UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30,~~March 31, ~~2021~~2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ________.

Commission File Number: 001-37886

CAPSTAR FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Tennessee	81-1527911
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1201 Demonbreun Street, Suite 700 Nashville, Tennessee (Address of principal executive offices)	37203 (zip code)

(615) 732-6400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1.00 par value per share	CSTR	Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☐	Accelerated Filer	☒
Non-Accelerated Filer	☐	Smaller Reporting Company	☒☐
		Emerging Growth Company	☒☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


		Shares outstanding as of ~~November 2, 2021~~May 3, 2022
Common Stock, par value $1.00 per share		~~22,166,963~~22,066,073

CAPSTAR FINANCIAL HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS


Item		Page

PART I – FINANCIAL INFORMATION			6

Item 1.	Financial Statements	6

	Consolidated Balance Sheets	6

	Consolidated Statements of Income	7

	Consolidated Statements of Comprehensive Income	8

	Consolidated Statements of Changes in Shareholders’ Equity	9

	Consolidated Statements of Cash Flows	10

	Notes to Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3633

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4843

Item 4.	Controls and Procedures	4843

PART II – OTHER INFORMATION			4944

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 6.	Exhibits	4945

SIGNATURES			5046

TERMINOLOGY

The terms “we,” “our,” “us,” “CapStar,” “the Company,” “CSTR” and “CapStar Financial” that appear in this Quarterly Report on Form 10-Q (this “Report”) refer to CapStar Financial Holdings, Inc. and its wholly-owned subsidiary, CapStar Bank, which we sometimes refer to as “CapStar Bank,” “our bank subsidiary,” “the Bank” and “our Bank”.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, statements relating to the Company’s assets, business, cash flows, condition (financial or otherwise), credit quality, financial performance, liquidity, short and long-term performance goals, prospects, results of operations, strategic initiatives, the benefits, cost and synergies of completed acquisitions or dispositions, and the timing, benefits, costs and synergies of future acquisitions, disposition and other growth opportunities. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “aspire,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “roadmap,” “goal,” “target,” “would,” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based upon current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates and projections will be achieved. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict and that are beyond our control. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date of this Report, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

•

the continuing effects of the COVID-19 (and variants of that virus) pandemic upon us, our customers, employees, and third-party service providers, and the ultimate extent of the impacts of the pandemic on our business, including on our credit quality, business operations and liquidity, as well as its impact on general economic and financial market conditions;

•

deterioration in general business and economic conditions, or turbulence in domestic or global financial markets, which could adversely affect CapStar’s revenues and the values of our assets and liabilities, reduce the availability of funding, affect credit quality, and increase stock price volatility;

•

the inability to capitalize on opportunities to enhance market share in certain markets and the risk that the Company’s services may not be generally accepted in new markets;



the ability of the Company to meet expectations regarding the benefits, costs, synergies and financial and operational impact of the FCB Corporation (“FCB”) and the Bank of Waynesboro (“BOW”) acquisitions;



the possibility that any of the anticipated benefits, costs, synergies and financial and operational improvements of the FCB and BOW acquisitions will not be realized or will not be realized as expected;

•

economic conditions (including interest rate environment, government economic and monetary policies, the strength of global financial markets and inflation and deflation) that impact the financial services industry as a whole and/or our business;

•

the concentration of our business in our target markets and the effect of changes in the economic, political and environmental conditions on this market;

•

increased competition in the financial services industry, locally, regionally or nationally, which may adversely affect pricing and the other terms offered to our clients;

•

an increase in the cost of deposits, loss of deposits or a change in the deposit mix, which could increase our cost of funding; an increase in the costs of capital, which could negatively affect our ability to borrow funds, successfully raise additional capital or participate in strategic acquisition opportunities;

•

our dependence on our management team and board of directors and changes in our management and board composition;

•

our reputation in the community; our ability to execute our strategy to achieve our loan, return on average assets and

efficiency ratio goals, hire seasoned bankers, and achieve deposit growth through organic growth and strategic acquisitions;

•

credit risks related to the size of our borrowers and our ability to adequately identify, assess and limit our credit risk;



~~our concentration of large loans to a small number of borrowers as well as to borrowers located within our target market;~~

•

the significant portion of our loan portfolio that originated during the past two years and therefore may less reliably predict future collectability than older loans;

•

the adequacy of reserves (including our allowance for loan losses) and the appropriateness of our methodology for

calculating such reserves;

•

non-performing loans, leases and other non-performing assets;

•

charge-offs, non-accruals, troubled debt restructurings, impairments and other credit-related issues;



adverse trends in the healthcare service industry, which is an integral component of our target market’s economy and which could adversely affect the business operations of certain of our key borrowers;

•

our management of risks inherent in our commercial real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of our collateral and our ability to sell collateral upon any foreclosure;

•

changes in secondary market conditions for underwriting or repurchase of secondary mortgages;

•

continued compliance and adherence to underwriting and servicing of Government Guaranteed Loans;

•

our inability to realize operating efficiencies and tax savings from the implementation of our strategic plan;

•

our ability to comply with existing and changing governmental legislation and regulation, including Basel guidelines, capital requirements, accounting regulation or standards and other applicable laws and regulations;

•

the loss of large depositor relationships, which could force us to fund our business through more expensive and less stable sources;

•

operational and liquidity risks associated with our business, including liquidity risks inherent in correspondent banking;

•

volatility in interest rates and our overall management of interest rate risk, including managing the sensitivity of our interest-earning assets and interest-bearing liabilities to interest rates, and the impact to our earnings from a change in interest rates;

•

the potential for our Bank’s regulatory lending limits and other factors related to our size to restrict our growth and prevent us from effectively implementing our business strategy;

•

our ability to identify and thereafter consummate strategic acquisitions that may be necessary in order to achieve our goals;

•

the sufficiency of our capital, including sources of capital and the extent to which we may be required to raise additional capital to meet our goals;

•

fluctuations in the fair value of our investment securities that are beyond our control;

•

deterioration in the fiscal position of the U.S. government and downgrades in Treasury and federal agency securities;

•

potential exposure to fraud, negligence, computer theft and cyber-crime;

•

the adequacy of our risk management framework;

•

our dependence on our information technology and telecommunications systems and the potential for any systems failures or interruptions;

•

threats to and breaches of our information technology systems and data security, including cyber-attacks; our dependence upon outside third parties for the processing and handling of our records and data;

•

our ability to adapt to technological change;

•

the financial soundness of other financial institutions;

•

our exposure to environmental liability risk associated with our lending activities;

•

our engagement in derivative transactions;

•

our involvement from time to time in legal proceedings and examinations and remedial actions by regulators;

•

our involvement from time to time in litigation or other proceedings instituted by or against shareholders, customers, employees or third parties and the cost of legal fees associated with such litigation or proceedings;

•

the susceptibility of our market to natural disasters and acts of God; and

•

the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting.

The foregoing factors should not be construed as exhaustive and should be read in conjunction with the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 (the ~~“2020~~“2021 Form 10-K”) and in future reports that we file with the Securities and Exchange Commission. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only

as of the date of this Report, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Balance Sheets

(In thousands, except share data)


	September 30, 2021						March 31, 2022
	(unaudited)			December 31, 2020			(unaudited)			December 31, 2021
Assets
Cash and due from banks	$	51,929		$	40,191		$	53,291		$	48,202
Interest-bearing deposits in financial institutions		287,438			237,248			282,790			347,023
Federal funds sold		19,900			0			19,900			19,900
Total cash and cash equivalents		359,267			277,439			355,981			415,125
Securities available-for-sale, at fair value		483,778			486,215			460,558			459,396
Securities held-to-maturity, fair value of $1,847 and $2,504 at September 30, 2021 and December 31, 2020, respectively		1,788			2,407
Loans held for sale, includes $79,842 and $97,303 measured at fair value at September 30, 2021 and December 31, 2020, respectively		176,488			186,998
Securities held-to-maturity, fair value of $1,791 and $1,830 at March 31, 2022 and December 31, 2021, respectively								1,775			1,782
Loans held for sale, includes $38,502 and $37,306 measured at fair value at March 31, 2022 and December 31, 2021, respectively								106,895			83,715
Loans held for investment		1,894,249			1,883,690			2,047,555			1,965,769
Less allowance for loan losses		(22,533	)		(23,245	)		(20,857	)		(21,698	)
Loans, net		1,871,716			1,860,445			2,026,698			1,944,071
Premises and equipment, net		25,886			26,689			25,464			25,727
Restricted equity securities		14,443			15,562			14,465			14,453
Accrued interest receivable		7,606			8,771			7,679			7,376
Goodwill		41,068			41,068			41,068			41,068
Core deposit intangible, net		7,152			8,630			6,245			6,691
Other real estate owned, net		349			523			178			266
Other assets		122,586			72,259			143,743			133,376
Total assets	$	3,112,127		$	2,987,006		$	3,190,749		$	3,133,046
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing	$	718,299		$	662,934		$	702,172		$	725,171
Interest-bearing		963,460			844,101			1,025,858			944,605
Savings and money market accounts		601,359			591,438			673,314			641,456
Time		391,274			469,528			354,651			373,049
Total deposits		2,674,392			2,568,001			2,755,995			2,684,281
Federal Home Loan Bank advances		0			10,000
Subordinated notes		29,499			29,423			29,566			29,532
Other liabilities		37,908			36,096			36,271			39,139
Total liabilities		2,741,799			2,643,520			2,821,832			2,752,952
Shareholders’ equity:
Common stock, voting, $1 par value; 25,000,000 shares authorized; 22,165,760 and 21,988,803 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively		22,166			21,989
Common stock, voting, $1 par value; 25,000,000 shares authorized; 22,195,071 and 22,166,129 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively								22,195			22,166
Additional paid-in capital		248,322			246,890			248,214			248,709
Retained earnings		99,341			66,879			119,842			110,489
Accumulated other comprehensive income, net of tax		499			7,728
Accumulated other comprehensive loss, net of tax								(21,334	)		(1,270	)
Total shareholders’ equity		370,328	��		343,486			368,917			380,094
Total liabilities and shareholders’ equity	$	3,112,127		$	2,987,006		$	3,190,749		$	3,133,046

See accompanying notes to consolidated financial statements (unaudited).

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Income (Unaudited)

(In thousands, except share and per share data)


	Three Months Ended				Nine Months Ended					Three Months Ended
	September 30,				September 30,					March 31,
	2021		2020		2021			2020		2022			2021
Interest income:
Loans, including fees	$	22,350	$	22,796	$	66,936		$	61,620	$	20,367		$	22,014
Securities:
Taxable		1,655		1,193		4,900			3,465		1,754			1,596
Tax-exempt		344		343		1,065			975		325			373
Federal funds sold		9		0		12			0		10			0
Restricted equity securities		161		139		482			421		156			161
Interest-bearing deposits in financial institutions		171		171		405			640		172			134
Total interest income		24,690		24,642		73,800			67,121		22,784			24,278
Interest expense:
Interest-bearing deposits		390		640		1,216			3,371		436			446
Savings and money market accounts		288		2,537		896			4,819		331			313
Time deposits		654		1,299		2,317			4,197		484			931
Federal Home Loan Bank advances		0		116		12			348		0			12
Subordinated notes		394		394		1,181			394		393			394
Total interest expense		1,726		4,986		5,622			13,129		1,644			2,096
Net interest income		22,964		19,656		68,178			53,992		21,140			22,182
Provision for loan losses		0		2,119		(415	)		11,295		(784	)		650
Net interest income after provision for loan losses		22,964		17,537		68,593			42,697		21,924			21,532
Noninterest income:
Deposit service charges		1,187		1,064		3,398			2,531		1,142			1,102
Interchange and debit card transaction fees		1,236		936		3,555			2,389		1,222			1,092
Mortgage banking		4,693		9,686		13,318			19,063		1,966			4,716
Tri-Net		1,939		668		4,618			2,528		2,171			1,143
Wealth management		481		382		1,412			1,162		440			459
SBA lending		911		476		1,781			525		222			492
Net gain on sale of securities		7		34		20			74		0			26
Other noninterest income		1,197		1,558		3,446			3,228		1,926			984
Total noninterest income		11,651		14,804		31,548			31,500		9,089			10,014
Noninterest expense:
Salaries and employee benefits		10,980		12,949		31,210			33,256		10,269			9,427
Data processing and software		2,632		2,353		8,530			6,317		2,647			2,827
Occupancy		1,028		999		3,193			2,615		1,099			1,108
Equipment		760		864		2,640			2,295		709			899
Professional services		469		638		1,634			1,854		679			704
Regulatory fees		279		397		746			893		280			257
Acquisition related expenses		0		2,548		323			3,286		0			67
Amortization of intangibles		477		539		1,478			1,300		446			508
Other operating		1,741		1,452		5,105			4,067
Other noninterest expense											1,607			1,616
Total noninterest expense		18,366		22,739		54,859			55,883		17,736			17,413
Income before income taxes		16,249		9,602		45,282			18,314		13,277			14,133
Income tax expense		3,147		2,115		9,075			3,299		2,604			3,103
Net income	$	13,102	$	7,487	$	36,207		$	15,015	$	10,673		$	11,030
Per share information:
Basic net income per share of common stock	$	0.59	$	0.34	$	1.64		$	0.77	$	0.48		$	0.50
Diluted net income per share of common stock	$	0.59	$	0.34	$	1.63		$	0.77	$	0.48		$	0.50
Weighted average shares outstanding:
Basic		22,164,278		21,948,579		22,114,948			19,558,281		22,198,339			22,045,501
Diluted		22,218,402		21,960,490		22,165,130			19,583,448		22,254,644			22,076,600

See accompanying notes to consolidated financial statements (unaudited).

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In thousands)

Three Months Ended

Nine Months Ended

September 30,

September 30,

2021

2020

2021

2020

Net income

$
13,102

$
7,487

$
36,207

$
15,015

Other comprehensive income (loss):

Unrealized gains (losses) on securities available-for-sale:

Unrealized gains (losses) arising during the period

(2,123
)

(440
)

(9,748
)

3,902

Reclassification adjustment for (gains) included in
net income

(7
)

(34
)

(20
)

(74
)
Tax effect

548

(40
)

2,539

(1,086
)
Net of tax

(1,582
)

(514
)

(7,229
)

2,742

Unrealized losses on cash flow hedges:

Reclassification adjustment for losses included in
net income

0

2,167

0

2,679

Tax effect

—

—

—

—

Net of tax

0

2,167

0

2,679

Other comprehensive income (loss)

(1,582
)

1,653

(7,229
)

5,421

Comprehensive income

$
11,520

$
9,140

$
28,978

$
20,436


	Three Months Ended
	March 31,
	2022			2021
Net income	$	10,673		$	11,030
Other comprehensive loss:
Unrealized losses on securities available-for-sale:
Unrealized losses arising during the period		(27,081	)		(12,708	)
Reclassification adjustment for gains included in net income		0			(26	)
Tax Effect		7,017			3,309
Other comprehensive income (loss), net of tax		(20,064	)		(9,425	)
Comprehensive Income (Loss)	$	(9,391	)	$	1,605

See accompanying notes to consolidated financial statements (unaudited).

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(In thousands, except share and per share data)


	Common Stock, voting			Additional paid-in		Retained		Accumulated other comprehensive		Total shareholders’	Common Stock, voting						Additional paid-in			Retained			Accumulated other comprehensive			Total shareholders’
	Shares	Amount	capital		earnings		income (loss)		equity		Shares			Amount			capital			earnings			income (loss)			equity
Balance December 31, 2019	18,361,922	$18,362	$207,083		$46,218		$1,383		$273,046
Net issuance (redemption) of restricted common stock	73,098	73	(196)		—		—		(123)
Balance December 31, 2020												21,988,803		$	21,989		$	246,890		$	66,879		$	7,728		$	343,486
Net issuance of restricted common stock												117,962			118			(216	)		—			—			(98	)
Stock-based compensation expense	—	—	360		—		—		360			—			—			349			—			—			349
Net exercise of common stock options	20,582	21	85		—		—		106			1,039			1			(1	)		—			—			—
Repurchase of common stock	(147,800)	(148)	(1,289)		—		—		(1,437)			(17,931	)		(18	)		(287	)		—			—			(305	)
Common stock dividends declared ($0.05 per share)	—	—	—		(916)		—		(916)			—			—			—			(1,093	)		—			(1,093	)
Net income	—	—	—		1,346		—		1,346			—			—			—			11,030			—			11,030
Other comprehensive income	—	—	—		—		3,408		3,408
Balance March 31, 2020	18,307,802	18,308	206,043		46,648		4,791		275,790
Net issuance (redemption) of restricted common stock	(5,614)	(6)	7		—		—		1
Other comprehensive loss												—			—			—			—			(9,425	)		(9,425	)
Balance March 31, 2021												22,089,873		$	22,090		$	246,735		$	76,816		$	(1,697	)	$	343,944

Balance December 31, 2021												22,166,129		$	22,166		$	248,709		$	110,489		$	(1,270	)	$	380,094
Net issuance of restricted common stock												65,550			66			(153	)		—			—			(87	)
Stock-based compensation expense	—	—	541		—		—		541			—			—			388			—			—			388
Common stock dividends declared ($0.05 per share)	—	—	—		(923)		—		(923)
Net income	—	—	—		6,181		—		6,181
Other comprehensive income	—	—	—		—		360		360
Balance June 30, 2020	18,302,188	18,302	206,591		51,906		5,151		281,950
Net issuance (redemption) of restricted common stock	13,899	14	(27)		—		—		(13)
Stock-based compensation expense	—	—	330		—		—		330
Issuance of common stock in conjunction with acquisitions	3,631,718	3,632	39,953		—		—		43,585
Common stock dividends declared ($0.05 per share)	—	—	—		(1,097)		—		(1,097)
Net income	—	—	—		7,487		—		7,487
Other comprehensive income	—	—	—		—		1,653		1,653
Balance September 30, 2020	21,947,805	$21,948	$246,847		$58,296		$6,804		$333,895

Balance December 31, 2020	21,988,803	$21,989	$246,890		$66,879		$7,728		$343,486
Net issuance (redemption) of restricted common stock	117,962	118	(216)		—		—		(98)
Stock-based compensation expense	—	—	349		—		—		349
Net exercise of common stock options	1,039	1	(1)		—		—		—
Repurchase of common stock	(27,260)	(27)	(435)		—		—		(462)			(36,608	)		(37	)		(730	)		—			—			(767	)
Common stock dividends declared ($0.05 per share)	—	—	—		(1,093)		—		(1,093)
Net income	—	—	—		11,030		—		11,030
Other comprehensive income	—	—	—		—		(9,425)		(9,425)
Balance March 31, 2021	22,080,544	22,081	246,587		76,816		(1,697)		343,787
Net redemption of restricted common stock	(2,926)	(3)	(27)		—		—		(30)
Stock-based compensation expense	—	—	447		—		—		447
Net exercise of common stock options	87,929	88	938		—		—		1,026
Common stock dividends declared ($0.06 per share)	—	—	—		(1,332)		—		(1,332)			—			—			—			(1,320	)		—			(1,320	)
Net income	—	—	—		12,076		—		12,076			—			—			—			10,673			—			10,673
Other comprehensive loss	—	—	—		—		3,778		3,778			—			—			—			—			(20,064	)		(20,064	)
Balance June 30, 2021	22,165,547	22,166	247,945		87,560		2,081		359,752
Net redemption of restricted common stock	(5,702)	(6)	(42)		—		—		(48)
Stock-based compensation expense	—	—	373		—		—		373
Net exercise of common stock options	5,915	6	46		—		—		52
Common stock dividends declared ($0.06 per share)	—	—	—		(1,321)		—		(1,321)
Net income	—	—	—		13,102		—		13,102
Other comprehensive loss	—	—	—		—		(1,582)		(1,582)
Balance September 30, 2021	22,165,760	$22,166	$248,322		$99,341		$499		$370,328
Balance March 31, 2022												22,195,071		$	22,195		$	248,214		$	119,842		$	(21,334	)	$	368,917

See accompanying notes to consolidated financial statements (unaudited).

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Nine Months Ended						Three Months Ended
	September 30,						March 31,
	2021			2020			2022			2021
Cash flows from operating activities:
Net income	$	36,207		$	15,015		$	10,673		$	11,030
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		(415	)		11,295			(784	)		650
Accretion of discounts on acquired loans and deferred fees		(5,412	)		(3,446	)		364			(1,703	)
Depreciation and amortization		2,615			2,261			819			867
Net amortization of premiums on investment securities		1,823			994			527			580
Net gain on sale of securities		(20	)		(74	)		0			(26	)
Mortgage banking		(13,318	)		(19,063	)		(1,966	)		(4,716	)
Tri-Net		(4,618	)		(2,528	)		(2,171	)		(1,143	)
SBA lending		(1,781	)		(525	)		(222	)		(492	)
Net gain on disposal of premises and equipment		(21	)		(303	)		(7	)		0
Net gain on sale of other real estate owned		(29	)		(108	)		(10	)		(29	)
Stock-based compensation		1,169			1,231			388			349
Deferred income tax expense		1,283			1,788
Deferred income tax (benefit) expense								(58	)		3
Origination of loans held for sale		(896,950	)		(845,982	)		(265,400	)		(315,112	)
Proceeds from loans held for sale		925,397			834,392			246,580			336,309
Cash payments arising from operating leases		(1,568	)		(1,402	)		(532	)		(521	)
Amortization of debt issuance expense		76			31			34			32
Net increase in accrued interest receivable and other assets		(15,373	)		(6,406	)
Net increase in accrued interest payable and other liabilities		1,812			4,186
Net (increase) decrease in accrued interest receivable and other assets								(2,630	)		3,744
Net decrease in accrued interest payable and other liabilities								(3,438	)		(10,239	)
Net cash provided by (used in) operating activities		30,877			(8,644	)		(17,833	)		19,583
Cash flows from investing activities:
Activities in securities available-for-sale:
Purchases		(83,420	)		(134,935	)		(49,616	)		(25,301	)
Sales		0			77,338
Maturities, prepayments and calls		74,305			64,009			20,853			23,446
Activities in securities held-to-maturity:
Maturities, prepayments and calls		600			880
Net redemption of restricted equity securities		1,119			1,154
Net redemption (purchase) of restricted equity securities								(12	)		569
Net increase in loans		(5,685	)		(185,614	)		(82,207	)		(47,676	)
Purchase of premises and equipment		(278	)		(417	)		(91	)		(84	)
Proceeds from the sale of premises and equipment		—			2,660
Proceeds from sale of other real estate								97			1,886
Purchases of bank owned life insurance		(31,000	)		—			0			(31,000	)
Proceeds from sale of other real estate		2,225			1,665
Cash paid for acquisitions		—			(27,278	)
Cash received from acquisitions		—			90,760
Proceeds from bank owned life insurance								125			0
Net cash used in investing activities		(42,134	)		(109,778	)		(110,851	)		(78,160	)
Cash flows from financing activities:
Net increase in deposits		106,391			445,414			71,714			183,200
Proceeds from Federal Home Loan Bank advances		—			680,000
Payments on Federal Home Loan Bank advances		(10,000	)		(680,000	)		0			(10,000	)
Issuance of subordinated debt		—			29,387
Repurchase of common stock		(462	)		(1,437	)		(767	)		(305	)
Exercise of common stock options and warrants, net of repurchase of restricted shares		902			(29	)
Exercise of common stock options, net of repurchase of restricted shares								(87	)		(98	)
Common stock dividends paid		(3,746	)		(2,936	)		(1,320	)		(1,093	)
Termination of interest rate swap agreements and related reclassification adjustment for unrealized losses included in income		—			2,679
Net cash provided by financing activities		93,085			473,078			69,540			171,704
Net increase in cash and cash equivalents		81,828			354,656
Net increase (decrease) in cash and cash equivalents								(59,144	)		113,127
Cash and cash equivalents at beginning of period		277,439			101,269			415,125			277,439
Cash and cash equivalents at end of period	$	359,267		$	455,925		$	355,981		$	390,566
Supplemental disclosures of cash paid:
Interest paid	$	5,279		$	12,525		$	1,207		$	1,808
Income taxes paid		13,395			5,620			0			248
Supplemental disclosures of noncash transactions:
Transfer of loans to other real estate	$	2,022		$	113		$	0		$	1,857
Loans charged off to the allowance for loan losses		407			1,014			119			62
Lease liabilities arising from obtaining right-of-use assets		—			668			570			0
Unrealized (losses) gains on securities available for sale		(7,229	)		2,742
Unrealized losses on securities available for sale, net of tax								(20,064	)		(9,425	)
Loans transferred from held for sale to held for investment		—			2,800			0			2,306
Assets acquired, net of cash		—			423,983
Liabilities assumed		—			447,412
Goodwill		—			3,558

See accompanying notes to consolidated financial statements (unaudited).

CAPSTAR FINANCIAL HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements as of and for the period ended ~~September 30, 2021~~March 31, 2022 include CapStar Financial Holdings, Inc. and its wholly owned subsidiary, CapStar Bank (the “Bank”, together referred to as the “Company”). Significant intercompany transactions and accounts are eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all information and notes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes appearing in the ~~2020~~2021 Form 10-K.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting. The accounts of an acquired entity are included as of the date of acquisition, and any excess of purchase price over the fair value of the net assets acquired is capitalized as goodwill. Under this method, all identifiable assets acquired, including purchased loans, and liabilities assumed are recorded at fair value.

The Company typically issues common stock and/or pays cash for an acquisition, depending on the terms of the acquisition agreement. The value of shares of common stock issued is determined based upon the market price of the stock as of the closing of the acquisition.

Reclassifications

Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no effect on shareholders' equity or net income.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, determination of impairment of intangible assets, including goodwill, the valuation of our investment portfolio, deferred tax assets and estimated liabilities. There have been no significant changes to the Company’s critical accounting policies and estimates as disclosed in the ~~2020~~2021 Form 10-K.

Subsequent Events

Accounting Standards Codification (“ASC”) 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company evaluated all significant events or transactions that occurred after ~~September 30, 2021~~March 31, 2022 through the date of filing this Quarterly Report on Form 10-Q and determined that there were no events that required disclosure.

~~NOTE 2 – ACQUISITIONS~~

~~FCB Acquisition~~

Effective July 1, 2020, pursuant to the Agreement and Plan of Acquisition dated as of January 23, 2020 (the “FCB Acquisition Agreement”), by and between the Company and FCB Corporation, a Tennessee corporation (“FCB”), FCB was acquired by CapStar, with CapStar continuing as the surviving entity (the “FCB Acquisition”). Immediately following the FCB Acquisition, The First National Bank of Manchester, a national banking association and a wholly owned subsidiary of FCB, was acquired by CapStar Bank, a Tennessee chartered bank and a wholly owned subsidiary of CapStar (the “FNBM Merger”), with CapStar Bank continuing as the surviving entity in the FNBM Acquisition.

~~Subject to the terms and conditions set forth in the FCB Acquisition Agreement, at the effective time of the FCB Acquisition, shares of common stock, par value $10.00~~ ~~per share, of FCB (“FCB Common Stock”) issued and outstanding immediately prior to the completion~~

of the FCB Acquisition (other than shares of FCB Common Stock owned or held by FCB, CapStar and their subsidiaries (in each case, other than shares of FCB Common Stock held in a fiduciary or agency capacity or in satisfaction of debts previously contracted) were collectively converted into the right to receive in the aggregate ~~2,966,918~~ ~~shares of common stock, par value $1.00~~ ~~per share, of CapStar (“CapStar Common Stock”), with cash (without interest) in lieu of fractional shares, and $22.2~~ ~~million in cash, without interest.~~

~~BOW Acquisition~~

Effective July 1, 2020, following the FCB Acquisition, pursuant to the Plan of Bank Acquisition, dated as of January 23, 2020 (the “BOW Acquisition Agreement,” and together with the FCB Acquisition Agreement, the “Acquisition Agreements”), by and among CapStar, CapStar Bank and The Bank of Waynesboro, a Tennessee chartered bank (“BOW”), BOW was acquired by CapStar Bank, with CapStar Bank continuing as the surviving entity (the “BOW Acquisition,” and together with the FCB Acquisition, the “Acquisitions”).

~~On the terms and subject to the conditions set forth in the BOW Acquisition Agreement, at the effective time of the BOW Acquisition, shares of common stock, par value $10.00~~ per share, of BOW (“BOW Common Stock”) issued and outstanding immediately prior to the completion of the BOW Acquisition (other than shares of BOW Common Stock owned or held by CapStar, CapStar Bank, BOW and their subsidiaries (in each case, other than shares of BOW Common Stock held in a fiduciary or agency capacity or in satisfaction of debts previously contracted)) were collectively converted into the right to receive in the aggregate ~~664,800~~ ~~shares of CapStar Common Stock, with cash (without interest) in lieu of fractional shares, and $5.1~~ ~~million in cash, without interest.~~

~~Total acquisition consideration resulting from the Acquisitions amounted to approximately $70.9~~ ~~million.~~

With the acquisitions, the Company further expanded its franchise in the Middle Tennessee market. FCB’s and BOW’s results of operations were included in the Company’s results beginning July 1, 2020. Acquisition related costs of $~~2.5~~ ~~million and $3.3~~ million are included in the Company’s consolidated statements of income for the three and nine months ended September 30, 2020, respectively. The fair value of the common shares issued as part of the consideration paid for the Acquisitions was determined by the closing price of the Company’s common shares immediately preceding the acquisition date.

~~Goodwill of $3.6~~ ~~million associated with the acquisitions is not amortizable for book or tax purposes.~~ ~~The following table summarizes the consideration paid for the acquisitions and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date (in thousands):~~

As recorded by FCB Corporation

Initial fair value adjustments

Measurement period adjustments

As recorded by CapStar Financial Holdings

Assets:

Cash and cash equivalents

$
90,760

$
—

$
—

$
90,760

Securities

98,536

159

(a)

—

98,695

Loans, gross

296,992

(2,318
)
(b)

—

294,674

Allowance for loan losses

(4,544
)

4,544

(c)

—

—

Premises and equipment, net

9,907

1,540

(d)

—

11,447

Core deposit intangible

—

3,570

(e)

—

3,570

Other

16,514

(917
)
(f)

—

15,597

Total

$
508,165

$
6,578

$
—

$
514,743

Liabilities:

Deposits

$
440,025

$
2,652

(g)
$
—

$
442,677

Other

4,735

—

—

4,735

Total

$
444,760

$
2,652

$
—

$
447,412

Net identifiable assets acquired

$
67,331

Total cost of acquisition:

Value of stock issued

$
43,611

Cash consideration paid

27,278

Total cost of acquisition

$
70,889

Goodwill recorded related to acquisition

$
3,558

~~(a) The amount represents the fair value adjustment of acquired securities that were subsequently sold.~~

~~(b) The amount represents the adjustment of the net book value of acquired loans to their estimated fair value based on interest rates and expected cash flows at the date of acquisition.~~

~~(c) The amount represents the removal of FCB’s and BOW’s existing allowance for loan losses.~~

~~(d) The amount represents the adjustment of the net book value of acquired premises and equipment to their estimated fair value.~~

(e) The amount represents the adjustment of recording the fair value of the core deposit intangible representing the intangible value of the deposit base acquired and the fair value of the customer relationship.

~~(f) The amount represents the net adjustment of the deferred tax asset recognized on the fair value adjustments on acquired assets and assumed liabilities.~~

~~(g)~~ The amount represents the adjustment necessary because the weighted average interest rate of acquired time deposits exceeded
the cost of similar funding at the time of acquisition. The fair value adjustment will be amortized to reduce future interest expense over the life of the portfolio.

NOTE 32 – SECURITIES

The amortized cost and fair value of securities available-for-sale and held-to-maturity at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 are summarized as follows (in thousands):


	September 30, 2021									December 31, 2020									March 31, 2022									December 31, 2021
	Amortized Cost		Gross unrealized gains		Gross unrealized (losses)			Estimated fair value		Amortized Cost		Gross unrealized gains		Gross unrealized (losses)			Estimated fair value		Amortized Cost		Gross unrealized gains		Gross unrealized (losses)			Estimated fair value		Amortized Cost		Gross unrealized gains		Gross unrealized (losses)			Estimated fair value
Securities available-for-sale:
U. S. government agency securities	$	11,588	$	101	$	(79	)	$	11,610	$	16,158	$	258	$	(25	)	$	16,391	$	16,617	$	0	$	(765	)	$	15,852	$	11,550	$	47	$	(94	)	$	11,503
State and municipal securities		82,471		1,996		(780	)		83,687		89,081		2,928		(81	)		91,928		79,352		782		(5,087	)		75,047		81,158		2,107		(705	)		82,560
Mortgage-backed securities		324,862		2,814		(7,176	)		320,500		332,014		4,892		(543	)		336,363		326,297		156		(26,210	)		300,243		300,398		2,008		(8,799	)		293,607
Asset-backed securities		3,325		19		—			3,344		3,325		—		(132	)		3,193		3,326		14		—			3,340		3,326		13		0			3,339
Other debt securities		63,271		1,592		(226	)		64,637		37,608		819		(87	)		38,340		66,187		659		(770	)		66,076		67,104		1,514		(231	)		68,387
Total	$	485,517	$	6,522	$	(8,261	)	$	483,778	$	478,186	$	8,897	$	(868	)	$	486,215	$	491,779	$	1,611	$	(32,832	)	$	460,558	$	463,536	$	5,689	$	(9,829	)	$	459,396
Securities held-to-maturity:
State and municipal securities	$	1,788	$	59	$	—		$	1,847	$	2,407	$	97	$	—		$	2,504	$	1,775	$	16	$	—		$	1,791	$	1,782	$	48	$	—		$	1,830
Total	$	1,788	$	59	$	—		$	1,847	$	2,407	$	97	$	—		$	2,504	$	1,775	$	16	$	—		$	1,791	$	1,782	$	48	$	—		$	1,830

Security fair values are established by an independent pricing service as of the dates indicated. The difference between amortized cost and fair value reflects current interest rates and represents the potential gain (loss) had the portfolio been liquidated on those dates. Security gains (losses) are realized only in the event of dispositions prior to maturity or other-than-temporary impairment. Securities with unrealized losses as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, and the length of time they were in continuous loss positions as of such dates are as follows (in thousands):


	Less than 12 months					12 months or more					Total					Less than 12 months					12 months or more					Total
September 30, 2021	Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses
March 31, 2022																Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses
U. S. government agency securities	$	2,931	$	(40	)	$	1,964	$	(39	)	$	4,895	$	(79	)	$	10,311	$	(545	)	$	2,519	$	(220	)	$	12,830	$	(765	)
State and municipal securities		34,046		(546	)		5,479		(234	)		39,525		(780	)		36,417		(3,246	)		12,839		(1,841	)		49,256		(5,087	)
Mortgage-backed securities		197,864		(5,773	)		41,195		(1,403	)		239,059		(7,176	)		132,254		(7,024	)		153,731		(19,186	)		285,985		(26,210	)
Asset-backed securities		—		—			—		—			—		—			—		—			—		—			—		—
Other debt securities		23,238		(226	)		—		—			23,238		(226	)		35,431		(770	)		—		—			35,431		(770	)
Total temporarily impaired securities	$	258,079	$	(6,585	)	$	48,638	$	(1,676	)	$	306,717	$	(8,261	)	$	214,413	$	(11,585	)	$	169,089	$	(21,247	)	$	383,502	$	(32,832	)

December 31, 2020
December 31, 2021
U. S. government agency securities	$	1,989	$	(25	)	$	—	$	—		$	1,989	$	(25	)	$	2,560	$	(20	)	$	2,737	$	(74	)	$	5,297	$	(94	)
State and municipal securities		10,463		(81	)		—		—			10,463		(81	)		15,309		(279	)		12,768		(426	)		28,077		(705	)
Mortgage-backed securities		100,291		(479	)		1,449		(64	)		101,740		(543	)		155,805		(5,291	)		75,934		(3,508	)		231,739		(8,799	)
Asset-backed securities		—		—			3,193		(132	)		3,193		(132	)		—		—			—					—		—
Other debt securities		6,103		(87	)		—		—			6,103		(87	)		30,375		(231	)		—		—			30,375		(231	)
Total temporarily impaired securities	$	118,846	$	(672	)	$	4,642	$	(196	)	$	123,488	$	(868	)	$	204,049	$	(5,821	)	$	91,439	$	(4,008	)	$	295,488	$	(9,829	)

As noted in the table above, as of ~~September 30, 2021,~~March 31, 2022, the Company had gross unrealized losses of $~~8.3~~32.8 million in its investment securities portfolio. The unrealized losses associated with these investment securities are driven by changes in interest rates and are recorded as a component of equity. These investment securities will continue to be monitored as a part of our ongoing impairment analysis. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments. If an expected shortfall in future cash flows is identified, a credit loss will be deemed to have occurred and will be recognized as a charge to earnings and a new cost basis for the security will be established.

Since the Company currently does not intend to sell any investment securities that have an unrealized loss at ~~September 30, 2021,~~March 31, 2022, and it is not likely that we will be required to sell these investment securities before recovery of their amortized cost bases, which may be at maturity, we do not consider these securities to be other-than-temporarily impaired at ~~September 30, 2021.~~March 31, 2022.

Securities with a market value of $~~201.5~~197.6 million at ~~September 30, 2021~~March 31, 2022 were pledged to collateralize public deposits, derivative positions and Federal Home Loan Bank advances.

Results from sales, maturities, prepayments and calls of securities available for sale were as follows (in thousands):


	Nine Months Ended			Nine Months Ended			Three Months Ended		Three Months Ended
	September 30, 2021			September 30, 2020			March 31, 2022		March 31, 2021
Proceeds	$	74,305		$	141,347		$	20,853	$	23,446
Gross gains		44			83			0		26
Gross losses		(24	)		(9	)		0		0

The amortized cost and fair value of securities at ~~September 30, 2021,~~March 31, 2022, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


	Available-for-sale				Held-to-maturity				Available-for-sale				Held-to-maturity
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value		Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
Due in less than one year	$	17,820	$	17,905	$	0	$	0	$	14,000	$	14,048	$	514	$	516
Due one to five years		73,699		75,446		1,788		1,847		68,801		68,643		1,261		1,275
Due five to ten years		55,125		56,249		—		—		63,159		60,140		—		—
Due beyond ten years		10,686		10,334		—		—		16,196		14,144		—		—
Mortgage-backed securities		324,862		320,500		—		—		326,297		300,243		—		—
Asset-backed securities		3,325		3,344		—		—		3,326		3,340		—		—
Total	$	485,517	$	483,778	$	1,788	$	1,847	$	491,779	$	460,558	$	1,775	$	1,791

NOTE 43 – LOANS AND ALLOWANCE FOR LOAN LOSSES

A summary of the loans held for investment portfolio as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 follows (in thousands):


	September 30, 2021			December 31, 2020			March 31, 2022			December 31, 2021
Commercial real estate	$	772,996		$	643,832		$	884,869		$	825,284
Consumer real estate		328,262			343,791			327,416			326,412
Construction and land development		210,516			174,859			208,513			214,310
Commercial and industrial		478,279			623,446			499,719			497,615
Consumer		45,669			44,279			48,790			46,811
Other		58,527			53,483			78,248			55,337
Total		1,894,249			1,883,690			2,047,555			1,965,769
Allowance for loan losses		(22,533	)		(23,245	)		(20,857	)		(21,698	)
Total loans, net	$	1,871,716		$	1,860,445		$	2,026,698		$	1,944,071

Payroll Protection Program Loans

In 2020, the CARES Act created a new guaranteed, unsecured loan program under the SBA called the Payroll Protection Program (“PPP”), which the Company ~~participates~~participated in, to fund operational costs of eligible businesses, organizations and self-employed persons during the pandemic period. The SBA has guaranteed 100% of the amounts loaned under the PPP by lenders to eligible small businesses. One of the notable features of the PPP is that borrowers are eligible for loan forgiveness if certain conditions are met related to retaining staff and if loan amounts are used to cover eligible expenses, such as payroll, mortgage interest, rents and utilities payments. These loans have a two to five year term and will earn interest at a rate of 1%. As of ~~September 30, 2021,~~March 31, 2022, the outstanding balance of loans originated under the PPP totaled $~~64.2~~6.5 million compared with $~~185.5~~26.5 million as of December 31, ~~2020~~2021 and was included in commercial and industrial loans.

Additionally, PPP borrowers are not required to pay any fees to the government or the lender and the loans may be repaid by the borrower at any time. The SBA, however, will pay lenders a processing fee based on the size of the PPP loan, ranging from 1% to 5% of the loan. Unamortized fees associated with PPP loans included in total loans were $~~2.2~~0.2 million as of ~~September 30,~~March 31, 2022 compared to $0.6 million as of December 31, 2021. These fees are deferred and amortized over the life of the loan. PPP fees recognized as income totaled $~~1.7~~0.5 million ~~and $5.6~~ ~~million, respectively,~~ for the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, compared to $~~1.0~~ ~~million and $1.9~~1.8 million for the same ~~periods~~period in ~~2020.~~2021.

1513

Allowance for Loan Losses

The adequacy of the allowance for loan losses (“ALL”) is assessed at the end of each quarter. The ALL includes a specific component related to loans that are individually evaluated for impairment and a general component related to loans that are segregated into homogenous pools and collectively evaluated for impairment. The ALL factors applied to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses from loans with similar characteristics, which are adjusted by management to reflect current events, trends, and conditions. The adjustments include consideration of the following: changes in lending policies and procedures, economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans, concentrations, and other external factors. The Company’s evaluation of other external factors included consideration of continuing developments regarding the novel coronavirus (“COVID-19”) global pandemic (including the effects of COVID-19 variants) and the resulting impact on the Company’s loan portfolio as of ~~September 30, 2021,~~March 31, 2022, which is ~~largely~~ uncertain due to ~~rapidly~~ evolving ~~conditions.~~conditions and unforeseen new variants.

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes all commercial loans ~~and consumer relationships with an outstanding balance greater than $500,000~~, individually and assigns each loan a risk rating. This analysis is performed ~~on a continual basis~~at origination by the relationship ~~managers~~manager and credit department personnel. On at least an annual basis, an independent party performs a formal credit risk review of a sample of the loan portfolio. Among other things, this review assesses the appropriateness of the loan’s risk rating. The Company uses the following definitions for risk ratings:

Special Mention – A special mention asset possesses deficiencies or potential weaknesses deserving of management’s attention. If uncorrected, such weaknesses or deficiencies may expose the Company to an increased risk of loss in the future.

Substandard – A substandard asset is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard.

Doubtful – A doubtful asset has all weaknesses inherent in one classified substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset exist, therefore, its classification as an estimated loss is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.

Loans not falling into the criteria above are considered to be pass-rated loans. The Company utilizes six loan grades within the pass risk rating.

1614

The following tables provides the risk category of loans by applicable class of loans as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 (in thousands):


September 30, 2021	Pass		Special Mention		Substandard		Doubtful		Total Impaired Loans		Total
March 31, 2022													Pass		Special Mention		Substandard		Doubtful		Total Impaired Loans		Total
Commercial real estate	$	748,967	$	13,755	$	4,960	$	—	$	1,154	$	768,836	$	862,430	$	12,835	$	4,683	$	—	$	1,144	$	881,092
Consumer real estate		312,991		482		855		—		884		315,212		314,983		626		536		—		856		317,001
Construction and land development		207,617		2,844		11		—		—		210,472		208,413		—		—		—		10		208,423
Commercial and industrial		451,180		10,194		14,382		26		63		475,845		471,407		4,642		21,149		70		248		497,516
Consumer		44,344		—		53		28		2		44,427		47,806		—		67		26		10		47,909
Other		58,107		—		79		—		—		58,186		77,877		—		79		—		—		77,956
Purchased credit impaired		17,060		—		3,931		280		—		21,271		13,675		1,026		2,648		309		—		17,658
Total	$	1,840,266	$	27,275	$	24,271	$	334	$	2,103	$	1,894,249	$	1,996,591	$	19,129	$	29,162	$	405	$	2,268	$	2,047,555

December 31, 2020
December 31, 2021
Commercial real estate	$	601,133	$	33,046	$	2,933	$	—	$	1,179	$	638,291	$	802,562	$	12,921	$	4,721	$	—	$	1,151	$	821,355
Consumer real estate		323,072		1,375		1,122		—		1,707		327,276		312,662		475		712		—		909		314,758
Construction and land development		169,315		5,153		19		—		102		174,589		214,209		—		—		—		10		214,219
Commercial and industrial		568,767		25,855		25,666		—		168		620,456		468,278		9,811		16,952		73		250		495,364
Consumer		41,640		4		18		2		7		41,671		45,695		—		56		3		23		45,777
Other		52,949		—		66		—		—		53,015		54,959		—		76		—		—		55,035
Purchased credit impaired		23,899		—		4,412		81		—		28,392		15,416		—		3,585		260		—		19,261
Total	$	1,780,775	$	65,433	$	34,236	$	83	$	3,163	$	1,883,690	$	1,913,781	$	23,207	$	26,102	$	336	$	2,343	$	1,965,769

The following table details the changes in the ALL for the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (in thousands):


	Commercial real estate			Consumer real estate		Construction and land development		Commercial and industrial			Consumer			Other			Total			Commercial real estate			Consumer real estate			Construction and land development			Commercial and industrial			Consumer			Other			Total
Three Months Ended September 30, 2021
Three Months Ended March 31, 2022
Balance, beginning of period	$	7,915		$	1,730	$	3,871	$	8,401		$	356		$	481		$	22,754		$	7,124		$	2,412		$	3,769		$	7,441		$	397		$	555		$	21,698
Charged-off loans		0			—		—		(125	)		(62	)		(80	)		(267	)		—			—			—			—			(81	)		(38	)		(119	)
Recoveries		—			17		—		1			17			11			46			—			—			—			—			57			5			62
Provision for loan losses		(521	)		596		239		(664	)		124			226			0			(137	)		(198	)		(461	)		(235	)		8			239			(784	)
Balance, end of period	$	7,394		$	2,343	$	4,110	$	7,613		$	435		$	638		$	22,533		$	6,987		$	2,214		$	3,308		$	7,206		$	381		$	761		$	20,857

Three Months Ended September 30, 2020
Three Months Ended March 31, 2021
Balance, beginning of period	$	5,139		$	1,398	$	2,387	$	11,514		$	234		$	363		$	21,035		$	7,349		$	1,831		$	3,476		$	9,708		$	305		$	576		$	23,245
Charged-off loans		—			0		—		0			(30	)		(22	)		(52	)		—			—			—			—			(26	)		(36	)		(62	)
Recoveries		13			1		—		3			16			32			65			10			3			—			1			19			11			44
Provision for loan losses		677			418		795		183			(20	)		66			2,119			329			(155	)		(113	)		503			35			51			650
Balance, end of period	$	5,829		$	1,817	$	3,182	$	11,700		$	200		$	439		$	23,167		$	7,688		$	1,679		$	3,363		$	10,212		$	333		$	602		$	23,877

1715

Commercial
real estate

Consumer
real estate

Construction
and land
development

Commercial
and
industrial

Consumer

Other

Total

Nine Months Ended September 30, 2021

Balance, beginning of period

$
7,349

$
1,831

$
3,476

$
9,708

$
305

$
576

$
23,245

Charged-off loans

(10
)

(1
)

0

(132
)

(106
)

(158
)

(407
)
Recoveries

—

22

—

2

63

23

110

Provision for loan losses

55

491

634

(1,965
)

173

197

(415
)
Balance, end of period

$
7,394

$
2,343

$
4,110

$
7,613

$
435

$
638

$
22,533

Nine Months Ended September 30, 2020

��

Balance, beginning of period

$
3,599

$
1,231

$
2,058

$
5,074

$
222

$
420

$
12,604

Charged-off loans

(3
)

(43
)

—

(710
)

(83
)

(175
)

(1,014
)
Recoveries

10

4

—

162

58

48

282

Provision for loan losses

2,223

625

1,124

7,174

3

146

11,295

Balance, end of period

$
5,829

$
1,817

$
3,182

$
11,700

$
200

$
439

$
23,167

A breakdown of the ALL and the loan portfolio by loan category at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 follows (in thousands):


	Commercial real estate		Consumer real estate		Construction and land development		Commercial and industrial		Consumer		Other		Total		Commercial real estate		Consumer real estate		Construction and land development		Commercial and industrial		Consumer		Other		Total
September 30, 2021
March 31, 2022
Allowance for Loan Losses:
Collectively evaluated for impairment	$	7,394	$	2,343	$	4,110	$	7,613	$	435	$	638	$	22,533	$	6,938	$	2,213	$	3,308	$	7,141	$	304	$	761	$	20,665
Individually evaluated for impairment		—		—		—		0		—		—		0		—		—		—		—		—		—		—
Purchased credit impaired		—		—		—		—		—		—		—		49		1		—		65		77		—		192
Balances, end of period	$	7,394	$	2,343	$	4,110	$	7,613	$	435	$	638	$	22,533	$	6,987	$	2,214	$	3,308	$	7,206	$	381	$	761	$	20,857
Loans:
Collectively evaluated for impairment	$	767,682	$	314,328	$	210,472	$	475,782	$	44,425	$	58,186	$	1,870,875	$	879,948	$	316,145	$	208,413	$	497,268	$	47,899	$	77,956	$	2,027,629
Individually evaluated for impairment		1,154		884		—		63		2		—		2,103		1,144		856		10		248		10		—		2,268
Purchased credit impaired		4,160		13,050		44		2,434		1,242		341		21,271		3,777		10,415		90		2,203		881		292		17,658
Balances, end of period	$	772,996	$	328,262	$	210,516	$	478,279	$	45,669	$	58,527	$	1,894,249	$	884,869	$	327,416	$	208,513	$	499,719	$	48,790	$	78,248	$	2,047,555

December 31, 2020
December 31, 2021
Allowance for Loan Losses:
Collectively evaluated for impairment	$	7,349		1,831		3,410		9,708		305		576	$	23,179	$	7,075	$	2,211	$	3,769	$	7,376	$	321	$	555	$	21,307
Individually evaluated for impairment		—		—		66		—		—		—		66		—		200		—		—		—		—		200
Purchased credit impaired		—		—		—		—		—		—		—		49		1		—		65		76		—		191
Balances, end of period	$	7,349	$	1,831	$	3,476	$	9,708	$	305	$	576	$	23,245	$	7,124	$	2,412	$	3,769	$	7,441	$	397	$	555	$	21,698
Loans:
Collectively evaluated for impairment	$	637,112	$	325,569	$	174,487	$	620,288	$	41,664	$	53,015	$	1,852,135	$	820,204	$	313,849	$	214,209	$	495,114	$	45,754	$	55,035	$	1,944,165
Individually evaluated for impairment		1,179		1,707		102		168		7		—		3,163		1,151		909		10		250		23		—		2,343
Purchased credit impaired		5,541		16,515		270		2,990		2,608		468		28,392		3,929		11,654		91		2,251		1,034		302		19,261
Balances, end of period	$	643,832	$	343,791	$	174,859	$	623,446	$	44,279	$	53,483	$	1,883,690	$	825,284	$	326,412	$	214,310	$	497,615	$	46,811	$	55,337	$	1,965,769

The following table presents the allocation of the ALL for each respective loan category with the corresponding percentage of the ALL in each category to total loans, net of deferred fees as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 (in thousands). PPP loans included in commercial and industrial loans in the below table do not have a corresponding ALL as they are fully guaranteed by the SBA:


	September 30, 2021					December 31, 2020					March 31, 2022					December 31, 2021
	Amount		Percent of total loans			Amount		Percent of total loans			Amount		Percent of total loans			Amount		Percent of total loans
Commercial real estate	$	7,394		0.39	%	$	7,349		0.39	%	$	6,987		0.34	%	$	7,124		0.36	%
Consumer real estate		2,343		0.12			1,831		0.10			2,214		0.11			2,412		0.12
Construction and land development		4,110		0.22			3,476		0.18			3,308		0.16			3,769		0.19
Commercial and industrial		7,613		0.41			9,708		0.51			7,206		0.35			7,441		0.38
Consumer		435		0.02			305		0.02			381		0.02			397		0.02
Other		638		0.03			576		0.03			761		0.04			555		0.03
Total allowance for loan losses	$	22,533		1.19	%	$	23,245		1.23	%	$	20,857		1.02	%	$	21,698		1.10	%

1816

The following table presents the Company’s impaired loans that were evaluated for specific loss allowance, excluding purchased credit impaired (“PCI”) loans, as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 (in thousands):


	September 30, 2021						December 31, 2020						March 31, 2022						December 31, 2021
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded:
Commercial real estate	$	1,154	$	1,135	$	—	$	1,179	$	1,176	$	—	$	1,144	$	1,138	$	—	$	1,151	$	1,115	$	—
Consumer real estate		884		909		—		1,707		1,608		—		856		882		—		255		281		—
Construction and land development		—		—		—		—		—		—		10		10		—		10		11		—
Commercial and industrial		63		63		—		168		457		—		248		293		—		250		298		—
Consumer		2		2		—		7		7		—		10		10		—		23		23		—
Other		—		—		—		—		—		—		—		—		—		—		—		—
Subtotal		2,103		2,109		—		3,061		3,248		—		2,268		2,333		—		1,689		1,728		—
With an allowance recorded:
Commercial real estate		—		—		—		—		—		—		—		—		—		—		—		—
Consumer real estate		—		—		—		—		—		—		—		—		—		654		654		200
Construction and land development		—		—		—		102		102		66		—		—		—		—		—		—
Commercial and industrial		0		0		0		—		—		—		0		0		0		—		—		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—		—		—		—		—		—
Subtotal		0		0		0		102		102		66		0		0		0		654		654		200
Total	$	2,103	$	2,109	$	0	$	3,163	$	3,350	$	66	$	2,268	$	2,333	$	0	$	2,343	$	2,382	$	200

The following table presents information related to the average recorded investment and interest income recognized on impaired loans, excluding PCI loans, for the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (in thousands):


	Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended				Three Months Ended				Three Months Ended
	September 30, 2021				September 30, 2020				September 30, 2021				September 30, 2020				March 31, 2022				March 31, 2021
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
With no related allowance recorded:
Commercial real estate	$	1,159	$	16	$	1,191	$	17	$	1,174	$	48	$	1,458	$	57	$	1,148	$	16	$	1,185	$	16
Consumer real estate		889		—		961		9		1,181		0		982		27		861		—		1,946		1
Construction and land development		—		—		0		—		—		—		0		—		10		—		—		—
Commercial and industrial		63		—		90		0		64		1		176		2		249		—		65		—
Consumer		2		—		4		—		49		—		4		0		11		—		7		—
Other		—		—		—		—		—		—		—		—		—		—		—		—
Subtotal		2,113		16		2,246		26		2,468		49		2,620		86		2,279		16		3,203		17
With an allowance recorded:
Commercial real estate		—		—		—		—		—		—		—		—		—		—		—		—
Consumer real estate		—		—		—		—		—		—		—		—		—		—		—		—
Construction and land development		—		—		0		—		—		—		0		—		—		—		100		—
Commercial and industrial		0		—		107		—		0		—		108		—		—		—		101		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—		—		—		—		—		—
Subtotal		0		—		107		—		0		—		108		—		—		—		201		—
Total	$	2,113	$	16	$	2,353	$	26	$	2,468	$	49	$	2,728	$	86	$	2,279	$	16	$	3,404	$	17

There was 0 interest income recognized on a cash basis for impaired loans during the three ~~or nine~~ month periods ended ~~September 30, 2021~~March 31, 2022 or ~~2020.~~2021.

1917

The following table presents the aging of the recorded investment in past due loans as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 by class of loans (in thousands):


	30 - 59		60 - 89		Greater Than								30 - 59		60 - 89		Greater Than
	Days		Days		89 Days		Total		Loans Not				Days		Days		89 Days		Total		Loans Not
	Past Due		Past Due		Past Due		Past Due		Past Due		Total		Past Due		Past Due		Past Due		Past Due		Past Due		Total
September 30, 2021
March 31, 2022
Commercial real estate	$	65	$	—	$	1,257		1,322	$	767,514	$	768,836	$	24	$	—	$	—	$	24	$	881,068	$	881,092
Consumer real estate		425		496		187		1,108		314,104		315,212		532		16		110		658		316,343		317,001
Construction and land development		30		—		12		42		210,430		210,472		334		—		10		344		208,079		208,423
Commercial and industrial		437		503		45		985		474,860		475,845		604		74		301		979		496,537		497,516
Consumer		160		99		38		297		44,130		44,427		195		31		84		310		47,599		47,909
Other		78		316		—		394		57,792		58,186		50		—		—		50		77,906		77,956
Purchased credit impaired		932		79		794		1,805		19,466		21,271		585		30		571		1,186		16,472		17,658
Total	$	2,127	$	1,493	$	2,333	$	5,953	$	1,888,296	$	1,894,249	$	2,324	$	151	$	1,076	$	3,551	$	2,044,004	$	2,047,555

December 31, 2020
December 31, 2021
Commercial real estate	$	409	$	—	$	1,176	$	1,585	$	636,706	$	638,291	$	—	$	—	$	1,115	$	1,115	$	820,240	$	821,355
Consumer real estate		6,084		1,596		687		8,367		318,909		327,276		1,806		—		241		2,047		312,711		314,758
Construction and land development		2,670		745		—		3,415		171,174		174,589		—		—		11		11		214,208		214,219
Commercial and industrial		1,734		38		1,595		3,367		617,089		620,456		57		48		268		373		494,991		495,364
Consumer		270		40		7		317		41,354		41,671		164		170		26		360		45,417		45,777
Other		252		38		—		290		52,725		53,015		—		—		—		—		55,035		55,035
Purchased credit impaired		1,372		1,554		901		3,827		24,565		28,392		302		153		459		914		18,347		19,261
Total	$	12,791	$	4,011	$	4,366	$	21,168	$	1,862,522	$	1,883,690	$	2,329	$	371	$	2,120	$	4,820	$	1,960,949	$	1,965,769

The following table presents the recorded investment in non-accrual loans, past due loans over 8990 days and accruing and troubled debt restructurings (“TDR”) by class of loans as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 (in thousands):


	Non-Accrual		Past Due Over 89 Days and Accruing		Troubled Debt Restructurings		Non-Accrual		Past Due Over 90 Days and Accruing		Troubled Debt Restructurings
September 30, 2021
March 31, 2022
Commercial real estate	$	115	$	1,257	$	1,135	$	0	$	0	$	1,138
Consumer real estate		1,174		77		661		1,033		47		647
Construction and land development		—		12		0		10		0		—
Commercial and industrial		89		45		63		463		—		62
Consumer		47		0		0		39		56		—
Other		—		—		0		—		—		—
Purchased credit impaired		2,006		169		0		1,957		133		—
Total	$	3,431	$	1,560	$	1,859	$	3,502	$	236	$	1,847

December 31, 2020
December 31, 2021
Commercial real estate	$	130	$	1,176	$	1,176	$	—	$	1,115	$	1,115
Consumer real estate		1,821		342		685		1,086		54		654
Construction and land development		107		—		—		11		—		—
Commercial and industrial		470		1,205		67		324		112		63
Consumer		9		5		—		31		10		—
Other		—		—		—		—		—		—
Purchased credit impaired		2,279		567		—		1,806		89		—
Total	$	4,816	$	3,295	$	1,928	$	3,258	$	1,380	$	1,832

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, all loans classified as nonperforming were deemed to be impaired.

2018

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the Company had a recorded investment in TDR of $~~1.9~~1.8 million. The Company had 0 specific allowance for those loans at ~~September 30, 2021~~March 31, 2022 or December 31, ~~2020~~2021 and there were 0 commitments to lend additional amounts. Loans accounted for as TDR include modifications from original terms such as those due to bankruptcy proceedings, certain modifications of amortization periods or extended suspension of principal payments due to customer financial difficulties. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s loan policy. Loans accounted for as TDR are individually evaluated for impairment. In accordance with interagency guidance, short term deferrals granted due to the COVID-19 pandemic are not considered TDR unless the borrower was experiencing financial difficulty prior to the pandemic.

There were 0 new TDR identified during the three ~~or nine~~ months ended ~~September 30, 2021~~March 31, 2022 or ~~2020.~~2021. There were 0 TDR for which there was a payment default within twelve months following the modification during the three ~~or nine~~ months ended ~~September 30, 2021~~March 31, 2022 or ~~2020.~~2021.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

~~Acquired Loans~~

~~On July 1, 2020, the Company acquired FCB and BOW (see Note 2 for more information). As a result of the acquisitions, the Company recorded loans with a fair value of $294.7~~ ~~million. Of those loans, $33.6~~ million were considered to be purchased credit impaired (“PCI”) loans, which are loans for which it is probable at the acquisition date that all contractually required payments will not be collected. The remaining loans are considered to be purchased non-impaired loans and their related fair value discount or premium is recognized as an adjustment to yield over the remaining life of each loan.

The following table relates to acquired FCB and BOW PCI loans and summarizes the contractually required payments, which includes principal and interest, expected cash flows to be collected, and the fair value of acquired PCI loans at the acquisition date (in thousands):


		~~FCB and BOW acquisitions on July 1, 2020~~
~~Contractually required payments~~		$~~42,443~~
~~Nonaccretable difference~~		~~4,501~~
~~Cash flows expected to be collected at acquisition~~		~~37,942~~
~~Accretable yield~~		~~4,349~~
~~Fair value of PCI loans at acquisition date~~		$~~33,593~~

The following table relates to purchased non-impaired loans acquired and provides the contractually required payments, fair value, and estimate of contractual cash flows not expected to be collected at the acquisition date (in thousands):


		~~FCB and BOW acquisitions on July 1, 2020~~
~~Contractually required payments~~		$~~296,527~~
~~Fair value of acquired loans at acquisition date~~		~~260,701~~
~~Contractual cash flows not expected to be collected~~		~~3,718~~

Purchased Credit Impaired Loans

The following table presents changes in the carrying value of PCI loans (in thousands) for the periods indicated:


	Three Months Ended			Nine Months Ended			Three Months Ended			Three Months Ended
	September 30, 2021			September 30, 2021			March 31, 2022			March 31, 2021
Balance at beginning of period	$	22,765		$	28,392		$	19,261		$	28,392
Change due to payments received and accretion		(1,494	)		(7,121	)		(1,411	)		(1,317	)
Reclassification of discount to allowance for loan losses								(192	)		—
Balance at end of period	$	21,271		$	21,271		$	17,658		$	27,075

The following table presents changes in the accretable yield for PCI loans (in thousands) for the periods indicated:


	Three Months Ended			Nine Months Ended			Three Months Ended			Three Months Ended
	September 30, 2021			September 30, 2021			March 31, 2022			March 31, 2021
Balance at beginning of period	$	3,169		$	4,068		$	5,763		$	4,068
Accretion		(603	)		(1,502	)		(437	)		(392	)
Balance at end of period	$	2,566		$	2,566		$	5,326		$	3,676

PCI loans had no0 impact on the ALL for the three ~~or nine~~ months ended ~~September 30, 2021.~~March 31, 2022.

NOTE 54 – PREMISES AND EQUIPMENT

The Company leases certain premises and equipment under operating leases. At ~~September 30, 2021,~~March 31, 2022, the Company had lease liabilities totaling $~~12.2~~12.1 million and right-of-use assets totaling $~~11.4~~11.2 million related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. At ~~September 30, 2021,~~March 31, 2022, the weighted average remaining lease term for operating leases was ~~9.3~~8.7 years and the weighted average discount rate used in the measurement of operating lease liabilities was ~~3.42~~3.36%.

Lease costs were as follows (in thousands):


	Three Months Ended		Nine Months Ended		Three Months Ended		Three Months Ended
	September 30, 2021		September 30, 2021		March 31, 2022		March 31, 2021
Operating lease cost	$	514	$	1,588	$	533	$	563
Short-term lease cost		0		0		0		0
Variable lease cost		0		0		0		0
Total lease cost	$	514	$	1,588	$	533	$	563

There were 0 sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three ~~or nine~~ months ended ~~September 30, 2021~~March 31, 2022 or ~~2020.~~2021.

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows (in thousands):


	September 30, 2021			March 31, 2022
Lease payments due:
2021	$	432
2022		1,751		$	1,404
2023		1,717			1,834
2024		1,425			1,543
2025		1,428			1,549
2026 and thereafter		7,655
2026					1,537
2027 and thereafter					6,252
Total undiscounted cash flows		14,408			14,119
Discount on cash flows		(2,181	)		(2,014	)
Total lease liability	$	12,227		$	12,105

NOTE 65 – SHORT TERM BORROWINGS AND LONG-TERM DEBT

Short-Term Borrowings

The Company had 0 outstanding advances as of ~~September 30, 2021 compared to $~~10 ~~million as of~~March 31, 2022 and December 31, ~~2020.~~2021.

Advances from the FHLB are collateralized by investment securities with a market value of $2.2 million ~~FHLB stock~~ and certain commercial and residential real estate mortgage loans totaling $~~634.1~~214.9 million under a blanket mortgage collateral agreement. At ~~September 30, 2021,~~March 31, 2022, the amount of available credit from the FHLB totaled $~~448.9~~154.4 million.

Subordinated Notes

The Company issued $30.0 million of fixed-to-floating rate subordinated notes during the third quarter of 2020, which were recorded net of issuance costs of $0.6 million, that mature June 30, 2030. Beginning on or after June 30, 2025, the Company may redeem the notes, in whole or in part, at their principal amount plus any accrued and unpaid interest. The notes have a fixed interest rate of 5.25% per annum for the first five years. Thereafter, the interest rate will reset quarterly to an interest rate per annum equal to a benchmark rate (which is expected to be Three-Month Term SOFR) plus 513 basis points. The carrying value of subordinated notes was $~~29.5~~29.6 million at ~~September 30, 2021~~March 31, 2022 and $~~29.4~~29.5 million at December 31, ~~2020.~~2021.

NOTE ~~7 –~~6– ACCUMULATED OTHER COMPREHENSIVE ~~INCOME (LOSS)~~LOSS

The following were changes in accumulated other comprehensive ~~income (loss)~~loss by component, net of tax, for the periods ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (in thousands):


				Unrealized Gains						Unrealized Gains
	Gains and			and Losses						and Losses
	Losses on			on Available						on Available
	Cash Flow			for Sale						for Sale
	Hedges			Securities			Total			Securities
Nine Months Ended September 30, 2021
Three Months Ended March 31, 2022
Beginning balance	$	—		$	7,728		$	7,728		$	(1,270	)
Other comprehensive loss before reclassification, net of tax		—			(7,214	)		(7,214	)		(20,064	)
Amounts reclassified from accumulated other comprehensive loss, net of tax		—			(15	)		(15	)		0
Net current period other comprehensive loss		—			(7,229	)		(7,229	)		(20,064	)
Ending Balance	$	—		$	499		$	499		$	(21,334	)

Nine Months Ended September 30, 2020
Three Months Ended March 31, 2021
Beginning balance	$	(2,679	)	$	4,062		$	1,383		$	7,728
Other comprehensive income before reclassification, net of tax		—			2,797			2,797
Amounts reclassified from accumulated other comprehensive income, net of tax		2,679			(55	)		2,624
Net current period other comprehensive income		2,679			2,742			5,421
Other comprehensive loss before reclassification, net of tax											(9,406	)
Amounts reclassified from accumulated other comprehensive loss, net of tax											(19	)
Net current period other comprehensive loss											(9,425	)
Ending Balance	$	0		$	6,804		$	6,804		$	(1,697	)

The following amounts were reclassified out of each component of accumulated other comprehensive income (loss) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (in thousands):


													Affected Line Item						Affected Line Item
Details about Accumulated Other	Three Months Ended September 30,						Nine Months Ended September 30,						in the Statement Where	Three Months Ended March 31,					in the Statement Where
Comprehensive Income (Loss) Components	2021			2020			2021			2020			Net Income is Presented	2022		2021			Net Income is Presented
Realized losses on cash flow hedges	$	—		$	(2,060	)	$	—		$	(2,466	)	Interest expense - money market accounts
		—			(107	)		—			(213	)	Interest expense - Federal Home Loan Bank advances
		—			—			—			—		Income tax benefit (expense)
	$	—		$	(2,167	)	$	—		$	(2,679	)	Net of tax
Realized gains on available- for-sale securities	$	7		$	34		$	20		$	74		Net gain on sale of securities	$	0	$	26		Net gain on sale of securities
		(2	)		(9	)		(5	)		(19	)	Income tax expense		0		(7	)	Income tax expense
	$	5		$	25		$	15		$	55		Net of tax	$	0	$	19		Net of tax

2421

NOTE ~~8 –~~7– INCOME TAXES

The Company’s effective tax rate for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021~~March 31, 2022 was ~~19.4~~19.6% ~~and~~ ~~20.0%, respectively,~~ compared to 22.0% ~~and~~ ~~18.0~~% for the three ~~and nine~~ months ended ~~September 30, 2020, respectively.~~

The three month period decrease is attributable to a revision in the Company's expected annual effective tax rate for 2021 based on continued benefits in the Company's tax strategy. The increase in the effective tax rate from the nine month period ended September 30, 2020 is largely the result of the impact of certain provisions under the CARES Act, which were effective for 2020. The CARES Act permitted NOL’s arising in taxable years beginning after DecemberMarch 31, ~~2017 and before January 1, 2021 to be carried back~~ ~~five~~ taxable years. This enabled the Company to carry back losses in 2020, which were incurred during the taxable year 2018 to prior years with a higher statutory tax rate, creating a permanent tax rate benefit. As a result, the Company recorded an income tax benefit of $~~0.8~~ ~~million related to the permanent tax rate benefit during the first nine months of 2020.~~2021.

The effective tax rate for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021~~March 31, 2022 compared favorably to the statutory federal rate of 21% and Tennessee excise tax rate of 6.5% primarily due to investments in qualified municipal securities, company owned life insurance, tax benefits of CapStar Bank’s real estate investment trust subsidiary, community investment tax credits, and tax benefits associated with share-based compensation, net of the effect of certain non-deductible expenses.

NOTE 98 – COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet.

The following table sets forth outstanding financial instruments whose contract amounts represent credit risk as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 (in thousands):


	Contract or notional amount				Contract or notional amount
	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
Financial instruments whose contract amounts represent credit risk:
Unused commitments to extend credit	$	806,444	$	804,520	$	883,987	$	831,075
Standby letters of credit		10,397		10,403		10,502		10,623
Total	$	816,841	$	814,923	$	894,489	$	841,698

The Company is party to litigation and claims arising in the normal course of business. Management believes that the liabilities, if any, arising from such litigation and claims as of ~~September 30, 2021,~~March 31, 2022, will not have a material impact on the financial statements of the Company.

NOTE 109 – DERIVATIVES

The Company utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

Interest Rate Swaps ~~Designated as Cash Flow Hedges~~

~~There were~~ 0 interest rate swaps designated as cash flow hedges as of September 30, 2021 and December 31, 2020. The Company previously terminated an interest rate swap during 2019, which resulted in a termination fee of $~~1.5~~ million which continued to be amortized as the corresponding hedged items, consisting of LIBOR-based brokered deposits and FHLB borrowings, were expected to remain outstanding until the initial maturities of the terminated swaps. However, during the year ended December 31, 2020, it was determined that in light of the Company’s surplus liquidity position this funding was expected to be terminated at the next renewal date and thus the previously terminated interest rate swaps which had been designated as cash flow hedges were no longer deemed effective, therefore, remaining unrealized losses of $~~1.9~~ ~~million included in accumulated other comprehensive income were recognized in net income. There are~~ 0 ~~other interest rate swap related unrealized gains or losses in accumulated other comprehensive income as of September 30, 2021.~~

~~Other Interest Rate Swaps~~

The Company enters into swaps to facilitate customer transactions and meet their financing needs. Upon entering into these transactions the Company enters into offsetting positions with large U.S. financial institutions in order to minimize market risk to the Company. A summary of the Company’s customer related interest rate swaps was as follows (in thousands):


	September 30, 2021					December 31, 2020					March 31, 2022					December 31, 2021
	Notional		Estimated			Notional		Estimated			Notional		Estimated			Notional		Estimated
	amount		fair value			amount		fair value			amount		fair value			amount		fair value
Interest rate swap agreements:
Pay fixed/receive variable swaps	$	58,040	$	(2,118	)	$	59,946	$	(2,740	)	$	50,911	$	1,131		$	54,055	$	(1,594	)
Pay variable/receive fixed swaps		58,040		2,118			59,946		2,740			50,911		(1,131	)		54,055		1,594
Total	$	116,080	$	0		$	119,892	$	0		$	101,822	$	0		$	108,110	$	0

Mortgage Banking Derivatives

The Company enters into various derivative agreements with customers in the form of interest-rate lock commitments, which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The derivatives are valued using a model that utilizes market interest rates and other unobservable inputs. Changes in the fair value of these commitments due to fluctuations in interest rates that are to be originated to our loans held for sale portfolio are economically hedged through the use of forward sale commitments of mortgage-backed securities. The gains and losses arising from this derivative activity are reflected in current period earnings under mortgage banking income. Interest rate lock

commitments are valued using a model with significant unobservable market parameters. Forward sale commitments are valued based on quoted prices for similar assets in an active market with inputs that are observable.

The net (losses) gains relating to mortgage banking derivative instruments included in mortgage banking income were as follows (in thousands):

Three Months Ended

Nine Months Ended

September 30, 2021

September 30, 2021

Mortgage loan interest rate lock commitments

$
(221
)

$
(1,528
)
Mortgage-backed securities forward sales commitments

307

919

Total

$
86

$
(609
)


	Three Months Ended
	March 31, 2022
Mortgage loan interest rate lock commitments	$	(471	)
Mortgage-backed securities forward sales commitments		415
Total	$	(56	)

The amount and fair value of mortgage banking derivatives included in the consolidated balance sheets were as follows (in thousands):


	September 30, 2021				December 31, 2020					March 31, 2022				December 31, 2021
	Notional		Estimated		Notional		Estimated			Notional		Estimated		Notional		Estimated
	amount		fair value		amount		fair value			amount		fair value		amount		fair value
Included in other assets:
Mortgage loan interest rate lock commitments	$	86,938	$	1,079	$	88,303	$	2,607		$	69,454	$	225	$	50,281	$	696
Mortgage-backed securities forward sales commitments		72,500		293		—		—			68,500		255		—		—
Included in other liabilities:
Mortgage-backed securities forward sales commitments	$	0	$	0	$	87,000	$	(626	)	$	0	$	0	$	43,000	$	(160	)

2623

NOTE 1110 – STOCK OPTIONS AND RESTRICTED SHARES

On April 23, 2021, the shareholders of CapStar Financial Holdings, Inc. approved the 2021 Stock Incentive Plan (the "Plan"). The Plan provides for the grant of stock-based incentives, including stock options, restricted stock units, performance awards and restricted stock, to employees, directors and service providers that are subject to forfeiture until vesting conditions have been satisfied by the award recipient under the terms of the award. The Plan is intended to help align the interests of employees and our shareholders and reward our employees for improved Company performance. A total of 1,168,543 shares of stock were reserved for issuance under the Plan. Stock incentives include both restricted share and stock option grants. Total shares issuable under the plan were ~~1,168,543~~1,098,499 as of ~~September 30, 2021.~~March 31, 2022.

The Company has recognized stock-based compensation expense, within salaries and employee benefits for employees, and within other non-interest expense for directors, in the consolidated statements of income as follows (in thousands):


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2021			2020			2021			2020			2022			2021
Stock-based compensation expense before income taxes	$	373		$	330		$	1,169		$	1,231		$	388		$	349
Less: deferred tax benefit		(98	)		(86	)		(306	)		(322	)		(101	)		(91	)
Reduction of net income	$	275		$	244		$	863		$	909		$	287		$	258

Restricted Shares, Restricted Stock Units, and Performance Stock Units

We grant time-vested restricted stock units and performance stock units to certain key employees and directors under our stock award plan. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. ~~Those granted after January 1, 2021,~~Awards vest ratably over a two or ~~three~~three-year~~-year~~ vesting period depending on the specific award.

Performance stock units vest based upon the attainment of certain performance metrics over a three-year cumulative performance period. Certain of these awards are eligible to receive dividend equivalent shares. The grant date fair value of these awards was estimated using a Monte Carlo simulation. For awards based upon the achievement of the performance goals, the awards are earned ratably from 0% to 188%. If the performance goals are met at the end of the performance period, the award is adjusted to reflect the Company’s three-year total shareholder return (TSR) performance relative to a capital market peer group. This TSR modifier cannot cause the award to exceed the maximum of 188%.

The recipients have the right to vote and receive dividends but cannot sell, transfer, assign, pledge, hypothecate, or otherwise encumber the restricted stock until the shares have vested. A summary of the changes in the Company’s nonvested restricted shares for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 follows:


				Weighted					Weighted
				Average					Average
	Restricted			Grant Date		Restricted			Grant Date
Nonvested Shares	Shares			Fair Value		Shares			Fair Value
Nonvested at beginning of period		148,414		$	14.39		177,020		$	14.00
Granted		140,549			14.81		76,539			21.41
Vested		(64,062	)		14.99		(27,836	)		16.10
Forfeited		(23,222	)		14.52		(6,864	)		13.43
Nonvested at end of period		201,679		$	14.10		218,859		$	16.34

As of ~~September 30, 2021,~~March 31, 2022, there was $~~1.9~~2.6 million of unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of ~~2.0~~2.2 years. The total fair value of shares vested during the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 was $~~1.1~~0.6 million.

Stock Options

Option awards are generally granted with an exercise price equal to the fair value of the Company’s common stock at the date of grant. Option awards generally have a three year vesting period and a ten year contractual term.

The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model. There were 0 options granted in ~~2021~~2022 or ~~2020.~~2021.

2724

A summary of the activity in stock options for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 follows:


						Weighted						Weighted
				Weighted		Average				Weighted		Average
				Average		Remaining				Average		Remaining
				Exercise		Contractual				Exercise		Contractual
	Shares			Price		Term (years)		Shares		Price		Term (years)
Outstanding at beginning of period		226,589		$	11.73				130,245	$	11.96
Granted		0			0				0		0
Exercised		(96,344	)		11.41				0		0
Forfeited or expired		0			0				0		0
Outstanding at end of period		130,245		$	11.96		5.2		130,245	$	11.96		4.7
Fully vested and expected to vest		130,245		$	11.96		5.2		130,245	$	11.96		4.7
Exercisable at end of period		113,578		$	11.54		4.8		113,578	$	11.54		4.3

Information related to stock options during each year follows:


	2021		2020		2022		2021
Intrinsic value of options exercised	$	821,174	$	188,662	$	0	$	34,700
Cash received from option exercises		1,077,489		105,847		0		0
Tax benefit realized from option exercises		148,312		16,524		0		0
Weighted average fair value of options granted		0		0		0		0

As of ~~September 30, 2021,~~March 31, 2022, there was $0.1 million of unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of ~~0.6~~0.1 years.

NOTE 1211 – REGULATORY CAPITAL REQUIREMENTS

The Company and the Bank are subject to regulatory capital requirements administered by the Federal Reserve and the Bank is also subject to the regulatory capital requirements of the Tennessee Department of Financial Institutions. Failure to meet capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that could, in that event, have a material adverse effect on the institutions’ financial statements. The relevant regulations require the Company and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting principles. The capital classifications of the Company and the Bank are also subject to qualitative judgments by their regulators about components, risk weightings, and other factors. Those qualitative judgments could also affect the capital status of the Company and the Bank and the amount of dividends the Company and the Bank may distribute. The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of ~~September 30, 2021,~~March 31, 2022, the Company and the Bank met all regulatory capital adequacy requirements to which they are subject.

2825

The Company’s and the Bank’s capital amounts and ratios as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 are presented in the following table (dollars in thousands).


	Actual					Minimum capital requirement (1)					Minimum to be well-capitalized (2)					Actual					Minimum capital requirement (1)					Minimum to be well-capitalized (2)
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
At September 30, 2021:
At March 31, 2022:
Total capital to risk-weighted assets:
CapStar Financial Holdings, Inc.	$	373,051		16.23	%	$	183,922		8.0	%	N/A		N/A			$	392,629		15.60	%	$	201,333		8.0	%	N/A		N/A
CapStar Bank		359,460		15.65			183,781		8.0		$	229,726		10	%		380,561		15.13			201,205		8.0		$	251,507		10	%
Tier I capital to risk-weighted assets:
CapStar Financial Holdings, Inc.		320,700		13.95			137,941		6.0		N/A		N/A				341,887		13.58			151,000		6.0		N/A		N/A
CapStar Bank		336,608		14.65			137,835		6.0			183,781		8.00			359,385		14.29			150,904		6.0			201,205		8.00
Common equity Tier 1 capital to risk weighted assets:
CapStar Financial Holdings, Inc.		320,700		13.95			103,456		4.5		N/A		N/A				341,887		13.58			113,250		4.5		N/A		N/A
CapStar Bank		320,108		13.93			103,377		4.5			149,322		6.50			342,885		13.63			113,178		4.5			163,479		6.50
Tier I capital to average assets:
CapStar Financial Holdings, Inc.		320,700		10.28			124,771		4.0		N/A		N/A				341,887		10.99			124,484		4.0		N/A		N/A
CapStar Bank		336,608		10.82			124,449		4.0			155,561		5.00			359,385		11.56			124,336		4.0			155,420		5.00

At December 31, 2020:
At December 31, 2021:
Total capital to risk-weighted assets:
CapStar Financial Holdings, Inc.	$	338,426		16.03	%	$	168,910		8.0	%	N/A		N/A			$	384,116		16.29	%	$	188,610		8.0	%	N/A		N/A
CapStar Bank		324,152		15.36			168,808		8.0		$	211,010		10.0			370,919		15.74			188,471		8.0		$	235,589		10.0
Tier I capital to risk-weighted assets:
CapStar Financial Holdings, Inc.		285,439		13.52			126,682		6.0		N/A		N/A				332,567		14.11			141,458		6.0		N/A		N/A
CapStar Bank		300,588		14.25			126,606		6.0			168,808		8.0			348,902		14.81			141,354		6.0			188,471		8.0
Common equity Tier 1 capital to risk weighted assets:
CapStar Financial Holdings, Inc.		285,439		13.52			95,012		4.5		N/A		N/A				332,567		14.11			106,093		4.5		N/A		N/A
CapStar Bank		284,088		13.46			94,954		4.5			137,156		6.5			332,402		14.11			106,015		4.5			153,133		6.5
Tier I capital to average assets:
CapStar Financial Holdings, Inc.		285,439		9.60			118,877		4.0		N/A		N/A				332,567		10.69			124,437		4.0		N/A		N/A
CapStar Bank		300,588		10.12			118,780		4.0			148,476		5.0			348,902		11.23			124,246		4.0			155,308		5.0

(1) For the calendar year ~~2021,~~2022, the Company must maintain a capital conservation buffer of Tier 1 common equity capital in excess of minimum risk-based capital ratios by at least 2.5% to avoid limits on capital distributions and certain discretionary bonus payments to executive officers and similar employees.

(2) For the Company to be well-capitalized, the Bank must be well-capitalized and the Company must not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Federal Reserve to meet and maintain a specific capital level for any capital measure.

2926

NOTE 1312 – EARNINGS PER SHARE

The following is a summary of the basic and diluted earnings per share calculation for the three and ~~nine~~three month periods ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (in thousands except share and per share data):


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2021		2020		2021		2020		2022		2021
Basic net income per share calculation:
Numerator – Net income	$	13,102	$	7,487	$	36,207	$	15,015	$	10,673	$	11,030
Denominator – Average common shares outstanding		22,164,278		21,948,579		22,114,948		19,558,281		22,198,339		22,045,501
Basic net income per share	$	0.59	$	0.34	$	1.64	$	0.77	$	0.48	$	0.50
Diluted net income per share calculation:
Numerator – Net income	$	13,102	$	7,487	$	36,207	$	15,015	$	10,673	$	11,030
Denominator – Average common shares outstanding		22,164,278		21,948,579		22,114,948		19,558,281		22,198,339		22,045,501
Dilutive shares contingently issuable		54,124		11,911		50,182		25,167		56,305		31,099
Average diluted common shares outstanding		22,218,402		21,960,490		22,165,130		19,583,448		22,254,644		22,076,600
Diluted net income per share	$	0.59	$	0.34	$	1.63	$	0.77	$	0.48	$	0.50

NOTE 1413 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Bank used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded and values debt securities by relying on quoted prices for the specific securities and the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). See below for additional discussion of Level 3 valuation methodologies and significant inputs. The fair values of all securities are determined from third party pricing services without adjustment.

Derivatives-Interest Rate Swaps: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). The Bank’s derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The fair values of all interest rate swaps are determined from third party pricing services without adjustment.

3027

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on at least a quarterly basis for additional impairment and adjusted in accordance with the loan policy.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Appraisals may be adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and/or management’s expertise and knowledge of the collateral. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The Company had 0 other real estate owned carried at fair value at ~~September 30, 2021~~March 31, 2022 or December 31, ~~2020.~~2021.

Loans Held For Sale: Loans held for sale are carried at either fair value, if elected, or the lower of cost or fair value on a pool-level basis. Origination fees and costs for loans held for sale recorded at lower of cost or market are capitalized in the basis of the loan and are included in the calculation of realized gains and losses upon sale. Origination fees and costs are recognized in earnings at the time of origination for loans held for sale that are recorded at fair value. Fair value is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

Derivatives-Mortgage Loan Interest Rate Lock Commitments: Interest rate lock commitments that relate to the origination of mortgage loans that will be held for sale are recorded at fair value, determined as the amount that would be required to settle each derivative instrument at the balance sheet date. The fair value of the interest rate lock commitment is derived from the fair value of related mortgage loans, which is based on observable market data and includes the expected net future cash flows related to servicing of the loans. In estimating the fair value of an interest rate lock commitment, the Company assigns a probability to the interest rate lock commitment based on an expectation that it will be exercised and the loan will be funded (a “pull through” rate). The expected pull through rates are applied to the fair value of the unclosed mortgage pipeline, resulting in a Level 3 fair value classification. The pull through rate is a statistical analysis of our actual rate lock fallout history to determine the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull through rate) are applied accordingly. Significant increases (decreases) in the pull through rate in isolation result in a significantly higher (lower) fair value measurement. Changes to the fair value of interest rate lock commitments are recognized based on interest rate changes, changes in the probability that the commitment will be exercised, and the passage of time.

Derivatives-Mortgage-Backed Securities Forward Sales Commitments: The Company utilizes mortgage-backed securities forward sales commitments to hedge mortgage loan interest rate lock commitments. Mortgage-backed securities forward sales commitments are recorded at fair value based on quoted prices for similar assets in an active market with inputs that are observable, resulting in a Level 2 fair value classification.

3128

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):


	Fair value measurements at September 30, 2021										Fair value measurements at March 31, 2022
				Quoted prices										Quoted prices
				in active		Significant								in active		Significant
				markets for		other			Significant					markets for		other			Significant
				identical		observable			unobservable					identical		observable			unobservable
	Carrying			assets		inputs			inputs		Carrying			assets		inputs			inputs
	Value			(Level 1)		(Level 2)			(Level 3)		Value			(Level 1)		(Level 2)			(Level 3)
Assets:
Securities available-for-sale:
U. S. government agency securities	$	11,610		$	0	$	11,610		$	0	$	15,852		$	0	$	15,852		$	0
State and municipal securities		83,687			0		83,687			0		75,047			0		75,047			0
Mortgage-backed securities		320,500			0		320,500			0		300,243			0		300,243			0
Asset-backed securities		3,344			0		3,344			0		3,340			0		3,340			0
Other debt securities		64,637			0		64,637			0		66,076			0		66,076			0
Loans held for sale		79,842			0		79,842			0		38,502			0		38,502			0
Derivative assets:
Non-hedging derivatives:
Interest rate swaps - customer related		2,118			—		2,118			—		1,131			—		1,131			—
Mortgage loan interest rate lock commitments		1,079			—		—			1,079		225			—		—			225
Mortgage-backed securities forward sales commitments		293			—		293			—		255			—		255			—
Liabilities:
Derivative liabilities:
Non-hedging derivatives:
Derivative Liabilities - customer related		(2,118	)		0		(2,118	)		0		(1,131	)		0		(1,131	)		0


	Fair value measurements at December 31, 2020										Fair value measurements at December 31, 2021
				Quoted prices										Quoted prices
				in active		Significant								in active		Significant
				markets for		other			Significant					markets for		other			Significant
				identical		observable			unobservable					identical		observable			unobservable
	Carrying			assets		inputs			inputs		Carrying			assets		inputs			inputs
	Value			(Level 1)		(Level 2)			(Level 3)		Value			(Level 1)		(Level 2)			(Level 3)
Assets:
Securities available-for-sale:
U. S. government agency securities	$	16,391		$	0	$	16,391		$	0	$	11,503		$	0	$	11,503		$	0
State and municipal securities		91,928			0		91,928			0		82,560			0		82,560			0
Mortgage-backed securities		336,363			0		336,363			0		293,607			0		293,607			0
Asset-backed securities		3,193			0		3,193			0		3,339			0		3,339			0
Other debt securities		38,340			0		38,340			0		68,387			0		68,387			0
Loans held for sale		97,303			0		97,303			0		37,306			0		37,306			0
Derivative assets:
Non-hedging derivatives:
Interest rate swaps - customer related		2,740			0		2,740			0		1,594			0		1,594			0
Mortgage loan interest rate lock commitments		2,607			0		0			2,607		696			0		0			696
Liabilities:
Derivative liabilities:
Non-hedging derivatives:
Interest rate swaps - customer related		(2,740	)		0		(2,740	)		0		(1,594	)		0		(1,594	)		0
Mortgage-backed securities forward sales commitments		(626	)		0		(626	)		0		(160	)		0		(160	)		0

3229

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (in thousands):


	Mortgage Loan Interest Rate					Mortgage Loan Interest Rate
	Lock Commitments					Lock Commitments
	2021			2020		2022			2021

Balance of recurring Level 3 assets at January 1st	$	2,607		$	648	$	696		$	2,607
Total gains or losses for the period:
Included in mortgage banking income		(1,528	)		3,488		(471	)		(1,805	)
Balance of recurring Level 3 assets at September 30th	$	1,079		$	4,136
Balance of recurring Level 3 assets at March 31st						$	225		$	802

The following table presents quantitative information about recurring Level 3 fair value measurements (dollars in thousands):

Range

��

Range

Fair

Valuation

(Weighted-

Fair

Valuation

(Weighted-

September 30, 2021

Value

Technique(s)

Unobservable Input(s)

Average)

March 31, 2022

Value

Technique(s)

Unobservable Input(s)

Average)

Assets:

Non-hedging derivatives:

Mortgage loan interest rate lock commitments

1,079

Consensus pricing

Origination pull-through rate

59% - 96% (82%)

225

Consensus pricing

Origination pull-through rate

77% - 100% (93%)

Range

Fair

Valuation

(Weighted-

Fair

Valuation

(Weighted-

December 31, 2020

Value

Technique(s)

Unobservable Input(s)

Average)

December 31, 2021

Value

Technique(s)

Unobservable Input(s)

Average)

Assets:

Non-hedging derivatives:

Mortgage loan interest rate lock commitments

2,607

Consensus pricing

Origination pull-through rate

54% - 91% (74%)

696

Consensus pricing

Origination pull-through rate

60% - 98% (80%)

There were no assets measured at fair value on a nonrecurring basis as of ~~September 30, 2021.~~March 31, 2022. Assets measured at fair value on a nonrecurring basis as of December 31, ~~2020~~2021 are summarized below (in thousands).

Fair value measurements at December 31, 2020

Fair value measurements at December 31, 2021

Quoted prices

in active

Significant

in active

Significant

markets for

other

Significant

markets for

other

Significant

identical

observable

unobservable

identical

observable

unobservable

Carrying

assets

inputs

Carrying

assets

inputs

Value

(level 1)

(level 2)

(level 3)

Value

(level 1)

(level 2)

(level 3)

Assets:

Impaired loans:

Commercial and industrial

Consumer real estate

454

The following table presents quantitative information about December 31, ~~2020~~2021 Level 3 fair value measurements for assets measured at fair value on a non-recurring basis (dollars in thousands):

Range

Fair

Valuation

(Weighted-
December 31, 2020

Value

Technique(s)

Unobservable Input(s)

Average)
Impaired loans:

Commercial and industrial

$
36

Sales Comparison approach

Appraisal discounts

10%


					Range
	Fair		Valuation		(Weighted-
December 31, 2021	Value		Technique(s)	Unobservable Input(s)	Average)
Impaired loans:
Consumer real estate	$	454	Sales comparison approach	Appraisal discounts	10%

3330

Fair Value of Financial Instruments

The carrying value and estimated fair values of the Bank’s financial instruments at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 were as follows (in thousands):


	September 30, 2021				December 31, 2020					March 31, 2022				December 31, 2021
	Carrying				Carrying				Fair value	Carrying				Carrying				Fair value
	amount		Fair value		amount		Fair value		level of input	amount		Fair value		amount		Fair value		level of input
Financial assets:
Cash and due from banks, interest-bearing deposits in financial institutions	$	339,367	$	339,367	$	277,439	$	277,439	Level 1	$	336,081	$	336,081	$	395,225	$	395,225	Level 1
Federal funds sold		19,900		19,900		—		—	Level 1		19,900		19,900		19,900		19,900	Level 1
Securities available-for-sale		483,778		483,778		486,215		486,215	Level 2		460,558		460,558		459,396		459,396	Level 2
Securities held-to-maturity		1,788		1,847		2,407		2,504	Level 2		1,775		1,791		1,782		1,830	Level 2
Loans held for sale		176,488		179,325		186,998		180,698	Level 2		106,895		108,724		83,715		84,934	Level 2
Restricted equity securities		14,443	N/A			15,562	N/A		N/A		14,465	N/A			14,453	N/A		N/A
Loans held for investment		1,894,249		1,901,826		1,883,690		1,900,647	Level 3		2,047,555		2,027,079		1,965,769		1,963,803	Level 3
Accrued interest receivable		7,606		7,606		8,771		8,771	Level 2		7,679		7,679		7,376		7,376	Level 2
Other assets		83,072		83,072		46,381		46,381	Level 2 / Level 3		90,407		90,407		91,064		91,064	Level 2 / Level 3
Financial liabilities:
Deposits		2,674,392		2,535,324		2,568,001		2,472,860	Level 3		2,755,995		2,521,735		2,684,281		2,517,856	Level 3
Subordinated notes and Federal Home Loan bank advances		29,499		31,022		39,423		41,400	Level 2		29,566		29,890		29,532		30,477	Level 2
Other liabilities		2,902		2,902		3,334		3,334	Level 3		1,816		1,816		1,842		1,842	Level 3

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(a) Cash and Due from Banks, Interest-Bearing Deposits in Financial Institutions

For these short‑term instruments, the carrying amount is a reasonable estimate of fair value.

(b) Restricted Equity Securities

It is not practical to determine the fair value of restricted securities due to restrictions placed on their transferability.

The fair value of loans was measured using an exit price notion. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral.

(d) Accrued Interest Receivable

The carrying amounts of accrued interest approximate fair value.

(e) Other Assets

Included in other assets are bank owned life insurance and certain interest rate swap agreements. The fair values of interest rate swap agreements are based on independent pricing services that utilize pricing models with observable market inputs. For bank owned life insurance, the carrying amount is based on the cash surrender value and is a reasonable estimate of fair value.

(f) Deposits

The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounted cash flow models, using current market interest rates offered on certificates with similar remaining maturities.

(g) Federal Home Loan Bank Advances and Subordinated Debt

The fair value of fixed rate Federal Home Loan Bank Advances and subordinated notes is estimated using discounted cash flow models, using current market interest rates offered on certificates, advances and other borrowings with similar remaining maturities.

3431

(h) Other Liabilities

Included in other liabilities are accrued interest payable and certain interest rate swap agreements. The fair values of interest rate swap agreements are based on independent pricing services that utilize pricing models with observable market inputs. The carrying amounts of accrued interest approximate fair value.

(i) Off-Balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

(j) Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on estimating on and off‑balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, fixed assets are not considered financial instruments and their value has not been incorporated into the fair value estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

3532

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion of our financial condition at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 and our results of operations for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere in this Report and our ~~2020~~2021 10-K. Annualized results for interim periods may not be indicative of results for the full year or future periods.

The following discussion and analysis pertains to our historical results on a consolidated basis. However, because we conduct all of our material business operations through our wholly-owned subsidiary, CapStar Bank, the following discussion and analysis relates to activities primarily conducted at the subsidiary level.

All dollar amounts in the tables in this section are in thousands of dollars, except share or per share data or when otherwise specifically noted.

Overview

The ~~third~~first quarter of ~~2021~~2022 resulted in ~~$0.59~~$0.48 diluted net income per share of common stock, ~~an increase~~a decrease of ~~73.5%~~4.0% compared to the ~~third~~first quarter of ~~2020.~~2021. Annualized return on average assets was ~~1.64%~~1.37% for the ~~third~~first quarter of ~~2021~~2022 compared to ~~0.98%~~1.45% for the same period in ~~2020.~~

For the nine months ended September 30, 2021, diluted net income per share of common stock was $1.63, an increase of 111.7% compared to the same periods in 2020. Annualized return on average assets was 1.57% for the nine months ended September 30, 2021 compared to 0.81% for the same period in 2020.2021.

At ~~September 30, 2021,~~March 31, 2022, loans held for investment increased to ~~$1.89~~$2.05 billion, as compared to ~~$1.88~~$1.97 billion at December 31, ~~2020.~~2021. Total deposits increased to ~~$2.67~~$2.76 billion at ~~September 30, 2021~~March 31, 2022 from ~~$2.57~~$2.68 billion at December 31, ~~2020.~~2021.

As the COVID-19 global pandemic (including various COVID-19 variants) has continued, the Company continues its proactive approach to protect our team members and their families. The Pandemic Committee continues to meet and discuss the health and safety of employees as well as to discuss updates provided by the CDC, state and local authorities. Best practices around social distancing, mask usage and cleaning of work areas has been incorporated into the daily work practice according to state, local and CDC recommendations. At this time, all financial centers and support operations centers are operating in a non-remote environment. The company is currently evaluating the potential impact of President Biden’s pending COVID-19 Action Plan on the Company and its operations, which would require the Company to mandate vaccinations or test its employees weekly.

In an effort to provide relief to clients most impacted by the pandemic, CapStar Bank proactively offered a 90-day full deferment of all loan payments to CapStar borrowers that were less than 30 days past due. As a result, approximately 700 loans (representing approximately $452 million in outstanding loan balances) were approved for payment deferment during the second quarter of 2020. As of September 30, 2021 the remaining loans still under deferment has been reduced to 5 loans (representing approximately $33.4 million in outstanding loan balances). As of September 30, 2021,March 31, 2022, the outstanding balance of loans originated under the ~~PPP~~SBA’s Paycheck Protection Program (“PPP”) totaled approximately ~~$64.2~~$6.5 million and was included in commercial and industrial loans.

As the global COVID pandemic ~~continues,~~and its variants continue, we will continue to assess the impact on our market. While it is uncertain losses will materialize in the future, we continue to proactively work with our clients and evaluate the potential impact of the pandemic on them and us.

Furthermore, we currently do not anticipate a significant adverse liquidity impact related to the COVID-19 pandemic. In fact, since the start of the pandemic, deposit inflows have increased sharply, significantly strengthening liquidity. Nonetheless, the Company has a comprehensive contingency funding plan that addresses potential adverse liquidity events and emergency cash flow requirements that may arise from the COVID-19 pandemic. See further discussion regarding the Company’s management of liquidity risk in the subsequent section titled ‘Liquidity’.

Despite the uncertainty the Company is well positioned to continue delivering on its strategic initiatives in a responsible manner by prioritizing things such as business continuity, liquidity management and maintaining an adequate allowance for loan losses.

Our primary revenue sources are net interest income and fees from various financial services provided to customers. Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. Business volumes are influenced by competition, new business acquisition efforts and economic factors including market interest rates, business spending and consumer confidence.

Net interest income ~~increased $3.3~~decreased $1.0 million, or ~~16.8%~~4.7%, for the three months ended ~~September 30, 2021,~~March 31, 2022, compared to the same period in ~~2020 and increased $14.2 million, or 26.3% for the nine months ended September 30, 2021 compared to the same period in 2020.~~2021. Net interest margin ~~increased~~decreased to ~~3.12%~~2.97% for the three months ended ~~September 30, 2021,~~March 31, 2022, compared with ~~2.72%~~3.13% for the same period of ~~2020~~2021. The decrease was attributable to a deferred loan origination expense adjustment related to prior periods of $0.5 million and ~~increased to 3.17% for the nine~~a $1.8 million decline in PPP fees.

The three months ended ~~September 30, 2021, compared with 3.09% for the same period of 2020.~~

~~There was no provision for loan losses for the third quarter of 2021 compared to a provision of $2.1 million during the comparable period of 2020. The nine months ended September 30, 2021~~March 31, 2022 yielded a ~~$0.4~~$0.8 million provision release compared to a ~~$11.3~~$0.7 million provision being recorded for the comparable period ~~in 2020.~~of 2021. The release of reserves was primarily attributable to improved asset quality trends ~~significant improvement in a specific classified loan,~~ and other qualitative factors. Net charge-offs for the third quarter of 2021 were $267 thousand compared to $52 thousand for the comparable period of 2020. The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, is adequate to provide coverage for the estimated probable inherent losses on outstanding loans. Our allowance for loan losses at September 30, 2021 was 1.19% of total loans held for investment compared to 1.22% as of September 30, 2020.

Total ~~non-interest~~noninterest income for the ~~third~~first quarter of ~~2021~~2022 decreased ~~$3.2~~$0.9 million, or ~~21.3%~~9.2%, compared with the same period in ~~2020,~~2021, and comprised ~~32%~~29% of total revenues. The decrease is primarily attributable to mortgage banking ~~results~~ returning to more normalized ~~levels. For the nine months ended September 30, 2021, total non-interest income remained relatively flat compared to the same period in 2020, with decreases in mortgage banking being~~levels, partially offset by increases in SBA lending, Tri-Net, deposit service charges, and interchange and debit card transaction fees. Non-interest income comprised 30% of total revenues for the nine months ended September 30, 2021.a $0.9 million death benefit from bank-owned life insurance policies.

Total ~~non-interest~~noninterest expense for the three months ended ~~September 30, 2021 decreased $4.4~~March 31, 2022 increased $0.3 million, or ~~19.2%~~1.9%, compared to the same period in ~~2020. For the nine months ended September 30, 2021, non-interest expense decreased $1.0 million compared to the nine months ended September 30, 2020.~~2021. The ~~decreases for both periods were~~increase was primarily driven by ~~lower~~higher salaries and employee ~~benefits, as well as acquisition related expenses.~~benefits. Our efficiency ratio for the three months ended ~~September 30, 2021~~March 31, 2022 was ~~53.06%~~58.67% compared to ~~65.99%~~54.08% for the same period in ~~2020. For the nine months ended September 30, 2021 our efficiency ratio was 55.01% compared to 65.37% for the same period in 2020.~~2021.

~~Tangible common~~Common equity ~~a non-GAAP~~tier 1 capital to risk weighted assets, summarized in Note 11 of the consolidated financial ~~measure,~~statements, is a useful measure ~~of a company's capital which is useful~~ in evaluating the quality and adequacy of capital. Our consolidated ratio of ~~tangible~~ common equity tier 1 capital to ~~total tangible~~risk weighted assets was ~~10.51%~~13.58% as of ~~September 30, 2021,~~March 31, 2022, compared with ~~10.00%~~14.11% at December 31, 2020. See “—Non-GAAP Financial Measures” for a discussion of and reconciliation to the most directly comparable measure calculated in accordance with the U.S. generally accepted accounting principles ("U.S. GAAP").
2021.

The following sections provide more details on subjects presented in this overview.

(a)

Results of Operations

The following is a summary of our results of operations:


					2021 - 2020								2021 - 2020								2022 - 2021
	Three Months Ended				Percent			Nine Months Ended					Percent			Three Months Ended					Percent
	September 30,				Increase			September 30,					Increase			March 31,					Increase
	2021		2020		(Decrease)			2021			2020		(Decrease)			2022			2021		(Decrease)
Interest income	$	24,690	$	24,642		0.2	%	$	73,800		$	67,121		10.0	%	$	22,784		$	24,278		-6.2	%
Interest expense		1,726		4,986		-65.4	%		5,622			13,129		-57.2	%		1,644			2,096		-21.6	%
Net interest income		22,964		19,656		16.8	%		68,178			53,992		26.3	%		21,140			22,182		-4.7	%
Provision for loan losses		—		2,119		-100.0	%		(415	)		11,295		-103.7	%		(784	)		650		-220.6	%
Net interest income after provision for loan losses		22,964		17,537		30.9	%		68,593			42,697		60.7	%		21,924			21,532		1.8	%
Noninterest income		11,651		14,804		-21.3	%		31,548			31,500		0.2	%		9,089			10,014		-9.2	%
Noninterest expense		18,366		22,739		-19.2	%		54,859			55,883		-1.8	%		17,736			17,413		1.9	%
Net income before income taxes		16,249		9,602		69.2	%		45,282			18,314		147.3	%		13,277			14,133		-6.1	%
Income tax expense		3,147		2,115		48.8	%		9,075			3,299		175.1	%		2,604			3,103		-16.1	%
Net income	$	13,102	$	7,487		75.0	%	$	36,207		$	15,015		141.1	%	$	10,673		$	11,030		-3.2	%

Basic net income per share of common stock	$	0.59	$	0.34		73.5	%	$	1.64		$	0.77		113.0	%	$	0.48		$	0.50		-4.0	%
Diluted net income per share of common stock	$	0.59	$	0.34		73.5	%	$	1.63		$	0.77		111.7	%	$	0.48		$	0.50		-4.0	%

Annualized return on average assets and annualized return on average shareholders’ equity were ~~1.64%~~1.37% and ~~14.13%~~11.39%, respectively, for the ~~third~~first quarter of ~~2021,~~2022, compared with ~~0.98%~~1.45% and ~~9.26%~~12.76%, respectively, for the same period in ~~2020.~~2021.

Annualized return on average assets and annualized return on average shareholders’ equity were 1.56% and 13.48%, respectively, for the nine months ended September 30, 2021, compared with 0.81% and 6.82%, respectively, for the same period in 2020.

Net Interest Income

The largest component of our net income is net interest income – the difference between the income earned on interest-earning assets and the interest paid on deposits and borrowed funds used to support our assets. Net interest income divided by total average interest-earning assets represents our net interest margin. The major factors that affect net interest income and net interest margin are changes in volumes, the yield on interest-earning assets and the cost of interest-bearing liabilities. Our margin can also be affected by economic conditions, the competitive environment, loan demand and deposit flow. Our ability to respond to changes in these factors by using effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and our net interest income.

The following tables set forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three ~~and nine~~ month periods ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:

For the Three Months Ended September 30,

2021

2020

Average
Outstanding
Balance

Interest
Income/
Expense

Average
Yield/
Rate

Average
Outstanding
Balance

Interest
Income/
Expense

Average
Yield/
Rate

Interest-Earning Assets

Loans (1)

$
1,884,935

$
20,942

4.41
%

$
1,899,182

$
21,398

4.47
%
Loans held for sale

173,402

1,408

3.22
%

163,390

1,398

3.56
%
Securities:

Taxable investment securities (2)

455,583

1,816

1.59
%

271,838

1,332

1.96
%
Investment securities exempt from
federal income tax (3)

60,294

344

2.90
%

51,851

343

3.35
%
Total securities

515,877

2,160

1.75
%

323,689

1,675

2.18
%
Cash balances in other banks

337,011

171

0.20
%

499,770

171

0.14
%
Funds sold

19,909

9

0.18
%

—

—

—

Total interest-earning assets

2,931,134

24,690

3.35
%

2,886,031

24,642

3.41
%
Noninterest-earning assets

240,048

157,816

Total assets

$
3,171,182

$
3,043,847

Interest-Bearing Liabilities

Interest-bearing deposits:

Interest-bearing transaction accounts

$
984,874

390

0.16
%

$
840,926

640

0.30
%
Savings and money market deposits

589,101

288

0.19
%

610,942

2,537

1.65
%
Time deposits

406,329

654

0.64
%

505,391

1,299

1.02
%
Total interest-bearing deposits

1,980,304

1,332

0.27
%

1,957,259

4,476

0.91
%
Borrowings and repurchase agreements

29,495

394

5.30
%

39,431

510

5.14
%
Total interest-bearing liabilities

2,009,799

1,726

0.34
%

1,996,690

4,986

0.99
%
Noninterest-bearing deposits

751,862

691,205

Total funding sources

2,761,661

2,687,895

Noninterest-bearing liabilities

41,714

34,446

Shareholders’ equity

367,807

321,506

Total liabilities and shareholders’ equity

$
3,171,182

$
3,043,847

Net interest spread (4)

3.01
%

2.42
%
Net interest income/margin (5)

$
22,964

3.12
%

$
19,656

2.72
%

~~Footnotes appear below second table~~

For the Nine Months Ended September 30,

2021

2020

Average
Outstanding
Balance

Interest
Income/
Expense

Average
Yield/
Rate

Average
Outstanding
Balance

Interest
Income/
Expense

Average
Yield/
Rate

Interest-Earning Assets

Loans (1)

$
1,917,536

$
63,077

4.40
%

$
1,624,722

$
56,875

4.68
%
Loans held for sale

162,092

3,859

3.18
%

176,585

4,745

3.59
%
Securities:

Taxable investment securities (2)

444,643

5,373

1.61
%

216,262

3,886

2.40
%
Investment securities exempt from
federal income tax (3)

62,265

1,074

2.91
%

46,955

975

3.50
%
Total securities

506,908

6,447

1.77
%

263,217

4,861

2.59
%
Cash balances in other banks

290,454

405

0.19
%

278,647

640

0.31
%


													For the Three Months Ended March 31,
													2022							2021
													Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate			Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate
Interest-Earning Assets
Loans (1)													$	2,001,740	$	19,599		3.97	%	$	1,929,342	$	20,723		4.47	%
Loans held for sale														90,163		768		3.46	%		164,867		1,291		3.56	%
Securities:
Taxable investment securities (2)														426,144		1,909		1.79	%		431,406		1,757		1.63	%
Investment securities exempt from federal income tax (3)														57,195		326		2.89	%		64,629		373		2.92	%
Total securities														483,339		2,235		1.92	%		496,035		2,130		1.80	%
Cash balances in other banks														305,922		172		0.23	%		298,722		134		0.18	%
Funds sold		12,866		12	0.12	%		24		—	2.77	%		20,149		10		0.19	%		153		—		1.27	%
Total interest-earning assets		2,889,856		73,800	3.43	%		2,343,195		67,121	3.84	%		2,901,313		22,784		3.20	%		2,889,119		24,278		3.42	%
Noninterest-earning assets		220,041						143,238						252,007							189,626
Total assets	$	3,109,897					$	2,486,433					$	3,153,320						$	3,078,745
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts	$	952,393		1,216	0.17	%	$	715,740		3,371	0.63	%	$	949,313		436		0.19	%	$	944,651		446		0.19	%
Savings and money market deposits		587,252		896	0.20	%		534,859		4,819	1.20	%		660,721		331		0.20	%		583,590		313		0.22	%
Time deposits		429,454		2,317	0.72	%		380,198		4,197	1.47	%		366,769		484		0.54	%		458,380		931		0.82	%
Total interest-bearing deposits		1,969,099		4,429	0.30	%		1,630,797		12,387	1.01	%		1,976,803		1,251		0.26	%		1,986,621		1,690		0.35	%
Borrowings and repurchase agreements		30,931		1,193	5.16	%		23,907		742	4.14	%		29,547		393		5.40	%		33,879		406		4.85	%
Total interest-bearing liabilities		2,000,030		5,622	0.38	%		1,654,704		13,129	1.06	%		2,006,350		1,644		0.33	%		2,020,500		2,096		0.42	%
Noninterest-bearing deposits		717,122						509,739						728,134							676,929
Total funding sources		2,717,152						2,164,443						2,734,484							2,697,429
Noninterest-bearing liabilities		33,569						28,000						38,797							30,635
Shareholders’ equity		359,176						293,990						380,039							350,681
Total liabilities and shareholders’ equity	$	3,109,897					$	2,486,433					$	3,153,320						$	3,078,745
Net interest spread (4)					3.05	%					2.78	%						2.86	%						3.00	%
Net interest income/margin (5)			$	68,178	3.17	%			$	53,992	3.09	%			$	21,140		2.97	%			$	22,182		3.13	%

(1)Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

(2) Taxable investment securities include restricted equity securities.

(3) Yields on tax exempt securities are shown on a tax equivalent basis.

(4)Net interest spread is the average yield on total interest-earning assets minus the average rate on total interest-bearing liabilities.

(5)Net interest margin is annualized net interest income calculated on a tax equivalent basis divided by total average interest-earning assets for the period.

3935

The net interest margin was ~~3.12%~~2.97% and ~~2.72%~~3.13% for the ~~third~~first quarters of ~~2021~~2022 and ~~2020, respectively. For the nine months ended September 30,~~ 2021, ~~and 2020, the net interest margin was 3.17% and 3.09%,~~ respectively. The ~~increase~~decrease in net interest margin for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 compared to ~~September 30, 2020~~March 31, 2021 was primarily due to ~~decreases in deposit rates and revenues~~a $0.5 million one time deferred origination expense adjustment related to prior periods as well as a $1.8 million decline in PPP ~~loans.~~

The decreases in average loan yields, shown above, for the three and nine month periods ended September 30, 2021, were due to the impact of lower market interest rates on yields of new loan originations and yields of existing variable rate loans and was triggered by the Federal Reserve reducing the Federal Funds target rate by 1.50% in March 2020, one of numerous actions intended to offset the pandemic's impact on the U.S. economy. This decrease was partially offset by fees recognized on PPP loans.fees. Average loans at ~~September 30, 2021 remained relatively flat compared to the three months ended September 30, 2020. For the nine months ended September 30, 2021, average loans~~March 31, 2022 increased ~~18.0% compared to the 2020 relative period~~$72.4 million primarily as a result of the ~~FCB and BOW acquisitions, the Company’s active participation in the SBA’s Paycheck Protection Program (“PPP”), additional bankers in the Nashville and Knoxville MSA,~~Company's recent Chattanooga expansion and continued focus on attracting new clients.

For the three and nine month periods ended September 30, 2021, average security yields decreased compared to the 2020 comparable periods, primarily due to the impact of lower market interest rates on the yields of securities purchased to replace security maturities and paydowns, and the Company’s purchase of additional conservative lower yield securities to deploy a portion of pandemic-related deposit growth.

The Company continues to experience favorable deposit trends. The Company experienced a favorable mix shift as average non-interest bearing deposits represented ~~27.5% and 26.7% of total deposits~~26.9% at March 31, 2022 compared to 25.4% for the three ~~and nine~~ month periods ending ~~September 30, 2021, increases of 3.2% and 25.5%, respectively, versus the three and nine month periods ending September 30, 2020.~~March 31, 2021. Deposit costs declined across all interest-bearing account types. Average funding sources slightly increased for the three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~September 30, 2020, and increased 25.5% for the nine months ended September 30, 2021 compared to the similar period in 2020.~~March 31, 2021. As shown in the tables above, the primary driver of our increased funding sources was the aforementioned growth in our average deposits, which was primarily driven by the FCB and BOW acquisitions as well as continued growth in our target markets, an enhanced focus on our deposit strategy, and increasing deposit balances from customers receiving COVID-19 related government stimulus funds. The COVID-19 related deposit increase, which led to a significant increase in interestnon-interest bearing ~~cash, was a major contributor to the net interest margin decline noted above as loan growth did not keep pace with deposit growth.~~deposits.

The average rate paid on interest-bearing liabilities was ~~0.34%~~0.33% for the ~~second~~first quarter of 2022 compared to ~~0.99%~~0.42% for ~~September 30, 2020. For the nine months ended September 30, 2021 and 2020, the average rate paid on interest-bearing liabilities was 0.38% and 1.06%, respectively.~~March 31, 2021. The majority of this decrease was due to ~~2020 decreases in~~the impact of the Federal ~~Funds~~Reserve sharply lowering the federal funds rate in response to the COVID-19 pandemic and its continued impact on deposit rates.

Asset/Liability Management and Interest Rate Risk

Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to mitigate effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity while attempting to optimize net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.

Interest Rate Simulation Sensitivity Analysis

We use earnings at risk, or EAR, simulations to assess the impact of changing rates on earnings under a variety of scenarios and time horizons. The simulation model is designed to reflect the dynamics of interest earning assets, interest bearing liabilities and off-balance sheet financial instruments. These simulations utilize both instantaneous and parallel changes in the level of interest rates, as well as non-parallel changes such as changing slopes and twists of the yield curve. Static simulation models are based on current exposures and assume a constant balance sheet with no growth. By estimating the effects of interest rate increases and decreases, the model can reveal approximate interest rate risk exposure. The simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and does not indicate actual expected results.

At ~~September 30, 2021,~~March 31, 2022, our EAR static simulation results indicated that our balance sheet is asset sensitive to parallel shifts in interest rates. This indicates that our assets generally reprice faster than our liabilities, which results in a favorable impact to net interest income when market interest rates increase and an unfavorable impact to net interest income when market interest rates decline. Many assumptions are used to calculate the impact of interest rate fluctuations on our net interest income, such as asset prepayments, non-maturity deposit price sensitivity, and key rate drivers. Because of the inherent use of these estimates and assumptions in the model, our actual results may, and most likely will, differ from our static EAR results. In addition, static EAR results do not include actions that

our management may undertake to manage the risks in response to anticipated changes in interest rates or client behavior. For example, as part of our asset/liability management strategy, management has the ability to increase asset duration and/or decrease liability duration in order to reduce asset sensitivity, or to decrease asset duration and/or increase liability duration in order to increase asset sensitivity.

The following table illustrates the results of our EAR analysis to determine the extent to which our net interest income over the next 12 months would change if prevailing interest rates increased or decreased immediately by the specified amounts.


		Net interest income change
Increase 200bp		~~2.7%~~7.2%
Increase 100bp		~~1.0~~ 4.1
Decrease 100bp		~~(3.1)~~ (4.5)

The Federal Reserve Bank is expected to aggressively raise short-term rates. However, following significant yield curve steepening in recent months, yield curve flattening could be a likely scenario. In a scenario where the federal funds rate rises 200 basis points over 12 months and 5 year rates rise by 45 basis points, net interest income is projected to increase by 1.7%.

Provision for Loan Losses

Our policy is to maintain an allowance for loan losses at a level sufficient to absorb probable incurred losses inherent in the loan portfolio. The allowance is increased by a provision for loan losses, which is a charge to earnings, is decreased by charge offs and increased by loan recoveries. ~~Our allowance for loan losses as a percentage of total loans was 1.19% and 1.23% at September 30, 2021 and December 31, 2020, respectively.~~

There was no provision expense for the three months ended September 30, 2021 compared to a $2.1 million provision for the three month period ended September 30, 2020. For the nine months ended September 30, 2021, there was a provision release of $0.4 million compared to an $11.3 million provision for the comparable period in 2020. The release was primarily attributable to improved asset quality trends, significant improvement in a specific classified loan, and other qualitative factors. Provision expense is impacted by the absolute level of loans, loan growth, the credit quality of the loan portfolio and the amount of net charge-offs.

~~Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at September 30, 2021.~~ While our policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by management, they are necessarily approximate and imprecise.

There are factors beyond our control, such as conditions in the local and national economy, local real estate markets, or particular industry or borrower-specific conditions, which may materially and negatively impact our asset quality and the adequacy of our allowance for loan losses and, thus, the resulting ~~increase in our~~ provision for loan ~~losses could be material.~~losses. Provision expense is impacted by macroeconomic factors, the absolute level of loans, loan growth, the credit quality of the loan portfolio and the amount of net charge-offs. We continue to assess the impact of and developments in the COVID-19 pandemic to our loan ~~portfolio based on several factors including~~portfolio.

For the ~~expected impact~~three months ended March 31, 2022, there was a provision release of $0.8 million compared to a $0.7 million provision for the ~~pandemic~~comparable period in 2021. The release was primarily attributable to ~~our~~improved asset quality trends and other qualitative factors. Net charge-offs for the first quarter of 2022 were $57 thousand compared to $18 thousand for the comparable period of 2021. Our allowance for loan ~~portfolio.~~losses at March 31, 2022 was 1.02% of total loans held for investment compared to 1.10% as of December 31, 2021.

See “Notes to Consolidated Financial Statements (Unaudited) — Note 43 — Loans and Allowance for Loan Losses” for additional information on our allowance for loan losses.

Noninterest Income

In addition to net interest ~~margin,~~income, we generate recurring noninterest ~~income from our lines of business.~~income. Our banking operations generate revenue from service charges ~~and fees~~ on deposit ~~accounts. We have a mortgage banking line of business that generates revenue from~~accounts, interchange and debit card transaction fees, originating and selling ~~mortgages, a line of business that originates and sells~~mortgage, commercial real estate ~~loans (Tri-Net),~~ and ~~we have a revenue-sharing relationship with a registered broker-dealer, which generates~~SBA loans, wealth management ~~revenue.~~and gains (losses) on sales of securities. In addition to these types of recurring noninterest income, we own insurance on several key employees and record income onwithin "Other noninterest income" based upon the increase in the cash surrender value of these policies.

The following table sets forth the principal components of noninterest income for the periods indicated.


					2021 - 2020							2021 - 2020							2022 - 2021
	Three Months Ended				Percent			Nine Months Ended				Percent			Three Months Ended				Percent
	September 30,				Increase			September 30,				Increase			March 31,				Increase
	2021		2020		(Decrease)			2021		2020		(Decrease)			2022		2021		(Decrease)
Noninterest income:
Deposit service charges	$	1,187	$	1,064		11.6	%	$	3,398	$	2,531		34.3	%	$	1,142	$	1,102		3.6	%
Interchange and debit card transaction fees		1,236		936		32.1	%		3,555		2,389		48.8	%		1,222		1,092		11.9	%
Mortgage banking		4,693		9,686		(51.5	)%		13,318		19,063		(30.1	)%		1,966		4,716		(58.3	)%
Tri-Net		1,939		668		190.3	%		4,618		2,528		82.7	%		2,171		1,143		89.9	%
Wealth management		481		382		25.9	%		1,412		1,162		21.5	%		440		459		(4.1	)%
SBA lending		911		476		91.4	%		1,781		525		239.2	%		222		492		(54.9	)%
Net gain on sale of securities		7		34		(79.4	)%		20		74		(73.0	)%		—		26		(100.0	)%
Other noninterest income		1,197		1,558		(23.2	)%		3,446		3,228		6.8	%		1,926		984		95.7	%
Total noninterest income	$	11,651	$	14,804		(21.3	)%	$	31,548	$	31,500		0.2	%	$	9,089	$	10,014		(9.2	)%

~~The increase in deposit~~Deposit service charges were flat for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 compared to the same period in ~~2020 is related to our acquisitions of FCB and BOW, as well as growth in~~2021. These amounts originate from our commercial and consumer deposit accounts.

~~The increase in interchange~~Interchange and debit card transaction fees ~~is due to increased~~fluctuate based upon transaction ~~volume,~~volumes, which ~~included new volume related~~were slightly higher for the three months ended March 31, 2022 compared to the ~~FCB~~same period in 2021. This increase is attributable to an emphasis on electronic banking and ~~BOW acquisitions.~~continued growth in deposits and volume of our commercial and consumer deposit accounts.

Mortgage banking income consists of mortgage fee income from the origination and sale of mortgage loans. These mortgage fees are for loans originated in our markets that are subsequently sold to third-party investors. Generally, mortgage origination fees increase in lower interest rate environments and more robust housing markets and decrease in rising interest rate environments and more challenging housing markets. Mortgage origination fees will fluctuate from ~~quarter~~period to ~~quarter~~period as the rate environment changes. The decrease above is indicative of the mortgage market returning to more normalized levels.

Tri-Net represents a line of business which originates and sells commercial real estate loans to third-party investors with the exception of certain loans originated to borrowers within our target market, which are retained at the discretion of management. All of these loan sales transfer servicing rights to the buyer. ~~The volume~~Tri-Net revenue for the three month period ended March 31, 2022 increased 89.9% when compared to the same period of ~~loan sales has increased through continued growth and development.~~2021, though future revenue is expected to return to more normalized levels.

Wealth management income is derived from advisory services offered to specific customers. The ~~increase~~decrease in wealth management fees for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021~~March 31, 2022 compared to the same ~~periods~~period in ~~2020~~2021 was mostly driven by transaction volume, which can fluctuate from period to period.

~~The increase in~~Noninterest income for SBA lending, ~~is primarily attributable to the Company’s~~which represents gains on sales of guaranteed portions of SBA loans, ~~which was driven by continued growth and development of our SBA lending program.~~

declined 54.9% for the three month period ended March 31, 2022 when compared to the same period in 2021.

Other noninterest income primarily consists of loan related fees, bank-owned life insurance, and other service-related fees. The largest driver of the increase across both comparative periods relates to $0.9 million in death benefit income from bank-owned life insurance policies ~~purchased in~~for the ~~first quarter of 2021.~~three months ended March 31, 2022.

Noninterest Expense

The following table presents the primary components of noninterest expense for the periods indicated.


			2021 - 2020			2021 - 2020			2022 - 2021
	Three Months Ended		Percent	Nine Months Ended		Percent	Three Months Ended		Percent
	September 30,		Increase	September 30,		Increase	March 31,		Increase
	2021	2020	(Decrease)	2021	2020	(Decrease)	2022	2021	(Decrease)
Noninterest expense:
Salaries and employee benefits	$10,980	$12,949	(15.2)%	$31,210	$33,256	(6.2)%	$10,269	$9,427	8.9%
Data processing and software	2,632	2,353	11.9%	8,530	6,317	35.0%	2,647	2,827	(6.4)%
Occupancy	1,028	999	2.9%	3,193	2,615	22.1%	1,099	1,108	(0.8)%
Equipment	760	864	(12.0)%	2,640	2,295	15.0%	709	899	(21.1)%
Professional services	469	638	(26.5)%	1,634	1,854	(11.9)%	679	704	(3.6)%
Regulatory fees	279	397	(29.7)%	746	893	(16.5)%	280	257	8.9%
Acquisition related expenses	—	2,548	(100.0)%	323	3,286	(90.2)%	—	67	(100.0)%
Amortization of intangibles	477	539	(11.5)%	1,478	1,300	13.7%	446	508	(12.2)%
Other operating	1,741	1,452	19.9%	5,105	4,067	25.5%	1,607	1,616	(0.6)%
Total noninterest expense	$18,366	$22,739	(19.2)%	$54,859	$55,883	(1.8)%	$17,736	$17,413	1.9%

The change in salaries and employee benefits was driven primarily by an overall increase in salaries and a ~~reduction in compensation associated with mortgage banking.~~one time severance/retirement related expense of $0.4 million. At ~~September 30, 2021,~~March 31, 2022, our associate base ~~decreased~~increased to ~~392~~397 compared to ~~403~~379 at ~~September 30, 2020.~~

Data processing and software expense increased during both comparable periods presented due to increased transaction volumes related to the Company's recent acquisitions and services related to the processing of PPP loans.

~~The increase in occupancy expense during the periods presented was largely attributable to facilities related costs and the increasing cost of managing our IT network.~~March 31, 2021.

Our efficiency ratio was ~~53.06%~~58.67% and ~~65.99%~~54.08% for the three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and September 30, 2020, respectively. For~~respectively, with the ~~nine~~increase being driven by the aforementioned noninterest expense factors combined with a 6.1% decline in total revenue for the three months ended ~~September 30, 2021 and 2020, our efficiency ratio was 55.01% and 65.37%, respectively.~~March 31, 2022 when compared to the same period of 2021. The efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income and measures the amount of expense that is incurred to generate a dollar of revenue. ~~The efficiency ratio improved in 2021 due~~Overall, noninterest expense remained relatively flat as the Company continues to ~~operational improvements and synergies achieved through the FCB and BOW acquisitions compounded by increased revenues and a continued emphasis~~focus on expense ~~discipline.~~discipline and operational improvements.

4338

Income Tax Provision

The Company’s effective tax rate for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021~~March 31, 2022 was ~~19.4% and 20.0%, respectively,~~19.6% compared to 22.0% ~~and 18.0%~~ for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2020, respectively.~~March 31, 2021. The three month period decrease is attributable to ~~a revision in the Company's expected annual effective tax rate for 2021 driven by continued~~increased benefits inrelated to the Company's tax strategy.
The nine month period increase in the effective tax rate from the nine month period ended September 30, 2020 is largely the result of the impact of the provisions under the CARES Act, which were effective for 2020. The CARES Act permitted NOL’s arising in taxable years beginning after December 31, 2017 and before January 1, 2021 to be carried back five taxable years. This enabled the Company to carry back in 2020 losses incurred during the taxable year 2018 to prior years with a higher statutory tax rate, creating a permanent tax rate benefit. As a result, the Company recorded an income tax benefit of $0.8 million related to the permanent tax rate benefit during the nine months ended September 30, 2020.

The effective tax rate for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 compared favorably tofrom the statutory ~~federal rate of 21% and Tennessee excise~~ tax rate ~~of 6.5% primarily~~ due to our investments in qualified municipal securities, tax benefits from our real estate investment trust, company owned life insurance, ~~tax benefits of CapStar Bank’s real estate investment trust subsidiary, community investment~~state tax credits, ~~and tax benefits associated with share-based compensation,~~ net of the effect of certain non-deductible ~~expenses.~~expenses and the recognition of excess tax benefits related to stock compensation. The Company anticipates its effective tax rate for 2021 to be approximately 20.0 percent.

(b) Financial Condition

Balance Sheet

Total assets increased ~~$125.1~~$57.7 million, or ~~4.2%~~1.8%, from ~~$2.99~~$3.13 billion on December 31, ~~2020~~2021 to ~~$3.11~~$3.19 billion on ~~September 30, 2021.~~March 31, 2022. Loans held for investment grew ~~$10.6~~$81.8 million, or ~~0.6%,~~16.9% annualized, in the first ~~nine~~three months of ~~2021.~~2022. Excluding PPP loans, loans held for investment increased ~~$128.0~~$101.8 million, or ~~7.5%,~~21.3% annualized, for the same period. Loans held for sale ~~decreased $10.5~~increased $23.2 million, or ~~5.6%,~~112.3% annualized, during the first ~~nine~~three months of ~~2021.~~2022.

Total liabilities increased ~~$98.3~~$68.9 million, or ~~3.7%,~~10.1% annualized, from ~~$2.64~~$2.75 billion on December 31, ~~2020~~2021 to ~~$2.74~~$2.82 billion on ~~September 30, 2021.~~March 31, 2022. Deposits increased ~~$106.4~~$71.7 million, or ~~4.1%~~10.8%.

Our growth in cash, loans and deposits ~~has been~~continues to be significantly influenced by the U.S. government’s various stimulus programs and their impact on our customers and economic uncertainty associated with the COVID-19 ~~pandemic.~~pandemic, as well as inflation and changes in the interest rate environment.

Loans

The composition of loans at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 and the percentage of each classification to total loans are summarized as follows:


	September 30, 2021					December 31, 2020					March 31, 2022					December 31, 2021
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
Commercial real estate - owner occupied	$	193,139		10.2	%	$	162,603		8.6	%	$	231,933		11.3	%	$	209,261		10.6	%
Commercial real estate - non-owner occupied		579,857		30.6	%		481,229		25.5	%		652,936		31.9	%		616,023		31.3	%
Consumer real estate		328,262		17.3	%		343,791		18.3	%		327,416		16.0	%		326,412		16.6	%
Construction and land development		210,516		11.1	%		174,859		9.3	%		208,513		10.2	%		214,310		10.9	%
Commercial and industrial		478,279		25.2	%		623,446		33.1	%		499,719		24.4	%		497,615		25.3	%
Consumer		45,669		2.4	%		44,279		2.4	%		48,790		2.4	%		46,811		2.4	%
Other		58,527		3.2	%		53,483		2.8	%		78,248		3.8	%		55,337		2.8	%
Total loans	$	1,894,249		100.0	%	$	1,883,690		100.0	%	$	2,047,555		100.0	%	$	1,965,769		100.0	%

Our principal market for lending is the State of Tennessee and adjacent states that can be effectively accessed from our banking offices. Our target borrower profile includes consumers, small to medium sized businesses, professional firms, real estate investors and developers, and their owners and managers. Our growth since 2018 has been concentrated in borrowers meeting that profile. Our primary competition is community, regional, and national banks operating in our primary markets. In seeking customer banking relationships, we rely on a model of delivering services through a qualified banker meeting all the banking service needs of the business and its primary stakeholders.

At ~~September 30, 2021,~~March 31, 2022, our loan portfolio composition remained relatively consistent with the composition at December 31, ~~2020.~~2021. Our primary focus has been on commercial and industrial and commercial real estate lending, which constituted ~~66%~~68% of our loan portfolio as of ~~September 30, 2021.~~March 31, 2022. Although we expect continued growth with respect to our loan portfolio, we do not expect any significant changes over the foreseeable future in the composition of our loan portfolio or in our emphasis on commercial lending. Our loan growth since inception has been reflective of the target market that we serve. The commercial real estate category includes owner-occupied ~~commercial real estate loans which are similar in many ways to our commercial~~ and ~~industrial lending in that these loans are generally made to businesses~~non-owner occupied properties. The repayment of owner-occupied properties is largely dependent on the ~~basis~~operations of the ~~cash flows~~tenant, while non-owner occupied properties is dependent upon the operation, refinance, or sale of the ~~affiliated business rather than on the valuation and cash flows of the~~underlying real estate from unaffiliated tenants. Since 2009, our commercial and industrial and commercial real estate portfolios have continued to experience strong growth, primarily due to implementation of our relationship-based banking model and the success of our relationship managersestate.

4439

in transitioning commercial banking relationships from other local financial institutions and in competing for new business from attractive small to mid-sized commercial clients. Many of our larger commercial clients have lengthy relationships with members of our senior management team or our relationship managers that date back to their employment by other financial institutions.

Non-Performing Loans and Assets

Information summarizing non-performing assets, including non-accrual loans follows:


	September 30, 2021			December 31, 2020			March 31, 2022			December 31, 2021
Non-accrual loans	$	3,431		$	4,816		$	3,502		$	3,258
Troubled debt restructurings		1,859			1,928			1,847			1,832
Loans past due over 89 days and still accruing		1,560			3,295
Loans past due over 90 days and still accruing								236			1,380

Non-performing loans		3,431			4,816			3,502			3,258
Other real estate owned		349			523			178			266
Non-performing assets		3,780			5,339			3,680			3,524
Non-performing loans as a percentage of total loans		0.18	%		0.26	%
Non-performing assets as a percentage of total assets		0.12	%		0.18	%
Non-performing loans to loans held for investment								0.17	%		0.17	%
Non-performing assets to total assets								0.12	%		0.11	%

The following table sets forth the major classifications of non-accrual loans:


	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
Commercial real estate	$	115	$	130	$	—	$	—
Consumer real estate		1,174		1,821		1,033		1,086
Construction and land development		—		107		10		11
Commercial and industrial		89		470		463		324
Consumer		47		9		39		31
Other		—		—		—		—
Purchased credit impaired		2,006		2,279		1,957		1,806
Total loans	$	3,431	$	4,816	$	3,502	$	3,258

Liquidity risk is the risk that we will be unable to meet our obligations as they become due because of an inability to liquidate assets or obtain adequate funding. To manage liquidity risk, management has established a comprehensive management process for identifying, measuring, monitoring and controlling liquidity risk. Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems (including assessments of the current and prospective cash flows or sources and uses of funds) that are commensurate with the complexity and business activities of the Bank; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the institution’s liquidity risk management process.

The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity is provided by short-term liquid assets that can be converted to cash, investment securities available-for-sale, various lines of credit available to us, and the ability to attract funds from external sources, principally deposits.

Our most liquid assets are comprised of cash and due from banks, interest-bearing deposits in financial institutions, available-for-sale marketable investment securities and federal funds sold. ~~Liquid assets increased significantly versus December 31, 2020 primarily due to continued strong deposit inflows since the start of the pandemic which have substantially bolstered liquidity.~~ Interest-bearing deposits in financial institutions totaled ~~$287.4~~$282.8 million at ~~September 30, 2021, an increase~~March 31, 2022, representing a decrease of ~~$50.2~~$64.2 million from December 31, ~~2020.~~2021 as the Company continues to deploy excess liquidity. The fair value of the available-for-sale investment portfolio was ~~$483.8~~$460.6 million at ~~September 30, 2021,~~March 31, 2022, a slight ~~decrease~~increase from December 31, ~~2020.~~2021. We pledge portions of our investment securities portfolio to secure public fund deposits, derivative positions and Federal Home

Loan Bank advances. At ~~September 30, 2021,~~March 31, 2022, total investment securities pledged for these purposes comprised ~~41%~~43% of the estimated fair value of the investment portfolio, leaving ~~$284.2~~$264.7 million of unpledged securities.

We have a large base of non-maturity customer deposits, defined as demand, savings, and money market deposit accounts. At ~~September 30, 2021,~~March 31, 2022, such deposits totaled ~~$2.3~~$2.4 billion and represented approximately ~~85%~~87% of our total deposits.

Other sources of funds available to meet daily needs include ~~$448.9~~$154.4 million of borrowing capacity from the FHLB of Cincinnati, ~~$252.0~~$325.1 million of borrowing capacity from the Federal Reserve Bank of Atlanta’s discount window and federal funds lines with correspondent banks totaling ~~$125.0~~$145.0 million at ~~September 30, 2021.~~March 31, 2022.

The principal source of cash for CapStar Financial Holdings, Inc. (the “Parent Company”) is dividends paid to it as the sole shareholder of the Bank. At ~~September 30, 2021,~~March 31, 2022, the Bank was able to pay up to ~~$70.6~~$87.9 million in dividends to the Parent Company without regulatory approval subject to the ongoing capital requirements of the Bank.

Accordingly, management currently believes that our funding sources are at sufficient levels to satisfy our short-term and long-term liquidity needs.

(d) Capital Resources

At ~~September 30, 2021,~~March 31, 2022, shareholders’ equity totaled ~~$370.3~~$368.9 million, ~~an increase~~a decrease of ~~$26.8~~$11.2 million ~~since~~from December 31, ~~2020.~~2021. The decrease was primarily a result of a decline in the fair value of available for sale securities included within other comprehensive income. As of ~~September 30, 2021,~~March 31, 2022, the Company and the Bank were well-capitalized under the regulatory framework for prompt corrective action. See the Consolidated Statement of Changes in Shareholders’ Equity as well as Notes 11 and 12 of the consolidated financial statements for further detail of the changes in equity since the end of 2020.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions that, in accordance with U.S. GAAP, are not included in our consolidated balance sheet. We enter into these transactions to meet the financing needs of our clients. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets. Most of these commitments mature within two years and are expected to expire without being drawn upon. Standby letters of credit are included in the determination of the amount of risk-based capital that the Company and the Bank are required to hold.

We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon clients maintaining specific credit standards until the time of loan funding.

Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a client to a third party. In the event that the client does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the client. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

We minimize our exposure to loss under loan commitments and standby letters of credit by subjecting them to the same credit approval and monitoring procedures as we do for on-balance sheet instruments. We assess the credit risk associated with certain commitments to extend credit and establish a liability for probable credit losses. The effect on our revenue, expenses, cash flows and liquidity of the unused portions of these commitments cannot be reasonably predicted because there is no guarantee that the lines of credit will be used.

Our off-balance sheet arrangements are summarized in Note 98 of the consolidated financial statements.

(e) Non-GAAP Financial Measures

This Report includes the following financial measures that have been prepared other than in accordance with U.S. GAAP (“non-GAAP financial measures”): tangible common equity, tangible common equity to total tangible assets and tangible common equity per share. The Company believes that these non-GAAP financial measures (i) provide useful information to management and investors that is supplementary to its financial condition, results of operations and cash flows computed in accordance with U.S. GAAP, (ii) enable a more complete understanding of factors and trends affecting the Company’s business, and (iii) allow investors to evaluate the Company’s

performance in a manner similar to management, the financial services industry, bank stock analysts and bank regulators; however, the Company acknowledges that its non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with U.S. GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use.

The following table presents a reconciliation of tangible common equity, tangible common equity to total tangible assets and tangible common equity per share to the most directly comparable U.S. GAAP financial measures.


(dollars in thousands, except share and per share data)	September 30, 2021			December 31, 2020			March 31, 2022			December 31, 2021
Total equity	$	370,328		$	343,486		$	368,917		$	380,094
Less core deposit intangible		(7,152	)		(8,630	)		(6,245	)		(6,691	)
Less goodwill		(41,068	)		(41,068	)		(41,068	)		(41,068	)
Tangible common equity	$	322,108		$	293,788		$	321,604		$	332,335

Total assets	$	3,112,127		$	2,987,006		$	3,190,749		$	3,133,046
Less core deposit intangible		(7,152	)		(8,630	)		(6,245	)		(6,691	)
Less goodwill		(41,068	)		(41,068	)		(41,068	)		(41,068	)
Total tangible assets	$	3,063,907		$	2,937,308		$	3,143,436		$	3,085,287

Total shareholders' equity to total assets		11.90	%		11.50	%		11.56	%		12.13	%
Tangible common equity ratio		10.51	%		10.00	%
Total shares of common stock outstanding		22,165,760			21,988,803			22,195,071			22,166,129
Book value per share of common stock	$	16.71		$	15.62		$	16.62		$	17.15
Tangible book value per share of common stock		14.53			13.36			14.49			14.99

(f) Recently Issued Accounting Pronouncements

ASU 2016-13, Financial Instruments – Credit Losses

In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments were originally supposed to be effective for the Company for reporting periods beginning after December 15, 2019 with early adoption permitted for all organizations for periods beginning after December 15, 2018. However, in November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which ~~finalized~~finalizes effective date delays for private companies, not-for-profit organizations, and certain smaller reporting companies applying the credit losses standard. The Company is not required to adopt this standard until January l,1, 2023. The Company ~~is currently assessing~~has established a Current Expected Credit Loss (CECL) Steering Committee which includes the appropriate members of management to evaluate the impact this ASU ~~2016-13, timing~~will have on the Company’s financial position, results of ~~adoption,~~operations and ~~its impact on its~~ financial ~~statements.~~statement disclosures. Additionally, the Company selected a third-party vendor to provide allowance for loan loss software as well as advisory services in developing a new methodology and a parallel model.

ASU 2019-05 ― Applicable to entities that hold financial instruments:

In May 2019, the FASB issued guidance to provide entities with an option to irrevocably elect the fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The amendments will be effective for the Company upon adoption of ASU 2016-13 in fiscal year 2023. The Company does not expect these amendments to have a material effect on its financial statements.

ASU ~~2019-12~~2020-04 ― Applicable to entities within the scope of Topic ~~740, Income Taxes:~~848, Reference Rate Reform:

In ~~December 2019,~~March 2020, the FASB issued guidance which provides temporary optional guidance to ~~simplify~~ease the potential burden in accounting for ~~income taxes~~reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by ~~removing specific technical exceptions that often produce information investors have a hard time understanding.~~the discounting transition. The ~~amendments also improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The amendments are~~guidance is effective for ~~fiscal years beginning after~~all entities as of March 12, 2020 through December ~~15, 2020, including interim periods within those fiscal years. These amendments were adopted on January 1, 2021~~31, 2022. The Company continues to implement its transition plan towards cessation of LIBOR and ~~did~~the modification of its outstanding financial instruments with attributes that are either directly or indirectly influenced by LIBOR. The Company expects to utilize the LIBOR transition relief allowed under ASU 2020-04 and ASU 2021-01, as applicable, and does not expect such adoption to have a material ~~effect~~impact on its accounting and disclosures. The Company will continue to assess the ~~Company’s financial statements.~~impact as the reference rate transition approaches June 30, 2023.

(g) Impact of Inflation

The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with U.S. GAAP and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes in our market risk as of ~~September 30, 2021~~March 31, 2022 from that presented in our ~~2020~~2021 10-K. Information about our interest rate sensitivity is included in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Simulation Sensitivity Analysis” of this Report and incorporated herein by this reference.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company, with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Report.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) that occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table shows information relating to the repurchase of shares of common stock by the Company during the three months ended March 31, 2022.


	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plan (1)		Maximum remaining dollar value of shares that may be purchased under the plan
January 1 - January 31		—	$	—		—		—
February 1 - February 28		14		20.79		14	$29.71 million
March 1 - March 31		23		20.99		23	$29.22 million
Total		37	$	20.91		37	$29.22 million

(1)

On January 27, 2022, the board of directors approved the Company’s share repurchase program which authorized the Company to repurchase up to $30 million of shares of common stock. The plan will terminate on the earlier of the date on which the maximum authorized dollar amount of shares of common stock has been repurchased or February 1, 2023.

Item 6. Exhibits


Exhibit Number		Description

3.1		Charter of CapStar Financial Holdings, Inc. (incorporated by reference herein to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (File Number 333-213367) filed on August 29, 2016)

3.2		Articles of Amendment to the Charter of CapStar Financial Holdings, Inc. (incorporated by reference herein to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 29, 2020)

3.3		Amended and Restated Bylaws of CapStar Financial Holdings, Inc. (incorporated by reference herein to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 28, 2019)

31.1		Certification of Chief Executive Officer of CapStar Financial Holdings, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.

31.2		Certification of Chief Financial Officer of CapStar Financial Holdings, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended.

32.1		Certification of Chief Executive Officer of CapStar Financial Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.

32.2		Certification of Chief Financial Officer of CapStar Financial Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.

101		Interactive data files for Capstar Financial Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2021,~~March 31, 2022, formatted in Inline XBRL: (i) the Consolidated Balance Sheets (unaudited); (ii) the Consolidated Statements of Income (unaudited); (iii) the Consolidated Statements of Comprehensive Income (unaudited); (iv) the Consolidated Statements in Shareholders’ Equity (unaudited); (v) the Consolidated Statements of Cash Flows (unaudited); and (vi) the Notes to Consolidated Financial Statements (unaudited).

104		The cover page from Capstar Financial Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2021~~March 31, 2022 (formatted in Inline XBRL and included in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


CAPSTAR FINANCIAL HOLDINGS, INC.


By:		/s/ ~~Denis J. Duncan~~Michael J Fowler
		~~Denis~~Michael J. ~~Duncan~~Fowler
		Chief Financial Officer (Principal Financial ~~Officer and~~ Officer)

Date:		May 5, 2022


By:		/s/ Jeffrey L. Moody
		Jeffrey L. Moody
		Controller (Principal Accounting Officer)

Date:		~~November 4, 2021~~May 5, 2022

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	As recorded by FCB Corporation			Initial fair value adjustments				Measurement period adjustments		As recorded by CapStar Financial Holdings
Assets:
Cash and cash equivalents	$	90,760		$	—			$	—	$	90,760
Securities		98,536			159		(a)		—		98,695
Loans, gross		296,992			(2,318	)	(b)		—		294,674
Allowance for loan losses		(4,544	)		4,544		(c)		—		—
Premises and equipment, net		9,907			1,540		(d)		—		11,447
Core deposit intangible		—			3,570		(e)		—		3,570
Other		16,514			(917	)	(f)		—		15,597
Total	$	508,165		$	6,578			$	—	$	514,743
Liabilities:
Deposits	$	440,025		$	2,652		(g)	$	—	$	442,677
Other		4,735			—				—		4,735
Total	$	444,760		$	2,652			$	—	$	447,412

Net identifiable assets acquired										$	67,331

Total cost of acquisition:
Value of stock issued										$	43,611
Cash consideration paid											27,278
Total cost of acquisition										$	70,889

Goodwill recorded related to acquisition										$	3,558


	For the Nine Months Ended September 30,
	2021							2020
	Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate			Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate
Interest-Earning Assets
Loans (1)	$	1,917,536	$	63,077		4.40	%	$	1,624,722	$	56,875		4.68	%
Loans held for sale		162,092		3,859		3.18	%		176,585		4,745		3.59	%
Securities:
Taxable investment securities (2)		444,643		5,373		1.61	%		216,262		3,886		2.40	%
Investment securities exempt from federal income tax (3)		62,265		1,074		2.91	%		46,955		975		3.50	%
Total securities		506,908		6,447		1.77	%		263,217		4,861		2.59	%
Cash balances in other banks		290,454		405		0.19	%		278,647		640		0.31	%