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

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

~~(Former name, former address and former fiscal year, if changed since last report)~~

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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. ~~(Check one):~~

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 ☒

AsIndicate the number of ~~October 16, 2017, there were 11,359,130~~ shares outstanding of each of the registrant’s classes of common stock, ~~$1.00 par value per share, issued and outstanding.~~as of the latest practicable date.

The terms “we,” “our,” “us,” “CapStar,” “the Company,” “CSTR” and ~~“CapStar”~~“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. The terms~~Bank, which we sometimes refer to as “CapStar Bank,” “our bank subsidiary,” “the Bank” and “our Bank” ~~that appear in this Report refer to CapStar Bank.~~.

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 ~~events~~acquisitions, disposition and ~~our financial performance.~~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,” ~~“roadmap,” “achieve,”~~ “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 onupon 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.~~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 ~~are~~ not limited to, the following:

The foregoing factors should not be construed as exhaustive and should be read in conjunction with~~those factors that are detailed from time to time in~~ the ~~Company’s periodic and current reports filed with the Securities and Exchange Commission (the “SEC”), including those factors~~section entitled “Risk Factors” included in ~~the Company’s~~our Annual Report on Form 10-K for the year ended December 31, ~~2016 under the headings “Item 1A. Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements”~~2021 (the “2021 Form 10-K”) and in future reports that we file with the ~~Company’s Quarterly Reports on Form 10-Q~~Securities and ~~Current Reports on Form 8-K.~~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.

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, ~~2017~~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. On February 5, 2016, CapStar Financial Holdings, Inc. acquired all of the Bank’s issued and outstanding shares of common stock, preferred stock, common stock options and warrants, and the Bank became the wholly owned subsidiary of CapStar Financial Holdings, Inc.

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all information and ~~footnotes~~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 ~~Company’s Annual Report on~~2021 Form ~~10-K~~10-K.

The consolidated financial statements as of and for the ~~year~~period ended ~~December 31, 2016.~~September 30, 2022 reported herein reflect minor changes from financial results previously reported in Form 8-K filed on October 20, 2022. The changes include a $0.20 million increase in noninterest expense and a $0.15 million decrease in net income for the three and nine months ended September 30, 2022, along with insignificant changes to balances previously reported in the balance sheet.

Business Combinations

~~Initial Public Offering~~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.

~~On September 21, 2016,~~The Company typically issues common stock and/or pays cash for an acquisition, depending on the ~~Securities and Exchange Commission (“SEC”) declared effective our registration statement on Form S-1 registering~~terms of the acquisition agreement. The value of shares of ~~our~~ common ~~stock. On September 27, 2016, we completed~~stock issued is determined based upon the ~~initial public offering~~market price of ~~2,972,750 shares~~the stock as of ~~our common stock. Of~~ the ~~2,972,750 shares sold, 1,688,049 shares were sold by us and 1,284,701 shares were sold by certain selling shareholders. Of~~closing of the 1,284,701 shares sold by certain selling shareholders, 731,707 were from preferred shares converted to common shares and 79,166 from the cashless exercise of 250,000 common share warrants. We received net proceeds of approximately $21.9 million from the offering, after deducting the underwriting discounts and commissions and estimated offering expenses. We did not receive any proceeds from the sale of shares by the selling shareholders.acquisition.

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, the valuation of loans held for sale, 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 ~~Company’s Annual Report on~~2021 Form ~~10-K for the year ended December 31, 2016.~~10-K.

~~Tri-Net Fees~~

Tri-Net fees represent a new line of business, implemented in the fourth quarter of 2016, which originates, with the intent to sell, commercial real estate loans to third-party investors. All of these loan sales transfer servicing rights to the buyer. Realized gains and losses are recognized when legal title of the loan has transferred to the investor and sales proceeds have been received and are reflected in the accompanying statement of income in Tri-Net fees, net of related costs such as commission expenses. Loans that have not been sold at period end are classified as held for sale on the balance sheet and recorded at the lower of aggregate cost or fair value. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

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, ~~2017~~2022 through the date of ~~the issued financial statements.~~filing this Quarterly Report on Form 10-Q and determined that there were no events that required disclosure.

Available-for-sale

Held-to-maturity

Amortized
cost

Estimated
fair value

Amortized
cost

Estimated
fair value

Due one to five years

$
11,388

$
11,511

$
27,299

$
29,448

Due five to ten years

17,970

17,788

14,069

15,129

Due beyond ten years

1,107

1,067

430

489

Mortgage-backed securities

96,975

95,823

3,837

3,914

Asset-backed securities

20,668

20,411

—

—

$
148,108

$
146,600

$
45,635

$
48,980

A summary of the ~~loan~~loans held for investment portfolio as of September 30, ~~2017~~2022 and December 31, ~~2016~~2021 follows ~~(dollars~~(in thousands):


	September 30, 2022			December 31, 2021
Commercial real estate	$	1,067,675		$	825,284
Consumer real estate		386,628			326,412
Construction and land development		198,869			214,310
Commercial and industrial		499,048			497,615
Consumer		52,715			46,811
Other		85,334			55,337
Total		2,290,269			1,965,769
Allowance for loan losses		(22,431	)		(21,698	)
Total loans, net	$	2,267,838		$	1,944,071

In 2020, the CARES Act created a new guaranteed, unsecured loan program under the SBA called the Payroll Protection Program (“PPP”), which the Company participated in, ~~thousands):~~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, 2022, the outstanding balance of loans originated under the PPP totaled $0.9 million compared with $26.5 million as of December 31, 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. These fees are deferred and amortized over the life of the loan. PPP fees recognized as income totaled $0.1 million and $0.7 million for the three and nine months ended September 30, 2022, compared to $1.9 million and $6.8 million for the same periods in 2021.

Included within the balance sheet as of September 30, 2022, the Company had $43.1 million in loans held for sale, which was comprised of $2.3 million in Tri-Net commercial real estate loans, $33.4 million in residential mortgage loans, and $7.4 million in the guaranteed

portion of SBA loans. At December 31, 2021, the Company had $83.7 million in loans held for sale, which was comprised of $40.9 million in Tri-Net commercial real estate loans, $37.3 million in residential mortgage loans, and $7.4 million in the guaranteed portion of SBA loans.

The adequacy of the allowance for loan losses ~~(ALL)~~(“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, 2022, which is uncertain due to evolving 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.

The following tables ~~present~~provides the ~~loan balances~~risk category of loans by ~~category as well as risk rating (dollars in thousands):~~

Performing Loans

September 30, 2017

Pass/Watch

Special
Mention

Substandard

Total
Performing

Total Impaired
Loans

Total

Commercial real estate

$
365,545

$
—

$
—

$
365,545

$
1,233

$
366,778

Consumer real estate

100,522

—

289

100,811

—

100,811

Construction and land development

79,951

—

—

79,951

—

79,951

Commercial and industrial

370,657

16,443

5,568

392,668

1,932

394,600

Consumer

6,276

—

13

6,289

—

6,289

Other

26,460

—

—

26,460

—

26,460

Total

$
949,411

$
16,443

$
5,870

$
971,724

$
3,165

$
974,889

December 31, 2016

Commercial real estate

$
301,012

$
—

$
—

$
301,012

$
1,310

$
302,322

Consumer real estate

96,722

—

293

97,015

—

97,015

Construction and land development

94,491

—

—

94,491

—

94,491

Commercial and industrial

349,857

11,035

16,419

377,311

2,309

379,620

Consumer

5,958

—

16

5,974

—

5,974

Other

56,796

—

—

56,796

—

56,796

Total

$
904,836

$
11,035

$
16,728

$
932,599

$
3,619

$
936,218

~~None~~applicable class of ~~the Company’s~~ loans ~~had a risk rating of “Doubtful”~~ as of September 30, ~~2017 or~~2022 and December 31, ~~2016.~~2021 (in thousands):


September 30, 2022	Pass		Special Mention		Substandard		Doubtful		Total Impaired Loans		Total
Commercial real estate	$	1,047,993	$	11,316	$	8	$	—	$	4,966	$	1,064,283
Consumer real estate		375,763		614		471		—		1,204		378,052
Construction and land development		198,793		—		—		—		8		198,801
Commercial and industrial		477,986		500		18,655		157		129		497,427
Consumer		52,097		—		88		2		10		52,197
Other		84,673		—		466		—		—		85,139
Purchased credit impaired		11,913		1,053		1,354		50		—		14,370
Total	$	2,249,218	$	13,483	$	21,042	$	209	$	6,317	$	2,290,269

December 31, 2021
Commercial real estate	$	802,562	$	12,921	$	4,721	$	—	$	1,151	$	821,355
Consumer real estate		312,662		475		712		—		909		314,758
Construction and land development		214,209		—		—		—		10		214,219
Commercial and industrial		468,278		9,811		16,952		73		250		495,364
Consumer		45,695		—		56		3		23		45,777
Other		54,959		—		76		—		—		55,035
Purchased credit impaired		15,416		—		3,585		260		—		19,261
Total	$	1,913,781	$	23,207	$	26,102	$	336	$	2,343	$	1,965,769

The following ~~tables detail~~table details the changes in the ALL for the three and nine ~~months~~month periods ended September 30, ~~2017~~2022 and ~~2016~~2021 (in thousands):

	Commercial real estate			Consumer real estate			Construction and land development		Commercial and industrial			Consumer			Other			Total
Three Months Ended September 30, 2017
																					Commercial real estate			Consumer real estate		Construction and land development		Commercial and industrial			Consumer			Other			Total
Three Months Ended September 30, 2022
Balance, beginning of period	$	3,533		$	1,081		$	911	$	6,395		$	57		$	477		$	12,454		$	7,149		$	2,555	$	3,271	$	7,464		$	498		$	747		$	21,684
Charged-off loans		—			—			—		—			—			—			—			—			—		—		(46	)		(64	)		(37	)		(147	)
Recoveries		3			—			—		1,860			—			—			1,863			—			1		—		7			14			5			27
Provision for loan losses		(242	)		(97	)		576		(306	)		22			(148	)		(195	)		692			392		40		(419	)		3			159			867
Balance, end of period	$	3,294		$	984		$	1,487	$	7,949		$	79		$	329		$	14,122		$	7,841		$	2,948	$	3,311	$	7,006		$	451		$	874		$	22,431

Three Months Ended September 30, 2016
Three Months Ended September 30, 2021
Balance, beginning of period	$	2,596		$	968		$	943	$	5,037		$	104		$	806		$	10,454		$	7,915		$	1,730	$	3,871	$	8,401		$	356		$	481		$	22,754
Charged-off loans		—			—			—		(645	)		—						(645	)		—			—		—		(125	)		(62	)		(80	)		(267	)
Recoveries		52			—			—		10			—			—			62			—			17		—		1			17			11			46
Provision for loan losses		(228	)		4			721		1,166			(18	)		(6	)		1,639			(521	)		596		239		(664	)		124			226			—
Balance, end of period	$	2,420		$	972		$	1,664	$	5,568		$	86		$	800		$	11,510		$	7,394		$	2,343	$	4,110	$	7,613		$	435		$	638		$	22,533

Commercial
real estate

Consumer
real estate

Construction
and land
development

Commercial
and
industrial

Consumer

Other

Total

Nine Months Ended September 30, 2017

Balance, beginning of period

$
2,655

$
1,013

$
1,574

$
5,618

$
76

$
698

$
11,634

Charged-off loans

—

—

—

(12,369
)

—

—

(12,369
)
Recoveries

4

—

—

1,862

91

—

1,957

Provision for loan losses

635

(29
)

(87
)

12,838

(88
)

(369
)

12,900

Balance, end of period

$
3,294

$
984

$
1,487

$
7,949

$
79

$
329

$
14,122

Nine Months Ended September 30, 2016

Balance, beginning of period

$
2,879

$
968

$
914

$
4,693

$
103

$
575

$
10,132

Charged-off loans

(350
)

—

—

(956
)

(146
)

—

(1,452
)
Recoveries

52

—

—

18

1

—

71

Provision for loan losses

(161
)

4

750

1,813

128

225

2,759

Balance, end of period

$
2,420

$
972

$
1,664

$
5,568

$
86

$
800

$
11,510


	Commercial real estate			Consumer real estate			Construction and land development			Commercial and industrial			Consumer			Other			Total
Nine Months Ended September 30, 2022
Balance, beginning of period	$	7,124		$	2,412		$	3,769		$	7,441		$	397		$	555		$	21,698
Charged-off loans		(12	)		—			—			(205	)		(211	)		(128	)		(556	)
Recoveries		225			2			—			30			95			11			363
Provision for loan losses		504			534			(458	)		(260	)		170			436			926
Balance, end of period	$	7,841		$	2,948		$	3,311		$	7,006		$	451		$	874		$	22,431

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	)		—			(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

A breakdown of the ALL and the loan portfolio by loan category at September 30, ~~2017~~2022 and December 31, ~~2016~~2021 follows ~~(dollars in~~(in thousands):

	Commercial real estate		Consumer real estate		Construction and land development		Commercial and industrial		Consumer		Other		Total
September 30, 2017
															Commercial real estate		Consumer real estate		Construction and land development		Commercial and industrial		Consumer		Other		Total
September 30, 2022
Allowance for Loan Losses:
Collectively evaluated for impairment	$	3,294	$	984	$	1,487	$	7,449	$	79	$	329	$	13,622	$	7,841	$	2,948	$	3,311	$	6,977	$	399	$	874	$	22,350
Individually evaluated for impairment		—		—		—		500		—		—		500		—		—		—		—		—		—		—
Purchased credit impaired																—		—		—		29		52		—		81
Balances, end of period	$	3,294	$	984	$	1,487	$	7,949	$	79	$	329	$	14,122	$	7,841	$	2,948	$	3,311	$	7,006	$	451	$	874	$	22,431
Loans:
Collectively evaluated for impairment	$	365,545	$	100,811	$	79,951	$	392,668	$	6,289	$	26,460	$	971,724	$	1,059,317	$	376,848	$	198,793	$	497,298	$	52,187	$	85,139	$	2,269,582
Individually evaluated for impairment		1,233		—		—		1,932		—		—		3,165		4,966		1,204		8		129		10		—		6,317
Purchased credit impaired																3,392		8,576		68		1,621		518		195		14,370
Balances, end of period	$	366,778	$	100,811	$	79,951	$	394,600	$	6,289	$	26,460	$	974,889	$	1,067,675	$	386,628	$	198,869	$	499,048	$	52,715	$	85,334	$	2,290,269

December 31, 2016
December 31, 2021
Allowance for Loan Losses:
Collectively evaluated for impairment	$	2,655	$	1,013	$	1,574	$	5,118	$	76	$	698	$	11,134	$	7,075	$	2,211	$	3,769	$	7,376	$	321	$	555	$	21,307
Individually evaluated for impairment		—		—		—		500		—		—		500		—		200		—		—		—		—		200
Purchased credit impaired																49		1		—		65		76		—		191
Balances, end of period	$	2,655	$	1,013	$	1,574	$	5,618	$	76	$	698	$	11,634	$	7,124	$	2,412	$	3,769	$	7,441	$	397	$	555	$	21,698
Loans:
Collectively evaluated for impairment	$	301,012	$	97,015	$	94,491	$	377,311	$	5,974	$	56,796	$	932,599	$	820,204	$	313,849	$	214,209	$	495,114	$	45,754	$	55,035	$	1,944,165
Individually evaluated for impairment		1,310		—		—		2,309		—		—		3,619		1,151		909		10		250		23		—		2,343
Purchased credit impaired																3,929		11,654		91		2,251		1,034		302		19,261
Balances, end of period	$	302,322	$	97,015	$	94,491	$	379,620	$	5,974	$	56,796	$	936,218	$	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, ~~2017~~2022 and December 31, ~~2016 (dollars~~2021 (in thousands). PPP loans included in ~~thousands):~~commercial and industrial loans in the below table do not have a corresponding ALL as they are fully guaranteed by the SBA:

September 30, 2017

December 31, 2016

Amount

Percent of total
loans, net of
deferred fees

Amount

Percent of total
loans, net of
deferred fees

Commercial real estate

$
3,294

0.34
%

$
2,655

0.28
%
Consumer real estate

984

0.10

1,013

0.11

Construction and land development

1,487

0.15

1,574

0.17

Commercial and industrial

7,949

0.82

5,618

0.60

Consumer

79

0.01

76

0.01

Other

329

0.03

698

0.07

Total allowance for loan losses

$
14,122

1.45
%

$
11,634

1.24
%


	September 30, 2022					December 31, 2021
	Amount		Percent of total loans			Amount		Percent of total loans
Commercial real estate	$	7,841		0.34	%	$	7,124		0.36	%
Consumer real estate		2,948		0.13			2,412		0.12
Construction and land development		3,311		0.14			3,769		0.19
Commercial and industrial		7,006		0.31			7,441		0.38
Consumer		451		0.02			397		0.02
Other		874		0.04			555		0.03
Total allowance for loan losses	$	22,431		0.98	%	$	21,698		1.10	%

1516

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, ~~2017~~2022 and December 31, ~~2016 (dollars in~~2021 (in thousands):


	September 30, 2022						December 31, 2021
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded:
Commercial real estate	$	4,966	$	4,974	$	—	$	1,151	$	1,115	$	—
Consumer real estate		1,204		1,218		—		255		281		—
Construction and land development		8		8		—		10		11		—
Commercial and industrial		129		414		—		250		298		—
Consumer		10		10		—		23		23		—
Other		—		—		—		—		—		—
Subtotal		6,317		6,624		—		1,689		1,728		—
With an allowance recorded:
Commercial real estate		—		—		—		—		—		—
Consumer real estate		—		—		—		654		654		200
Construction and land development		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Other		—		—		—		—		—		—
Subtotal		—		—		—		654		654		200
Total	$	6,317	$	6,624	$	—	$	2,343	$	2,382	$	200

September 30, 2017

December 31, 2016

Recorded
investment

Unpaid
principal
balance

Related
allowance

Recorded
investment

Unpaid
principal
balance

Related
allowance

With no related allowance recorded:

Commercial real estate

$
1,233

$
1,660

$
—

$
1,310

$
1,686

$
—

Consumer real estate

—

—

—

—

—

—

Construction and land development

—

—

—

—

—

—

Commercial and industrial

—

—

—

—

—

—

Consumer

—

��
—

—

—

—

—

Other

—

—

—

—

—

—

Subtotal

1,233

1,660

—

1,310

1,686

—

With an allowance recorded:

Commercial real estate

—

—

—

—

—

—

Consumer real estate

—

—

—

—

—

—

Construction and land development

—

—

—

—

—

—

Commercial and industrial

1,932

2,770

500

2,309

2,921

500

Consumer

—

—

—

—

—

—

Other

—

—

—

—

—

—

Subtotal

1,932

2,770

500

2,309

2,921

500

Total

$
3,165

$
4,430

$
500

$
3,619

$
4,607

$
500

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 ~~months~~month periods ended September 30, ~~2017~~2022 and ~~2016 (dollars in~~2021 (in thousands):


	Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended				Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
	September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016				September 30, 2022				September 30, 2021				September 30, 2022				September 30, 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		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
With no related allowance recorded:
Commercial real estate	$	1,245	$	—	$	—	$	—	$	1,272	$	—	$	—	$	—	$	4,988	$	59	$	1,159	$	16	$	5,075	$	234	$	1,174	$	48
Consumer real estate		—		—		—		—		—		—		—		—		548		6		889		—		337		7		1,181		—
Construction and land development		—		—		—		—		—		—		—		—		8		—		—		—		9		—		—		—
Commercial and industrial		—		—		—		—		—		—		—		—		106		2		63		—		79		—		64		1
Consumer		—		—		—		—		—		—		—		—		11		—		2		—		12		3		49		—
Other		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Subtotal		1,245		—		—		—		1,272		—		—		—		5,661		67		2,113		16		5,512		244		2,468		49
With an allowance recorded:
Commercial real estate		—		—		1,685		—		—		—		1,742		—		—		—		—		—		—		—		—		—
Consumer real estate		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Commercial and industrial		1,941		—		3,411		—		2,141		—		3,534		30		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Subtotal		1,941		—		5,096		—		2,141		—		5,276		30		—		—		—		—		—		—		—		—
Total	$	3,186	$	—	$	5,096	$	—	$	3,413	$	—	$	5,276	$	30	$	5,661	$	67	$	2,113	$	16	$	5,512	$	244	$	2,468	$	49

There was no interest income recognized on a cash basis for impaired loans ~~for~~during the three or nine ~~months~~month periods ended September 30, ~~2017~~2022 or ~~2016.~~2021.

The following table presents the aging of the recorded investment in ~~past-due~~past due loans as of September 30, ~~2017~~2022 and December 31, ~~2016~~2021 by class of loans ~~(dollars in~~(in thousands):

	30 - 59		60 - 89		Greater Than
	Days		Days		89 Days		Total		Loans Not				30 - 59		60 - 89		Greater Than
	Past Due		Past Due		Past Due		Past Due		Past Due		Total		Days		Days		89 Days		Total		Loans Not
September 30, 2017
													Past Due		Past Due		Past Due		Past Due		Past Due		Total
September 30, 2022
Commercial real estate	$	—	$	—	$	—	$	—	$	366,778	$	366,778	$	22	$	—	$	4,973	$	4,995	$	1,059,288	$	1,064,283
Consumer real estate		506		279		—		785		100,026		100,811		1,157		633		209		1,999		376,053		378,052
Construction and land development		—		—		—		—		79,951		79,951		—		—		73		73		198,728		198,801
Commercial and industrial		1,154		218		27		1,398		393,202		394,600		1,771		3,496		437		5,704		491,723		497,427
Consumer		—		1		—		1		6,288		6,289		269		117		43		429		51,768		52,197
Other		—		—		—		—		26,460		26,460		—		—		37		37		85,102		85,139
Purchased credit impaired														506		301		324		1,131		13,239		14,370
Total	$	1,660	$	497	$	27	$	2,184	$	972,705	$	974,889	$	3,725	$	4,547	$	6,096	$	14,368	$	2,275,901	$	2,290,269

December 31, 2016
December 31, 2021
Commercial real estate	$	—	$	—	$	—	$	—	$	302,322	$	302,322	$	—	$	—	$	1,115	$	1,115	$	820,240	$	821,355
Consumer real estate		81		282		—		363		96,652		97,015		1,806		—		241		2,047		312,711		314,758
Construction and land development		—		—		—		—		94,491		94,491		—		—		11		11		214,208		214,219
Commercial and industrial		—		—		—		—		379,620		379,620		57		48		268		373		494,991		495,364
Consumer		—		—		—		—		5,974		5,974		164		170		26		360		45,417		45,777
Other		—		—		—		—		56,796		56,796		—		—		—		—		55,035		55,035
Purchased credit impaired														302		153		459		914		18,347		19,261
Total	$	81	$	282	$	—	$	363	$	935,855	$	936,218	$	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 90 days ~~outstanding~~ and accruing and troubled debt restructurings (“TDR”) by class of loans as of September 30, ~~2017~~2022 and December 31, ~~2016 (dollars in~~2021 (in thousands):

	Non-Accrual		Past Due Over 90 Days and Accruing		Troubled Debt Restructurings
September 30, 2017
							Non-Accrual		Past Due Over 90 Days and Accruing		Troubled Debt Restructurings
September 30, 2022
Commercial real estate	$	1,233	$	—	$	1,222	$	4,974	$	—	$	—
Consumer real estate		—		—		—		307		175		—
Construction and land development		—		—		—		8		65		—
Commercial and industrial		1,932		27		—		186		436		344
Consumer		—		—		—		41		22		—
Other		—		—		—		—		37		—
Purchased credit impaired								1,218		256		—
Total	$	3,165	$	27	$	1,222	$	6,734	$	991	$	344

December 31, 2016
December 31, 2021
Commercial real estate	$	1,310	$	—	$	1,272	$	—	$	1,115	$	1,115
Consumer real estate		—		—		—		1,086		54		654
Construction and land development		—		—		—		11		—		—
Commercial and industrial		2,309		—		—		324		112		63
Consumer		—		—		—		31		10		—
Other		—		—		—		—		—		—
Purchased credit impaired								1,806		89		—
Total	$	3,619	$	—	$	1,272	$	3,258	$	1,380	$	1,832

As of September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, all loans classified as nonperforming were deemed to be purchased credit impaired or impaired.

As of September 30, ~~2017~~2022 and December 31, ~~2016,~~2021, the Company had a recorded investment in TDR of ~~$1.2~~$0.3 million and ~~$1.3~~1.8 million, respectively. The Company had no specific allowance for those loans at September 30, ~~2017~~2022 or December 31, ~~2016~~2021 and there were no 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.

The following table presents loans by class modified as TDR that occurred during the three and nine months ended September 30, ~~2016~~2022 (dollars in thousands). There were no new TDR identified during the three or nine months ended September 30, ~~2017.~~2021.

Three Months Ended

Nine Months Ended

September 30,

September 30,

Number of contracts

Pre modification outstanding recorded investment

Post modification outstanding recorded investment, net of related allowance

Number of contracts

Pre modification outstanding recorded investment

Post modification outstanding recorded investment, net of related allowance

2016

Commercial real estate

—

$
—

$
—

1

$
1,948

$
1,170

Consumer real estate

—

—

—

—

—

—

Construction and land development

—

—

—

—

—

—

Commercial and industrial

—

—

—

—

—

—

Consumer

—

—

—

—

—

—

Other

—

—

—

—

—

—

Total

—

$
—

$
—

1

$
1,948

$
1,170

Three Months Ended

Nine Months Ended

September 30,

Number of contracts

Pre modification outstanding recorded investment

Post modification outstanding recorded investment, net of related allowance

Number of contracts

Pre modification outstanding recorded investment

Post modification outstanding recorded investment, net of related allowance

2022

Commercial and industrial

—

$—

$86

~~The following table presents loans by class modified as~~There were no TDR for which there was a payment default within twelve months following the modification during the ~~three and~~ nine months ended September 30, ~~2016 (dollars in thousands). There were no TDR for which there was a payment default within twelve months following the modification during the three~~2022 or ~~nine months ended September 30, 2017.~~2021.

Three Months Ended

Nine Months Ended

September 30,

September 30,

Number of contracts

Recorded investment

Number of contracts

Recorded investment

2016

Commercial real estate

—

$
—

—

$
—

Consumer real estate

—

—

—

—

Construction and land development

—

—

—

—

Commercial and industrial

—

—

—

—

Consumer

—

—

1

124

Other

—

—

—

—

Total

—

$
—

1

$
124

~~The consumer loan TDR that subsequently defaulted during the nine months ended September 30, 2016 had no specific reserve in the allowance for loan losses and resulted in a $0.1 million charge-off.~~

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

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
	September 30,						September 30,
	2022			2021			2022			2021
Balance at beginning of period	$	15,809		$	22,765		$	19,261		$	28,392
Change due to payments received and accretion		(1,439	)		(1,494	)		(4,810	)		(7,121	)
Reclassification of discount to allowance for loan losses		—			—			(81	)		—
Balance at end of period	$	14,370		$	21,271		$	14,370		$	21,271

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Balance at beginning of period	$	4,992		$	3,169		$	5,763		$	4,068
Accretion		(376	)		(603	)		(1,245	)		(1,502	)
Reclassification from nonaccretable difference		—			—			304			—
Other, net		—			—			(206	)		—
Balance at end of period	$	4,616		$	2,566		$	4,616		$	2,566

NOTE 4 – ~~FEDERAL HOME LOAN BANK ADVANCES~~PREMISES AND EQUIPMENT

The Company leases certain premises and equipment under operating leases. At September 30, 2022, the Company had lease liabilities totaling $11.4 million and right-of-use assets totaling $10.4 million related to these leases. Lease liabilities and right-of-use assets are

reflected in other liabilities and other assets, respectively. At September 30, 2022, the weighted average remaining lease term for operating leases was 8.3 years and the weighted average discount rate used in the measurement of operating lease liabilities was 3.38%.

Lease costs were as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Operating lease cost	$	535	$	514	$	1,626	$	1,588
Short-term lease cost		—		—		—		—
Variable lease cost		—		—		—		—
Total lease cost	$	535	$	514	$	1,626	$	1,588

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three or nine months ended September 30, 2022 or 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, 2022
Lease payments due:
2022	$	470
2023		1,834
2024		1,543
2025		1,549
2026		1,537
2027 and thereafter		6,252
Total undiscounted cash flows		13,185
Discount on cash flows		(1,827	)
Total lease liability	$	11,358

NOTE 5 – SHORT TERM BORROWINGS AND LONG-TERM DEBT

Short-Term Borrowings

The Company had outstanding borrowings totaling ~~$95.0~~$120.0 million ~~and $55.0 million at~~as of September 30, ~~2017 and December 31, 2016, respectively,~~2022 via various FHLB advances. These advances are non-callable; interest payments are due monthly, with principal due at maturity. The Company had no outstanding advances as of December 31, 2021.

The following is a summary of the contractual maturities and average effective rates of outstanding advances (dollars in thousands):

September 30, 2017

December 31, 2016

Year

Amount

Interest Rates

Amount

Interest Rates

2017

$
60,000

1.18
%

$
55,000

0.80
%
2018

35,000

1.50

—

—

2019

—

—

—

—

2020

—

—

—

—

2021

—

—

—

—

Thereafter

—

—

—

—

Total

$
95,000

1.30
%

$
55,000

0.80
%


	September 30, 2022
Year	Amount	Interest Rates
2022	120,000	3.02%

Advances from the FHLB are collateralized by investment securities ~~FHLB stock~~with a market value of $20.4million and certain commercial and residential real estate mortgage loans totaling ~~$367.0~~$721.0 million under a blanket mortgage collateral agreement. At September 30, ~~2017,~~2022, the amount of available credit from the FHLB totaled ~~$108.0~~$439.7 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 $29.6 million at September 30, 2022 and $29.5 million at December 31, 2021.

NOTE 56 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following were changes in accumulated other comprehensive income (loss) by component, net of tax, for the ~~nine months~~periods ended September 30, ~~2017~~2022 and ~~2016 (dollars in~~2021 (in thousands):

Unrealized Gains

Unrealized

Gains and

and Losses

Losses on

Losses on

on Available

Securities

Cash Flow

for Sale

Transferred to

Hedges

Securities

Held to Maturity

Total

Nine Months Ended September 30, 2017

Beginning Balance

$
(4,241
)

$
(698
)

$
(1,212
)

$
(6,151
)
Other comprehensive income (loss) before
   reclassification, net of tax

(193
)

1,502

—

1,309

Amounts reclassified from accumulated other
   comprehensive income (loss), net of tax

589

(26
)

100

663

Net current period other comprehensive income (loss)

396

1,476

100

1,972

Ending Balance

$
(3,845
)

$
778

$
(1,112
)

$
(4,179
)

Nine Months Ended September 30, 2016

Beginning Balance

$
(3,704
)

$
105

$
(1,315
)

$
(4,914
)
Other comprehensive income (loss) before
    reclassification, net of tax

(1,086
)

1,746

—

660

Amounts reclassified from accumulated other
   comprehensive income (loss), net of tax

261

(75
)

77

263

Net current period other comprehensive income (loss)

(825
)

1,671

77

923

Ending Balance

$
(4,529
)

$
1,776

$
(1,238
)

$
(3,991
)


	Unrealized Gains
	and Losses
	on Available
	for Sale
	Securities
Nine Months Ended September 30, 2022
Beginning balance	$	(1,270	)
Other comprehensive loss before reclassification, net of tax		(50,504	)
Amounts reclassified from accumulated other comprehensive loss, net of tax		(6	)
Net current period other comprehensive loss		(50,510	)
Ending Balance	$	(51,780	)

Nine Months Ended September 30, 2021
Beginning balance	$	7,728
Other comprehensive loss before reclassification, net of tax		(7,214	)
Amounts reclassified from accumulated other comprehensive loss, net of tax		(15	)
Net current period other comprehensive loss		(7,229	)
Ending Balance	$	499

The following amounts were ~~significant amounts~~ reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, ~~2017~~2022 and ~~2016 (dollars in~~2021 (in thousands):

Affected Line Item
Details about Accumulated Other

Three Months Ended September 30,

Nine Months Ended September 30,

in the Statement Where
Comprehensive Income Components

2017

2016

2017

2016

Net Income is Presented
Unrealized losses on cash flow hedges

$
109

$
38

$
322

$
113

Interest expense - money market

168

50

267

148

Interest expense - Federal Home Loan Bank advances

$
277

$
88

$
589

$
261

Net of tax
Unrealized (gains) and losses on
available for sale securities

$
(9
)

$
4

$
(42
)

$
(121
)
Net (gain) loss on sale of securities

3

(2
)

16

46

Income tax expense (benefit)

$
(6
)

$
2

$
(26
)

$
(75
)
Net of tax
Unrealized losses on securities
transferred to held to maturity

$
79

$
42

$
162

$
125

Interest income - securities

(30
)

(16
)

(62
)

(48
)
Income tax benefit

$
49

$
26

$
100

$
77

Net of tax


													Affected Line Item
Details about Accumulated Other	Three Months Ended September 30,						Nine Months Ended September 30,						in the Statement Where
Comprehensive Income (Loss) Components	2022			2021			2022			2021			Net Income is Presented
Realized gains on available- for-sale securities	$	8		$	7		$	8		$	20		Net gain (loss) on sale of securities
		(2	)		(2	)		(2	)		(5	)	Income tax (expense) benefit
	$	6		$	5		$	6		$	15		Net of tax

NOTE ~~6 –~~7– INCOME TAXES

The Company’s effective tax rate for the three and nine ~~months~~month periods ended September 30, ~~2017~~2022 was ~~25.5%~~19.8% and ~~9.1%~~19.7%, respectively, compared to ~~33.1%~~19.4% and ~~32.7%~~20.0% for the three and nine months ended September 30, ~~2016. In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions, including income~~2021.

The effective tax consequences. In addition to other changes, the guidance changes the accounting for excess tax benefits and tax deficiencies from generally being recognized in additional paid-in capital to recognition as income tax expense or benefit in the period they occur. The Company adopted the new guidance in the first quarter of 2017. As a result, the Company’s income tax expense was reduced by $144,000 and $310,000rate for the three ~~and nine months~~month period ended September 30, ~~2017.~~

~~The effective tax rate~~2022 compared favorably to the statutory federal rate of ~~34%~~21% and Tennessee excise tax rate of ~~6.5%~~6.5% primarily due to investments in qualified municipal securities, company owned life insurance, ~~state~~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 and the recognition of excess tax benefits related to stock compensation.~~expenses.

NOTE 78 – 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, ~~2017~~2022 and December 31, ~~2016 (dollars in~~2021 (in thousands):

Contract or notional amount

September 30, 2017

December 31, 2016

Financial instruments whose contract amounts represent
credit risk:

Unused commitments to extend credit

$
575,558

$
508,990

Standby letters of credit

11,535

10,886

Total

$
587,093

$
519,876


	Contract or notional amount
	September 30, 2022		December 31, 2021
Financial instruments whose contract amounts represent credit risk:
Unused commitments to extend credit	$	1,008,167	$	831,075
Standby letters of credit		8,288		10,623
Total	$	1,016,455	$	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, ~~2017,~~2022, will not have a material impact on the financial statements of the Company.

NOTE 89 – 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~~

Forward starting interest rate swaps with notional amounts totaling $20 million and $20 million as of September 30, 2017 and December 31, 2016, respectively, were designated as cash flow hedges of certain liabilities and were determined to be fully effective during all periods presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss). The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedges no longer be considered effective. The Company ~~expects the hedges to remain fully effective during the remaining terms of the swaps.~~

~~Summary information about the interest-rate swaps designated as cash flow hedges was as follows (dollars in thousands):~~

September 30, 2017

December 31, 2016

Notional amounts

$
20,000

$
20,000

Weighted average pay rates

3.54
%

3.54
%
Weighted average receive rates

3 month LIBOR

3 month LIBOR

Weighted average maturity

5.7 years

6.5 years

Fair value

$
(1,658
)

$
(1,535
)
Amount of unrealized loss recognized in accumulated
other comprehensive income, net of tax

$
(1,023
)

$
(947
)

Pursuant to its interest rate swap agreements, the Company pledged collateral to the counterparties in the form of investment securities with a carrying value of $2.7 million at September 30, 2017. There was no collateral posted from the counterparties to the Company as of September 30, 2017. It is possible that the Company may need to post additional collateral in the future or that the counterparties may be required to post collateral to the Company in the future.

~~Other Interest Rate Swaps~~

~~The Company also~~ 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 ~~(dollars~~(in thousands):


	September 30, 2022					December 31, 2021
	Notional		Estimated			Notional		Estimated
	amount		fair value			amount		fair value
Interest rate swap agreements:
Pay fixed/receive variable swaps	$	36,402	$	2,435		$	54,055	$	(1,594	)
Pay variable/receive fixed swaps		36,402		(2,435	)		54,055		1,594
Total	$	72,804	$	—		$	108,110	$	—

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, 2022			September 30, 2022
Mortgage loan interest rate lock commitments	$	(870	)	$	(940	)
Mortgage-backed securities forward sales commitments		350			356
Total	$	(520	)	$	(584	)

September 30, 2017

December 31, 2016

Notional

Estimated

Notional

Estimated

amount

fair value

amount

fair value

Interest rate swap agreements:

Pay fixed/receive variable swaps

$
46,021

$
(250
)

$
41,254

$
(460
)
Pay variable/receive fixed swaps

46,021

250

41,254

460

Total

$
92,042

$
—

$
82,508

$
—

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


	September 30, 2022					December 31, 2021
	Notional		Estimated			Notional		Estimated
	amount		fair value			amount		fair value
Included in other assets:
Mortgage loan interest rate lock commitments	$	—	$	—		$	50,281	$	696
Mortgage-backed securities forward sales commitments		24,500		196			—		—

Included in other liabilities:
Mortgage loan interest rate lock commitments	$	28,851	$	(244	)	$	—	$	—
Mortgage-backed securities forward sales commitments		—		—			43,000		(160	)

NOTE 910 – STOCK OPTIONS AND RESTRICTED SHARES

~~During 2008,~~On April 23, 2021, the board of directors of the Bank approved the CapStar Bank 2008 Stock Incentive Plan (the Plan). The Plan was intended to provide incentives to certain officers, employees, and directors to stimulate their efforts toward the continued success of the Bank and to operate and manage the business in a manner that will provide for the long‑term growth and profitability of the Bank. Additionally the Plan was intended to encourage stock ownership to align the interests of employees and shareholders ~~and to provide a means of obtaining, rewarding and retaining officers, employees, and directors.~~

~~Following the formation~~ of CapStar Financial Holdings, Inc. ~~in 2016, and in connection with~~approved the ~~Share Exchange, the outstanding awards of restricted stock and stock options under the CapStar Bank 2008~~2021 Stock Incentive Plan were exchanged for similar awards of restricted stock and stock options issued by CapStar Financial Holdings, Inc. under the CapStar Financial Holdings, Inc. Stock Incentive Plan, which the board of directors adopted in 2016.(the "Plan"). The ~~Stock Incentive~~ 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 ~~reserved 1,569,475~~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 ~~of stock incentives.~~under the Plan. Stock incentives include both restricted share and stock option grants. Total shares issuable under the plan were ~~169,867 at~~1,105,148 as of September 30, ~~2017.~~2022.

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


	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2022			2021			2022			2021
Stock-based compensation expense before income taxes	$	288		$	212		$	771		$	643		$	258		$	373		$	971		$	1,169
Less: deferred tax benefit		(110	)		(81	)		(295	)		(246	)		(67	)		(98	)		(254	)		(306	)
Reduction of net income	$	178		$	131		$	476		$	397		$	191		$	275		$	717		$	863

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. Awards vest ratably over a two or three-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 ~~each restricted stock grant~~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 ~~based on valuations performed by independent consultants.~~ 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. ~~Restricted shares fully vest on the third anniversary of the grant date.~~ A summary of the changes in the Company’s nonvested restricted shares for the nine months ended September 30, ~~2017~~2022 follows:


				Weighted
				Average
	Restricted			Grant Date
Nonvested Shares	Shares			Fair Value
Nonvested at beginning of period		177,020		$	14.00
Granted		92,212			21.22
Vested		(31,521	)		18.90
Forfeited		(33,131	)		14.93
Nonvested at end of period		204,580		$	16.89

Weighted

Average

Restricted

Grant Date

Nonvested Shares

Shares

Fair Value

Nonvested at beginning of period

199,641

$
12.34

Granted

37,233

18.05

Vested

(58,921
)

12.24

Forfeited

(3,600
)

13.57

Nonvested at end of period

174,353

$
13.56

As of September 30, ~~2017,~~2022, there was ~~$1.6~~$2.0 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 1.9 years. The total fair value of shares vested during the nine months ended September 30, ~~2017 and 2016~~2022 was ~~$1.1 million and $0.5 million, respectively.~~$0.7 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 that uses the assumptions noted in the table below. Expected volatility is based on calculations performed by management using industry data. The Company’s expected dividend yield is 0.00% because the Company has not paid dividends in the past. The expected term of options granted was calculated using the “simplified” method for plain vanilla options as permitted under authoritative literature. The risk free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.model. There were no options granted in ~~2017.~~2022 or 2021.

~~The fair value of options granted was determined using the following weighted average assumptions as of the grant date:~~

2017

2016

Dividend yield

—

—

Expected term (in years)

—

7.48

Expected stock price volatility

—

17.20
%
Risk-free interest rate

—

1.66
%
Pre-vest forfeiture rate

—

10.25
%

A summary of the activity in stock options for the nine months ended September 30, ~~2017~~2022 follows:


						Weighted
				Weighted		Average
				Average		Remaining
				Exercise		Contractual
	Shares			Price		Term (years)
Outstanding at beginning of period		130,245		$	11.96
Granted		—			—
Exercised		(5,800	)		8.79
Forfeited or expired		—			—
Outstanding at end of period		124,445		$	12.11		4.5
Fully vested and expected to vest		124,445		$	12.11		4.5
Exercisable at end of period		124,445		$	12.11		4.5

Weighted

Weighted

Average

Average

Remaining

Exercise

Contractual

Shares

Price

Term (years)

Outstanding at beginning of period

1,006,000

$
10.48

Granted

—

—

Exercised

(82,150
)

10.00

Forfeited or expired

—

—

Outstanding at end of period

923,850

$
10.52

2.5

Fully vested and expected to vest

918,437

$
10.51

2.5

Exercisable at end of period

875,100

$
10.43

2.2

Information related to stock options during each year follows:


	2017		2016		2022		2021
Intrinsic value of options exercised	$	684,275	$	—	$	71,340	$	821,174
Cash received from option exercises		821,500		—		50,982		1,077,489
Tax benefit realized from option exercises		263,446		—		18,648		148,312
Weighted average fair value of options granted		—		3.16		—		—

As of September 30, ~~2017, there was $0.1 million of unrecognized~~2022, all compensation cost related to ~~nonvested~~ stock options granted under the ~~Plan. The cost is expected to be recognized over a weighted-average period of 1.8 years.~~Plan has been recognized.

NOTE 1011 – 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, ~~2017,~~2022, the Company and the Bank met all regulatory capital adequacy requirements to which they are subject.

2324

The Company’s and the Bank’s capital amounts and ratios as of September 30, ~~2017~~2022 and December 31, ~~2016~~2021 are presented in the following table (dollars in thousands).


	Actual					Minimum capital requirement (1)					Minimum to be well-capitalized (2)
	Amount		Ratio			Amount		Ratio			Amount		Ratio
At September 30, 2022:
Total capital to risk-weighted assets:
CapStar Financial Holdings, Inc.	$	403,888		14.59	%	$	221,410		8.0	%	N/A		N/A
CapStar Bank		391,827		14.16			221,306		8.0		$	276,633		10	%
Tier I capital to risk-weighted assets:
CapStar Financial Holdings, Inc.		351,505		12.70			166,058		6.0		N/A		N/A
CapStar Bank		369,077		13.34			165,980		6.0			221,306		8.00
Common equity Tier 1 capital to risk weighted assets:
CapStar Financial Holdings, Inc.		351,505		12.70			124,543		4.5		N/A		N/A
CapStar Bank		352,577		12.75			124,485		4.5			179,811		6.50
Tier I capital to average assets:
CapStar Financial Holdings, Inc.		351,505		11.22			125,360		4.0		N/A		N/A
CapStar Bank		369,077		11.79			125,257		4.0			156,572		5.00

At December 31, 2021:
Total capital to risk-weighted assets:
CapStar Financial Holdings, Inc.	$	384,116		16.29	%	$	188,610		8.0	%	N/A		N/A
CapStar Bank		370,919		15.74			188,471		8.0		$	235,589		10.0
Tier I capital to risk-weighted assets:
CapStar Financial Holdings, Inc.		332,567		14.11			141,458		6.0		N/A		N/A
CapStar Bank		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.		332,567		14.11			106,093		4.5		N/A		N/A
CapStar Bank		332,402		14.11			106,015		4.5			153,133		6.5
Tier I capital to average assets:
CapStar Financial Holdings, Inc.		332,567		10.69			124,437		4.0		N/A		N/A
CapStar Bank		348,902		11.23			124,246		4.0			155,308		5.0

(1)For the calendar year 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.

Actual

Minimum capital
requirement (1)

Minimum to be
well-capitalized (2)

Amount

Ratio

Amount

Ratio

Amount

Ratio

At September 30, 2017:

Total capital to risk-weighted assets:

CapStar Financial Holdings, Inc.

$
155,426

12.42
%

$
100,130

8.00
%

N/A

N/A

CapStar Bank

141,843

11.33

100,118

8.00

$
125,147

10.00

Tier I capital to risk-weighted assets:

CapStar Financial Holdings, Inc.

141,125

11.28

75,098

6.00

N/A

N/A

CapStar Bank

127,542

10.19

75,088

6.00

100,118

8.00

Common equity Tier 1 capital to risk weighted
assets:

CapStar Financial Holdings, Inc.

132,417

10.58

56,323

4.50

N/A

N/A

CapStar Bank

111,334

8.90

56,316

4.50

81,346

6.50

Tier I capital to average assets:

CapStar Financial Holdings, Inc.

141,125

10.36

54,464

4.00

N/A

N/A

CapStar Bank

127,542

9.37

54,463

4.00

68,079

5.00

At December 31, 2016:

Total capital to risk-weighted assets:

CapStar Financial Holdings, Inc.

$
149,616

12.60
%

$
95,028

8.00
%

N/A

N/A

CapStar Bank

126,718

10.67

95,028

8.00

$
118,785

10.00

Tier I capital to risk-weighted assets:

CapStar Financial Holdings, Inc.

137,909

11.61

71,271

6.00

N/A

N/A

CapStar Bank

115,011

9.68

71,271

6.00

95,028

8.00

Common equity Tier 1 capital to risk weighted
assets:

CapStar Financial Holdings, Inc.

129,528

10.90

53,453

4.50

N/A

N/A

CapStar Bank

99,130

8.35

53,453

4.50

77,210

6.50

Tier I capital to average assets:

CapStar Financial Holdings, Inc.

137,909

10.46

52,727

4.00

N/A

N/A

CapStar Bank

115,011

8.72

52,727

4.00

65,909

5.00

~~(1)~~

For the calendar year 2017, 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 1.25% 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.

NOTE 1112 – EARNINGS PER SHARE

The following is a summary of the basic and diluted earnings per share calculation for the three and nine ~~months~~month periods ended September 30, ~~2017~~2022 and ~~2016 (dollars in~~2021 (in thousands except share and per share data):


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2017		2016		2017		2016		2022		2021		2022		2021
Basic net income per share calculation:
Numerator – Net income	$	4,419	$	2,109	$	1,409	$	6,169	$	8,039	$	13,102	$	28,686	$	36,207
Denominator – Average common shares outstanding		11,279,364		8,792,665		11,239,093		8,701,596		21,938,259		22,164,278		22,051,950		22,114,948
Basic net income per share	$	0.39	$	0.24	$	0.13	$	0.71	$	0.37	$	0.59	$	1.30	$	1.64
Diluted net income per share calculation:
Numerator – Net income	$	4,419	$	2,109	$	1,409	$	6,169	$	8,039	$	13,102	$	28,686	$	36,207
Denominator – Average common shares outstanding		11,279,364		8,792,665		11,239,093		8,701,596		21,938,259		22,164,278		22,051,950		22,114,948
Dilutive shares contingently issuable		1,471,059		2,006,871		1,518,998		1,981,380		49,826		54,124		52,737		50,182
Average diluted common shares outstanding		12,750,423		10,799,536		12,758,091		10,682,976		21,988,085		22,218,402		22,104,687		22,165,130
Diluted net income per share	$	0.35	$	0.20	$	0.11	$	0.58	$	0.37	$	0.59	$	1.30	$	1.63

NOTE 1213 – 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.~~

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.

2526

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 no other real estate owned carried at fair value at September 30, ~~2017~~2022 or December 31, ~~2016.~~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 ~~which is evaluated~~ on a pool-level basis. ~~The fair value of~~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). ~~There were no~~

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 ~~carried~~are recorded at fair value, determined as the amount that would be required to settle each derivative instrument at ~~September 30, 2017 or December 31, 2016.~~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.

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


	Fair value measurements at September 30, 2022
				Quoted prices
				in active		Significant
				markets for		other			Significant
				identical		observable			unobservable
	Carrying			assets		inputs			inputs
	Value			(Level 1)		(Level 2)			(Level 3)
Assets:
Securities available-for-sale:
U. S. government agency securities	$	13,318		$	—	$	13,318		$	—
State and municipal securities		65,747			—		65,747			—
Mortgage-backed securities		251,535			—		251,535			—
Asset-backed securities		3,260			—		3,260			—
Other debt securities		67,485			—		67,485			—
Loans held for sale		35,574			—		35,574			—
Derivative assets:
Non-hedging derivatives:
Interest rate swaps - customer related		2,435			—		2,435			—
Mortgage-backed securities forward sales commitments		196			—		196			—
Liabilities:
Derivative liabilities:
Non-hedging derivatives:
Interest rate swaps - customer related		(2,435	)		—		(2,435	)		—
Mortgage loan interest rate lock commitments		(244	)		—		—			(244	)


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

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 months ended September 30, 2022 and 2021 (in thousands):


	Mortgage Loan Interest Rate
	Lock Commitments
	2022			2021

Balance of recurring Level 3 assets at January 1st	$	696		$	2,607
Total gains or losses for the period:
Included in mortgage banking income		(940	)		(1,528	)
Balance of recurring Level 3 assets (liabilites) at September 30th	$	(244	)	$	1,079

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

Fair value measurements at September 30, 2017

Quoted prices

in active

Significant

markets for

other

Significant

identical

observable

unobservable

Carrying

assets

inputs

inputs

Value

(Level 1)

(Level 2)

(Level 3)

Assets:

Securities available for sale:

U.S. government-sponsored agencies

$
11,299

$
—

$
11,299

$
—

Obligations of states and political subdivisions

19,067

—

19,067

—

Mortgage-backed securities-residential

95,823

—

95,823

—

Asset-backed securities

20,411

—

20,411

—

Total securities available for sale

$
146,600

$
—

$
146,600

$
—

Derivatives:

Interest rate swaps - customer related

$
352

$
—

$
352

$
—

Liabilities:

Derivatives:

Interest rate swaps - customer related

$
(352
)

$
—

$
(352
)

$
—

Interest rate swaps - cash flow hedges

(1,658
)

—

(1,658
)

—

Total derivatives

$
(2,010
)

$
—

$
(2,010
)

$
—


						Range
	Fair			Valuation		(Weighted-
September 30, 2022	Value			Technique(s)	Unobservable Input(s)	Average)
Liabilities:
Non-hedging derivatives:
Mortgage loan interest rate lock commitments	$	(244	)	Consensus pricing	Origination pull-through rate	75% - 100% (95%)


					Range
	Fair		Valuation		(Weighted-
December 31, 2021	Value		Technique(s)	Unobservable Input(s)	Average)
Assets:
Non-hedging derivatives:
Mortgage loan interest rate lock commitments	$	696	Consensus pricing	Origination pull-through rate	60% - 98% (80%)

Fair value measurements at December 31, 2016

Quoted prices

in active

Significant

markets for

other

Significant

identical

observable

unobservable

Carrying

assets

inputs

inputs

Value

(Level 1)

(Level 2)

(Level 3)

Assets:

Securities available for sale:

U.S. government-sponsored agencies

$
9,374

$
—

$
9,374

$
—

Obligations of states and political subdivisions

27,913

—

27,913

—

Mortgage-backed securities-residential

124,595

—

124,595

—

Asset-backed securities

20,473

—

20,473

—

Total securities available for sale

$
182,355

$
—

$
182,355

$
—

Derivatives:

Interest rate swaps - customer related

$
460

$
—

$
460

$
—

Liabilities:

Derivatives:

Interest rate swaps - customer related

$
(460
)

$
—

$
(460
)

$
—

Interest rate swaps - cash flow hedges

(1,535
)

—

(1,535
)

—

Total derivatives

$
(1,995
)

$
—

$
(1,995
)

$
—

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

Fair value measurements at December 31, 2021

Quoted prices

in active

Significant

markets for

other

Significant

identical

observable

unobservable

Carrying

assets

inputs

Value

(level 1)

(level 2)

(level 3)

Assets:

Impaired loans:

Consumer real estate

454

—

454

The following table presents quantitative information about December 31, 2021 Level 3 fair value measurements for assets measured at fair value on a non-recurring basis ~~at September 30, 2017 and December 31, 2016~~ (dollars in thousands):

Range

Fair

Valuation

(Weighted-

September 30, 2017

Value

Technique(s)

Unobservable Input(s)

Average)

Impaired loans:

Commercial and industrial

$
1,432

Sales comparison approach

Appraisal discounts

25
%


					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%

Range

Fair

Valuation

(Weighted-

December 31, 2016

Value

Technique(s)

Unobservable Input(s)

Average)

Impaired loans:

Commercial and industrial

$
1,809

Sales comparison approach

Appraisal discounts

25
%

Fair Value of Financial Instruments

The carrying value and estimated fair values of the Bank’s financial instruments at September 30, ~~2017~~2022 and December 31, ~~2016~~2021 were as follows ~~(dollars in~~(in thousands):


	September 30, 2017				December 31, 2016					September 30, 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	$	69,789	$	69,789	$	63,456	$	63,456	Level 1	$	198,388	$	198,388	$	395,225	$	395,225	Level 1
Federal funds sold		—		—		16,654		16,654	Level 1		1,525		1,525		19,900		19,900	Level 1
Securities available for sale		146,600		146,600		182,355		182,355	Level 2
Securities held to maturity		45,635		48,980		46,864		49,731	Level 2
Securities available-for-sale											401,345		401,345		459,396		459,396	Level 2
Securities held-to-maturity											1,762		1,759		1,782		1,830	Level 2
Loans held for sale		53,225		54,407		42,111		42,302	Level 2		43,122		43,068		83,715		84,934	Level 2
Restricted equity securities		8,799	N/A			6,032	N/A		N/A		16,625	N/A			14,453	N/A		N/A
Loans, net of unearned income		974,530		974,551		935,251		934,628	Level 3
Loans held for investment											2,290,269		2,273,779		1,965,769		1,963,803	Level 3
Accrued interest receivable		3,849		3,849		3,942		3,942	Level 2		9,459		9,459		7,376		7,376	Level 2
Bank owned life insurance		22,335		22,335		21,900		21,900	Level 2
Other assets		352		352		460		460	Level 2		92,774		92,774		91,064		91,064	Level 2 / Level 3
Financial liabilities:
Deposits		1,091,495		1,050,801		1,128,723		1,088,758	Level 3		2,633,673		2,386,898		2,684,281		2,517,856	Level 3
Federal Home Loan Bank advances		95,000		94,980		55,000		54,989	Level 2
Accrued interest payable		305		305		212		212	Level 2
Subordinated notes and Federal Home Loan bank advances and other borrowings											149,633		146,760		29,532		30,477	Level 2
Other liabilities		3,800		3,800		5,349		5,349	Level 3		3,764		3,764		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~~

(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)~~

~~Federal Funds Sold~~

~~Federal funds sold clear on a daily basis. For this reason, the carrying amount is a reasonable estimate of fair value.~~(b) Restricted Equity Securities

~~(c)~~

~~Restricted Equity Securities~~

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

~~(d)~~

~~Loans, net~~

Loans held for sale include residential mortgage loans, the guaranteed portion of SBA loans, and Tri-Net loans. The fair value of ~~the Bank’s loan portfolio includes a credit risk assumption~~residential mortgage and SBA loans held for sale is measured using an exit price notion. The fair value of Tri-Net loans held for sale is measured using an exit price notion in ~~the determination of~~as much as observable market data is available. Where there is no observable market data, the fair value of ~~its loans. This credit risk assumption~~Tri-Net loans held for sale is ~~intended to approximate the~~estimated using discounted cash flow models.

(d) Loans held for investment

The fair value ~~that a market participant would realize in a hypothetical orderly transaction. The Bank’s loan portfolio~~of loans held for investment is ~~initially fair valued~~measured using a segmented approach. The Bank divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk. For variable‑rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values.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. ~~For~~

(e) Accrued Interest Receivable

The carrying amounts of accrued interest approximate fair value.

(f) Other Assets

Included in other ~~loans,~~assets are bank owned life insurance and certain interest rate swap agreements. The fair values of interest rate swap agreements are ~~estimated using discounted cash flow~~based on independent pricing services that utilize pricing models ~~using current~~with observable market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

~~(e)~~

~~Bank Owned Life Insurance~~

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)~~

~~Other Assets~~

Included in other assets are certain interest rate swap agreements and the cash flow hedge relationships. The fair values of interest rate swap agreements and the cash flow hedge relationships are based on independent pricing services that utilize pricing models with observable market inputs.

28(g) Deposits

~~(g)~~

~~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 ismay be estimated by discounted cash flow models, using current market interest rates offered on certificates with similar remaining ~~maturities.~~maturities or other valuation techniques.

~~(h)~~

~~Federal Home Loan Bank Advances~~

(h) 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.

~~(i)~~

~~Accrued Interest Receivable/Payable~~

~~The carrying amounts of accrued interest approximate fair value.~~(i) Other Liabilities

~~(j)~~

~~Other Liabilities~~

Included in other liabilities are accrued interest payable and certain interest rate swap ~~agreements, the cash flow hedge relationships and contingent consideration.~~agreements. The fair values of interest rate swap agreements ~~and the cash flow hedge relationships~~ are based on independent pricing services that utilize pricing models with observable market inputs. The carrying amounts of accrued interest approximate fair ~~value of contingent consideration is estimated by a discounted cash flow model that utilizes various unobservable inputs.~~value.

~~(k)~~

~~Off-Balance Sheet Instruments~~

(j) 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.

~~(l)~~

~~Limitations~~

(k) 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.

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, ~~2017~~2022 and December 31, ~~2016~~2021 and our results of operations for the three and nine months ended September 30, ~~2017~~2022 and ~~2016.~~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 ~~Annual Report on Form 10-K for the year ended December 31, 2016.~~2021 10-K. Annualized results for interim periods may not be indicative of results for the full year or future periods. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our current expectations. Factors that could cause such differences are discussed in the section entitled “Cautionary Note Regarding Forward-Looking Statements” in this Report and the sections entitled “Item 1A. Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in our Annual Report on Form 10-K for the year ended December 31, 2016. We assume no obligation to update any of these forward-looking statements except to the extent required by applicable law.

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

~~We completed the first nine months~~The third quarter of ~~2017 with net income of $1.4 million, a 77.2% decrease~~2022 resulted in net income from the comparable period of 2016. The decrease in our net income was primarily due to a higher provision for loan losses, resulting from $12.4 million of charged-off loans recognized during the first nine months of 2017. The decrease in our net income was partially offset by higher net interest income resulting from continued loan growth. Fully$0.37 diluted net income per share of common stock, a decrease of 37.3% compared to the third quarter of 2021. Annualized return on average assets was 1.01% for the ~~first~~third quarter of 2022 compared to 1.64% for the same period in 2021.

For the nine months ended September 30, 2022, diluted net income per share of ~~2017~~common stock was ~~$0.11,~~$1.30, a decrease of 20.2% compared ~~with $0.58~~to the same period in 2021. Annualized return on average assets was 1.22% for the ~~first~~ nine months ~~of 2016. Average loans~~ended September 30, 2022 compared to 1.56% for the ~~first nine months of 2017 were $998.2 million, a 14.5%~~same period in 2021.

At September 30, 2022, loans held for investment increased to $2.29 billion, as compared to $1.97 billion at December 31, 2021. Included within the increase ~~over the comparable period of 2016. Average deposits~~ for the ~~first nine months~~third quarter was $25.6 million of ~~2017 were $1.12~~Tri-Net loans transferred from loans held for sale to loans held for investment. Total deposits decreased to $2.63 billion at September 30, 2022 from $2.68 billion at December 31, 2021.

As of September 30, 2022, the outstanding balance of loans originated under the SBA’s Paycheck Protection Program (“PPP”) totaled approximately $0.7 million and was included in commercial and industrial loans.

As the global COVID pandemic 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 ~~2.9% increase over~~significant adverse liquidity impact related to the ~~comparable period~~COVID-19 pandemic. See further discussion regarding the Company’s management of ~~2016.~~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.

~~The Company’s~~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 ~~our~~ overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact ~~our~~ 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 ~~$3.1~~$2.6 million, or ~~10.8%~~11.3%, for the ~~first nine~~three months ~~of 2017,~~ended September 30, 2022, compared ~~with~~to the same period in ~~2016. The positive effects of~~2021 and increased ~~volume and yields on earning assets were partially offset by~~$3.0 million, or 4.3% for the ~~negative effect of increasing deposit costs.~~nine months ended September 30, 2022 compared to the same period in 2021. Net interest margin increased to ~~3.18%~~3.50% for the ~~first nine~~three months ~~of 2017,~~ended September 30, 2022, compared with ~~3.17%~~3.12% for the same period of ~~2016.~~2021 and increased to 3.29% for the nine months ended September 30, 2022 compared to 3.17% for the comparable period of 2021. The increases primarily resulted from continued increases in interest rates and the positive mix shift in average earning assets.

~~In response~~The three months ended September 30, 2022 yielded a $0.9 million provision compared to ~~an assessment~~no provision being recorded for the comparable period of ~~risk~~2021. The increase in ~~the loan portfolio, including net~~provision was primarily attributable to strong loan growth and ~~charge-offs, we recorded a $12.9 million provision for loan losses~~an increase in the first nine months of 2017, compared with a $2.8 million provision in the first nine months of 2016. 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 inherent losses on outstanding loans.qualitative factors.

Total ~~non-interest~~noninterest income for the ~~first nine months~~third quarter of ~~2017 was comparable with the same period in 2016, and comprised 18% of total revenues.~~

~~Total non-interest expense in the first nine months of 2017 increased $0.6~~2022 decreased $8.4 million, or ~~2.4%~~71.9%, compared with the same period in ~~2016. Our efficiency ratio in~~2021, and comprised 11% of total revenues, defined as net interest income plus noninterest income. For the ~~first~~ nine months ~~of 2017 was 63.4%~~ended September 30, 2022, total noninterest income decreased $13.3 million, or 42.2%, compared to ~~67.2% in~~ the same period in ~~2016.~~

~~Our effective tax rate decreased to 9.1%~~2021, and comprised 20% of total revenues for the ~~first~~ nine months ~~of 2017 from 32.7%~~ended September 30, 2022. Decreases across comparable periods were primarily attributable to declines in mortgage and Tri-Net division revenues as the recent rapid rise in interest rates has decreased demand.

Total noninterest expense for the three months ended September 30, 2022 decreased $0.4 million, or 2.4%, compared to the same period in 2021, and decreased $2.1 million, or 3.9%, for the nine months ended September 30, 2022 when compared to 2021. The decreases were primarily driven by lower incentive expense included within salaries and employee benefits offset by $2.2 million in operational losses. Our efficiency ratio for the three months ended September 30, 2022 was 62.21% compared to 53.06% for the same period in ~~2016. The decrease~~2021. For the nine months ended September 30, 2022 our efficiency ratio was 59.01% compared to 55.01% for the same period in ~~the effective tax rate is largely the result~~2021.

Common equity tier 1 capital to risk weighted assets, summarized in Note 11 of the effectiveness of Accounting Standards Update (ASU) 2016-09, Compensation – Stock Compensation, which, among other things, amended existing guidance for the accounting of excess tax benefits from stock compensation.

~~Tangible common equity (TCE), a non-GAAP measure,~~consolidated financial statements, is a useful measure ~~of a company's capital which is useful~~ in evaluating the quality and adequacy of capital. ~~The~~Our consolidated ratio of ~~tangible~~ common equity tier 1 capital to ~~total tangible~~risk weighted assets was ~~9.7%~~12.70% as of September 30, ~~2017,~~2022, compared with ~~9.3%~~14.11% at December 31, ~~2016.~~ See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures” for details on reconciliations to the most directly comparable U.S. GAAP measures.2021.

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

~~(a)~~

~~Results of Operations~~

(a)

Results of Operations

The following is a summary of our results of operations:


						2017 - 2016							2017 - 2016							2022 - 2021								2022 - 2021
	Three Months Ended					Percent			Nine Months Ended				Percent			Three Months Ended				Percent			Nine Months Ended					Percent
	September 30,					Increase			September 30,				Increase			September 30,				Increase			September 30,					Increase
	2017			2016		(Decrease)			2017		2016		(Decrease)			2022		2021		(Decrease)			2022		2021			(Decrease)
Interest income	$	13,521		$	11,875		13.9	%	$	38,390	$	33,388		15.0	%	$	30,454	$	24,690		23.3	%	$	79,728	$	73,800			8.0	%
Interest expense		2,678			1,749		53.1	%		7,045		5,105		38.0	%		4,901		1,726		184.0	%		8,595		5,622			52.9	%
Net interest income		10,843			10,126		7.1	%		31,345		28,283		10.8	%		25,553		22,964		11.3	%		71,133		68,178			4.3	%
Provision for loan losses		(195	)		1,639		(111.9	)%		12,900		2,759		367.6	%		867		—		100.0	%		926		(415	)		-323.1	%
Net interest income after provision for loan losses		11,038			8,487		30.1	%		18,445		25,524		(27.7	)%		24,686		22,964		7.5	%		70,207		68,593			2.4	%
Noninterest income		3,372			3,191		5.7	%		8,171		8,130		0.5	%		3,272		11,651		-71.9	%		18,237		31,548			-42.2	%
Noninterest expense		8,475			8,527		(0.6	)%		25,066		24,487		2.4	%		17,931		18,366		-2.4	%		52,740		54,859			-3.9	%
Net income before income taxes		5,935			3,151		88.3	%		1,550		9,167		(83.1	)%		10,027		16,249		-38.3	%		35,704		45,282			-21.2	%
Income tax expense		1,516			1,042		45.5	%		141		2,998		(95.3	)%		1,988		3,147		-36.8	%		7,018		9,075			-22.7	%
Net income	$	4,419		$	2,109		109.5	%	$	1,409	$	6,169		(77.2	)%	$	8,039	$	13,102		-38.6	%	$	28,686	$	36,207			-20.8	%

Basic net income per share of common stock	$	0.39		$	0.24		63.3	%	$	0.13	$	0.71		(82.3	)%	$	0.37	$	0.59		-37.3	%	$	1.30	$	1.64			-20.7	%
Fully diluted net income per share of common stock	$	0.35		$	0.20		77.4	%	$	0.11	$	0.58		(80.9	)%
Diluted net income per share of common stock																$	0.37	$	0.59		-37.3	%	$	1.30	$	1.63			-20.2	%

We recorded net income of $4.4 million for the third quarter of 2017, an increase of $2.3 million, or 109.5%, from net income of $2.1 million for the third quarter of 2016. Basic net income per share of common stock was $0.39 and $0.24 for the third quarter of 2017 and 2016, respectively. Fully diluted net income per share of common stock was $0.35 and $0.20 for the third quarter of 2017 and 2016, respectively. We recorded a negative $0.2 million provision for loan losses in the third quarter of 2017, compared with $1.6 million for the same period of 2016.

Annualized return on average assets and annualized return on average shareholders’ equity were ~~1.28%~~1.01% and ~~12.38%~~8.76%, respectively, for the third quarter of ~~2017,~~2022, compared with ~~0.65%~~1.64% and ~~7.15%~~14.13%, respectively, for the same period in ~~2016.~~2021.

Our net income of $1.4 million for the nine months ended September 30, 2017 represented a $4.8 million, or 77.2%, decrease from net income of $6.2 million for the comparable 2016 period. Basic net income per share was $0.13 for the first nine months of 2017, a decrease of 82.3% from the $0.71 for the first nine months of 2016. Net income per share on a diluted basis was $0.11 for the first nine months of 2017, a decrease of 80.9% from the $0.58 for the first nine months of 2016. We recorded a $12.9 million provision for loan losses in the first nine months of 2017, compared with $2.8 million in the same period of 2016.

Annualized return on average assets and annualized return on average ~~stockholders’~~shareholders’ equity were ~~0.14%~~1.22% and ~~1.33%~~10.41%, respectively, for the ~~first~~ nine months ~~of 2017,~~ended September 30, 2022, compared with ~~0.66%~~1.56% and ~~7.25%~~13.51%, respectively, for the same period in ~~2016.~~2021.

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.

3133

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 ~~months~~month periods ended September 30, ~~2017~~2022 and ~~2016:~~

For the Three Months Ended September 30,

2017

2016

Average
Outstanding
Balance

Interest
Income/
Expense

Average
Yield/
Rate

Average
Outstanding
Balance

Interest
Income/
Expense

Average
Yield/
Rate

Interest-Earning Assets

Loans (1)

$
991,238

$
11,375

4.55
%

$
918,302

$
10,072

4.36
%
Loans held for sale

67,886

720

4.21
%

63,640

587

3.67
%
Securities:

Taxable investment securities (2)

156,979

946

2.41
%

170,382

858

2.01
%
Investment securities exempt from
federal income tax (3)

50,947

304

2.39
%

48,081

291

2.42
%
Total securities

207,926

1,250

2.40
%

218,463

1,149

2.10
%
Cash balances in other banks

49,151

169

1.36
%

45,122

63

0.56
%
Funds sold

1,711

7

1.67
%

1,510

4

0.95
%
Total interest-earning assets

1,317,912

13,521

4.07
%

1,247,037

11,875

3.79
%
Noninterest-earning assets

50,081

49,834

Total assets

$
1,367,993

$
1,296,871

Interest-Bearing Liabilities

Interest-bearing deposits:

Interest-bearing transaction accounts

$
291,250

635

0.87
%

$
303,727

404

0.53
%
Savings and money market deposits

354,972

772

0.86
%

437,827

689

0.63
%
Time deposits

211,122

706

1.32
%

203,240

546

1.07
%
Total interest-bearing deposits

857,344

2,113

0.98
%

944,794

1,639

0.69
%
Borrowings and repurchase agreements

123,859

565

1.81
%

34,946

110

1.25
%
Total interest-bearing liabilities

981,203

2,678

1.08
%

979,740

1,749

0.71
%
Noninterest-bearing deposits

237,156

187,244

Total funding sources

1,218,359

1,166,984

Noninterest-bearing liabilities

8,078

12,497

Shareholders’ equity

141,556

117,390

Total liabilities and shareholders’ equity

$
1,367,993

$
1,296,871

Net interest spread (4)

2.99
%

3.08
%
Net interest income/margin (5)

$
10,843

3.26
%

$
10,126

3.23
%

~~(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)~~

~~Balances for investment securities exempt from federal income tax are not calculated 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 net interest income divided by total average interest-earning assets and is presented in the table above on an annualized basis.~~

322021:


	For the Three Months Ended September 30,
	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)	$	2,241,355	$	26,128		4.62	%	$	1,884,935	$	20,942		4.41	%
Loans held for sale		94,811		1,207		5.05	%		173,402		1,408		3.22	%
Securities:
Taxable investment securities (2)		396,358		2,181		2.20	%		455,583		1,816		1.59	%
Investment securities exempt from federal income tax (3)		54,575		314		2.92	%		60,294		344		2.90	%
Total securities		450,933		2,495		2.29	%		515,877		2,160		1.75	%
Cash balances in other banks		120,624		617		2.03	%		337,011		171		0.20	%
Funds sold		755		7		3.65	%		19,909		9		0.18	%
Total interest-earning assets		2,908,478		30,454		4.17	%		2,931,134		24,690		3.35	%
Noninterest-earning assets		238,363							240,048
Total assets	$	3,146,841						$	3,171,182
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts	$	821,545		1,205		0.58	%	$	984,874		390		0.16	%
Savings and money market deposits		709,591		1,603		0.90	%		589,101		288		0.19	%
Time deposits		462,036		1,332		1.14	%		406,329		654		0.64	%
Total interest-bearing deposits		1,993,172		4,140		0.82	%		1,980,304		1,332		0.27	%
Borrowings and repurchase agreements		88,584		761		3.41	%		29,495		394		5.30	%
Total interest-bearing liabilities		2,081,756		4,901		0.93	%		2,009,799		1,726		0.34	%
Noninterest-bearing deposits		666,096							751,862
Total funding sources		2,747,852							2,761,661
Noninterest-bearing liabilities		34,851							41,714
Shareholders’ equity		364,138							367,807
Total liabilities and shareholders’ equity	$	3,146,841						$	3,171,182
Net interest spread (4)						3.23	%						3.01	%
Net interest income/margin (5)			$	25,553		3.50	%			$	22,964		3.12	%

Footnotes appear below second table

For the Nine Months Ended September 30,

2017

2016

Average
Outstanding
Balance

Interest
Income/
Expense

Average
Yield/
Rate

Average
Outstanding
Balance

Interest
Income/
Expense

Average
Yield/
Rate

Interest-Earning Assets

Loans (1)

$
998,247

$
32,580

4.36
%

$
871,637

$
28,252

4.33
%
Loans held for sale

43,790

1,355

4.14
%

45,564

1,280

3.75
%
Securities:

Taxable investment securities (2)

170,810

3,098

2.42
%

178,388

2,806

2.10
%
Investment securities exempt from
federal income tax (3)

53,230

944

2.36
%

45,370

841

2.47
%
Total securities

224,040

4,042

2.41
%

223,758

3,647

2.17
%
Cash balances in other banks

48,980

387

1.06
%

49,430

197

0.53
%
Funds sold

2,359

26

1.46
%

2,053

12

0.79
%
Total interest-earning assets

1,317,416

38,390

3.90
%

1,192,442

33,388

3.74
%
Noninterest-earning assets

49,873

49,550

Total assets

$
1,367,289

$
1,241,992

Interest-Bearing Liabilities

Interest-bearing deposits:

Interest-bearing transaction accounts

$
307,992

1,839

0.80
%

$
263,251

1,096

0.56
%
Savings and money market deposits

389,425

2,360

0.81
%

442,740

2,141

0.65
%
Time deposits

193,436

1,750

1.21
%

191,440

1,566

1.09
%
Total interest-bearing deposits

890,853

5,949

0.89
%

897,431

4,803

0.71
%
Borrowings and repurchase agreements

100,221

1,096

1.46
%

31,926

302

1.26
%
Total interest-bearing liabilities

991,074

7,045

0.95
%

929,357

5,105

0.73
%
Noninterest-bearing deposits

225,623

187,058

Total funding sources

1,216,697

1,116,415

Noninterest-bearing liabilities

8,627

11,970

Shareholders’ equity

141,965

113,607

Total liabilities and shareholders’ equity

$
1,367,289

$
1,241,992

Net interest spread (4)

2.95
%

3.01
%
Net interest income/margin (5)

$
31,345

3.18
%

$
28,283

3.17
%

~~(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)~~

~~Balances for investment securities exempt from federal income tax are not calculated 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 net interest income divided by total average interest-earning assets and is presented in the table above on an annualized basis.~~


	For the Nine Months Ended September 30,
	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)	$2,131,159	$68,481	4.30%	$1,917,536	$63,077	4.40%
Loans held for sale	99,749	2,995	4.01%	162,092	3,859	3.18%
Securities:
Taxable investment securities (2)	413,229	6,187	2.00%	444,643	5,373	1.61%
Investment securities exempt from federal income tax (3)	55,798	958	2.90%	62,265	1,074	2.91%
Total securities	469,027	7,145	2.10%	506,908	6,447	1.77%
Cash balances in other banks	189,681	1,076	0.76%	290,454	405	0.19%
Funds sold	9,547	31	0.43%	12,866	12	0.12%
Total interest-earning assets	2,899,163	79,728	3.69%	2,889,856	73,800	3.43%
Noninterest-earning assets	243,822			220,041
Total assets	$3,142,985			$3,109,897
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts	$895,097	2,279	0.34%	$952,393	1,216	0.17%
Savings and money market deposits	680,331	2,401	0.47%	587,252	896	0.20%
Time deposits	393,594	2,271	0.77%	429,454	2,317	0.72%
Total interest-bearing deposits	1,969,022	6,951	0.47%	1,969,099	4,429	0.30%
Borrowings and repurchase agreements	63,099	1,644	3.49%	30,931	1,193	5.16%
Total interest-bearing liabilities	2,032,121	8,595	0.57%	2,000,030	5,622	0.38%
Noninterest-bearing deposits	707,084			717,122
Total funding sources	2,739,205			2,717,152
Noninterest-bearing liabilities	35,396			33,569
Shareholders’ equity	368,384			359,176
Total liabilities and shareholders’ equity	$3,142,985			$3,109,897
Net interest spread (4)			3.12%			3.05%
Net interest income/margin (5)		$71,133	3.29%		$68,178	3.17%

~~Our~~(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.

The net interest margin was ~~3.26%~~3.50% and ~~3.23%~~3.12% for the third ~~quarter~~quarters of ~~2017~~2022 and ~~2016,~~2021, respectively. For the nine months ended September 30, ~~2017 and 2016, our~~2022 the net interest margin was ~~3.18%~~3.29% compared to 3.17% for the comparable period of 2021. Both quarter and ~~3.17%, respectively. The increase~~year to date periods in ~~net interest margin for both periods is primarily due to growth of our~~2022 benefitted from a mix shift in interest earning assets ~~at a higher pace than our interest bearing liabilities.~~

~~For the third quarter of 2017 and 2016, average~~as excess liquidity was deployed to fund loan ~~yields increased from 4.36% to 4.55% which was primarily driven by increases in short-term interest rate indexes affecting the variable rate portion of our loan portfolio,~~growth. These improvements were partially offset by ~~competitive pricing pressures. From September 30, 2016 to September 30, 2017,~~a $1.9 million and $6.1 million decline in PPP fees for the ~~LIBOR – 1 month interest rate increased from 0.53% to 1.23%. Approximately 65% of our loan portfolio is variable in nature~~three and ~~indexed to 1 month LIBOR. For the~~ nine months ended September 30, 2017 and 2016, average loan yields increased from 4.33% to 4.36%. Average loans for the first nine months of 2017 increased 14.5% compared to the same period in 2016 as a result of our continued focus on attracting new clients to our Company.2022, respectively.

For the ~~third quarter of 2017 and 2016,~~three months ended September 30, 2022, the average security yields increased ~~from 2.10%~~54 basis points to ~~2.40% and from 2.17%~~2.29 percent when compared to ~~2.41%~~2021, while for the nine ~~months~~month period ended September 30, ~~2016 and 2017, respectively, primarily~~2022, average security yields increased 33 basis points to 2.10%. Both increases were due to ~~increases in the LIBOR rate on the variable rate portion~~be benefits of ~~our securities portfolio. The resulting yield on~~increasing market interest rates.

Average noninterest bearing deposits represented 25.1% and 26.4% of total average ~~interest-earning assets increased 28 basis points~~deposits for the ~~third quarter of 2017~~three and nine month periods ending September 30, 2022 , respectively, a decline from 27.5% and 26.7% for the three and nine month periods ending September 30, 2021. Deposit costs increased across all periods for all interest-bearing deposit categories. Average funding sources for the three and nine month periods ended September 30, 2022 remained flat at $2.7 billion compared to the similar ~~period~~periods in ~~2016 and 16 basis points for the nine months ended September 30, 2017 compared~~2021. A key longer-term strategic initiative is to ~~the similar period of 2016.~~create a stronger deposit-led culture with an emphasis on lower cost relationship-based deposits.

We funded our growth in loans through an increase in our funding sources of 9.0% for the nine months ended September 30, 2017 compared to the similar period in 2016. For the first nine months of 2017, average interest-bearing liabilities increased $61.8 million, or 6.6%, from the same period in 2016.

The average rate paid on interest-bearing liabilities was ~~0.95%~~0.93% for the ~~first~~third quarter compared to 0.34% for September 30, 2021. For the nine months ~~of 2017, as compared to 0.73% for the same period in 2016. A portion of the increase was due to increases in the Fed Funds rate during the period. The Fed Funds rate increased from 0.50% at~~ended September 30, ~~2016 to 1.25% at September 30, 2017. We passed along a portion of these~~2022 and 2021, the average rate ~~increases to our clients.~~paid on interest-bearing liabilities was 0.57% and 0.38%, respectively.

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

~~The Company uses~~

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 ~~new~~ growth. ~~Dynamic simulation models are also utilized that rely on detailed assumptions regarding changes in existing lines of business, new business, and changes in management and client behavior.~~ 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, ~~2017,~~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.~~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 decay rates,~~ 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		~~6.2%~~(0.9)%
Increase 100bp		~~2.7~~ 0.3
Decrease 100bp		~~(8.8)~~
~~Decrease 200bp~~		~~(13.8)~~ (3.2)

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~~charge offs and increased by loan recoveries. ~~Our allowance for loan losses as a percentage of total loans was 1.45% and 1.24% at September 30, 2017 and December 31, 2016, respectively.~~

The provision for loan losses amounted to $(0.2) million and $12.9 million, respectively, for the three and nine months ended September 30, 2017 compared to $1.6 million and $2.8 million, respectively, for the three and nine months ended September 30, 2016. 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.

Provision expense increased for the nine months ended September 30, 2017 compared to the same period in 2016 due to increased charge-offs. Charge-offs for the nine months ended September 30, 2017 were $12.4 million compared to $1.5 million for the same period in 2016. These increases were caused primarily by deterioration in the credit quality of commercial and industrial loans to one borrower. In particular, during the second quarter of 2017 we charged-off the loans associated with this borrower because issues emerged which undermined our assessment that an expedient and positive outcome was possible. This particular charge-off amounted to $11.0 million in the aggregate. These loans experienced weakness due to the borrower’s declining financial condition, which led to falling values of the collateral securing these loans. Our primary collateral for these loans are the enterprise value of the borrower as determined by an Asset Purchase Agreement that was subsequently withdrawn. As the financial condition of the borrower deteriorated, ultimate repayment became increasingly difficult. We determined that timely repayment of these loans was unlikely and charged-off the loans. As a result, our provision expense increased during the nine months ended September 30, 2017 compared to the similar period in 2016.

Our allowance for loan losses as a percentage of total loans increased from 1.24% at December 31, 2016 to 1.45% at September 30, 2017. This increase was largely due to our assessment of risk inherent in the commercial and industrial loan portfolio generally related to macro-economic, geo-political conditions and, in particular, uncertainty in the healthcare industry. In addition, during the third quarter of 2017, we increased the look-back period, from which we calculate peer bank historical loss experience, from seven years to eight years. Our look-back period is utilized to calculate peer historical loss experience, adjusted for current factors, to comprise the general component of the allowance for loan losses. In the current economic environment, management believes the extension of the look-back period is necessary in order to capture sufficient loss observations to develop a reliable loss estimate of credit losses. The extension of the historical look-back period to capture the historical loss experience of peer banks was applied to all classes and segments of our loan portfolio. During the third quarter of 2017, we recovered approximately $1.86 million of the previous second quarter charge-off related to the non-performing borrower referenced in the previous paragraph, which reduced our need to take additional provision expense.

~~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, 2017.~~ 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, ~~legislation and regulation,~~ 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 provision for loan losses. ~~See our Annual Report on Form 10-K~~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.

The provision for loan losses amounted to $0.9 million for both the three and nine month periods ended September 30, 2022 compared to no provision for the ~~year~~three months ended September 30, 2021 and ($0.4) million for the nine month period of 2021. The current period provision was primarily a result of continued strong loan growth partially offset by reduction of pandemic reserve. Net charge-offs for the three and nine months ended September 30, 2022 were $120 thousand and $193 thousand, respectively, compared to $221 thousand and $297 thousand for the three and nine comparable periods of 2021, respectively. The allowance for loan losses at September 30, 2022 was 0.98% of total loans held for investment compared to 1.10% as of December 31, ~~2016 “Notes to Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies” and~~2021.

See “Notes to Consolidated Financial Statements (Unaudited) — Note 3 — Loans and Allowance for Loan Losses” for additional information on our allowance for loan losses.

Noninterest Income

In addition to net interest income, we generate ~~other types of~~ 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,~~ and ~~we have a revenue-sharing relationship with a registered broker-dealer, which generates~~SBA loans, wealth management ~~fees.~~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.


						2017-2016							2017-2016								2022 - 2021							2022 - 2021
	Three Months Ended					Percent			Nine Months Ended				Percent			Three Months Ended					Percent			Nine Months Ended				Percent
	September 30,					Increase			September 30,				Increase			September 30,					Increase			September 30,				Increase
	2017		2016			(Decrease)			2017		2016		(Decrease)			2022			2021		(Decrease)			2022		2021		(Decrease)
Noninterest income:
Treasury management and other deposit service charges	$	427	$	277			54.2	%	$	1,097	$	805		36.2	%
Loan commitment fees		223		329			(32.0	)%		646		901		(28.3	)%
Deposit service charges																$	1,251		$	1,187		5.4	%	$	3,575	$	3,398		5.2	%
Interchange and debit card transaction fees																	1,245			1,236		0.7	%		3,803		3,555		7.0	%
Mortgage banking																	765			4,693		(83.7	)%		4,436		13,318		(66.7	)%
Tri-Net																	(2,059	)		1,939		(206.2	)%		39		4,618		(99.2	)%
Wealth management																	385			481		(20.0	)%		1,284		1,412		(9.1	)%
SBA lending																	560			911		(38.5	)%		1,054		1,781		(40.8	)%
Net gain (loss) on sale of securities		9		(4	)		(319.8	)%		42		121		(65.0	)%		7			7		—			8		20		(60.0	)%
Tri-Net fees		367		—			100.0	%		748		—		100.0	%
Mortgage banking income		2,030		2,339			(13.2	)%		4,617		5,342		(13.6	)%
Other noninterest income		316		250			26.2	%		1,021		961		6.2	%		1,118			1,197		(6.6	)%		4,038		3,446		17.2	%
Total noninterest income	$	3,372	$	3,191			5.7	%	$	8,171	$	8,130		0.5	%	$	3,272		$	11,651		(71.9	)%	$	18,237	$	31,548		(42.2	)%

~~The increase in treasury management and other deposit~~Deposit service charges were up slightly for the three and nine months ended September 30, ~~2017~~2022 compared to the same ~~periods~~period in ~~2016 are primarily related~~2021. These amounts originate from our commercial and consumer deposit accounts.

Interchange and debit card transaction fees fluctuate based upon transaction volumes, which were slightly higher for the three and nine months ended September 30, 2022 compared to ~~increased analysis fees due~~the same period in 2021. This increase is attributable to an emphasis on electronic banking and 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 ~~the volume of commercial accounts.~~

~~Loan commitment~~lower interest rate environments and more robust housing markets and decrease in rising interest rate environments and more challenging housing markets. Mortgage origination fees ~~vary~~will fluctuate from period to period ~~based~~as the rate environment changes, though the Company benefits from our strong markets and focus on purchase transactions. The Company’s mortgage division experienced a reduction in demand due to higher market rates and reduced demand and anticipates a difficult environment at least until the ~~timing of one-time, transaction related loan fees.~~2023 buying season returns.

Tri-Net ~~fees represent~~represents a ~~new~~ line of business ~~implemented in the fourth quarter of 2016,~~ which originates and sells commercial real estate loans to third-party investors. All of these loan sales transfer servicing rights to the buyer.

Mortgage banking income consists of mortgage fee income from the origination and sale of mortgage loans. These mortgage fees are for loans that we originated and that are subsequently sold to third-party investors. All of these loan sales transfer servicing rights to the buyer. Mortgage origination fees will fluctuate from quarter to quarter as the rate environment changes. Mortgage banking income decreased 13.2% and 13.6%Tri-Net revenue for the three and nine month period ended September 30, 2022 decreased 206.2% and 99.2%, respectively, when compared to the same periods of 2021. The decreases are attributable to the adverse impact of rapidly rising interest rates on pricing and investor demand. As a result of this impact, the Company transferred $131.1 million of Tri-Net loans from loans held for sale to loans held for investment, comprised of $106.9 and $24.2 million in the second and third quarters, respectively, of 2022. For the three months ended September 30, ~~2017, respectively,~~2022, Tri-Net results included a $1.3 million realized loss on sale of loans and a $2.2 million unrealized loss on loans transferred to held for investment, partially offset by a $1.6 million gain on its hedge instruments.For the nine months ended September 30, 2022, Tri-Net results included a $1.3 million realized loss on sale of loans and a $2.4 million unrealized loss on loans transferred to held for investment, partially offset by a $1.6 million gain on its hedge instruments. As of September 30, 2022, the Company retained $2.1 million Tri-Net loans held for sale, which were under a letter of intent to be sold in the fourth quarter of 2022. Similar to the Company's mortgage division, the Company anticipates continued near-term challenges in the Tri-Net division in a volatile rate environment. The Company paused any further commitments to originate such loans early in the third quarter and will only restart originations when clear indications of market stabilization and liquidity normalization are observed.

Wealth management income is derived from advisory services offered to specific customers. The activity for the three and nine month periods ended September 30, 2022 declined slightly compared to the ~~similar~~same periods in ~~2016 due~~2021. Any changes in activity are mostly driven by transaction volume, which can fluctuate from period to ~~declining volumes~~period.

Noninterest income for SBA lending, which represents gains on sales of guaranteed portions of SBA loans, declined 38.5% and ~~margins on mortgage loans sold.~~40.8% for the three and nine month periods ended September 30, 2022, respectively, 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. While flat for the three month comparable periods, the increase in the nine months ended September 30, 2022 compared to 2021 relates to $0.9 million in death benefit income from bank-owned life insurance policies.

Noninterest Expense

~~Our total noninterest expense increase reflects expenses that we have incurred as we build the foundation to support our recent growth and enable us to execute our growth strategy.~~

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


			2022 - 2021			2022 - 2021
	Three Months Ended		Percent	Nine Months Ended		Percent
	September 30,		Increase	September 30,		Increase
	2022	2021	(Decrease)	2022	2021	(Decrease)
Noninterest expense:
Salaries and employee benefits	$8,712	$10,980	(20.7)%	$28,191	$31,210	(9.7)%
Data processing and software	2,861	2,632	8.7%	8,355	8,530	(2.1)%
Occupancy	1,092	1,028	6.2%	3,266	3,193	2.3%
Equipment	743	760	(2.2)%	2,235	2,640	(15.3)%
Professional services	468	469	(0.2)%	1,653	1,634	1.2%
Regulatory fees	269	279	(3.6)%	814	746	9.1%
Acquisition related expenses	—	—	—	—	323	(100.0)%
Amortization of intangibles	415	477	(13.0)%	1,291	1,478	(12.7)%
Other operating	3,371	1,741	93.6%	6,935	5,105	35.8%
Total noninterest expense	$17,931	$18,366	(2.4)%	$52,740	$54,859	(3.9)%

2017-2016

2017-2016

Three Months Ended

Percent

Nine Months Ended

Percent

September 30,

Increase

September 30,

Increase

2017

2016

(Decrease)

2017

2016

(Decrease)

Noninterest expense:

Salaries and employee benefits

$
5,119

$
5,119

(0.0
)%

$
14,989

$
15,275

(1.9
)%
Data processing and software

709

627

13.0
%

2,040

1,831

11.4
%
Professional fees

336

391

(14.1
)%

1,050

1,148

(8.5
)%
Occupancy

531

352

51.0
%

1,518

1,133

34.0
%
Equipment

564

458

23.1
%

1,604

1,301

23.3
%
Regulatory fees

270

250

7.6
%

877

742

18.2
%
Other operating

946

1,330

(28.8
)%

2,988

3,057

(2.3
)%
Total noninterest expense

$
8,475

$
8,527

(0.6
)%

$
25,066

$
24,487

2.4
%

The ~~largest increase between periods~~decreases in salaries and employee benefits were driven primarily by lower incentive expense included within ~~noninterest expense was~~salaries and employee benefits related to ~~a new lease of our corporate headquarters which we moved into~~lower profitability driven primarily by lower Tri-Net and Mortgage operating results. Additionally, following two operational loss incidents in the ~~first~~current quarter, the Company recorded $0.8 million of ~~2017. This new lease resulted in an~~voluntary executive incentive reversals. At September 30, 2022, our associate base decreased to 387 compared to 392 at September 30, 2021.

The increase in ~~occupancy expense of 51.0%~~other operating expenses was attributable to $2.2 million in the aforementioned operational loss incidents, which occurred during the quarter and ~~34.0%~~for which the bank is seeking potential recoveries.

Our efficiency ratio was 62.21% and 59.01% for the three and nine months ended September 30, ~~2017,~~2022, respectively, ~~compared to the same periods in 2016.~~

~~Salaries~~versus 53.06% and ~~employee benefits was flat and declined 1.9%~~55.01%, respectively, for the ~~three and nine months~~comparable periods ended September 30, ~~2017, respectively, compared to the similar periods in 2016 primarily due to reduced incentive compensation for the 2017 periods.~~

Data processing and software expense increased during the periods presented due to an increase in the volume of transactions and implementation of new software in our mortgage banking line of business.

~~Professional fees expense decreased during the periods presented primarily due to fees associated with going public in 2016 and our change in external audit firms for 2017.~~

2021. The ~~increases in equipment expense for each period presented is related to the increasing cost of managing our IT network.~~

~~Regulatory fees expense increased primarily due to changes in the FDIC’s assessment methodology.~~

Other operating expenses for the third quarter of 2017 decreased 28.8% from the similar 2016 period primarily due to decreased contingent consideration expenses associated with our mortgage line of business. As mortgage origination volumes differ from our original estimates the resulting difference in contingent consideration is recorded in other noninterest expense. For the nine months ended September 30, 2017 compared to the similar period in 2016, the lower contingent consideration expense was offset by increased expenses related to one non-performing borrower, resulting in a 2.3% decrease of other operating expenses.

~~Our~~ efficiency ratio ~~(ratio~~is the ratio of noninterest expense to the sum of net interest income and noninterest ~~income) was 59.6% for the three months ended September 30, 2017 compared to 64.0% for the same period 2016. For the nine months ended September 30, 2017~~income and ~~2016, our efficiency ratio was 63.4% and 67.2%, respectively. The efficiency ratio~~ measures the amount of expense that is incurred to generate a dollar of revenue. ~~The efficiency ratio for both periods was positively impacted by growth in our net interest income that outpaced increases in our expenses. For~~Overall, noninterest expense has declined due to the ~~nine months ended September 30, 2017, our revenue (net interest income plus noninterest income) grew at rate of approximately 3.6 times our noninterest expense.~~lower incentive expense as well as the Company's continued focus on expense discipline and operational improvements.

Income Tax Provision

~~During the three and nine months ended September 30, 2017, we recorded income~~The Company’s effective tax ~~expense of $1.5 million and $0.1 million, respectively, compared to $1.0 million and $3.0 million, respectively,~~rate for the three and nine month periods ended September 30, 2022 was 19.8% and 19.7%, respectively, compared to 19.4% and 20.0% for the three and nine month periods ended September 30, 2021.

The effective tax rate for the three months ended September 30, ~~2016. Our income tax expense for the nine months ended September 30, 2017 reflects an effective income tax rate of 9.1%~~2022 compared ~~to 32.7% for the same period in 2016. Our effective tax rate differs~~favorably from the statutory tax rate bydue to our investments in qualified municipal securities, tax benefits from our real estate investment trust, company owned life insurance, state tax credits, net of the effect of certain non-deductible expenses, and the recognition of excess tax benefits related to stock compensation. In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions, including income tax consequences. In addition to other changes, the guidance changes the accounting for excess tax benefits and tax deficiencies from generally being recognized in additional paid-in capital to recognition as income tax expense or benefit in the period they occur. The Company ~~adopted the new guidance in the first quarter of 2017. As a result, the Company’s income~~anticipates its effective tax ~~expense was reduced by $310,000~~rate for ~~the nine months ended September 30, 2017.~~2022 to be approximately 20.0 percent.

~~(b)~~

~~Financial Condition~~

(b) Financial Condition

Balance Sheet

Total assets increased ~~$4.9~~$32.7 million, or ~~0.4%~~1.1%, from ~~$1.33~~$3.13 billion on December 31, ~~2016~~2021 to ~~$1.34~~$3.17 billion on September 30, ~~2017.~~2022. Loans ~~and leases~~held for investment grew ~~$39.3~~$327.0 million ~~or 4.2%,~~ in the first nine months of ~~2017, offset by a decrease~~2022.

Total liabilities increased to $2.8 billion at September 30, 2022 when compared to $2.75 billion at December 31, 2021. Deposits decreased $50.6 million, or 1.9%.

Our growth in cash, ~~of $10.3 million, or 12.9% for~~loans and deposits continues to be significantly influenced by inflation, volatility in the ~~same period. Securities decreased $35.8 million, or 19.6% as we sold out of lower yielding securities to fund loan growth. Loans held for sale increased $11.1 million, or 26.4%, during~~interest rate environment, and funding through the ~~first nine months of 2017 as we implemented a new line of business related to originating and selling commercial real estate loans.~~

~~Total liabilities were $1.19 billion on December 31, 2016 and on September 30, 2017. Deposits decreased $37.2 million, or 3.3%, due primarily to decreases in our~~Company's correspondent banking deposits. We increased our Federal Home Loan Bank advances $40.0 million during the first nine months of 2017 to help fund our loan growth and declining deposits. Other liabilities decreased $3.0 million, or 28.3%, largely due to the scheduled payout of incentives and the earn-out related contingent liability.customers.

37Loans

~~Loans and Leases~~

The composition of loans ~~and leases~~ at September 30, ~~2017~~2022 and December 31, ~~2016~~2021 and the percentage of each classification to total loans are summarized as follows:

	September 30, 2017					December 31, 2016
	Amount		Percent			Amount		Percent			September 30, 2022					December 31, 2021
Commercial real estate	$	366,778		37.6	%	$	302,322		32.3	%
											Amount		Percent			Amount		Percent
Commercial real estate - owner occupied											$	235,519		10.3	%	$	209,261		10.6	%
Commercial real estate - non-owner occupied												832,156		36.3	%		616,023		31.3	%
Consumer real estate		100,811		10.3	%		97,015		10.4	%		386,628		16.9	%		326,412		16.6	%
Construction and land development		79,951		8.2	%		94,491		10.1	%		198,869		8.7	%		214,310		10.9	%
Commercial and industrial		394,600		40.5	%		379,620		40.5	%		499,048		21.8	%		497,615		25.3	%
Consumer		6,289		0.6	%		5,974		0.6	%		52,715		2.3	%		46,811		2.4	%
Other		26,460		2.7	%		56,796		6.1	%		85,334		3.7	%		55,337		2.8	%
Total loans	$	974,889		100.0	%	$	936,218		100.0	%	$	2,290,269		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, ~~2017,~~2022, our loan portfolio composition remained relatively consistent with the composition at December 31, ~~2016.~~2021. Our primary focus has been on commercial and industrial and commercial real estate lending, which constituted 68% of our loan portfolio as of September 30, 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~~and non-owner occupied properties. The repayment of owner-occupied properties is ~~similar in many ways to our commercial and industrial lending in that these loans are generally made to businesses~~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 ~~business rather than on the valuation of the~~underlying real estate. At September 30, 2017, approximately 28.1% of the outstanding principal balance of our commercial real estate loans was secured by owner-occupied properties. Growth in the commercial real estate segment reflects the growth and development of the Nashville MSA in which we operate.

Non-Performing Loans and Assets

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

(Dollars in thousands)

September 30,
2017

December 31,
2016

Non-accrual loans

$
3,165

$
3,619

Troubled debt restructurings

1,222

1,272

Loans past due 90 days or more and still accruing

27

—

Non-performing loans

3,165

3,619

Foreclosed real estate

—

—

Non-performing assets

$
3,165

$
3,619

Non-performing loans as a percentage of total loans

0.32
%

0.39
%
Non-performing assets as a percentage of total assets

0.24
%

0.27
%


	September 30, 2022			December 31, 2021
Non-accrual loans	$	6,734		$	3,258
Troubled debt restructurings		344			1,832
Loans past due over 90 days and still accruing		991			1,380

Non-performing loans		6,734			3,258
Other real estate owned		165			266
Non-performing assets		6,899			3,524
Non-performing loans to loans held for investment		0.29	%		0.17	%
Non-performing assets to total assets		0.22	%		0.12	%

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


	September 30, 2017		December 31, 2016		September 30, 2022		December 31, 2021
Commercial real estate	$	1,233	$	1,310	$	4,974	$	—
Consumer real estate		—		—		307		1,086
Construction and land development		—		—		8		11
Commercial and industrial		1,932		2,309		186		324
Consumer		—		—		41		31
Other		—		—		—		—
Purchased credit impaired						1,218		1,806
Total loans	$	3,165	$	3,619	$	6,734	$	3,258

The increase in non-performing assets is solely related to one relationship in the Company's commercial real estate portfolio for which the Company feels the risk of loss is nominal.

38(c) Liquidity

~~(c)~~

~~Liquidity~~

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 ~~optimizing financial results within our corporate guidelines.~~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. Interest-bearing deposits in financial institutions totaled $164.4 million at September 30, 2022, representing a decrease of $182.6 million from $347.0 million at December 31, 2021 as the Company deployed excess liquidity to fund loan growth. The fair value of the available-for-sale investment portfolio was ~~$146.6~~$401.3 million at September 30, ~~2017.~~2022, a $58.1 million decrease from December 31, 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, ~~2017,~~2022, total investment securities pledged for these purposes comprised ~~65%~~53% of the estimated fair value of the ~~entire~~ investment portfolio, leaving ~~$68.5~~$188.7 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, 2017, such deposits totaled $892.2 million and represented 82% of our total deposits. Because these deposits are less volatile and are often tied to other products through long lasting relationships they do not put heavy pressure on liquidity.40

Other sources of funds available to meet daily needs include ~~FHLB advances. As a member~~$439.7 million of borrowing capacity from the FHLB of Cincinnati, ~~the Company has access to credit products offered by the FHLB. The Company views these borrowings as a low cost alternative to other time deposits. At September 30, 2017, available credit~~$303.2 million of borrowing capacity from the ~~FHLB totaled $108.0 million. Additionally, we had available~~Federal Reserve Bank of Atlanta’s discount window and federal funds ~~purchased~~ lines with correspondent banks totaling ~~$110.0~~$165.0 million at September 30, ~~2017.~~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, ~~2017,~~2022, the Bank was able to pay up to ~~$19.2~~$85.3 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~~

(d) Capital Resources

At September 30, ~~2017,~~2022, shareholders’ equity totaled ~~$144.2~~$347.4 million, ~~an increase~~a decrease of ~~$5.0~~$32.7 million ~~since~~from December 31, ~~2016. Accordingly, as~~2021. The decrease was driven by a decline in the fair value of available for sale securities included within other comprehensive income, which more than offset a $23.0 million increase in retained earnings. As of September 30, ~~2017,~~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 and Note 10 of the consolidated financial statements for further detail of the changes in equity since the end of 2016.~~

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 78 of the consolidated financial statements.

~~(e)~~

~~Non-GAAP Financial Measures~~

(e) Non-GAAP Financial Measures

This Report ~~includes~~may include the following financial measures that have been prepared other than in accordance with ~~generally accepted accounting principles in the United States~~U.S. GAAP (“non-GAAP financial measures”): tangible common equity, tangible book value per share of common stock, tangible book value per share of common stock less after-tax unrealized available for sale investment (gains) losses, tangible common equity to ~~total~~ tangible assets, and tangible common equity ~~per share.~~to tangible assets less after-tax unrealized available for sale investment (gains) losses. 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~~these measures to the most directly comparable U.S. GAAP financial measures.

(dollars in thousands, except per share data)

September 30, 2017

December 31, 2016

Total equity

$
144,204

$
139,207

Less core deposit intangible

(33
)

(71
)
Less goodwill

(6,219
)

(6,219
)
Less preferred equity

(9,000
)

(9,000
)
Tangible common equity

$
128,952

$
123,917

Total assets

$
1,338,559

$
1,333,675

Less core deposit intangible

(33
)

(71
)
Less goodwill

(6,219
)

(6,219
)
Total tangible assets

$
1,332,307

$
1,327,385

Total shareholders' equity to total assets

10.77
%

10.44
%
Tangible common equity ratio

9.68
%

9.34
%
Total shares of common stock outstanding

11,346,498

11,204,515

Book value per share of common stock

$
11.92

$
11.62

Tangible book value per share of common stock

11.36

11.06


(dollars in thousands, except share and per share data)	September 30, 2022	December 31, 2021
Tangible Equity:
Total shareholders' equity	$347,365	$380,094
Less: intangible assets	(46,468)	(47,759)
Tangible equity	$300,897	$332,335

Tangible book value per share of common stock:
Tangible equity	$300,897	$332,335
Total shares of common stock outstanding	21,931,624	22,166,129
Tangible book value per share of common stock	$13.72	$14.99

Tangible book value per share of common stock less after-tax unrealized available for sale investment (gains) losses:
Total shareholders' equity	$347,365	$380,094
Less: intangible assets	(46,468)	(47,759)
Add: after-tax unrealized available for sale investment (gains) losses	53,488	2,978
Tangible equity less after-tax unrealized available for sale investment (gains) losses	$354,385	$335,313
Total shares of common stock outstanding	21,931,624	22,166,129
Tangible book value per share of common stock less after-tax unrealized available for sale investment (gains) losses	$16.16	$15.13

Tangible common equity to tangible assets:
Tangible equity	$300,897	$332,335

Assets	$3,165,706	$3,133,046
Less: intangible assets	(46,468)	(47,759)
Tangible assets	$3,119,238	$3,085,287
Tangible common equity to tangible assets	9.65%	10.77%

Tangible common equity to tangible assets less after-tax unrealized available for sale investment (gains) losses:
Tangible equity less after-tax unrealized available for sale investment (gains) losses	$354,385	$335,313

Tangible assets	$3,119,238	$3,085,287
Add: after-tax unrealized available for sale investment (gains) losses	�� 53,488	2,978
Tangible assets less after-tax unrealized available for sale investment (gains) losses	$3,172,726	$3,088,265
Tangible common equity to tangible assets less after-tax unrealized available for sale investment (gains) losses	11.17%	10.86%

40(f) Recently Issued Accounting Pronouncements

~~(f)~~

~~Recently Issued Accounting Pronouncements~~

~~ASU 2014-09, Revenue from Contracts with Customers~~

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for use in accounting for revenue arising from contracts with customers, and supersedes most current revenue recognition guidance. The ASU was originally effective for fiscal years and interim periods beginning after December 15, 2016. In August 2015, FASB issued ASU 2015-14 which delays the effective date. The effective date will be annual reporting periods beginning after December 15, 2017, and the interim periods within that year. The Company is evaluating the potential impact of adoption of ASU 2014-09.

~~ASU 2016-02, Leases~~

In February 2016, the FASB issued guidance in the form of a FASB ASU, Leases. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain optional practical expedients available. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the impact of the pending adoption of the new standard on the Company’s financial statements and disclosures.

ASU 2016-13, Financial Instruments – Credit Losses

In June 2016, the FASB issued ~~ASU No. 2016-13, Financial Instruments-Credit Losses, which outlines changes~~guidance to ~~replace~~change the ~~incurred loss impairment methodology currently in place with a methodology that reflects expected~~accounting for credit losses and ~~requires consideration of a broader range of reasonable and supportable information~~modify the impairment model for certain debt securities. The amendments were originally supposed to estimate credit losses. The ASU is effective for fiscal years and interim periods beginning after December 15, 2019. The adoption of ASU 2016-13 is expected to have a significant impact on the Bank’s operations and financial statements.

~~ASU 2017-04, Simplifying the Test of Goodwill Impairment~~

In January 2017, the FASB amended the Goodwill and Other Topic of the Accounting Standards Codification to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, ~~2019.~~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 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 1, 2023. The Company has established a Current Expected Credit Loss (CECL) Steering Committee which includes the appropriate members of management to evaluate the impact this ASU will have on the Company’s financial position, results of operations and

financial 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 ~~2017-09, Scope~~2022-02 ― Financial Instruments- Credit Losses- Troubled Debt Restructurings and Vintage Disclosures:

In March 2022, the FASB issued troubled debt restructurings accounting guidance requiring entities to evaluate whether a modification provided to a borrower results in a new loan or continuation of ~~Modification Accounting~~an existing loan. The amendments enhance existing disclosures and require new disclosures for receivables when there has been a modification in contractual cash flows due to a borrower experiencing financial difficulties. Additionally, the amendments require public business entities to disclose gross charge-off information by year of origination in the vintage disclosures. The guidance is effective for entities that have adopted ASU 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. Early adoption is permitted, including early adoption in an interim period. An entity should apply ASU 2022-02 prospectively. If an entity elects to early adopt ASU 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. The Company is assessing ASU 2022-02 and its impact on its financial statements.

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

In May ~~2017,~~2019, the FASB ~~amended~~issued guidance to provide entities with an option to irrevocably elect the ~~requirements in the Compensation—Stock Compensation Topic~~fair value option, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ~~the Accounting Standards Codification related to changes to the terms or conditions~~ASU 2016-13, Measurement of ~~a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting.~~Credit Losses on Financial Instruments. The amendments will be effective for the Company ~~for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early~~upon adoption ~~is permitted.~~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 ~~2017-12, Derivatives and Hedging: Targeted Improvements~~2020-04 ― Applicable to ~~Accounting for Hedging Activities~~entities within the scope of Topic 848, Reference Rate Reform:

In ~~August 2017,~~March 2020, the FASB ~~amended~~issued guidance which provides temporary optional guidance to ease the ~~requirements of the Derivatives~~potential burden in accounting for reference rate reform. The ASU provides optional expedients and ~~Hedging Topic of the Accounting Standards Codification~~exceptions for applying generally accepted accounting principles to ~~improve the financial reporting of~~contract modifications and hedging relationships, subject to ~~better portray~~meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the ~~economic results of an entity’s risk management activities~~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 ~~its financial statements.~~Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ~~amendments will be~~guidance is effective for ~~the Company for interim and annual periods beginning after~~all entities as of March 12, 2020 through December ~~15, 2018. Early adoption is permitted.~~31, 2022. The Company continues to implement its transition plan towards cessation of LIBOR and 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 ~~these amendments~~such adoption to have a material ~~effect~~impact on its ~~financial statements.~~accounting and disclosures. The Company will continue to assess the impact as the reference rate transition approaches June 30, 2023.

41(g) Impact of Inflation

~~(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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes in our market risk as of September 30, 2022 from that presented in our 2021 10-K. Information ~~required by this item~~about our interest rate sensitivity is included in ~~Item 2, “Management’s~~“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Simulation Sensitivity ~~Analysis.”~~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 Rules 13a-15(e) and 15d-15(e) under the Exchange Act) asAs of the end of the period covered by this ~~Report. Based upon that evaluation,~~report, under the ~~Company’s~~supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Management applied its judgment in assessing the effectiveness of those controls and procedures, which by their nature, can provide only reasonable assurance about management’s control objectives. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based upon this evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that ~~as of the end of the period covered by this Report, the Company’s~~our disclosure controls and procedures were not effective as of September 30, 2022 because of the material weakness in internal control over financial reporting described below. In light of the material weakness, management performed additional procedures to ~~ensure that information required to be disclosed~~validate the accuracy and completeness of the financial results impacted by the control deficiencies. Such procedures included the validation of underlying data and detailed testing.

Material Weakness in ~~the Company’s filings~~Internal Control Over Financial Reporting

A material weakness (as defined in Rule 12b-2 under the Exchange ~~Act~~Act) is ~~recorded, processed, summarized and reported within~~a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the ~~time periods specified~~Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

For the quarter ended September 30, 2022, we identified the following deficiencies in the ~~SEC’s rules~~design of internal control over financial reporting for our general ledger account balancing.

1. Insufficient management review over general ledger accounts assigned to the Company's Operations Division led to certain accounts not being appropriately balanced.

2. Inadequate oversight and ~~forms~~governance of the Company's general ledger accounts by the Company's Accounting Department led to the insufficient management review being unidentified.

All accounts have now been balanced as of September 30, 2022 resulting in a reclassification of certain balance sheet amounts and an increase in operating expense of $196,000 for the three and nine months ended September 30, 2022, all of which are reflected in results for the quarter ended September 30, 2022 in this report. Although the errors were not material to previous financial statements, we concluded that the combination of control deficiencies represented a material weakness.

Remediation of Material Weakness

We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that ~~such information is accumulated and communicated~~control deficiencies contributing to the ~~Company’s~~material weakness are remediated as soon as possible. We have made progress towards remediation and continue to implement our remediation plan for the material weakness in internal control over financial reporting described above, which includes assigning each general ledger account an owner and second reviewer, implementing procedures for the Accounting Division to review and attest to each general ledger account, and ensuring our internal and external audit plans test the effectiveness of our general ledger account oversight. We will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management ~~including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.~~has concluded, through testing, that the controls are operating effectively.

Changes in Internal Control over Financial Reporting

~~There have been no changes~~Except as set forth in the ~~Company’s~~following sentences, no change in our internal control over financial reporting (as that term is defined in Exchange Act Rule 13a-15(f)) occurred during the ~~period covered by this Report~~fiscal quarter ended September 30, 2022 that ~~have~~ materially affected, or ~~are~~is reasonably likely to materially affect, ~~the Company’s~~our internal control over financial reporting. Management determined, with respect to the general ledger accounts in question, that it did not adequately design and implement effective control activities which includes the information and communication necessary for management to evidence the implementation and effectiveness of internal control over financial reporting. The previously noted control deficiency (related to several general ledger accounts not being balanced and related oversight and governance) was considered a material weakness. We expect that the remediation of this material weakness will be fully implemented and validated by the end of the fourth quarter of 2022.

4244

PART II. OTHER INFORMATION

~~Item 1.~~

~~Legal Proceedings~~

From time to time, the Company is party to legal actions that are routine and incidental to its business. Given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to the Company’s business, including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws, the Company, like all banking organizations, is subject to heightened legal and regulatory compliance and litigation risk. There are currently no material pending legal proceedings to which the Company or the Bank is a party or of which any of their property is the subject.

~~Item 1A.~~

~~Risk Factors~~

In evaluating an investment in the Company’s securities, investors should consider carefully, among other things, information under the heading “Cautionary Note Regarding Forward-Looking Statements” in this Report as well as those factors that are detailed from time to time in the Company’s periodic and current reports filed with the SEC, including those factors included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 under the headings “Item 1A. Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” and in the Company’s Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

~~There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.~~

~~Item 2.~~

~~Unregistered Sales of Equity Securities and Use of Proceeds~~

~~Unregistered Sales 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 September 30, 2017.~~

Total number of
shares purchased (1)

Average price paid
per share

Total number of
shares purchased
as part of publicly
announced plan

Maximum number
of shares that may
yet be purchased
under the plan

July 1 - July 31

1,236

$
18.15

—

—

August 1 - August 31

543

17.17

—

—

September 1 - September 30

1,428

17.32

—

—

Total

3,207

$
17.61

—

—

~~(1)~~

~~Activity represents shares of stock withheld to pay taxes due upon vesting of restricted shares and exercise of stock options.~~

~~Use of Proceeds~~

On September 27, 2016, the Company sold 1,688,049 shares of its common stock, including 387,750 shares purchased by the underwriters pursuant to the full exercise of their purchase option, in its initial public offering (“IPO”). In addition, certain selling shareholders participated in the IPO and sold an aggregate of 1,284,701 shares of the Company’s common stock.

The shares were sold at a public offering price of $15.00 per share, resulting in aggregate gross proceeds of approximately $44.6 million. The aggregate offering price for the shares sold by the Company was approximately $25.3 million, and after deducting approximately $1.6 million for the underwriting discount and approximately $1.7 million of offering expenses paid to third parties, the Company received net proceeds of approximately $21.9 million. The aggregate offering price for the shares sold by the selling shareholders was approximately $19.3 million.

All of the shares were sold pursuant to our Registration Statement on Form S-1, as amended (File No. 333-213367), which was declared effective by the SEC on September 21, 2016. The offering did not terminate until all of the shares offered were sold. The Company made no payments to its directors, officers or persons owning ten percent or more of its common stock or to their associates, or to its affiliates in connection with the issuance and sale of the common stock. Keefe, Bruyette & Woods, Inc. and Sandler O’Neill & Partners, L.P. acted as lead book-running managers for the IPO. Our common stock is currently trading on the NASDAQ Global Select Market under the symbol “CSTR.”

There has been no material change in the planned use of proceeds from our IPO as described in our prospectus filed with the SEC on September 23, 2016 pursuant to Rule 424(b)(4) under the Securities Act. Pending application of the IPO proceeds, we have invested~~the net proceeds in short-term investments.~~

Item 6. Exhibits

~~Item 6.~~Exhibit

Number

~~Exhibits~~

	Description
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)
~~31.1~~
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.INS~~101	XBRL Instance Document.*

~~101.SCH~~	XBRL Taxonomy Extension Schema Document.*

~~101.CAL~~	XBRL Taxonomy Extension Calculation Linkbase Document.*

~~101.LAB~~	XBRL Taxonomy Extension Label Linkbase Document.*

~~101.PRE~~	XBRL Taxonomy Extension Presentation Linkbase Document.*

~~101.DEF~~	XBRL Taxonomy Extension Definition Document.*

~~Filed with this~~Interactive data files for Capstar Financial Holdings, Inc.’s Quarterly Report on Form ~~10-Q.~~10-Q for the quarter ended June 30, 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).

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

~~SIGNATURES~~

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.~~


CAPSTAR FINANCIAL HOLDINGS, INC.
~~By:~~		~~/s/ Robert B. Anderson~~
		~~Robert B. Anderson~~
By:		~~Chief Financial Officer and Chief Administrative Officer~~/s/ Michael J Fowler
		Michael J. Fowler
~~Date:~~		~~October 18, 2017~~Chief Financial Officer (Principal Financial Officer)

Date:		November 14, 2022


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

Date:		November 14, 2022


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 ~~office)~~offices)	37203 (zip code)


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


Large Accelerated Filer	☐		Accelerated Filer	☐☒
Non-Accelerated Filer	☒☐	~~(Do not check if a smaller reporting company)~~	Smaller Reporting Company	☐
			Emerging Growth Company	☒☐


	Nine Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2022			2021
Cash flows from operating activities:
Net income	$	1,409		$	6,169		$	28,686		$	36,207
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		12,900			2,759			926			(415	)
Accretion of discounts on acquired loans and deferred fees		(537	)		(1,232	)
Amortization (accretion) of discounts on acquired loans and deferred fees, net								473			(5,412	)
Depreciation and amortization		345			324			2,391			2,615
Net amortization of premiums on investment securities		984			1,106			1,426			1,823
Securities gains, net		(42	)		(121	)
Mortgage banking income		(4,617	)		(5,342	)
Tri-Net fees		(748	)		—
Net gain on sale of loans		(67	)		—
Net loss on disposal of premises and equipment		137			—
Net gain on sale of securities								(8	)		(20	)
Mortgage banking								(4,436	)		(13,318	)
Tri-Net								(39	)		(4,618	)
SBA lending								(1,054	)		(1,781	)
Net gain on disposal of premises and equipment								(14	)		(21	)
Net gain on sale of other real estate owned		—			(157	)		(7	)		(29	)
Stock-based compensation		771			643			971			1,169
Excess tax benefit from stock compensation		—			(29	)
Deferred income tax expense		(445	)		63			2,394			1,283
Origination of loans held for sale		(409,179	)		(393,378	)		(533,326	)		(896,950	)
Proceeds from loans held for sale		403,497			370,374			448,369			925,397
Cash payments arising from operating leases								(1,633	)		(1,568	)
Amortization of debt issuance expense								101			76
Net increase in accrued interest receivable and other assets		(1,320	)		(2,021	)		(7,098	)		(15,373	)
Net increase (decrease) in accrued interest payable and other liabilities		(2,630	)		1,077			(4,674	)		1,812
Net cash provided by (used in) operating activities		458			(19,765	)		(66,552	)		30,877
Cash flows from investing activities:
Activities in securities available for sale:
Purchases		(11,754	)		(55,862	)
Sales		34,299			46,700
Maturities, prepayments and calls		14,718			17,113
Activities in securities held to maturity:
Activities in securities available-for-sale:
Purchases		—			(4,300	)		(66,512	)		(83,420	)
Maturities, prepayments and calls		1,332			1,233			54,955			74,305
Purchase of restricted equity securities		(2,767	)		(112	)
Net redemption (purchase) of restricted equity securities								(2,172	)		1,119
Net increase in loans		(49,154	)		(112,961	)		(194,087	)		(5,685	)
Purchase of premises and equipment		(1,074	)		(103	)		(428	)		(278	)
Proceeds from the sale of premises and equipment		3			—			415			—
Proceeds from sale of other real estate		—			373			108			2,225
Purchases of bank owned life insurance								—			(31,000	)
Proceeds from bank owned life insurance								1,545			—
Net cash used in investing activities		(14,397	)		(107,919	)		(206,176	)		(42,134	)
Cash flows from financing activities:
Net increase (decrease) in deposits		(37,228	)		97,599			(50,608	)		106,391
Proceeds from Federal Home Loan Bank advances		135,000			15,000			300,000			—
Payments on Federal Home Loan Bank advances		(95,000	)		(30,000	)		(180,000	)		(10,000	)
Issuance of common stock		—			21,928
Exercise of common stock options and warrants, net of repurchase of restricted shares		845			149
Excess tax benefit from stock compensation		—			29
Net decrease in repurchase agreements		—			(3,755	)
Repurchase of common stock								(6,123	)		(462	)
Exercise of common stock options, net of repurchase of restricted shares								(75	)		902
Common stock dividends paid								(5,678	)		(3,746	)
Net cash provided by financing activities		3,617			100,950			57,516			93,085
Net decrease in cash and cash equivalents		(10,322	)		(26,734	)
Net increase (decrease) in cash and cash equivalents								(215,212	)		81,828
Cash and cash equivalents at beginning of period		80,111			100,185			415,125			277,439
Cash and cash equivalents at end of period	$	69,789		$	73,451		$	199,913		$	359,267
Supplemental disclosures of cash paid:
Interest paid	$	6,951		$	5,079		$	7,513		$	5,279
Income taxes		2,142			2,545
Income taxes paid								9,305			13,395
Supplemental disclosures of noncash transactions:
Transfer of loans to other real estate							$	—		$	2,022
Loans charged off to the allowance for loan losses	$	12,369		$	1,452			556			407
Lease liabilities arising from obtaining right-of-use assets								570			—
Unrealized losses on securities available for sale, net of tax								(50,510	)		(7,229	)
Loans transferred from held for sale to held for investment		—			2,823			131,079			—


	Less than 12 months					12 months or more					Total
September 30, 2022	Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses
U. S. government agency securities	$	10,396	$	(1,299	)	$	2,922	$	(454	)	$	13,318	$	(1,753	)
State and municipal securities		42,671		(4,856	)		21,712		(6,178	)		64,383		(11,034	)
Mortgage-backed securities		90,279		(9,858	)		161,256		(46,435	)		251,535		(56,293	)
Asset-backed securities		3,260		(70	)		—		—			3,260		(70	)
Other debt securities		48,972		(2,220	)		15,508		(993	)		64,480		(3,213	)
Total temporarily impaired securities	$	195,578	$	(18,303	)	$	201,398	$	(54,060	)	$	396,976	$	(72,363	)

December 31, 2021
U. S. government agency securities	$	2,560	$	(20	)	$	2,737	$	(74	)	$	5,297	$	(94	)
State and municipal securities		15,309		(279	)		12,768		(426	)		28,077		(705	)
Mortgage-backed securities		155,805		(5,291	)		75,934		(3,508	)		231,739		(8,799	)
Asset-backed securities		—		—			—		—			—		—
Other debt securities		30,375		(231	)		—		—			30,375		(231	)
Total temporarily impaired securities	$	204,049	$	(5,821	)	$	91,439	$	(4,008	)	$	295,488	$	(9,829	)


		Shares outstanding as of November 9, 2022
Common Stock, par value $1.00 per share		21,914,768


Item		Page

PART I – FINANCIAL INFORMATION			6

Item 1.	~~Consolidated~~ Financial Statements	56

	Consolidated Balance Sheets ~~as of September 30, 2017 (Unaudited) and December 31, 2016~~	56

	Consolidated Statements of Income ~~(Unaudited) for the three and nine months ended September 30, 2017 and 2016~~	67

	Consolidated Statements of Comprehensive Income ~~(Unaudited) for the three and nine months ended September 30, 2017 and 2016~~(Loss)	78

	Consolidated Statements of Changes in Shareholders’ Equity ~~(Unaudited) for the nine months ended September 30, 2017 and 2016~~	89

	Consolidated Statements of Cash Flows ~~(Unaudited) for the nine months ended September 30, 2017 and 2016~~	910

	Notes to Consolidated Financial Statements ~~(Unaudited)~~	1011

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3032

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4243

Item 4.	Controls and Procedures	4243

PART II – OTHER INFORMATION			4345

Item 1. 6.	~~Legal Proceedings~~Exhibits	4345

~~Item 1A.~~	~~Risk Factors~~	43

~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	43

~~Item 6.~~	~~Exhibits~~	44

SIGNATURES			4546


	September 30, 2022
	(unaudited)			December 31, 2021
Assets
Cash and due from banks	$	34,009		$	48,202
Interest-bearing deposits in financial institutions		164,379			347,023
Federal funds sold		1,525			19,900
Total cash and cash equivalents		199,913			415,125
Securities available-for-sale, at fair value		401,345			459,396
Securities held-to-maturity, fair value of $1,759 and $1,830 at September 30, 2022 and December 31, 2021, respectively		1,762			1,782
Loans held for sale, includes $35,574 and $37,306 measured at fair value at September 30, 2022 and December 31, 2021, respectively		43,122			83,715
Loans held for investment		2,290,269			1,965,769
Less allowance for loan losses		(22,431	)		(21,698	)
Loans, net		2,267,838			1,944,071
Premises and equipment, net		24,691			25,727
Restricted equity securities		16,625			14,453
Accrued interest receivable		9,459			7,376
Goodwill		41,068			41,068
Core deposit intangible, net		5,400			6,691
Other real estate owned, net		165			266
Other assets		154,318			133,376
Total assets	$	3,165,706		$	3,133,046
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing	$	628,846		$	725,171
Interest-bearing		734,526			944,605
Savings and money market accounts		721,116			641,456
Time		549,185			373,049
Total deposits		2,633,673			2,684,281
Federal Home Loan Bank advances		120,000			—
Subordinated notes		29,633			29,532
Other liabilities		35,035			39,139
Total liabilities		2,818,341			2,752,952
Shareholders’ equity:
Common stock, voting, $1 par value; 25,000,000 shares authorized; 21,931,624 and 22,166,129 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		21,932			22,166
Additional paid-in capital		243,716			248,709
Retained earnings		133,497			110,489
Accumulated other comprehensive loss, net of tax		(51,780	)		(1,270	)
Total shareholders’ equity		347,365			380,094
Total liabilities and shareholders’ equity	$	3,165,706		$	3,133,046

	Preferred			Common Stock				Additional paid-in			Retained		Accumulated other comprehensive			Total shareholders’
	stock			Shares		Amount		capital			earnings		loss			equity
Balance December 31, 2015	$	1,610			8,577,051	$	8,577	$	95,277		$	8,036	$	(4,914	)	$	108,586
Issuance of restricted common stock, net of forfeitures and withholdings to satisfy employee tax obligations		—			106,548		107		(123	)		—		—			(16	)
Stock-based compensation expense		—			—		—		643			—		—			643
Excess tax benefit from stock compensation		—			—		—		29			—		—			29
Issuance of common stock		—			1,688,049		1,688		20,240			—		—			21,928
Conversion of preferred stock		(732	)		731,707		732		—			—		—			—
Exercise of common stock warrants		—			87,666		88		77			—		—			165
Net income		—			—		—		—			6,169		—			6,169
Other comprehensive income		—			—		—		—			—		923			923
Balance September 30, 2016	$	878			11,191,021	$	11,192	$	116,143		$	14,205	$	(3,991	)	$	138,427

Balance December 31, 2016	$	878			11,204,515	$	11,205	$	116,143		$	17,132	$	(6,151	)	$	139,207
Issuance of restricted common stock, net of forfeitures and withholdings to satisfy employee tax obligations		—			21,480		21		(285	)		—		—			(264	)
Stock-based compensation expense		—			—		—		771			—		—			771
Exercise of employee common stock options, net of withholdings to satisfy employee tax obligations		—			71,517		72		572			—		—			644
Exercise of common stock warrants		—			48,986		49		416			—		—			465
Net income		—			—		—		—			1,409		—			1,409
Other comprehensive income		—			—		—		—			—		1,972			1,972
Balance September 30, 2017	$	878			11,346,498	$	11,347	$	117,617		$	18,541	$	(4,179	)	$	144,204


	Common Stock, voting						Additional paid-in			Retained			Accumulated other comprehensive			Total shareholders’
	Shares			Amount			capital			earnings			income (loss)			equity
Balance December 31, 2020		21,988,803		$	21,989		$	246,890		$	66,879		$	7,728		$	343,486
Net restricted common stock activity		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	)
Common stock dividends declared ($0.05 per share)		—			—			—			(1,093	)		—			(1,093	)
Net income		—			—			—			11,030			—			11,030
Other comprehensive loss		—			—			—			—			(9,425	)		(9,425	)
Balance March 31, 2021		22,080,544			22,081			246,587			76,816			(1,697	)		343,787
Net restricted common stock activity		(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	)
Net income		—			—			—			12,076			—			12,076
Other comprehensive income		—			—			—			—			3,778			3,778
Balance June 30, 2021		22,165,547			22,166			247,945			87,560			2,081			359,752
Net restricted common stock activity		(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 December 31, 2021		22,166,129		$	22,166		$	248,709		$	110,489		$	(1,270	)	$	380,094
Net restricted common stock activity		65,550			66			(153	)		—			—			(87	)
Stock-based compensation expense		—			—			388			—			—			388
Repurchase of common stock		(36,608	)		(37	)		(730	)		—			—			(767	)
Common stock dividends declared ($0.06 per share)		—			—			—			(1,320	)		—			(1,320	)
Net income		—			—			—			10,673			—			10,673
Other comprehensive loss		—			—			—			—			(20,064	)		(20,064	)
Balance March 31, 2022		22,195,071			22,195			248,214			119,842			(21,334	)		368,917
Net restricted common stock activity		(3,719	)		(4	)		4			—			—			—
Stock-based compensation expense		—			—			325			—			—			325
Net exercise of common stock options		5,800			6			45			—			—			51
Repurchase of common stock		(262,598	)		(263	)		(5,091	)		—			—			(5,354	)
Common stock dividends declared ($0.10 per share)		—			—			—			(2,184	)		—			(2,184	)
Net income		—			—			—			9,972			—			9,972
Other comprehensive loss		—			—			—			—			(13,992	)		(13,992	)
Balance June 30, 2022		21,934,554			21,934			243,497			127,630			(35,326	)		357,735
Net restricted common stock activity		(2,930	)		(2	)		(39	)		—			—			(41	)
Stock-based compensation expense		—			—			258			—			—			258
Common stock dividends declared ($0.10 per share)		—			—			—			(2,172	)		—			(2,172	)
Net income		—			—			—			8,039			—			8,039
Other comprehensive loss		—			—			—			—			(16,454	)		(16,454	)
Balance September 30, 2022		21,931,624		$	21,932		$	243,716		$	133,497		$	(51,780	)	$	347,365


	Available-for-sale				Held-to-maturity
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
Due in less than one year	$	3,895	$	3,897	$	1,762	$	1,759
Due one to five years		28,551		27,379		—		—
Due five to ten years		107,384		97,731		—		—
Due beyond ten years		22,707		17,543		—		—
Mortgage-backed securities		307,828		251,535		—		—
Asset-backed securities		3,330		3,260		—		—
Total	$	473,695	$	401,345	$	1,762	$	1,759

	Performing Loans
September 30, 2017	Pass/Watch		Special Mention		Substandard		Total Performing		Total Impaired Loans		Total
Commercial real estate	$	365,545	$	—	$	—	$	365,545	$	1,233	$	366,778
Consumer real estate		100,522		—		289		100,811		—		100,811
Construction and land development		79,951		—		—		79,951		—		79,951
Commercial and industrial		370,657		16,443		5,568		392,668		1,932		394,600
Consumer		6,276		—		13		6,289		—		6,289
Other		26,460		—		—		26,460		—		26,460
Total	$	949,411	$	16,443	$	5,870	$	971,724	$	3,165	$	974,889

December 31, 2016
Commercial real estate	$	301,012	$	—	$	—	$	301,012	$	1,310	$	302,322
Consumer real estate		96,722		—		293		97,015		—		97,015
Construction and land development		94,491		—		—		94,491		—		94,491
Commercial and industrial		349,857		11,035		16,419		377,311		2,309		379,620
Consumer		5,958		—		16		5,974		—		5,974
Other		56,796		—		—		56,796		—		56,796
Total	$	904,836	$	11,035	$	16,728	$	932,599	$	3,619	$	936,218

				Unrealized Gains			Unrealized
	Gains and			and Losses			Losses on
	Losses on			on Available			Securities
	Cash Flow			for Sale			Transferred to
	Hedges			Securities			Held to Maturity			Total
Nine Months Ended September 30, 2017
Beginning Balance	$	(4,241	)	$	(698	)	$	(1,212	)	$	(6,151	)
Other comprehensive income (loss) before reclassification, net of tax		(193	)		1,502			—			1,309
Amounts reclassified from accumulated other comprehensive income (loss), net of tax		589			(26	)		100			663
Net current period other comprehensive income (loss)		396			1,476			100			1,972
Ending Balance	$	(3,845	)	$	778		$	(1,112	)	$	(4,179	)

Nine Months Ended September 30, 2016
Beginning Balance	$	(3,704	)	$	105		$	(1,315	)	$	(4,914	)
Other comprehensive income (loss) before reclassification, net of tax		(1,086	)		1,746			—			660
Amounts reclassified from accumulated other comprehensive income (loss), net of tax		261			(75	)		77			263
Net current period other comprehensive income (loss)		(825	)		1,671			77			923
Ending Balance	$	(4,529	)	$	1,776		$	(1,238	)	$	(3,991	)

	September 30, 2017			December 31, 2016
Notional amounts	$	20,000		$	20,000
Weighted average pay rates		3.54	%		3.54	%
Weighted average receive rates	3 month LIBOR			3 month LIBOR
Weighted average maturity	5.7 years			6.5 years
Fair value	$	(1,658	)	$	(1,535	)
Amount of unrealized loss recognized in accumulated other comprehensive income, net of tax	$	(1,023	)	$	(947	)

	2017		2016
Dividend yield		—		—
Expected term (in years)		—		7.48
Expected stock price volatility		—		17.20	%
Risk-free interest rate		—		1.66	%
Pre-vest forfeiture rate		—		10.25	%

(Dollars in thousands)	September 30, 2017			December 31, 2016
Non-accrual loans	$	3,165		$	3,619
Troubled debt restructurings		1,222			1,272
Loans past due 90 days or more and still accruing		27			—

Non-performing loans		3,165			3,619
Foreclosed real estate		—			—
Non-performing assets	$	3,165		$	3,619
Non-performing loans as a percentage of total loans		0.32	%		0.39	%
Non-performing assets as a percentage of total assets		0.24	%		0.27	%

	Total number of shares purchased (1)		Average price paid per share		Total number of shares purchased as part of publicly announced plan		Maximum number of shares that may yet be purchased under the plan
July 1 - July 31		1,236	$	18.15		—		—
August 1 - August 31		543		17.17		—		—
September 1 - September 30		1,428		17.32		—		—
Total		3,207	$	17.61		—		—