CapStar Financial Holdings, Inc. (ONB) Earnings Call Transcript & Summary

Welcome to Old National and CapStar Merger Conference Call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. Corresponding presentation slides can be found on the Investor Relations page at oldnational.com and will be archived there for 12 months. Comments made during today's call regarding either companies or the combined companies' future results or future financial performance may include forward-looking statements and are subject to certain risks, uncertainties and other factors that could cause actual results to differ from those discussed. Please review the forward-looking disclaimer and safe harbor language included in the presentation. I'd now like to turn the call over to Mr. Jim Ryan, CEO of Old National, for opening remarks. Mr. Ryan?

Thank you, Sarah. Good afternoon, and thank you for joining us on such short notice. I will begin on Page 3 of the presentation. We're thrilled to be in Nashville today to announce our partnership with CapStar Bank, a $3 billion bank headquartered in Nashville with 23 branches. CapStar is a dynamic bank with a top 10 share in Nashville, and also has offices in vibrant communities such as Athens, Chattanooga, Knoxville and one in Asheville, North Carolina. By partnering together, we can accelerate their already demonstrated success and growth by bringing our larger balance sheet and more robust product suite. This partnership allows Old National to leverage the excellent entry we made a little more than a year ago into Nashville with the opening of our 1834 Wealth management office, and recently the addition of 2 new commercial leaders. Recently, we had a client and prospect event in Nashville with 250 clients, and I realized what a great success we were already having with a small office. Our partnership announced today allows us to invest and grow even faster than we could achieve on our own. The CapStar headquarters in Nashville is slightly over 2 hours from our Evansville-based headquarters and closer to us than any of our previous partnerships in my 20-year plus career at ONB. Our partnership is financially compelling by all measures. The multiples are attractive versus comparable deals as measured by both price-to-tangible book value and price-to-forward earnings, including cost savings. We expect the partnership to be accretive by 5% to our 2025 earnings with less than 2% tangible book value dilution or only $0.20, which results in a quick earn-back of under 2 years. Our capital will remain strong as this partnership will be approximately neutral to our pro forma capital ratios at closing. Most importantly, this earnings-accretive partnership is much cheaper, less dilutive and significantly faster way for us to build scale in this dynamic footprint. We believe this transaction to be low risk, given the highly compatible culture, business mix and relationship banking approach to banking. We are very pleased with our due diligence. We found strong credit underwriting, stronger than almost any other opportunities we looked at during my tenure. This speaks to the below average net charge-off for CapStar versus the industry for the last 10 years plus. Lastly, after completing our successful FMBI partnership more than a year ago, combined with our strong track record of achieving and exceeding our model results, we feel confident that we can successfully integrate our newest partner. We have learned much from previous partnerships and believe we have the expertise and leadership to achieve or even exceed our expectations. Moving to Slide 4. This slide shares an overview of CapStar's metrics, balance sheet composition and the competitive landscape. As you can see from the competitive landscape, we aim to gain share in deposits, loans and wealth management and believe we can compete effectively. And to the extent there is further industry consolidation in Tennessee, we will be well positioned to gain market share. Lastly, on Page 5, I think we all understand the attractive demographics in the Southeast, specifically Nashville, which has increasingly become the city of choice for new businesses, jobs and population growth. I will close with a few other comments. CapStar contacted us directly based on our reputation and most recent entry into Nashville. CapStar CEO, Tim Schools and the Board, felt that we were a perfect fit to help them achieve their goals. From our perspective, this is an excellent opportunity to achieve our long-term strategic growth plan and build on our strategic investment in Nashville already. While today's stock market appears to be more short-term focused and negative, I remain focused on long-term shareholder value. We are pleased with the early results of our Nashville team, and we are incredibly excited about this opportunity. I'm confident that we will look back in a few years and see this was truly an opportunistic platform and a partnership in great markets that enhanced our franchise. With those short comments, I will open the call for any questions. And I'm joined by Mark Sander, Brendon Falconer and John Moran to answer any questions. Thank you.

[Operator Instructions] Your first question comes from the line of Scott Siefers of Piper Sandler.

I think the first one sort of a broader one. I mean I think there's a sense that in this whatever emerging regulatory environment we've got, you sort of get one bite at the apple over maybe at least a year or so. Do you think is that the case? And I guess what I'm really getting at is, if this is the only deal that you might be able to do over the next like 1 to 2 years, what is it specifically about CapStar that made this the one that you wanted to go after?

Well, I think it's too early to tell about how many applications can be filed. We're not necessarily looking for the next opportunity beyond this. We're really just focused on this Nashville opportunity. And given the investment we've made here already and the significant upside we have here, we really felt like this was a perfect opportunity. It's small enough to be easier to integrate, but yet it's big enough to matter, especially given the demographics here in Nashville and the already investment we've made here.

Okay. Perfect. And then I guess just a follow-up. Any pieces of the company that you are not interested, that as you sell off portions of it or sort of let runoff. I know, for example, they've got a -- or at least have had a triple net leasing business. Anything that's sort of often being passed through you guys that would lead us on the outside to believe that the growth trajectory of the combined company might be a little less as you integrate and go forward? Or is it just sort of steady as she goes?

No. I'm actually very bullish on our ability to continue to bring our funding base, our strong funding base to the organization here. And our plans would be to let them continue to grow. And with our strong funding base and our larger hold limits and the team we've got here, I think it accelerates our ability to grow. It's too early to tell in any individual portfolio. We have a lot of work to do there, but we feel really comfortable with our ability to grow and fund that growth with core deposits.

Your next question comes from the line of Terry McEvoy with Stephens.

Yes. When I think about the ONB M&A track record kind of before FMBI and you were there, I'm thinking like Grand Rapids; Ann Arbor; Madison, Wisconsin. Nashville, obviously, a much more dynamic market. So I guess my question is, how did that impact the due diligence on this transaction? And overall, kind of how do you approach this deal or this market differently once completed?

Maybe I'll start and ask my team members to join in here. I think our successful integrations and growth profile in the communities you mentioned, and I would also include Minneapolis in that conversation and Chicago. I think we have a lot of confidence going into this that no matter the size of the market, our ability to come in and do banking the way we like to do banking, focused on core deposits, building out deep and full relationships, bringing our product suite, we think we're going to have great success here. If we look at the competitive landscape here, we feel good about our ability to compete. So I'm excited. I mean the demographics, and I don't think people always appreciate, Nashville is as close to us as any of the other large cities are. I mean Indianapolis is actually slightly farther away to Evansville than Nashville is to Evansville. So this is very close to home for us. We feel very confident with our ability to be successful.

And as you think, Terry, about future growth prospects, clearly, we think they're exciting here and strategically, it makes a lot of sense. But when you think about due diligence, we did the same due diligence for this no matter what. So in terms of what we've looked at up and down the ladder and specifically relative to credit, the due diligence was exactly the same. Again, the growth prospects here might be a little bit better. But fundamentally, if you have the right team, you can -- we can compete and outgrow the market in any market we're in.

And then as a follow-up, I just want to make sure, do you expect all of the cost savings to be achieved by the end of 2024 and fully in the 2025 run rate to hit that EPS accretion I see in the presentation?

Yes. Terry, this is Brendon. Yes, we're expecting 50% in the back half of '24 [indiscernible] realized in '25. So we'll be on a track record by the end of Q4 to realize that.

Your next question comes from the line of Chris McGratty with KBW.

Jim, question from me that I've never covered CapStar. Why did they sell? And it seems like it's kind of a quick close. My guess is it's size, but just any color on why they sold.

I think they were looking for a partner to help them accelerate their own growth plans. And obviously, 6 months ago, I mean the market has changed pretty radically here. And so our ability to bring more funding and a strong core deposit base to this great market and their teams and our teams coming together, I think they see the synergies that are inherent in that. So I think it's not much harder than that, really. Obviously, banks that are a few billion dollars in assets are always going to struggle with new regulations and implementing new requirements. And so I think that's a benefit too we can bring. We can take all that off their plates, right, and really bring the best of relationship banking to Nashville with our combined teams here. So I don't think it's much more complicated than that.

Okay. And just a follow-up, Jim. How long is the courtship -- how long was the courtship between the two of you?

It was relatively short. I think they started the process based on our reputation, based on knowing a little bit more about this, they invited to participate on that. So it was relatively short. And we weren't necessarily looking for the next opportunity kind of found us, and we were excited to participate, especially given, again, really build off of the 10 team members we have here. And I made references to that. We were here not too long ago having a great client and prospect event, and really just hit home the opportunities that are in front of us here. We're able to do this with a relatively small team in a single office without a branch location, and I got super excited about what the prospects look like for this potential partnership and how we could build and leverage off each other. So again, we're thrilled to be here, and we're thrilled to leverage the investments we've already made.

Your next question comes from the line of Brody Preston with UBS.

Just wanted to ask you, when you look at the, I guess, roster of producers at CapStar, is there like these smaller banks can kind of be driven by a handful of folks? Is that the case here in terms of there's a handful of kind of chunky revenue producers here that you need to make sure you keep?

I don't believe that to be the case. We're going to be focused on all of our team members, but I don't believe that would be the case. And plus, we're going to be adding our teams, combining our teams together here. So we feel great about that prospect.