the bottom left, you can see the breakdown by category. Non-correspondent customer deposits rose 32 basis points to a level of 1.1%. Correspondent and broker deposits both rose about 98 basis points. Overall, deposits rose 58. So we are pleased that on the customer side, again, we're able to grow that modestly. with discipline pricing, being competitive where we need to be, but again, trying to balance profitability and growth. We would certainly target deposit growth to keep pace with loan growth, challenging in this rate environment, but that continues to be the focus of the markets. I will turn it to Kevin for a minute on page 12 to comment on loan portfolio performance.