Exhibit 99.4
UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma combined consolidated financial information and accompanying notes showing the impact on the historical financial conditions and results of operations of CapStar and Athens have been prepared to illustrate the effects of the merger under the acquisition method of accounting.
The unaudited pro forma combined consolidated balance sheet as of June 30, 2018 is presented as if the Athens merger had occurred on June 30, 2018. The unaudited pro forma combined consolidated income statements for the year ended December 31, 2017 and the six months ended June 30, 2018 are presented as if the merger had occurred on January 1, 2017. The actual completion date of the merger was October 1, 2018.
The historical consolidated financial information has been adjusted to reflect factually supportable items that are directly attributable to the merger and, with respect to the income statement only, expected to have a continuing impact on consolidated results of operations, as such,one-time merger costs are not included.
The unaudited pro forma combined consolidated financial statements are provided for informational purposes only. The unaudited pro forma combined consolidated financial statements are not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the merger been completed as of the dates indicated or that may be achieved in the future. The preparation of the unaudited pro forma combined consolidated financial statements and related adjustments required management to make certain assumptions and estimates. The unaudited pro forma combined consolidated financial statements should be read together with:
• | the accompanying notes to the unaudited pro forma combined consolidated financial statements; |
• | CapStar’s audited consolidated financial statements and accompanying notes as of and for the twelve months ended December 31, 2017, included in CapStar’s Annual Report on Form10-K for the year ended December 31, 2017; |
• | CapStar’s Quarterly Report on Form10-Q for the three months ended June 30, 2018; |
• | Athens’ audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2017, included as Exhibit 99.1 to this Form8-K/A; |
• | Athens’ unaudited consolidated financial statements and accompanying notes as of and for the six months ended June 30, 2018, included as Exhibit 99.2 to this Form8-K/A. |
1
Unaudited Pro Forma Combined Consolidated Balance Sheet
At June 30, 2018
(in thousands, except per share data)
CapStar as reported | Athens as reported | Pro Forma Adjustments | Pro Forma Combined | |||||||||||||||||
Assets | ||||||||||||||||||||
Cash and due from banks | $ | 14,185 | $ | 21,700 | $ | (19,663 | ) | a,n,p | $ | 16,222 | ||||||||||
Interest-bearing deposits in financial institutions | 32,965 | 17 | 32,982 | |||||||||||||||||
Federal funds sold | 11,072 | 11,283 | (11,283 | ) | a | 11,072 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total cash and cash equivalents | 58,222 | 33,000 | (30,946 | ) | 60,276 | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Securitiesavailable-for-sale, at fair value | 183,364 | 69,483 | (172 | ) | e | 252,675 | ||||||||||||||
Securitiesheld-to-maturity | 3,746 | — | 3,746 | |||||||||||||||||
Loans held for sale | 65,320 | — | 65,320 | |||||||||||||||||
Loans | 1,046,525 | 342,187 | (4,019 | ) | f | 1,384,693 | ||||||||||||||
Less allowance for loan losses | (14,705 | ) | (4,019 | ) | 4,019 | b | (14,705 | ) | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Loans, net | 1,031,820 | 338,168 | — | 1,369,988 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Premises and equipment, net | 5,831 | 7,823 | 4,500 | g | 18,154 | |||||||||||||||
Restricted equity securities | 8,809 | 3,220 | 12,029 | |||||||||||||||||
Accrued interest receivable | 4,347 | 1,380 | 5,727 | |||||||||||||||||
Goodwill | 6,219 | — | 44,589 | o | 50,808 | |||||||||||||||
Core deposit intangible | 3 | 2,849 | 3,151 | c,d | 6,003 | |||||||||||||||
Other assets | 33,500 | 18,137 | (824 | ) | h,i | 50,813 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total assets | $ | 1,401,181 | $ | 474,060 | $ | 20,297 | $ | 1,895,538 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||||||
Deposits: | ||||||||||||||||||||
Non-interest-bearing | $ | 223,579 | $ | 60,377 | $ | (10,232 | ) | a | $ | 273,724 | ||||||||||
Interest-bearing | 921,434 | 351,892 | (11,283 | ) | a | 1,262,043 | ||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total deposits | 1,145,013 | 412,269 | (21,515 | ) | 1,535,767 | |||||||||||||||
Federal Home Loan Bank advances | 95,000 | — | 95,000 | |||||||||||||||||
Other liabilities | 8,022 | 7,110 | 1,500 | j | 16,632 | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total liabilities | 1,248,035 | 419,379 | (20,015 | ) | 1,647,399 | |||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Shareholders’ equity: | ||||||||||||||||||||
Preferred stock | 878 | — | 878 | |||||||||||||||||
Common stock | 11,932 | 18 | 5,185 | l,m | 17,135 | |||||||||||||||
Additionalpaid-in capital | 120,555 | 19,115 | 80,107 | l,m | 219,777 | |||||||||||||||
Common stock acquired by benefit plans: unallocated common | — | (1,037 | ) | 1,037 | k | — | ||||||||||||||
Retained earnings | 25,086 | 37,870 | (47,301 | ) | m,n,p | 15,655 | ||||||||||||||
Accumulated other comprehensive loss, net of income tax | (5,305 | ) | (1,285 | ) | 1,285 | m | (5,305 | ) | ||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total shareholders’ equity | 153,146 | 54,681 | 40,312 | 248,139 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||
Total liabilities and shareholders’ equity | $ | 1,401,181 | $ | 474,060 | $ | 20,297 | $ | 1,895,538 | ||||||||||||
|
|
|
|
|
|
|
|
See accompanying notes to Unaudited Pro Forma Combined Consolidated Financial Information
2
Unaudited Pro Forma Combined Consolidated Statement of Income
For the six months ended June 30, 2018
(in thousands, except per share data)
CapStar as reported | Athens as reported | Income Statement Reclassifications | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Loans, including fees | $ | 26,030 | $ | 8,814 | $ | — | $ | 134 | x,z | $ | 34,978 | |||||||||||||
Securities: | ||||||||||||||||||||||||
Taxable | 1,815 | 1,178 | (605 | ) | q | — | 2,388 | |||||||||||||||||
Tax-exempt | 546 | — | 356 | q | — | 902 | ||||||||||||||||||
Federal funds sold | 39 | — | 102 | q | (102 | ) | aa | 39 | ||||||||||||||||
Restricted equity securities | 257 | 178 | — | — | 435 | |||||||||||||||||||
Interest-bearing deposits in financial institutions | 411 | — | 147 | q | — | 558 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total interest income | 29,098 | 10,170 | — | 32 | 39,300 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Deposits | 5,547 | 919 | — | (102 | ) | aa | 6,364 | |||||||||||||||||
Federal funds purchased | 1 | 1 | — | — | 2 | |||||||||||||||||||
Federal Home Loan Bank advances | 1,117 | — | — | — | 1,117 | |||||||||||||||||||
Note payable to bank | — | 9 | — | (9 | ) | z | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total interest expense | 6,665 | 929 | — | (111 | ) | 7,483 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Net interest income | 22,433 | 9,241 | — | 143 | 31,817 | |||||||||||||||||||
Provision for loan losses | 846 | 90 | — | — | 936 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Net interest income after provision for loan losses | 21,587 | 9,151 | — | 143 | 30,881 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Noninterest income: | ||||||||||||||||||||||||
Treasury management and other deposit service charges | 829 | 1,293 | (700 | ) | r | — | 1,422 | |||||||||||||||||
Loan related fees | 572 | — | 519 | r | — | 1,091 | ||||||||||||||||||
Net gain (loss) on sale of securities | 3 | — | — | — | 3 | |||||||||||||||||||
Tri-Net fees | 853 | — | — | — | 853 | |||||||||||||||||||
Mortgage banking income | 2,695 | — | 563 | r | — | 3,258 | ||||||||||||||||||
Other noninterest income | 902 | 2,164 | (382 | ) | r | — | 2,684 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total noninterest income | 5,854 | 3,457 | — | — | 9,311 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Noninterest expense: | ||||||||||||||||||||||||
Salaries and employee benefits | 12,598 | 4,290 | — | — | 16,888 | |||||||||||||||||||
Data processing and software | 1,608 | 751 | 244 | s | — | 2,603 | ||||||||||||||||||
Professional fees | 819 | — | 312 | u | — | 1,131 | ||||||||||||||||||
Occupancy | 1,056 | 1,088 | (590 | ) | s,t | — | 1,554 | |||||||||||||||||
Equipment | 1,141 | — | 346 | t | — | 1,487 | ||||||||||||||||||
Regulatory fees | 436 | — | 150 | u | — | 586 | ||||||||||||||||||
Merger related expenses | 335 | — | 315 | u | — | 650 | ||||||||||||||||||
Other operating | 1,593 | 2,381 | (777 | ) | u | 401 | v,w | 3,598 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total noninterest expense | 19,586 | 8,510 | — | 401 | 28,497 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Income before income taxes | 7,855 | 4,098 | — | (258 | ) | 11,695 | ||||||||||||||||||
Income tax expense (benefit) | 1,148 | 963 | — | (67 | ) | y | 2,044 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Net income | $ | 6,707 | $ | 3,135 | $ | — | $ | (190 | ) | $ | 9,652 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Per share information: | ||||||||||||||||||||||||
Basic net income per share of common stock | $ | 0.57 | $ | 1.83 | $ | — | $ | — | $ | 0.57 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Diluted net income per share of common stock | $ | 0.52 | $ | 1.69 | $ | — | $ | — | $ | 0.52 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||||||
Basic | 11,755,535 | 1,714,639 | — | 3,488,805 | 16,958,979 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Diluted | 13,021,744 | 1,849,813 | — | 3,792,441 | 18,663,998 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Unaudited Pro Forma Combined Consolidated Financial Information
3
Unaudited Pro Forma Combined Consolidated Statement of Income
For the year ended December 31, 2017
(in thousands, except per share data)
CapStar as reported | Athens as reported | Income Statement Reclassifications | Pro Forma Adjustments | Pro Forma Combined | ||||||||||||||||||||
Interest income: | ||||||||||||||||||||||||
Loans, including fees | $ | 45,601 | $ | 15,557 | $ | — | $ | 72 | x,z | $ | 61,230 | |||||||||||||
Securities: | ||||||||||||||||||||||||
Taxable | 3,682 | 2,047 | (660 | ) | q | — | 5,069 | |||||||||||||||||
Tax-exempt | 1,244 | — | 458 | q | — | 1,702 | ||||||||||||||||||
Federal funds sold | 41 | — | 106 | q | — | 147 | ||||||||||||||||||
Restricted equity securities | 396 | 453 | (286 | ) | — | 563 | ||||||||||||||||||
Interest-bearing deposits in financial institutions | 551 | — | 382 | q | (107 | ) | aa | 826 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total interest income | 51,515 | 18,057 | — | (35 | ) | 69,537 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Interest expense: | ||||||||||||||||||||||||
Deposits | 8,080 | 1,747 | — | (107 | ) | aa | 9,720 | |||||||||||||||||
Federal funds purchased | 13 | 1 | — | — | 14 | |||||||||||||||||||
Federal Home Loan Bank advances | 1,559 | — | — | — | 1,559 | |||||||||||||||||||
Note payable to bank | — | 214 | — | (214 | ) | z | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total interest expense | 9,652 | 1,962 | — | (321 | ) | 11,293 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Net interest income | 41,863 | 16,095 | — | 286 | 58,244 | |||||||||||||||||||
Provision for loan losses | 12,870 | 18 | — | 12,888 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Net interest income after provision for loan losses | 28,993 | 16,077 | — | 286 | 45,356 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Noninterest income: | ||||||||||||||||||||||||
Treasury management and other deposit service charges | 1,516 | 2,471 | (1,350 | ) | r | — | 2,637 | |||||||||||||||||
Loan fees | 771 | — | 605 | r | — | 1,376 | ||||||||||||||||||
Net gain (loss) on sale of securities | (66 | ) | — | — | — | (66 | ) | |||||||||||||||||
Tri-Net fees | 1,002 | — | — | — | 1,002 | |||||||||||||||||||
Mortgage banking income | 6,238 | — | 987 | r | — | 7,225 | ||||||||||||||||||
Other noninterest income | 1,447 | 4,161 | (242 | ) | r | — | 5,366 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total noninterest income | 10,908 | 6,632 | — | — | 17,540 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Noninterest expense: | ||||||||||||||||||||||||
Salaries and employee benefits | 20,400 | 9,025 | — | — | 29,425 | |||||||||||||||||||
Data processing and software | 2,786 | 1,432 | 390 | s | — | 4,608 | ||||||||||||||||||
Professional fees | 1,522 | 0 | 640 | u | — | 2,162 | ||||||||||||||||||
Occupancy | 2,025 | 2,029 | (1,059 | ) | s,t | — | 2,995 | |||||||||||||||||
Equipment | 2,071 | 0 | 669 | t | — | 2,740 | ||||||||||||||||||
Regulatory fees | 1,111 | 0 | 308 | u | — | 1,419 | ||||||||||||||||||
Other operating | 3,850 | 3,579 | (948 | ) | u | 727 | v,w | 7,208 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total noninterest expense | 33,765 | 16,065 | — | 727 | 50,557 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Income before income taxes | 6,136 | 6,644 | — | (441 | ) | 12,339 | ||||||||||||||||||
Income tax expense (benefit) | 4,635 | 2,513 | — | (115 | ) | y | 7,033 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Net income | $ | 1,501 | $ | 4,131 | $ | — | $ | (326 | ) | $ | 5,306 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Per share information: | ||||||||||||||||||||||||
Basic net income per share of common stock | $ | 0.13 | $ | 2.46 | $ | — | $ | — | $ | 0.32 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Diluted net income per share of common stock | $ | 0.12 | $ | 2.27 | $ | — | $ | — | $ | 0.29 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||||||
Basic | 11,280,580 | 1,677,746 | — | 3,525,698 | 16,484,024 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Diluted | 12,803,511 | 1,820,142 | — | 3,819,315 | 18,442,968 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Unaudited Pro Forma Combined Consolidated Financial Information
4
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(all amounts are in thousands, except per share data, unless otherwise indicated)
Note 1—Basis of Pro Forma Presentation
The unaudited pro forma combined balance sheet as of June 30, 2018 and the unaudited pro forma combined income statements for the year ended December 31, 2017 and the six months ended June 30, 2018 are based on the historical financial statements of CapStar and Athens after giving effect to the completion of the mergers and the assumptions and adjustments described in the accompanying notes. Such financial statements do not reflect cost savings or operating synergies expected to result from the mergers, or the costs to achieve these cost savings or operating synergies, or any anticipated disposition of assets that may result from the integration of the operations of the three companies. Certain historical financial information has been reclassified to conform to the current presentation.
The transactions will be accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). In business combination transactions in which the consideration given is not in the form of cash (that is, in the form ofnon-cash assets, liabilities incurred, or equity interests issued), measurement of the acquisition consideration is based on the fair value of the consideration given or the fair value of the asset (or net assets) acquired, whichever is more clearly evident and, thus, a more reliable measure.
Under ASC 805, all of the assets acquired and liabilities assumed in a business combination are recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense. Subsequent to the completion of the merger, CapStar and Athens will finalize an integration plan, which may affect how the assets acquired, including intangible assets, will be utilized by the combined company. For those assets in the combined company that will be phased out or will no longer be used, additional amortization, depreciation and possibly impairment charges will be recorded after management completes the integration plan.
The unaudited pro forma information is presented solely for informational purposes and is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company.
5
Note 2—Preliminary Estimated Acquisition Consideration
Under the terms of the Athens Merger Agreement, Athens shareholders will be entitled to receive 2.864 shares of CapStar common stock for each share of Athens common stock.
Based on Athens’s estimate of shares of Athens common stock outstanding as of June 30, 2018, the preliminary estimated acquisition consideration is as follows.
(dollars are in thousands, except per share data) | ||||
Total number of common shares as provided by Athens management | 1,816,845 | |||
|
| |||
Total number of Athens common stock to exchange | 1,816,845 | |||
Per share exchange ratio | 2.864 | |||
|
| |||
Number of shares of CapStar common stock as exchanged | 5,203,444 | |||
Multiplied by CapStar common stock price per share on June 30, 2018 | $ | 18.53 | ||
|
| |||
Estimated fair value of CapStar common stock issued (“Stock Consideration”) | $ | 96,420 | ||
|
| |||
Calculated deal price per Athens share | $ | 53.07 | ||
Total number of stock options outstanding as provided by Athens management to exchange | 206,263 | |||
|
| |||
Stock options outstanding weighted average strike price as provided by Athens management | $ | 14.26 | ||
Intrinsic value per stock option outstanding | $ | 38.81 | ||
|
| |||
Estimated fair value of stock options rolled (“Rolled Stock Options Consideration”) | $ | 8,005 | ||
|
| |||
Stock Consideration | $ | 96,420 | ||
Rolled Stock Options Consideration | $ | 8,005 | ||
|
| |||
Total Preliminary Estimated Acquisition Consideration | $ | 104,425 | ||
|
|
Note 3—Preliminary Estimated Acquisition Consideration Allocation
Under the acquisition method of accounting, the total acquisition consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of Athens based on their estimated fair values as of the closing of the merger. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill.
The allocation of the estimated acquisition consideration with regard to Athens is preliminary because the proposed merger has not yet been completed. The preliminary allocation is based on estimates, assumptions, valuations, and other studies which have not progressed to a stage where there is sufficient information to make a definitive allocation. Accordingly, the acquisition consideration allocation unaudited pro forma adjustments will remain preliminary until CapStar management determines the final acquisition consideration and the fair values of assets acquired and liabilities assumed. The final determination of the acquisition consideration allocation is anticipated to be completed as soon as practicable after the completion of the merger and will be based on the value of the CapStar common stock at the closing of the merger. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the unaudited pro forma combined consolidated financial statements.
6
The total preliminary estimated acquisition consideration as shown in the tables above is allocated to Athens’s tangible and intangible assets and liabilities as of June 30, 2018 based on their preliminary estimated fair values as follows.
Cash and cash equivalents | $ | 33,000 | ||
Securitiesavailable-for-sale | 69,311 | |||
Loans | 338,168 | |||
Premises and equipment, net | 12,323 | |||
Goodwill | 44,589 | |||
Core deposit intangible | 6,000 | |||
Other assets | 21,913 | |||
Deposits | (412,269 | ) | ||
Other liabilities | (8,610 | ) | ||
|
| |||
Total preliminary estimated acquisition consideration | $ | 104,425 | ||
|
|
Approximately $6,000 has been preliminarily allocated to amortizable intangible assets acquired. The amortization related to the preliminary fair value of net amortizable intangible assets is reflected as a pro forma adjustment to the unaudited pro forma condensed combined financial statements.
Identifiable intangible assets.The preliminary fair values of intangible assets were determined based on the provisions of ASC 805, which defines fair value in accordance with ASC Topic 820,Fair Value Measurements and Disclosures(“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Intangible assets were identified that met either the separability criterion or the contractual-legal criterion described in ASC 805. The preliminary allocation to intangible assets is allocated to core deposit intangibles.
Goodwill.Goodwill represents the excess of the preliminary estimated acquisition consideration over the preliminary fair value of the underlying net tangible and intangible assets. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets are the skill sets, operations, customer base and organizational cultures that can be leveraged to enable the combined company to build an enterprise greater than the sum of its parts. In accordance with ASC Topic 350,Intangibles—Goodwill and Other, goodwill will not be amortized, but instead will be tested for impairment at least annually and whenever events or circumstances have occurred that may indicate a possible impairment. In the event management determines that the value of goodwill has become impaired, the combined company will incur an accounting charge for the amount of the impairment during the period in which the determination is made.
Note 4—Preliminary Unaudited Pro Forma and Acquisition Accounting Adjustments
The unaudited pro forma financial information is not necessarily indicative of what the financial position actually would have been had the merger been completed at the date indicated. Such information includes adjustments which are preliminary and may be revised. Such revisions may result in material changes. The financial position shown herein is not necessarily indicative of what the past financial position of the combined companies would have been, nor necessarily indicative of the financial position of the post-merger periods. The unaudited pro forma financial information does not give consideration to the impact of possible cost savings, expense efficiencies, synergies, strategy modifications, asset dispositions or other actions that may result from the merger.
The following unaudited pro forma adjustments result from accounting for the merger, including the determination of fair value of the assets, liabilities, and commitments which CapStar, as the acquirer, will acquire from Athens. The descriptions related to these preliminary adjustments are as follows.
7
Balance Sheet – the explanations and descriptions below are referenced to the June 30, 2018 Unaudited Pro Forma Combined Consolidated Balance Sheet on page 2.
Pro Forma Adjusting Entries (Balance Sheet): | Debit | Credit | ||||||||
a | Cash and due from banks | $ | 10,232 | |||||||
a | Federal funds sold | 11,283 | ||||||||
a | Non-interest-bearing deposits | 10,232 | ||||||||
a | Interest-bearing deposits | 11,283 | ||||||||
b | Allowance for loan losses | 4,019 | ||||||||
c | Core deposit intangible | 2,849 | ||||||||
d | Core deposit intangible | 6,000 | ||||||||
e | Securitiesavailable-for-sale | 172 | ||||||||
f | Loans | 4,019 | ||||||||
g | Premises and equipment | 4,500 | ||||||||
h | Servicing asset (included in “other assets”) | 1,000 | ||||||||
i | Deferred tax asset (included in “other assets”) | 1,824 | ||||||||
j | Other liabilities | 1,500 | ||||||||
k | Common stock acquired by benefit plans: unallocated common stock held by Employee Stock Ownership Plan Trust | 1,037 | ||||||||
l | Common stock | 5,203 | ||||||||
l | Additionalpaid-in capital | 99,222 | ||||||||
m | Common stock | 18 | ||||||||
m | Additionalpaid-in capital | 19,115 | ||||||||
m | Retained earnings | 37,870 | ||||||||
m | Accumulated other comprehensive loss, net of income tax | 1,285 | ||||||||
n | Cash and due from banks | 1,185 | ||||||||
n | Retained earnings | 1,185 | ||||||||
o | Goodwill | 44,589 | ||||||||
p | Cash and due from banks | 8,246 | ||||||||
p | Retained earnings | 8,246 |
a) | Elimination of deposits Athens holds at CapStar. |
b) | Adjustment to allowance for loan losses to reflect the reversal of Athens’ allowance for loan losses. |
c) | Remove Athens’ existing core deposit intangible. |
d) | Adjustment to intangible assets to reflect the preliminary estimate of the core deposit intangible at the acquisition date. |
e) | Adjust certain security investments to estimated fair value. |
f) | Adjustment to loans to reflect the preliminary estimated fair value at acquisition date. |
g) | Adjustment to real estate to reflect the preliminary estimated fair value at acquisition date. |
h) | Adjustment to record the estimated fair value of Athens’ loan servicing portfolio at acquisition date. |
i) | Adjustment to reflect the net deferred tax asset generated by the net fair value adjustments using an assumed effective tax rate equal to 26.14%. |
j) | Adjustment to record the commitment payable to Athens Foundation. |
k) | Remove Athens’ existing Employee Stock Ownership Plan loan payable. |
l) | CapStar common shares issued to Athens’ shareholders representing the stock consideration and rolled stock option components of the total respective merger consideration. For the purposes of thispro-forma presentation, the value of a share of CapStar common stock was assumed to equal its closing price on June 30, 2018, the pro forma date, as reported by NASDAQ ($18.53 per share). |
m) | To reflect the reversal of Athens’ equity. |
n) | Represents Athens’ (seller) estimated merger expenses which is expected to be paid immediately prior to the merger closing date, net of the related tax benefit and the net effect on Athens’ retained earnings. |
o) | Adjustment to reflect the preliminary estimated goodwill generated as a result of consideration paid in excess of the fair value of the net assets acquired. |
p) | Represents CapStar’s (acquirer) estimated merger expenses, net of the related tax benefit and the net effect on retained earnings. |
8
Income Statements – the explanations and descriptions below are referenced to the Unaudited Pro Forma Combined Consolidated Statements of Income for the six months ended June 30, 2018 and the year ended December 31, 2017 starting on page 3.
Income Statements – reclassifications
The following reclassifications adjusted Athens’ historical income statements to conform to CapStar’s historical income statements.
q) | Interest income—Securities and interest-bearing deposits in other banks has been reclassed to Interest Income—Securities-taxable,tax-exempt, federal funds sold and interest-bearing deposits in financial institutions to conform to CapStar’s historical income statement. |
r) | Noninterest income has been reclassified to conform to CapStar’s historical income statement. |
s) | Software expenses included in Athens’ Occupancy and equipment expense has been reclassified to Data processing and software to conform to CapStar’s historical income statement. |
t) | Equipment expense included in Athens’ Occupancy and equipment expense has been reclassified to Equipment expense to conform to CapStar’s historical income statement. |
u) | Professional fees, Regulatory fees and Merger related expenses included in Athens’ Other operating expenses has been reclassified to their respective categories to conform to CapStar’s historical income statement. |
Income Statements – Pro Forma Adjustments
Six Months Ended June 30, 2018 | ||||||||||
Pro Forma Adjusting Entries (Income Statement): | Debit | Credit | ||||||||
v | Remove amortization of existing CDI | $ | 182 | |||||||
w | Amortization of new CDI | 583 | ||||||||
x | Preliminary estimate of loan interest accretion | 143 | ||||||||
y | Income tax benefit ofpro-forma adjustments | 67 | ||||||||
z | Elimination of note payable to bank (ESOP) interest income/expense | 9 | 9 | |||||||
aa | Elimination of intercompany income/expense | 102 | 102 |
Year Ended December 31, 2017 | ||||||||||
Pro Forma Adjusting Entries (Income Statement): | Debit | Credit | ||||||||
v | Remove amortization of existing CDI | $ | 364 | |||||||
w | Amortization of new CDI | 1,091 | ||||||||
x | Preliminary estimate of loan interest accretion | 286 | ||||||||
y | Income tax benefit ofpro-forma adjustments | 115 | ||||||||
z | Elimination of note payable to bank (ESOP) interest income/expense | 214 | 214 | |||||||
aa | Elimination of intercompany income/expense | 107 | 107 |
v) | Remove amortization expense of Athens’ existing core deposit intangible (“CDI”) asset. |
w) | The preliminary estimate of CDI related to CapStar’s acquisition of Athens is expected to approximate $6,000 and will be amortized over a ten year period on an accelerated basis which is expected to produce approximately $583 of amortization expense during the first six months of operations. |
x) | Represents the preliminary estimate of the first quarter’s interest income accretion related to the preliminary estimate of the fair value adjustment of the loans acquired pursuant to the merger. The total amount to be accreted in interest income over the estimated lives of the related loans is approximately $2 million. |
y) | Adjustment to reflect the income tax provision of the Pro Forma Adjustments using 26.14% as the incremental effective tax rate. |
9
z) | Adjustment to reflect the elimination of Athens’ Employee Stock Ownership Plan loan payable interest expense and the intercompany interest income for the loan held at CapStar during the period. |
aa) | Elimination of intercompany income/expense related to Athens’ deposits held at CapStar. |
Note 5—Earnings per Common Share
Unaudited pro forma earnings per common share for the six months ended June 30, 2018 and the year ended December 31, 2017 have been calculated using CapStar’s historic weighted average common shares outstanding plus the common shares assumed to be issued to Athens’ shareholders in each of their mergers.
The following table sets forth the calculation of basic and diluted unaudited pro forma earnings per common share for the six months ended June 30, 2018 and the year ended December 31, 2017. In the table below, amounts are in thousands except for per share data.
Six Months Ended June 30, 2018 | Year Ended December 31, 2017 | |||||||||||||||
Basic | Diluted | Basic | Diluted | |||||||||||||
Pro forma net income available to common shareholders | $ | 9,652 | $ | 9,652 | $ | 5,306 | $ | 5,306 | ||||||||
Weighted average common shares outstanding: | ||||||||||||||||
CapStar | 11,755,535 | 13,021,744 | 11,280,580 | 12,803,511 | ||||||||||||
Common shares issued to Athens | 5,203,444 | 5,642,254 | 5,203,444 | 5,639,457 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Pro forma | 16,958,979 | 18,663,998 | 16,484,024 | 18,442,968 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Pro forma net income per common share | $ | 0.57 | $ | 0.52 | $ | 0.32 | $ | 0.29 | ||||||||
|
|
|
|
|
|
|
|
Note 6—Merger Related Charges
CapStar’s preliminary estimated transaction expenses related to the Athens merger are approximately $8,494, net of tax.One-time merger related expenses of $248, net of tax have been included in the Unaudited Pro Forma Combined Consolidated Statement of Income. The remainingone-time merger related expenses of $8,246, net of tax have not been included in the Unaudited Pro Forma Combined Consolidated Statement of Income, as the pro forma adjustments do not give consideration tonon-recurring items, the impact of possible cost savings, expense efficiencies, synergies, strategy modifications, asset dispositions or other actions that may result from the merger. These preliminary estimated merger transaction expenses are still being developed and will continue to be refined over the next several months, and will include assessing personnel, benefit plans, premises, equipment, and service contracts to determine where they may take advantage of redundancies. The preliminary estimated pro forma presentation of CapStar’s merger transaction costs is in the following table.
Change in control and severance expenses | $ | 5,920 | ||
System termination fees and system conversion expenses | 1,880 | |||
Investment bankers, accounting, auditing and legal | 3,200 | |||
Other related expenses | 500 | |||
|
| |||
Totalnon-interest expense | 11,500 | |||
|
| |||
Tax benefit | 3,006 | |||
|
| |||
Net expense after tax benefit | $ | 8,494 | ||
|
|
10