CapStar Financial Holdings, Inc.

CapStar reported second-quarter 2023 EPS of $0.37 and return on equity of 8.95%. Tangible common equity was 9.64%, after repurchasing approximately 453,833 shares in the quarter; over the past 18 months, the company repurchased about 1.5 million shares, or about 7% of total outstanding shares. Net interest margin was 3.06%, down from 3.50% in the third quarter of last year, and annualized net charge-offs were 3 basis points, unchanged from the prior quarter. Customer deposits declined $75 million from March 31 to June 30, but June produced $41 million of growth and July-to-date trends were described as stronger. Management said it identified approximately $3 million of annualized expense reduction opportunities, expects material improvement next quarter, and is targeting a lower quarterly expense run-rate around $18 million if the environment stays similar. For guidance, management said NIM could see further modest downside in the next quarter or two, mortgage activity should stay near current levels until rates break lower, Tri-Net revenues should remain low in coming months, and SBA gain-on-sale revenues should be higher over the balance of the year than in the last two quarters.

Tim Schools framed the quarter as one of discipline in a difficult banking backdrop, emphasizing deposit retention, credit restraint, and capital management. He said CapStar moved early to reduce investor-property lending, lifted insured/collateralized deposits to over 75%, and identified expense savings from the bottom up rather than cutting franchise capability. His tone was candid and cautious on the environment, but constructive on the company’s valuation, liquidity, and long-term franchise value.

Mike Fowler focused on four profitability targets: revenue growth above 5%, net interest margin of 3.6% or more, an efficiency ratio of 55% or less, and net charge-offs below 25 basis points. He said the efficiency ratio was 66.6% in the second quarter, but the company expects material improvement from roughly $3 million of annualized expense reductions implemented late in June and through the rest of 2023. He also highlighted $1.5 billion of on- and off-balance sheet liquidity sources, 76% of deposits insured or collateralized versus 66% in Q1, and reiterated that the investment portfolio is 100% available-for-sale, so unrealized losses are already reflected in tangible common equity.

Analysts pressed on expenses, margin pressure, buybacks, loan growth, and the mix shift in deposits. Management said expenses should trend lower than the second-quarter run rate, with Tim Schools saying quarterly expenses could move closer to $18 million if conditions stay similar, and that buybacks may slow a bit near term but remain available given the stock’s valuation and the bank’s capital position. On deposits, management explained that reported DDA pressure looks worse because recent funding included $400 million to $450 million of brokered CDs; excluding those, DDA as a percentage of non-broker deposits was said to be about flat versus pre-pandemic levels.