LE TTER TO SHAREHOLDERS
FEBRUARY 25, 2018
Dear Fellow Shareholders,
2018 represents the tenth year of operations for
CapStar Bank, where our emphasis is centered
around our four primary constituencies: our
shareholders, associates, customers and
communities. The business strategy that served
as the foundation remains core to us; we focus on
small to medium sized businesses, operating in
our primary market, as well as their owners and
employees. We augment this primary strategy
with client segments that specialize in commercial
real estate financing, residential mortgage and
wealth management. We recently added a
professional team of SBA bankers who expand our
reach into a new prospect cohort with a product
offering designed to produce loan growth as well
as fee income.
Throughout the years, we have grown CapStar
organically and will continue to do so by
leveraging the talented group of bankers with
years of experience in our market and by
continually investing in superior technology
solutions. The majority of our bankers have come
to CapStar with experience at larger regional
financial institutions, providing them with the
ability to compete very effectively and efficiently
as they develop creative financial solutions
in concert with our targeted companies and
individuals.
Since inception, we have completed two
acquisitions; first, the purchase of American
Security Bank and Trust in 2012, and second, the
purchase of Farmington Mortgage in 2014. Both
of these have served to enhance CapStar’s growth
and profitability.
In the context of sound, profitable growth,
delivering strong and consistent financial
performance remains a primary priority at
CapStar. We remain committed to achievement of
sustainable Return on Average Assets of 1.0% by
the end of 2018.
As was the case for many financial institutions,
fourth quarter 2017 financial results were impacted
by changes in federal tax law resulting in a
deferred tax asset write down. Excluding that
charge, ROAA was 1.09%.
Greenwich Associates recently completed a
Customer Experience Evaluation revealing very
positive feedback. Customers appreciated that
our bankers are proactive in presenting new
business solutions for financing needs as well
as treasury management. In fact, a majority of
commercial clients consider CapStar to be their
primary Treasury Management provider. Client
advocacy and willingness to recommend CapStar
are well above industry norms, with key strengths
including trust, delivering on promise and ease of
doing business. These results will further enhance
the ability of our bankers to continue to convert
prospects to customers and build market share.
Our 179 associates are essentially the heartbeat
of CapStar, enabling the delivery of creative
solutions to our customers on multiple fronts.
At the center are our primary values including
integrity, teamwork, results and service. On a
quarterly basis, we accept nominations from all of
our associates to recognize team members who
have excelled on these fronts, including customer
experience. These nominations are considered
by the President’s Awards committee with the
winners honored at a quarterly all-associate
meeting. Additionally, one individual receives the
annual “We’re Listening” award, for demonstrating
the characteristics of teamwork and leading by
example.
Several years ago, “CapStar Cares” was
established as a means of connecting the
interests of our associates with the needs of our
communities. The Mission Statement of CapStar
Cares is:
“To ensure CapStar Bank is a meaningful part
of and contributor to the communities in which
we operate. We will promote the welfare and
development of the communities by utilizing
the talents and experience of our associates to
address the needs of those we serve.”
As part of our commitment to our communities,
we encourage each of our associates to volunteer
at his or her chosen not-for-profit organizations;
to support these activities, we provide each
associate 40 hours of annual paid time. Several
of the projects benefiting local organizations
supported by our team include Financial Literacy
classes taught by our associates at Harvest Hands;
a school supply drive for our partner schools
at Cameron Middle School in Davidson County
and Nannie Berry Elementary in Sumner County;
several disease prevention projects including
No-Shave November, the Komen Walk and the
American Heart Association Walk; projects with
United Way, in addition to our annual campaign,
like Dirty Hands, Big Hearts, Stuff the Bus school
supply drive in both Davidson and Sumner
Counties, and a massive drive for volunteer-stuffed
back packs.
CapStar also benefits from community leaders
who serve on our Sumner County Advisory
Board and our Health Care Advisory Council.
These individuals bring vital expertise, wisdom
and connectedness to our growth across middle
Tennessee.
Please join the CapStar team at our annual
shareholder meeting on April 26 at 9:00 a.m. at
the Envision Conference Center in Brentwood,
TN. Thank you for your continued interest in and
support of CapStar Bank.
Claire W. Tucker
President and CEO
CapStar Financial Holdings, Inc.
Cover photo by Eric England of
media wall in CapStar’s financial
center in the CapStar building at
1201 Demonbreun Street
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:3)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
(cid:3)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to________
Commission File Number 001-37886
CAPSTAR FINANCIAL HOLDINGS, INC.
(Exact name of Registrant as specified in its Charter)
Tennessee
(State or other jurisdiction of
incorporation or organization)
1201 Demonbreun Street, Suite 700
Nashville, Tennessee
(Address of principal executive office)
81-1527911
(IRS Employer
Identification No.)
37203
(zip code)
(615) 732-6400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, par value $1.00 per share
Name on Exchange on which Registered:
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:3) NO (cid:4)
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES (cid:3) NO (cid:4)
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 (cid:4)NO (cid:3)
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 (cid:4)NO (cid:3)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not
be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. (cid:3)
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company,
or an emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging
growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
Non-accelerated filer
(cid:3)
(cid:3)(Do not check if a small reporting company)
(cid:4)
Accelerated filer
Small reporting company
(cid:3)
Emerging growth company (cid:4)
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. (cid:4)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES (cid:3) NO (cid:4)
As of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the
registrant’s voting and non-voting common equity held by non-affiliates of the registrant was $199,313,424, based on the closing sales price of
$17.74 per share as reported on the Nasdaq Global Select Market.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Stock, par value $1.00 per share
Non-voting Common Stock, par value $1.00 per share
Shares outstanding as of February 26, 2018
11,560,593
132,561
Portions of the Registrant’s Definitive Proxy Statement relating to the 2018 Annual Meeting of Shareholders, which will be filed within 120 days
after December 31, 2017, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Table of Contents
PART I
tem 1.
tem 1A.
tem 1B.
tem 2.
tem 3.
tem 4.
PART II
tem 5.
tem 6.
tem 7.
tem 7A.
tem 8.
tem 9.
tem 9A.
tem 9B.
PART III
tem 10.
tem 11.
tem 12.
tem 13.
tem 14.
PART IV
tem 15.
tem 16.
Business ..................................................................................................................................
Risk Factors ............................................................................................................................
Unresolved Staff Comments ...................................................................................................
Properties ................................................................................................................................
Legal Proceedings ...................................................................................................................
Mine Safety Disclosures .........................................................................................................
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities ............................................................................................................
Selected Financial Data...........................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations ..
Quantitative and Qualitative Disclosures About Market Risk ................................................
Financial Statements and Supplementary Data .......................................................................
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures .........................................................................................................
Other Information ...................................................................................................................
Directors, Executive Officers and Corporate Governance ......................................................
Executive Compensation ........................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related .................
Certain Relationships and Related Transactions, and Director Independence ........................
Principal Accounting Fees and Services .................................................................................
Exhibits and Financial Statement Schedules ...........................................................................
Form 10-K Summary ..............................................................................................................
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i
TERMINOLOGY
Unless this Annual Report on Form 10-K (this “Report”) indicates otherwise or the context otherwise requires, the
terms “we,” “our,” “us,” ”Company,” ”CapStar,” “CapStar Financial,” as used herein refer to CapStar Financial
Holdings, Inc., and its subsidiary, CapStar Bank, which we sometimes refer to as “our bank subsidiary,” “the bank”
or “our bank”. References herein to the fiscal years 2013, 2014, 2015, 2016 and 2017 mean our fiscal years ended
December 31, 2013, 2014, 2015, 2016, and 2017, respectively.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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, future events and our financial performance. 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,” “estimate,” “intend,” “plan,” “project,” “projection,”
“forecast,” “goal,” “target,” “would,” and “outlook,” or the negative version of those words or other comparable
words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based
upon current expectations, estimates and projections about our industry, management’s beliefs and certain
assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control.
The inclusion of these forward-looking statements should not be regarded as a representation by us or any other
person that such expectations, estimates and projections will be achieved. Accordingly, we caution you that any such
forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and
uncertainties that are difficult to predict and that are beyond our control. Although we believe that the expectations
reflected in these forward-looking statements are reasonable as of the date of this Report, actual results may prove to
be materially different from the results expressed or implied by the forward-looking statements. There are or will be
important factors that could cause our actual results to differ materially from those indicated in these forward-
looking statements, including, but not limited to, the following:
Economic conditions (including interest rate environment, government economic and monetary policies, the strength
of global financial markets and inflation and deflation) that impact the financial services industry as a whole and/or
our business; the concentration of our business in the Nashville metropolitan statistical area (“MSA”) and the effect
of changes in the economic, political and environmental conditions on this market; increased competition in the
financial services industry, locally, regionally or nationally, which may adversely affect pricing and the other terms
offered to our clients; our dependence on our management team and board of directors and changes in our
management and board composition; our reputation in the community; our ability to execute our strategy and to
achieve loan and deposit growth through organic growth and strategic acquisitions; credit risks related to the size of
our borrowers and our ability to adequately assess and limit our credit risk; our concentration of large loans to a
small number of borrowers; the significant portion of our loan portfolio that originated during the past two years and
therefore may less reliably predict future collectability than older loans; the adequacy of reserves (including our
allowance for loan losses) and the appropriateness of our methodology for calculating such reserves; adverse trends
in the healthcare service industry, which is an integral component of our market’s economy; our management of
risks inherent in our commercial real estate loan portfolio, and the risk of a prolonged downturn in the real estate
market, which could impair the value of our collateral and our ability to sell collateral upon any foreclosure;
governmental legislation and regulation, including changes in the nature and timing of the adoption and
effectiveness of new requirements under the Dodd-Frank Act of 2010, as amended, the Tax Cuts and Jobs Act of
2017, as amended, Basel guidelines, capital requirements, accounting regulation or standards and other applicable
laws and regulations; the loss of large depositor relationships, which could force us to fund our business through
more expensive and less stable sources; operational and liquidity risks associated with our business, including
liquidity risks inherent in correspondent banking; volatility in interest rates and our overall management of interest
rate risk, including managing the sensitivity of our interest-earning assets and interest-bearing liabilities to interest
rates, and the impact to our earnings from a change in interest rates; the potential for our Bank’s regulatory lending
limits and other factors related to our size to restrict our growth and prevent us from effectively implementing our
business strategy; strategic acquisitions we may undertake to achieve our goals; the sufficiency of our capital,
including sources of capital and the extent to which we may be required to raise additional capital to meet our goals;
fluctuations to the fair value of our investment securities that are beyond our control; deterioration in the fiscal
ii
position of the U.S. government and downgrades in Treasury and federal agency securities; potential exposure to
fraud, negligence, computer theft and cyber-crime; the adequacy of our risk management framework; our
dependence on our information technology and telecommunications systems and the potential for any systems
failures or interruptions; our dependence upon outside third parties for the processing and handling of our records
and data; our ability to adapt to technological change; the financial soundness of other financial institutions; our
exposure to environmental liability risk associated with our lending activities; our engagement in derivative
transactions; our involvement from time to time in legal proceedings and examinations and remedial actions by
regulators; the susceptibility of our market to natural disasters and acts of God; and the effectiveness of our internal
controls over financial reporting and our ability to remediate any future material weakness in our internal controls
over financial reporting.
The foregoing factors should not be construed as exhaustive and should be read in conjunction with the section
entitled “Risk Factors” included in this Report. 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.
MARKET DATA
Market data used in this Report has been obtained from government and independent industry sources and
publications available to the public, sometimes with a subscription fee, as well as from research reports prepared for
other purposes. Industry publications and surveys and forecasts generally state that the information contained therein
has been obtained from sources believed to be reliable. The Company did not commission the preparation of any of
the sources or publications referred to in this Report. The Company has not independently verified the data obtained
from these sources, and, although the Company believes such data to be reliable as of the dates presented, it could
prove to be inaccurate. Forward-looking information obtained from these sources is subject to the same
qualifications and the additional uncertainties regarding the other forward-looking statements in this Report.
iii
PART I
ITEM 1. BUSINESS
OVERVIEW
CapStar Financial Holdings, Inc. is a bank holding company that is headquartered in Nashville, Tennessee and that
operates primarily through its wholly owned subsidiary, CapStar Bank, a Tennessee-chartered state bank. CapStar
Bank was incorporated in the State of Tennessee in 2007 and acquired a state charter in 2008 which was
accomplished through a de novo application with the Tennessee Department of Financial Institutions (“TDFI”) and
the Federal Reserve Bank of Atlanta. Upon approval of its charter, CapStar Bank opened for business to the public
on July 14, 2008. CapStar Financial Holdings, Inc. was incorporated in 2015 and, on February 5, 2016, completed a
share exchange with CapStar Bank’s shareholders that resulted in CapStar Bank becoming a wholly owned
subsidiary of the Company.
We are a commercial bank that seeks to establish and maintain comprehensive relationships with our clients by
delivering customized and creative banking solutions and superior client service. Our products and services include
(i) commercial and industrial loans to small and medium sized businesses, with a particular focus on businesses
operating in the healthcare industry, (ii) commercial real estate loans, (iii) private banking and wealth management
services for the owners and operators of our business clients and other high net worth individuals and (iv)
correspondent banking services to meet the needs of Tennessee’s smaller community banks. Our operations are
presently concentrated in the Nashville Metropolitan Statistical Area (“MSA”).
As of December 31, 2017, on a consolidated basis, we had total assets of $1.3 billion, total deposits of $1.1 billion,
total net loans of $934 million, and shareholders’ equity of $147 million.
Core Operating Principles
We operate our business in conformity with our core principles which are, in order of priority:
(cid:129)
(cid:129)
(cid:129)
Soundness - We strive to engage in safe and sound banking practices that preserve the asset quality of
our balance sheet and protect our deposit base and ensure we maintain capital levels that are considered
above “well capitalized” according to regulatory standards.
Profitability - We continuously seek to improve our core profits by growing our revenue faster than our
expenses in order to increase net income and improve our profitability metrics.
Strategic Growth - We seek to grow our total loans and deposits by leveraging our operating platform to
facilitate organic and acquisitive growth.
We have historically adhered to these core operating principles, and we intend to continue to emphasize the
importance of these principles to the conduct of our business.
Acquisitions
On July 31, 2012, our bank completed its acquisition of American Security, a Tennessee banking corporation
headquartered in Hendersonville, Tennessee. Our bank acquired all outstanding shares of common stock of
American Security for approximately $15.2 million in total consideration which was comprised of the issuance of
approximately 1.5 million shares of common stock of our bank. At the time of the acquisition, American Security
had two banking locations located in Sumner County, Tennessee. The operations of American Security are included
in CapStar Bank’s financial statements beginning on July 31, 2012.
On February 3, 2014, CapStar Bank completed its acquisition of Farmington Financial Group, LLC, a Tennessee
limited liability company headquartered in Nashville, Tennessee. Farmington primarily originates residential real
estate loans that are sold in the secondary market. The bank acquired all the assets and liabilities of Farmington for
approximately $6.4 million in total consideration which was comprised of $3.0 million in cash, 100,000 shares of
common stock of our bank and a five year earn-out based on pre-tax income. The operations of Farmington are
included in CapStar Bank’s financial statements beginning on February 3, 2014.
1
Our Products and Services
Loans
General Through our bank, we offer a broad range of commercial lending products to small and medium sized
businesses, the owners and operators of our business clients and other high net worth individuals. Our strategy is to
maintain a broadly diversified loan portfolio in terms of type of loan product and type of client and industries in
which our business clients are engaged.
Our commercial and industrial lending products include commercial loans, business term loans, equipment financing
and lines of credit to a diversified mix of small and medium sized businesses. We offer commercial real estate loans
that are collateralized by both owner-occupied and non-owner occupied properties, as well as interim construction
loans. As a general practice, we originate substantially all of our loans, and we limit the amount of participations we
purchase to loans originated by lead banks with which we have a close relationship and which share our credit
philosophies.
Our consumer lending products include residential first mortgage loans which are typically thereafter sold on the
secondary market. We offer second mortgage home equity mortgage loans and other consumer related loans such as
loans for automobile or other recreational vehicles, which we maintain on the Bank’s balance sheet. Additionally,
we offer lines of credit to facilitate investment opportunities for consumer clients whose financial characteristics
support the request.
We market our lending products and services to existing clients through our client service. We seek to attract new
lending clients through customized and creative lending solutions and competitive pricing. We have banking teams
that are specifically dedicated to our lines of business, including a team that is dedicated to the healthcare sector. We
believe our industry-specific knowledge, product and local market expertise and engagement increase our profile
within these lending verticals, enable us to identify, select and compete for qualified borrowers and attractive
financing projects and manage more effectively the potential risks of our loan portfolio.
Underwriting Disciplined underwriting is the foundation of our credit culture. We strive to adhere to thorough
underwriting standards and deliver customized and creative loan solutions in a responsive and timely manner.
Philosophically, we seek loans that are prudent and desirable, not just “doable.” In considering a loan, we
follow the underwriting principles in our loan and credit administration policies which include the following
requirements:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
receipt of certain financial information, such as financial statements, tax returns and credit reports, to
ensure that the potential borrower has sufficient recurring cash flow and liquidity to repay the loan;
determination that the structure of the loan matches the underlying purpose of and repayment source for
the loan, the potential borrower’s creditworthiness and the depreciable life of any collateral;
verification that the potential borrower has an adequate credit score;
consideration of the value, liquidity and marketability of the potential borrower’s assets and identifying
and evaluating all significant direct and contingent liabilities; and
determination and approval by the bank’s Asset Liability Management Committee (“ALCO”) of the
rates and fees associated with the potential loan.
Except in very limited circumstances in which substantial equity is present, our commercial and industrial and
owner-occupied commercial real estate loans are supported by personal guaranties from the principals of the
borrower. In addition, we require our non-owner occupied commercial real estate loans to be secured by well-
managed income producing property with adequate margins, supported by a history of profitable operations and
cash flows, and proven operating stability.
Our underwriting processes collaboratively engage our bankers, credit underwriters and portfolio managers in the
analysis of each loan request. We manage our credit risks by analyzing metrics related to our lines of business in
order to maintain a conservative and well-diversified loan portfolio reflective of our assessment of various
subsets within these lines of business. Based upon our aggregate exposure to any given borrower relationship, we
employ tiered review of loan originations that may involve senior credit officers, our Chief Credit Officer, our
bank’s Credit Committee or, ultimately, our full board of directors.
2
Concentrations We are a relationship-oriented, rather than a transaction-based, lender. Accordingly, substantially
all of our loans have been made to borrowers located or operating in the Nashville MSA. As of December 31, 2017,
approximately 85% of the loans in our loan portfolio (measured by dollar amount) were made to borrowers who live
or conduct business in the Nashville MSA, and a substantial portion of those loans are considered commercial and
industrial loans (including loans to businesses operating in the healthcare industry), commercial real estate loans
(including owner-occupied and non-owner occupied real estate), mortgage loans and construction loans. As such, a
substantial majority of our loan portfolio is dependent upon the economic environment of the Nashville MSA. We
do have a limited number of loans secured by properties located outside of the Nashville MSA, most of which are
made to borrowers who are well-known to us because they are headquartered or reside within the Nashville MSA.
In addition, we employ appropriate limits on our overall loan portfolio and requirements with respect to certain
types of lending. As a general practice, we operate with an internal guideline limiting loans to any single borrowing
relationship to a tiered amount based upon our internal risk rating. Many of our loans have been made to a small
number of borrowers, resulting in a concentration of large loans to certain borrowers. As of December 31, 2017, our
25 largest borrowing relationships accounted for approximately 23% of our total loan portfolio.
Credit Risk Management Managing credit risk is a process that involves the entire Company. Our strategy for
credit risk management includes the disciplined underwriting process described above, adherence to prudent
standards, and ongoing risk monitoring and review processes for all loan exposures. Our Chief Credit Officer
provides bank-wide credit oversight and regularly reviews the loan portfolio to ensure that the risk identification
processes are functioning properly and that our credit standards are followed. We periodically submit ourselves to
review by independent third parties to validate our internal oversight. We strive to identify potential problem loans
early in an effort to aggressively seek resolution of these situations before the loans become a loss, record any
necessary charge-offs promptly and maintain adequate allowance levels for probable loan losses inherent in the loan
portfolio.
Credit risk management involves a partnership between our lenders and our credit administration group with credit
approval processes requiring concurrence of the two. The members of our credit administration group primarily
focus their efforts on credit analysis, underwriting and monitoring new credits and providing management reporting
to executive management and our board of directors. Based upon size, emerging problem loans are assigned to our
Special Assets Group to mitigate the risk of loss. Executive management regularly reviews the status of the watch
list and classified assets portfolio as well as the larger credits in the portfolio. Our Special Assets Group is also
responsible for managing the collection and foreclosure process and the disposal of other real estate owned.
Deposits
Core deposits are our principal source of funds for use in lending and other general banking purposes. We solicit
core deposits through our relationship-driven team of dedicated and accessible bankers and through relationship-
focused marketing. We provide a full range of deposit products and services, including demand deposits, interest-
bearing transaction accounts, money market accounts, time and savings deposits, certificates of deposit and
CDARS® reciprocal products. Other than deposits obtained through the CDARS program, we do not rely on
brokered deposits as a meaningful source of funding.
Our ability to gather deposits is an important aspect of our business franchise, and we believe this is a significant
driver of our success. Our largest source of deposits is money market and savings accounts. Our transaction accounts
include checking and NOW accounts, which provide us with a source of fee income, as well as a low-cost source of
funds. Time accounts also provide us with a relatively stable and low-cost source of funding. Certificates of deposit
in excess of $100,000 are held primarily by clients in the Nashville MSA.
Deposit rates are reviewed regularly by senior management as we continuously seek to price our deposit products
and services competitively to promote core deposit growth. Our management believes that the rates that we offer are
competitive with those offered by other institutions in the Nashville MSA.
3
Correspondent Banking
We provide correspondent banking services to community banks located in the State of Tennessee. Services we
offer include settlement, Fed Funds lines of credit, depository products, wire transfer services, bank holding
company loans and loan participations on larger commercial and commercial real estate exposures. Correspondent
banking loans and deposits comprised approximately $22.8 million of our total loans and $153.0 million of our total
deposits as of December 31, 2017. We include the amount of total loans and total deposits from our correspondent
banking line of business in the amounts of our total loans and total deposits for our commercial and industrial line of
business. Loans made to community banks operating in the correspondent banking line of business comprised 6% of
commercial and industrial loans as of December 31, 2017. Deposits from community banks operating in the
correspondent banking line of business comprised 14% of total deposits as of December 31, 2017.
Correspondent banking provides a valuable funding source for the bank. In 2013 management identified a void in
the correspondent banking market due to the instability of larger correspondent banks. Other factors leading to the
expansion of correspondent banking included a need to diversify our funding base, the desire by many community
banks to do business with a Tennessee-based correspondent bank, the ability to recruit well-known and respected
talent for business development and risk management, and the ability to license a low cost proprietary settlement
platform.
Mortgage Banking
Our mortgage banking line of business generated $440.1 million in mortgage loan originations for the year ended
December 31, 2017. Mortgage loans are typically sold in the secondary market and are underwritten by the investor.
This line of business has provided the bank a source of noninterest income and referrals for other banking services
including home equity lines of credit and deposit products.
Other Services
Given client demand for increased convenience and account access, we offer a range of products and services,
including 24-hour telephone and online banking, direct deposit, mobile banking, safe deposit boxes, remote deposit
and cash management services for individuals and small and medium sized business. We also participate in a shared
network of automated teller machines and a debit card system that our customers are able to use throughout
Tennessee and other regions. In many cases, we reimburse our customer for any ATM fees that may be charged to
the customer.
Competition
The financial services industry is highly competitive. The Nashville MSA banking market consisted of 64 financial
institutions with over $57 billion in deposits as of June 30, 2017. We held the number 11 deposit market share
position at June 30, 2017 with 2.0% of the deposit market share. We compete for loans, deposits, and financial
services in the Nashville MSA. We compete directly with other bank and nonbank institutions located within our
market area, Internet-based banks, out-of-market banks, and bank holding companies that advertise in or otherwise
serve our market area, along with money market and mutual funds, brokerage houses, mortgage companies, and
insurance companies or other commercial entities that offer financial services products. Competition involves efforts
to retain current clients, obtain new loans and deposits, increase the scope and type of services offered, and offer
competitive interest rates paid on deposits and charged on loans. Many of our competitors enjoy competitive
advantages, including greater financial resources, a wider geographic presence, more accessible branch office
locations, the ability to offer additional services, more favorable pricing alternatives, and lower origination and
operating costs. Some of our competitors have been in business for a long time and have an established client base
and name recognition. We believe that our experienced leadership, efficient and scalable operating model,
personalized service and emphasis on attracting core deposits from our other product offerings enable us to
effectively compete in the communities in which we operate.
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Information and Technology
We continually adapt to the changing technological needs and wants of our clients by investing in our electronic
banking platform. We use a combination of online and mobile banking channels to attract and retain clients and
expand the convenience of banking with us. In most cases, our clients can initiate banking transactions from the
convenience of their personal computer or smart phone, reducing the number of in-branch visits necessary to
conduct routine banking transactions. The remote transactions available to our clients include remote image deposit,
bill payment, external and internal transfers, ACH origination and wire transfer. We believe that our investments in
technology and innovation are consistent with our clients’ needs and will support future migration of our clients’
transactions to these and other developing electronic banking channels.
Employees
As of December 31, 2017, we had 175 total employees. None of our employees are represented by any collective
bargaining unit or are parties to a collective bargaining agreement. We believe that our relations with our employees
are good.
SUPERVISION AND REGULATION
General
Insured banks, their holding companies and their affiliates are extensively regulated under federal and state law. As
a result, our growth and earnings performance and that of our subsidiaries may be affected not only by management
decisions and general economic conditions, but also by the requirements of federal and state statutes and by the
regulations and policies of various bank regulatory agencies, including the TDFI, the Board of Governors of the
Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the
Consumer Financial Protection Bureau (“CFPB”). Furthermore, tax laws administered by the Internal Revenue
Service (“IRS”) and state taxing authorities, accounting rules developed by the Financial Accounting Standards
Board (“FASB”), securities laws administered by the Securities and Exchange Commission (“SEC”) and state
securities authorities, anti-money laundering laws enforced by the U.S. Department of the Treasury and mortgage
related rules, including with respect to loan securitization and servicing by the U.S. Department of Housing and
Urban Development and agencies such as Ginnie Mae and Freddie Mac, have an impact on our business. The effect
of these statutes, regulations, regulatory policies and rules are significant to our operations and results and those of
our bank, and the nature and extent of future legislative, regulatory or other changes affecting financial institutions
are impossible to predict with any certainty.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the
operations of insured banks, their holding companies and affiliates that is intended primarily for the protection of the
depositors of banks, rather than their shareholders. These federal and state laws, and the regulations of the bank
regulatory agencies issued under them, affect, among other things, the scope of business, the kinds and amounts of
investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of
collateral for loans, the establishment of branches, the ability to merge, consolidate and enter into acquisitions with
other companies, dealings with insiders and affiliates and the payment of dividends.
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by
their respective regulatory agencies, which results in examination reports and ratings that, while not publicly
available, can impact the conduct and growth of their businesses. These examinations consider not only compliance
with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and
performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion
to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among
other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise
inconsistent with laws and regulations or with the supervisory policies of these agencies.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to us
and our bank. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate
all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the
particular statutory and regulatory provision.
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Bank Holding Company Regulation
Since we own all of the capital stock of our bank, we are a bank holding company under the Bank Holding
Company Act of 1956, as amended (“BHC Act”). As a result, we are primarily subject to the supervision,
examination and reporting requirements of the BHC Act and the regulations of the Federal Reserve.
Acquisition of Banks
The BHC Act requires every bank holding company to obtain the Federal Reserve’s prior approval before:
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acquiring direct or indirect ownership or control of any voting shares of any bank if, after the
acquisition, the bank holding company will, directly or indirectly, own or control 5% or more of the
bank’s voting shares;
acquiring all or substantially all of the assets of any bank; or
merging or consolidating with any other bank holding company.
Additionally, the BHC Act provides that the Federal Reserve may not approve any of the above transactions if such
transaction would result in or tend to create a monopoly or substantially lessen competition or otherwise function as
a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the
public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also
required to consider the financial and managerial resources and future prospects of the bank holding companies and
banks concerned and the convenience and needs of the community to be served. The Federal Reserve’s
consideration of financial resources includes a focus on capital adequacy, which is discussed in the section titled
“Bank Regulation and Supervision—Capital Adequacy.” The Federal Reserve also considers the effectiveness of the
institutions in combating money laundering, including a review of the anti-money laundering program of the
acquiring bank holding company and the anti-money laundering compliance records of a bank to be acquired as part
of the transaction. Finally, the Federal Reserve takes into consideration the extent to which the proposed transaction
would result in greater or more concentrated risks to the stability of the U.S. banking or financial system.
Under the BHC Act, if well-capitalized and well-managed, we or any other bank holding company located in
Tennessee may purchase a bank located outside of Tennessee without regard to whether such transaction is
prohibited under state law. Conversely, a well-capitalized and well-managed bank holding company located outside
of Tennessee may purchase a bank located inside Tennessee without regard to whether such transaction is prohibited
under state law. In each case, however, restrictions may be placed under state law on the acquisition of a bank that
has only been in existence for a limited amount of time or will result in concentrations of deposits exceeding limits
specified by statute. For example, Tennessee law currently prohibits a bank holding company from acquiring control
of a Tennessee-based financial institution until the target financial institution has been in operation for at least three
years.
Change in Bank Control
Subject to various exceptions, the BHC Act and the Change in Bank Control Act, together with related regulations,
require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company.
Under a rebuttable presumption established by the Federal Reserve pursuant to the Change in Bank Control Act, the
acquisition of 10% or more of a class of voting stock of a bank holding company would constitute acquisition of
“control” of the bank holding company if no other person will own, control, or hold the power to vote a greater
percentage of that class of voting stock immediately after the transaction or the bank holding company has registered
securities under the Exchange Act. In addition, any person or group of persons acting in concert must obtain the
approval of the Federal Reserve under the BHC Act before acquiring 25% (or 5% in the case of an acquirer that is
already a bank holding company) or more of the outstanding voting stock of a bank holding company, the right to
control in any manner the election of a majority of the company’s directors, or otherwise obtaining control or a
“controlling influence” over the bank holding company.
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Permitted Activities
Under the BHC Act, a bank holding company is generally permitted to engage in or acquire direct or indirect control
of the voting shares of any company engaged in the following activities:
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banking or managing or controlling banks; and
any activity that the Federal Reserve determines to be so closely related to banking as to be a proper
incident to the business of banking.
Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the
business of banking include:
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factoring accounts receivable;
making, acquiring, brokering or servicing loans and usual related activities in connection with the
foregoing;
leasing personal or real property under certain conditions;
operating a non-bank depository institution, such as a savings association;
engaging in trust company functions in a manner authorized by state law;
financial and investment advisory activities;
discount securities brokerage activities;
underwriting and dealing in government obligations and money market instruments;
providing specified management consulting and counseling activities;
performing selected data processing services and support services;
acting as an agent or broker in selling credit life insurance and other types of insurance in connection
with credit transactions; and
performing selected insurance underwriting activities.
The Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to
terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding
company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or
stability of it or any of its bank subsidiaries.
Support of Subsidiary Institutions
The Federal Deposit Insurance Act and Federal Reserve policy require a bank holding company to serve as a source
of financial and managerial strength to its bank subsidiaries. As a result of a bank holding company’s source of
strength obligation, a bank holding company may be required to provide funds to a bank subsidiary in the form of
subordinate capital or other instruments which qualify as capital under bank regulatory rules. Any loans from the
holding company to such subsidiary banks likely would be unsecured and subordinated to such bank’s depositors
and perhaps to other creditors of the bank.
Repurchase or Redemption of Securities
A bank holding company is generally required to give the Federal Reserve prior written notice of any purchase or
redemption of its own then outstanding equity securities if the gross consideration for the purchase or redemption,
when combined with the net consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may disapprove
such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or
would violate any law, regulation, Federal Reserve order or directive, or any condition imposed by, or written
agreement with, the Federal Reserve. The Federal Reserve has adopted an exception to this approval requirement for
well-capitalized bank holding companies that meet certain conditions.
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Bank Regulation and Supervision
Our bank is subject to extensive federal and state banking laws and regulations that impose restrictions on and
provide for general regulatory oversight of the operations of our bank. These laws and regulations are generally
intended to protect the safety and soundness of our bank and our bank’s depositors, rather than our shareholders.
The following discussion describes the material elements of the regulatory framework that applies to our bank.
Since our bank is a commercial bank chartered under the laws of the state of Tennessee and is a member of the
Federal Reserve System, it is primarily subject to the supervision, examination and reporting requirements of the
Federal Reserve and the TDFI. The Federal Reserve and the TDFI regularly examine our bank’s operations and have
the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both
regulatory agencies have the power to take enforcement action to prevent the development or continuance of unsafe
or unsound banking practices or other violations of law. Our bank’s deposits are insured by the FDIC to the
maximum extent provided by law. Our bank is also subject to numerous federal and state statutes and regulations
that affect its business, activities and operations.
Branching
Under current Tennessee law, our bank may open branch offices throughout Tennessee with the prior approval of, or
prior notice to, the TDFI and the Federal Reserve. In addition, with prior regulatory approval, our bank may acquire
branches of existing banks located in Tennessee. Under federal law, our bank may establish branch offices with the
prior approval of the Federal Reserve. While prior law imposed various limits on the ability of banks to establish
new branches in states other than their home state, the Dodd-Frank Act allows a bank to branch into a new state by
setting up a new branch if, under the laws of the state in which the branch is to be located, a state bank chartered by
that state would be permitted to establish the branch. This makes it much simpler for banks to open de novo
branches in other states.
FDIC Insurance and Other Assessments
The Bank pays deposit insurance assessments to the Deposit Insurance Fund, which is determined through a risk-
based assessment system. The Bank’s deposit accounts are currently insured by the Deposit Insurance Fund,
generally up to a maximum of $250,000 per separately insured depositor. The Bank pays assessments to the FDIC
for such deposit insurance. Under the current assessment system, the FDIC assigns an institution to a risk category
based on the institution’s most recent supervisory and capital evaluations, which are designed to measure risk.
Under the FDIA, the FDIC may terminate a bank’s deposit insurance upon a finding that the institution has engaged
in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, agreement or condition imposed by the FDIC.
In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on
bonds issued by the Financing Corporation, or FICO, a federal government corporation established to recapitalize
the predecessor to the Savings Association Insurance Fund. FICO assessments are set quarterly and the assessment
rate was 0.560 (annual) basis points in the first quarter of 2017 and 0.540 basis points during the second, third and
fourth quarters of 2017. These assessments will continue until the FICO bonds mature in 2018 through 2019.
Community Reinvestment Act
The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of financial institutions
within their respective jurisdictions, the federal banking agencies will evaluate the record of each financial
institution in meeting the needs of its local community, including low- and moderate-income neighborhoods. Our
bank’s record of performance under the CRA is publicly available. A bank’s CRA performance is also considered in
evaluating applications seeking approval for mergers, acquisitions, and new offices or facilities. Failure to
adequately meet these criteria could result in additional requirements and limitations being imposed on the bank.
Additionally, we must publicly disclose the terms of certain CRA-related agreements. At December 31, 2017 the
Bank had a CRA rating of “Satisfactory.”
Interest Rate Limitations
Interest and other charges collected or contracted for by our bank are subject to applicable state usury laws and
federal laws concerning interest rates.
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Federal Laws Applicable to Consumer Credit and Deposit Transactions
Our bank’s loan and deposit operations are subject to a number of federal consumer protection laws, including:
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the Federal Truth in Lending Act, governing disclosures of credit terms to consumer borrowers;
the Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the
public and public officials to determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the communities it serves;
the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, color, religion,
national origin, sex, marital status or certain other prohibited factors in all aspects of credit transactions;
the Fair Credit Reporting Act, or FCRA, governing the use and provision of information to credit
reporting agencies;
the Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected
by debt collectors;
the Service Members Civil Relief Act, governing the repayment terms of, and property rights
underlying, secured obligations of persons in military service;
the Gramm-Leach-Bliley Act, governing the disclosure and safeguarding of sensitive non-public
personal information of our clients;
the Right to Financial Privacy Act, imposing a duty to maintain confidentiality of consumer financial
records and prescribes procedures for complying with administrative subpoenas of financial records;
the Electronic Funds Transfer Act governing automatic deposits to and withdrawals from deposit
accounts and clients’ rights and liabilities arising from the use of automated teller machines and other
electronic banking services; and
the rules and regulations of the CFPB and various federal agencies charged with the responsibility of
implementing these federal laws.
Capital Adequacy
In July 2013, the federal banking regulators, in response to the statutory requirements of the Dodd-Frank Act,
adopted regulations implementing the Basel Capital Adequacy Accord, or Basel III, which had been approved by the
Basel member central bank governors in 2010 as an agreement among the countries’ central banks and bank
regulators on the amount of capital banks and their holding companies must maintain as a cushion against losses and
insolvency. The U.S. Basel III rule’s minimum capital to risk-weighted assets, or RWA, requirements are a common
equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%. The minimum
leverage ratio (Tier 1 capital to total assets) is 4.0%. The rule also changes the definition of capital, mainly by
adopting stricter eligibility criteria for regulatory capital instruments, and new constraints on the inclusion of
minority interests, mortgage-servicing assets, deferred tax assets, and certain investments in the capital of
unconsolidated financial institutions. In addition, the U.S. Basel III rule requires that most regulatory capital
deductions be made from common equity Tier 1 capital.
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Under the U.S. Basel III rule, in order to avoid limitations on capital distributions, including dividend payments and
certain discretionary bonus payments to executive officers, a banking organization must maintain a capital
conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements.
The buffer is measured relative to RWA. Phase-in of the capital conservation buffer requirements began on January
1, 2016, and the requirements will be fully phased in on January 1, 2019. A banking organization with a buffer
greater than 2.5% once the capital conservation buffer is fully phased in would not be subject to limits on capital
distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5%
would be subject to increasingly stringent limitations as the buffer approaches zero. A banking organization also
would be prohibited from making distributions or discretionary bonus payments during any quarter if its eligible
retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the
beginning of the quarter. Effectively, the Basel III framework will require us to meet minimum risk-based capital
ratios of (i) 7% for common equity Tier 1 capital, (ii) 8.5% Tier 1 capital, and (iii) 10.5% total capital, once it is
fully phased in. The eligible retained income of a banking organization is defined as its net income for the four
calendar quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, net
of any distributions and associated tax effects not already reflected in net income. When the rule is fully phased in,
the minimum capital requirements plus the capital conservation buffer will exceed the prompt corrective action, or
PCA, well-capitalized thresholds.
Generally, banking organizations of our size became subject to the U.S. Basel III rule on January 1, 2015, while the
capital conservation buffer and the deductions from common equity Tier 1 capital will phase in over time. Failure to
meet statutorily mandated capital guidelines or more restrictive ratios separately established for a banking institution
could subject the institution to a variety of enforcement remedies available to federal regulatory authorities,
including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on
accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its
deposits, and other restrictions on its business.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) establishes a system of “prompt
corrective action” (“PCA”) to resolve the problems of undercapitalized insured depository institutions. Under this
system, the federal banking regulators have established five capital categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) into which all insured
depository institutions are placed. The federal banking agencies have specified by regulation the relevant capital
thresholds and other qualitative requirements for each of those categories. For an insured depository institution to be
“well capitalized” under the PCA framework, it must have a common equity Tier 1 capital ratio of 6.5%, Tier 1
capital ratio of 8.0%, a total capital ratio of 10.0%, and a leverage ratio of 5.0%, and must not be subject to any
written agreement, order or capital directive, or prompt corrective action directive issued by its primary federal
regulator to meet and maintain a specific capital level for any capital measure. At December 31, 2017, our bank
qualified for the well capitalized category.
Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take
other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the
action depends upon the capital category in which the institution is placed. For example, institutions in all three
undercapitalized categories are automatically restricted from paying distributions and management fees, whereas
only an institution that is significantly undercapitalized or critically undercapitalized is restricted in its compensation
paid to senior executive officers. Generally, subject to a narrow exception, the banking regulator must appoint a
receiver or conservator for an institution that is critically undercapitalized.
An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is
required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding
company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various
limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of
(i) 5% of an undercapitalized subsidiary’s assets at the time it became undercapitalized and (ii) the amount required
to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing
its average total assets, making acquisitions, establishing any branches or engaging in any new line of business,
except under an accepted capital restoration plan or with Federal Reserve approval.
The regulations also establish procedures for downgrading an institution to a lower capital category based on
supervisory factors other than capital.
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Liquidity
Financial institutions are subject to significant regulatory scrutiny regarding their liquidity positions. This scrutiny
has increased during recent years, as the economic downturn that began in the late 2000s negatively affected the
liquidity of many financial institutions. Various bank regulatory publications, including Federal Reserve SR 10-6
(Funding and Liquidity Risk Management) and FDIC Financial Institution Letter FIL-84-2008 (Liquidity Risk
Management), address the identification, measurement, monitoring and control of funding and liquidity risk by
financial institutions.
Any increased liquidity requirements applied to us or our bank generally would be expected to cause us or our bank
to invest assets more conservatively—and therefore at lower yields—than we and our bank otherwise might invest.
Such lower-yield investments likely would reduce our revenue stream, and in turn our earnings potential.
Payment of Dividends
We are a legal entity separate and distinct from our bank. Our principal source of cash flow, including cash flow to
pay dividends to our shareholders, is dividends our bank pays to us as our bank’s sole shareholder. Statutory and
regulatory limitations apply to our bank’s payment of dividends to us as well as to our payment of dividends to our
shareholders. The requirement that a bank holding company must serve as a source of strength to its subsidiary
banks also results in the position of the Federal Reserve that a bank holding company should not maintain a level of
cash dividends to its shareholders that places undue pressure on the capital of its bank subsidiaries or that can be
funded only through additional borrowings or other arrangements that may undermine the bank holding company’s
ability to serve as such a source of strength. Our ability to pay dividends is also subject to the provisions of
Tennessee corporate law which prevents payment of dividends if, after giving effect to such payment, we would not
be able to pay our debts as they become due in the usual course of business or our total assets would be less than the
sum of our total liabilities plus any amounts needed to satisfy any preferential rights if we were dissolving. In
addition, in deciding whether or not to declare a dividend of any particular size, our board of directors must consider
our and our bank’s current and prospective capital, liquidity, and other needs.
The TDFI also regulates our bank’s dividend payments. Under Tennessee law, a state-chartered bank may not pay a
dividend without prior approval of the Commissioner of the TDFI if the total of all dividends declared by its board
of directors in any calendar year will exceed (i) the total of its retained net income for that year, plus (ii) its retained
net income for the preceding two years.
Our bank’s payment of dividends may also be affected or limited by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying
dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound
banking practice. Under FDICIA, a depository institution may not pay any dividends if payment would cause it to
become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy
statements providing that bank holding companies and insured banks should generally only pay dividends out of
current operating earnings.
Restrictions on Transactions with Affiliates and Insiders
Our bank is subject to Section 23A of the Federal Reserve Act, which places limits on the amount of the bank’s
transactions with its affiliates.
Subject to various exceptions, the total amount of the bank’s transactions with affiliates is limited in amount, as to
any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital
and surplus. In addition to the limitation on the amount of these transactions, transactions with affiliates also must
meet specified collateral requirements and safety and soundness requirements. Our bank must also comply with
provisions prohibiting the acquisition of low-quality assets from an affiliate.
Our bank is also subject to Section 23B of the Federal Reserve Act, which, among other things, prohibits a bank
from engaging in transactions with affiliates, as well as other types of transactions set forth in Section 23B, unless
the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the
time for comparable transactions with nonaffiliated companies.
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Our bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal
shareholders and their related interests. These extensions of credit (i) must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for comparable transactions between the bank
and third parties, and (ii) must not involve more than the normal risk of repayment or present other unfavorable
features. There are also individual and aggregate limitations on loans to insiders and their related interests. The
aggregate amount of insider loans generally cannot exceed the institution’s total unimpaired capital and surplus.
Insiders and banks are subject to enforcement actions for knowingly entering into insider loans in violation of
applicable restrictions.
Single Borrower Credit Limits
Under Tennessee law, total loans and extensions of credit to a borrower may not exceed 15% of our bank’s capital,
surplus and undivided profits. However, such loans may be in excess of that percentage, but not above 25%, if each
loan in excess of 15% is first submitted to and approved in advance in writing by the board of directors and a record
is kept of such written approval and reported to the board of directors quarterly.
Commercial Real Estate Concentration Limits
In December 2006, the federal banking regulators issued guidance entitled “Concentrations in Commercial Real
Estate Lending, Sound Risk Management Practices” to address increased concentrations in commercial real estate,
or CRE, loans. In addition, in December 2015, the federal bank agencies issued additional guidance entitled
“Statement on Prudent Risk Management for Commercial Real Estate Lending.” Together, these guidelines describe
the criteria the agencies will use as indicators to identify institutions potentially exposed to CRE concentration risk.
An institution that has (i) experienced rapid growth in CRE lending, (ii) notable exposure to a specific type of CRE,
(iii) total reported loans for construction, land development, and other land representing 100% or more of the
institution’s capital, or (iv) total CRE loans representing 300% or more of the institution’s capital, and the
outstanding balance of the institutions CRE portfolio has increased by 50% or more in the prior 36 months, may be
identified for further supervisory analysis of the level and nature of its CRE concentration risk. As of December 31,
2017, our bank’s total CRE loans represented 245% of its capital, thus falling beneath the 300% target.
Privacy
Financial institutions are required to disclose their policies for collecting and protecting non-public personal
information of their clients. Clients generally may prevent financial institutions from sharing non-public personal
information with nonaffiliated third parties except under certain circumstances, such as the processing of
transactions requested by the consumer or when the financial institution is jointly offering a product or service with
a nonaffiliated financial institution. Additionally, financial institutions generally are prohibited from disclosing
consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other
marketing to consumers.
Consumer Credit Reporting
The Fair Credit Reporting Act (“FCRA”) imposes, among other things:
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requirements for financial institutions to develop policies and procedures to identify potential identity
theft and, upon the request of a consumer, to place a fraud alert in the consumer’s credit file stating that
the consumer may be the victim of identity theft or other fraud;
requirements for entities that furnish information to consumer reporting agencies to implement
procedures and policies regarding the accuracy and integrity of the furnished information and regarding
the correction of previously furnished information that is later determined to be inaccurate;
requirements for mortgage lenders to disclose credit scores to consumers in certain circumstances; and
limitations on the ability of a business that receives consumer information from an affiliate to use that
information for marketing purposes.
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Anti-Terrorism and Money Laundering Legislation
Our bank is subject to the Bank Secrecy Act and USA Patriot Act. These statutes and related rules and regulations
impose requirements and limitations on specified financial transactions and accounts and other relationships
intended to guard against money laundering and terrorism financing. Our bank has established an anti-money
laundering program pursuant to the Bank Secrecy Act and customer identification program pursuant to the USA
Patriot Act. The bank also maintains records of cash purchases of negotiable instruments, files reports of certain
cash transactions exceeding $10,000 (daily aggregate amount), and reports suspicious activity that might signify
money laundering, tax evasion, or other criminal activities pursuant to the Bank Secrecy Act. Our bank otherwise
has implemented policies and procedures to comply with the foregoing requirements.
Overdraft Fees
Federal Reserve Regulation E restricts banks’ abilities to charge overdraft fees. The rule prohibits financial
institutions from charging fees for paying overdrafts on ATM and one-time debit card transactions, unless a
consumer consents, or opts in, to the overdraft service for those types of transactions.
The Dodd-Frank Act
As final rules and regulations implementing the Dodd-Frank Act have been adopted, this new law has significantly
changed and is significantly changing the bank regulatory framework and affected the lending, deposit, investment,
trading and operating activities of banks and their holding companies. The Dodd-Frank Act requires various federal
agencies to adopt a broad range of new implementing rules and regulations and to prepare numerous studies and
reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and
regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act will depend on the
rules and regulations that implement it.
A number of the effects of the Dodd-Frank Act are described or otherwise accounted for in various parts of this
“Supervision and Regulation” section. The following items provide a brief description of certain other provisions of
the Dodd-Frank Act that may be relevant to us and our bank.
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The Dodd-Frank Act created the CFPB with broad powers to supervise and enforce consumer financial
protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection
laws that apply to all banks, including the authority to prohibit “unfair, deceptive or abusive” acts and
practices. The Bureau has examination and enforcement authority with respect to enumerated consumer
financial protection laws over all banks with more than $10 billion in assets. Institutions with less than
$10 billion in assets will continue to be examined for compliance with consumer financial protection
laws by their primary bank regulator.
The Dodd-Frank Act imposed new requirements regarding the origination and servicing of residential
mortgage loans. The law created a variety of new consumer protections, including limitations, subject to
exceptions, on the manner by which loan originators may be compensated and an obligation on the part
of lenders to verify a borrower’s “ability to repay” a residential mortgage loan. Final rules implementing
these latter statutory requirements became effective in 2014.
The Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits effective
one year after the date of its enactment, thus allowing businesses to have interest-bearing checking
accounts. Depending on competitive responses, this significant change to existing law could have an
adverse impact on our interest expense.
The Dodd-Frank Act addresses many investor protection, corporate governance and executive
compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act (i)
requires publicly traded companies to give shareholders a non-binding vote on executive compensation
and golden parachute payments; (ii) enhances independence requirements for compensation committee
members; (iii) requires national securities exchanges to require listed companies to adopt incentive-
based compensation clawback policies for executive officers; (iv) authorizes the SEC to promulgate
rules that would allow shareholders to nominate their own candidates using a company’s proxy
materials; and (v) directs the federal banking regulators to issue rules prohibiting incentive
compensation that encourages inappropriate risks.
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As noted above, many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several
years, making it difficult to anticipate the overall financial impact on us. However, we expect compliance with the
Dodd-Frank Act and its implementing regulations will result in additional operating and compliance costs that could
have a material adverse effect on our business, financial condition and results of operations. In addition, on February
3, 2017, President Trump signed an executive order calling for his administration to review existing U.S. financial
laws and regulations, including the Dodd-Frank Act. At this time, it is unclear if this executive order will result in
any material changes to current laws and regulations applicable to us.
The Volcker Rule
On December 10, 2013, five U.S. financial regulators, including the Federal Reserve, adopted a final rule
implementing the “Volcker Rule.” The Volcker Rule was created by Section 619 of the Dodd-Frank Act and
prohibits “banking entities” from engaging in “proprietary trading.” Banking entities also are prohibited from
sponsoring or investing in private equity or hedge funds, or extending credit to or engaging in other covered
transactions with affiliated private equity or hedge funds. The fundamental prohibitions of the Volcker Rule
generally apply to banking entities of any size, including us, the bank and any other “affiliate” under the BHC Act.
Limitations on Incentive Compensation
In April 2016, the Federal Reserve and other federal financial agencies re-proposed restrictions on incentive-based
compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1 billion or more in
total consolidated assets. For institutions with at least $1 billion but less than $50 billion in total consolidated assets,
such as the Company and our bank, the proposal would impose principles-based restrictions that are broadly
consistent with existing interagency guidance on incentive-based compensation. Such institutions would be
prohibited from entering into incentive compensation arrangements that encourage inappropriate risks by the
institution (1) by providing an executive officer, employee, director, or principal shareholder with excessive
compensation, fees, or benefits, or (2) that could lead to material financial loss to the institution. The proposal would
also impose certain governance and recordkeeping requirements on institutions of the Company’s and our bank’s
size. The Federal Reserve would reserve the authority to impose more stringent requirements on institutions of the
Company’s and our bank’s size. We are evaluating the expected impact of the proposal on our business.
U.S. Tax Reform
On December 22, 2017, Public Law 115-97, informally referred to as the Tax Cuts and Jobs Act (the “Tax Reform
Act”) was enacted into law. The Tax Reform Act provides for significant changes to the U.S. tax code that impact
businesses. Effective January 1, 2018, the Tax Reform Act reduces the U.S. federal tax rate for corporations from
35% to 21% for U.S. taxable income and requires a one-time remeasurement of deferred taxes to reflect their value
at a lower tax rate of 21%. The Tax Reform Act includes other changes, including, but not limited to, a limitation of
the deduction for net operating losses, elimination of net operating loss carrybacks, immediate deductions for certain
new investments instead of deductions for depreciation expense over time, additional limitations on the deductibility
of executive compensation and limitations on the deductibility of interest. As a result of the Tax Reform Act, we
recorded a $3.56 million increase in income tax expense for 2017. The effects of the Tax Reform Act on the
Company are still being evaluated.
AVAILABLE INFORMATION
We file reports with the SEC including Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and proxy statements, as well as any amendments to those reports. The public may read and
copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC
20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-
800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC at http://www.sec.gov. Our Annual Reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to section 13(a) or 15(d) of the Exchange Act are also accessible at no cost on our website at
http://www.ir.capstarbank.com after they are electronically filed with the SEC. Reference to our website does not
constitute incorporation by reference of the information contained on the website and should not be considered part
of this Report.
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ITEM 1A. RISK FACTORS
We are subject to numerous risks, and the material risks that management believe affect our assets, business, cash
flow, condition (financial or otherwise), liquidity, prospects and results of operations are described below. Many of
these risks are beyond our control, though efforts are made to manage those risks while optimizing financial and
operational results. You should carefully read and consider the following risks factors. The occurrence of any of
the following risks, as well as risks of which we are currently unaware or currently deem immaterial, could
materially and adversely affect our assets, business, cash flow, condition (financial or otherwise), liquidity,
prospects and results of operations. As a result, the trading price of shares of our common stock could decline and
you could lose all or part of your investment. In addition, the following risks and other information in this Report
or incorporated into this Report by reference, including our Consolidated Financial Statements and related notes
and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” should be
carefully considered before investing in shares of our common stock.
Some statements in the following risk factors constitute forward-looking statements. Please refer to the section
entitled “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this Report.
Risks Related To Our Business
As a business operating in the financial services industry, our business and operations may be adversely affected
in numerous and complex ways by weak economic conditions.
Our business and operations, which primarily consist of lending money to clients in the form of loans, borrowing
money from clients in the form of deposits and investing in securities, are sensitive to general business and
economic conditions in the United States. If the U.S. economy weakens, our growth and profitability from our
lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking
process, the medium- and long-term fiscal outlook of the federal government, and future tax rates is a concern for
businesses, consumers and investors in the United States.
Weak economic conditions are characterized by numerous factors, including deflation, fluctuations in debt and
equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for mortgage loans,
increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price
declines and lower home sales and commercial activity. The current economic environment is also characterized by
interest rates at near historically low levels, which impacts our ability to attract deposits and to generate attractive
earnings through our loan and investment portfolios. All of these factors can individually or in the aggregate be
detrimental to our business, and the interplay between these factors can be complex and unpredictable. Adverse
economic conditions could have a material adverse effect on our assets, business, cash flow, condition (financial or
otherwise), liquidity, prospects and results of operations.
Our business and operations are concentrated in state of Tennessee generally and the Nashville MSA more
specifically, and we are more sensitive than our more geographically diversified competitors to adverse changes
in the local economy.
Unlike with many of our larger competitors that maintain significant operations located outside our market area,
substantially all of our clients are individuals and businesses located and doing business in the Nashville MSA. As
of December 31, 2017, approximately 85% of the loans in our loan portfolio (measured by dollar amount) were
made to borrowers who live or conduct business in the Nashville MSA. Therefore, our success will depend upon the
general economic conditions in this area, which we cannot predict with certainty. As a result, our operations and
profitability may be more adversely affected by a local economic downturn in the Nashville MSA than those of
larger, more geographically diverse competitors. For example, the Nashville economy is particularly sensitive to
changes in the healthcare service, music and entertainment and hospitality and tourism industries, among others. A
downturn in these industries or in the local economy generally could make it more difficult for our borrowers to
repay their loans and may lead to loan losses that are not offset by operations in other markets; it may also reduce
the ability of depositors to make or maintain deposits with us. For these reasons, any regional or local economic
downturn that affects the state of Tennessee generally and the Nashville MSA specifically, or existing or prospective
borrowers or depositors in the Nashville MSA could have a material adverse effect on our assets, business, cash
flow, condition (financial or otherwise), liquidity, prospects and results of operations.
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From time to time, our bank may provide financing to clients who or that have companies or properties located
outside the Nashville MSA or the state of Tennessee. In such cases, we would face similar local market risk in those
communities for these clients.
Competition from financial institutions and other financial service providers may adversely affect our
profitability.
The banking business is highly competitive, and we experience competition in our market from many other financial
institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking
firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and
other mutual funds, as well as other community banks and super-regional and national financial institutions that
operate offices in our service area. These competitors often have far greater resources than we do and are able to
conduct more intensive and broader-based promotional efforts to reach both commercial and individual clients.
We compete with these other financial institutions both in attracting deposits and in making loans. In addition, we
must attract our client base from other existing financial institutions and from new residents. We expect competition
to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of
consolidation in the financial services industry. Our profitability depends upon our continued ability to successfully
compete with an array of financial institutions in our service area.
Our ability to compete successfully will depend on a number of factors, including, among other things:
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our ability to recruit and retain experienced and talented bankers at competitive compensation levels;
our ability to build and maintain long-term client relationships while ensuring high ethical standards and
safe and sound banking practices;
the scope, relevance and pricing of products and services that we offer;
client satisfaction with our products and services;
industry and general economic trends; and
our ability to keep pace with technological advances and to invest in new technology.
Increased competition could require us to increase the rates that we pay on deposits or lower the rates that we offer
on loans, which could reduce our profitability. We derive a substantial majority of our business from the Nashville
MSA. Our failure to compete effectively in our market could restrain our growth or cause us to lose market share,
which could have a material adverse effect on our assets, business, cash flow, condition (financial or otherwise),
liquidity, prospects and results of operations.
We are dependent on the services of our management team and board of directors, and the unexpected loss of key
personnel or directors may adversely affect our business and operations.
We are led by an experienced core management team with substantial experience in the markets that we serve, and
our operating strategy focuses on providing products and services through long-term relationship managers and
ensuring that our largest clients have relationships with our senior management team. Accordingly, our success
depends in large part on the performance of these key personnel, as well as on our ability to attract, motivate and
retain highly qualified senior and middle management. Competition for employees is intense, and the process of
locating key personnel with the combination of skills and attributes required to execute our business plan may be
lengthy. If any of our executive officers, other key personnel, or directors leaves us or our bank, our operations may
be adversely affected. While we have employment agreements containing non-competition provisions with many of
our key personnel, if any of such personnel leaves his or her position for any reason, our financial condition and
results of operations may suffer because of his or her skills, knowledge of our market, years of industry experience
and the difficulty of promptly finding qualified personnel to replace him or her. Additionally, our directors’
community involvement and diverse and extensive local business relationships are important to our success.
Our business strategy includes the continuation of our growth plans, and we could be negatively affected if we
fail to grow or fail to manage our growth effectively.
We intend to continue pursuing our growth strategy for our business through organic growth of our loan and deposit
portfolio as well as through strategic acquisitions. Our prospects must be considered in light of the risks, expenses
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and difficulties that can be encountered by financial service companies in rapid growth stages, which include the
risks associated with the following:
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maintaining loan quality;
maintaining adequate management personnel and information systems to oversee such growth;
maintaining adequate control and compliance functions;
obtaining regulatory approvals with respect to acquisitions;
entry into new markets, industries, and product areas; and
securing capital and liquidity needed to support anticipated growth.
We may not be able to expand our presence in our existing market or new markets. Our ability to grow successfully
will depend on a variety of factors, including the continued availability of desirable business opportunities, the
competitive responses from other financial institutions in our market areas and our ability to manage our growth.
Failure to manage our growth effectively could adversely affect our ability to successfully implement our business
strategy, which could have a material adverse effect on our assets, business, cash flow, condition (financial or
otherwise), liquidity, prospects and results of operations.
As a bank that focuses on building comprehensive banking relationships with clients, our reputation is critical to
our business, and damage to it could have a material adverse effect on us.
A key differentiating factor for our business is the strong brand we are building in the Nashville MSA market.
Through our branding, we communicate to the market about our company and our service offerings. Maintaining a
positive reputation is critical to our attracting and retaining clients and employees. Adverse perceptions of us could
make it more difficult for us to execute on our strategy. Harm to our reputation can arise from many sources,
including actual or perceived employee misconduct, misconduct by our outsourced service providers or other
counterparties, litigation or regulatory actions, our failure to meet our standards of service and quality and
compliance failures. Negative publicity regarding us or our bank, whether or not accurate, may damage our
reputation, which could have a material adverse effect on our assets, business, cash flow, condition (financial or
otherwise), liquidity, prospects and results of operations.
We target small and medium sized businesses as loan clients, who may have greater credit risk than larger
borrowers.
We target small and medium sized businesses as loan clients. Because of their size, these borrowers may be less able
to withstand competitive, economic or financial pressures than larger borrowers in periods of economic weakness. If
loan losses occur at a level where the allowance for loan losses is not sufficient to cover actual loan losses, our
earnings will decrease.
Our concentration of large loans to a limited number of borrowers may increase our credit risk.
Our growth over the last several years has been partially attributable to our ability to originate and retain large loans.
In addition to regulatory limits to which our bank is subject, we have established an internal policy limiting loans to
one borrower, principal or guarantor based on “total exposure,” which represents the aggregate exposure of
economically related borrowers for approval purposes; loans in excess of our internal limit require acknowledgment
by our bank’s full board of directors. Many of these loans have been made to a small number of borrowers, resulting
in a concentration of large loans to certain borrowers. As of December 31, 2017, our 25 largest borrowing
relationships accounted for approximately 23% of our total loan portfolio. Along with other risks inherent in these
loans, such as the deterioration of the underlying businesses or property securing these loans, this high concentration
of borrowers presents a risk to our lending operations. If any one of these borrowers becomes unable to repay its
loan obligations as a result of economic or market conditions, or personal circumstances, such as divorce or death,
our non-accrual loans and our allowance for loan losses could increase significantly, which could have a material
adverse effect on our assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results
of operations.
Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.
As a result of our growth over the past several years, as of December 31, 2017, approximately 58% of our loan
portfolio had been originated since December 31, 2015, including new originations and renewals. In general, loans
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do not begin to show signs of credit deterioration or default until they have been outstanding for some period of
time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more
predictably than a newer portfolio. Because a large portion of our portfolio is relatively new, the current level of
delinquencies and defaults may not represent the level of delinquencies and defaults that could occur as the portfolio
becomes more seasoned and may not serve as a reliable basis for predicting the health and nature of our loan
portfolio. Our limited experience with these loans does not provide us with a significant payment history pattern
with which to judge future collectability. As a result, it may be difficult to predict the future performance of our loan
portfolio. If delinquencies and defaults increase, we may be required to increase our allowance for loan losses,
which could have a material adverse effect on our assets, business, cash flow, condition (financial or otherwise),
liquidity, prospects and results of operations.
We may not be able to adequately assess and limit our credit risk, which could adversely affect our profitability.
A primary component of our business involves making loans to clients. The business of lending is inherently risky
because the principal of or interest on the loan may not be repaid timely or at all or the value of any collateral
supporting the loan may be insufficient to cover our outstanding exposure. These risks may be affected by the
strength of the borrower’s business sector and local, regional and national market and economic conditions. Our risk
management practices, such as monitoring our loan applicants and the concentration of our loans within specific
lines of business and our credit approval practices, may not adequately assess credit risk, and our credit
administration personnel, policies and procedures may not adequately adapt to changes in economic or any other
conditions affecting clients and the quality of the loan portfolio. A failure to effectively assess and limit the credit
risk associated with our loan portfolio could have a material adverse effect on our assets, business, cash flow,
condition (financial or otherwise), liquidity, prospects and results of operations.
Repayment of our leveraged loans is often dependent on the cash flows of the borrower, which may be
unpredictable, and the collateral securing these loans may fluctuate in value.
Our leveraged loans are primarily commercial in nature and often contained within our healthcare portfolio.
Frequently, these loans have a secondary source of repayment that is directly correlated with the primary source of
repayment. Leveraged borrowers may have a diminished ability to adjust to unexpected events and changes in
business conditions because of a higher ratio of liabilities to capital, and in some cases, reliance is placed on
enterprise value as a secondary source of repayment. The repayment of leveraged loans depends primarily on the
cash flow and credit worthiness of the borrower and on enterprise value as a secondary source of repayment.
Our allowance for loan losses may prove to be insufficient to absorb losses inherent in our loan portfolio.
We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks
inherent in our loan portfolio. The level of the allowance reflects management’s continuing evaluation of
concentrations within our lines of business, specific credit risks, loan loss experience, current loan portfolio quality,
present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio.
The determination of the appropriate level of the allowance for loan losses is highly subjective and requires us to
make significant estimates of current credit risks and future trends, all of which may undergo material changes.
Inaccurate management assumptions, continuing deterioration of economic conditions affecting borrowers, new
information regarding existing loans, identification of additional problem loans and other factors, both within and
outside of our control, may require us to increase our allowance for loan losses. In addition, our regulators, as an
integral part of their examination process, periodically review our loan portfolio and the adequacy of our allowance
for loan losses and may require adjustments based upon judgments that are different than those of management.
Further, if actual charge-offs in future periods exceed the amounts allocated to the allowance for loan losses, we
may need to increase our provision for loan losses to restore the adequacy of our allowance for such losses. If we are
required to materially increase our level of allowance for loan losses for any reason, our assets, business, cash flow,
condition (financial or otherwise), liquidity, prospects and results of operations could be materially and adversely
affected.
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The healthcare service industry is an integral component of the local economy, and adverse trends in the
healthcare service industry could have a material adverse effect on us.
The healthcare service industry is an integral segment of the local economy.
As of December 31, 2017,
approximately 17% of our loan portfolio was composed of loans to borrowers in the healthcare service industry.
Adverse trends in the healthcare service industry may have a negative impact on a significant portion of the
Company’s borrowers and clients. The healthcare service industry may be affected by the following:
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trends in the method of delivery of healthcare services;
competition among healthcare providers;
consolidation of large health insurers;
lower reimbursement rates from government and commercial payors, high uncompensated care expense,
investment losses and limited admissions growth pressuring operating profit margins for healthcare
providers;
availability of capital;
credit downgrades;
liability insurance expense;
regulatory and government reimbursement uncertainty resulting from changes to laws governing the
delivery of healthcare services and reimbursement of providers of healthcare services;
congressional efforts to repeal and federal court cases challenging the legality of certain aspects of the
Patient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of
2010;
health reform initiatives to address healthcare costs through expanded value-based purchasing programs,
bundled provider payments, health insurance exchanges, increased patient cost-sharing, geographic
payment variations, comparative effectiveness research, lower payments for hospital readmissions, and
shared risk-and-reward payment models such as accountable care organizations;
federal and state government plans to reduce budget deficits and address debt ceiling limits by lowering
healthcare provider Medicare and Medicaid payment rates, while requiring increased patient access to
care;
equalizing Medicare payment rates across different facility-type settings;
heightened health information technology security standards and the meaningful use of electronic health
records by healthcare providers; and
potential tax law changes affecting healthcare providers.
These changes, among others, could adversely affect the economic performance of some or all of our borrowers and
clients in the healthcare services industry and, in turn, have a materially negative impact on our assets, business,
cash flow, condition (financial or otherwise), liquidity, prospects and results of operations.
Our commercial real estate loan portfolio exposes us to credit risks that may be greater than the risks related to
other types of loans.
Our loan portfolio includes non-owner-occupied commercial real estate loans, or CRE loans, to individuals and
businesses for various purposes, which are secured by commercial properties, as well as construction and land
development loans. CRE loans typically involve repayment dependent upon income generated, or expected to be
generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. The
availability of such income for repayment may be adversely affected by changes in the economy or local market
conditions. These loans expose us to greater credit risk than loans secured by other types of collateral because the
collateral securing these loans is typically more difficult to liquidate. Additionally, non-owner-occupied CRE loans
generally involve relatively large balances to single borrowers or related groups of borrowers. Unexpected
deterioration in the credit quality of our non-owner-occupied CRE loan portfolio could require us to increase our
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allowance for loan losses, which would reduce our profitability and could have a material adverse effect on our
assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of operations.
A prolonged downturn in the real estate market could result in losses and adversely affect our profitability.
As of December 31, 2017, approximately 37% of our loan portfolio was composed of commercial real estate loans,
11% consumer real estate loans, and 9% construction and land development loans. The real estate collateral in each
case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value
during the time the credit is extended. A decline in real estate values could further impair the value of our collateral
and our ability to sell the collateral upon any foreclosure, which would likely require us to increase our allowance
for loan losses. In the event of a default with respect to any of these loans, the amounts we receive upon sale of the
collateral may be insufficient to recover the outstanding principal and interest on the loan. If we are required to re-
value the collateral securing a loan to satisfy the debt during a period of reduced real estate values or to increase our
allowance for loan losses, our profitability could be adversely affected, which could have a material adverse effect
on our assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of operations.
Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage
our capital and adversely affect our growth and profitability.
The federal bank regulatory agencies have indicated their view that banks with high concentrations of loans secured
by commercial real estate are subject to increased risk and should implement robust risk management policies and
maintain higher capital than regulatory minimums to maintain an appropriate cushion against loss that is
commensurate with the perceived risk. Federal bank regulatory guidelines identify institutions potentially exposed
to CRE concentration risk as those that have (i) experienced rapid growth in CRE lending, (ii) notable exposure to a
specific type of CRE, (iii) total reported loans for construction, land development and other land loans representing
100% or more of the institution’s capital, or (iv) total CRE loans representing 300% or more of the institution’s
capital if the outstanding balance of the institution’s CRE loan portfolio has increased 50% or more during the prior
36 months. Because a significant portion of our loan portfolio is dependent on commercial real estate, a change in
the regulatory capital requirements applicable to us or a decline in our regulatory capital could limit our ability to
leverage our capital as a result of these policies, which could have a material adverse effect on our assets, business,
cash flow, condition (financial or otherwise), liquidity, prospects and results of operations.
We engage in lending secured by real estate and may be forced to foreclose on the collateral and own the
underlying real estate, subjecting us to the costs and potential risks associated with the ownership of the real
property.
Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our
investment and may thereafter own and operate such property, in which case we would be exposed to the risks
inherent in the ownership of real estate. As of December 31, 2017, we did not have any other real estate owned. The
amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control,
including, but not limited to:
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general or local economic conditions;
environmental cleanup liability;
neighborhood assessments;
interest rates;
real estate tax rates;
operating expenses of the mortgaged properties;
supply of and demand for rental units or properties;
ability to obtain and maintain adequate occupancy of the properties;
zoning laws;
governmental and regulatory rules;
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fiscal policies; and
natural disasters.
Our inability to manage the amount of costs or size of the risks associated with the ownership of real estate, or write-
downs in the value of other real estate owned, could have a material adverse effect on our assets, business, cash
flow, condition (financial or otherwise), liquidity, prospects and results of operations.
We have several large depositor relationships, the loss of which could force us to fund our business through more
expensive and less stable sources.
As of December 31, 2017, our ten largest non-brokered depositors accounted for approximately 20% of our total
deposits. Withdrawals of deposits by any one of our largest depositors could force us to rely more heavily on
borrowings and other sources of funding for our business and withdrawal demands, adversely affecting our net
interest margin and results of operations. We may also be forced, as a result of any withdrawal of deposits, to rely
more heavily on other, potentially more expensive and less stable funding sources. Consequently, the occurrence of
any of these events could have a material adverse effect on our assets, business, cash flow, condition (financial or
otherwise), liquidity, prospects and results of operations.
Correspondent banking introduces unique risks, which could affect our liquidity.
Although correspondent banking provides diversification of our funding base, it introduces a unique set of
risks. Increases in the federal funds rate could create liquidity issues within the bank as it competes with the interest
on reserves rate paid by the Federal Reserve Bank. Additionally, strong industry-wide loan demand could also create
liquidity issues as excess balances held at CapStar Bank by our correspondent banks would presumably be
redeployed by those banks into new loans. Further, capital inadequacy or asset quality issues at other institutions
could result in increased risk to us due to the potential for large deposit withdrawals. If any of the foregoing were to
occur, our liquidity could be materially and adversely affected.
Liquidity risk could impair our ability to fund operations and meet our obligations as they become due, and our
funding sources may be insufficient to fund our future growth.
Liquidity is essential to our business. Liquidity risk is the potential that we will be unable to meet our obligations as
they come due because of an inability to liquidate assets or obtain adequate funding. An inability to raise funds, at
competitive rates or at all, through deposits, borrowings, the sale of loans and other sources could have a substantial
negative effect on our liquidity. In particular, approximately 82% of our bank’s deposits as of December 31, 2017
were checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while
by comparison, 70% of the assets of our bank were loans at December 31, 2017, which cannot be called or sold in
the same time frame. Our access to funding sources in amounts adequate to finance our activities or on terms that are
acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy
in general.
Factors that could negatively impact our access to liquidity sources include a decrease of our business activity as a
result of a downturn in the markets in which our loans are concentrated, adverse regulatory action against us, or our
inability to attract and retain deposits. Market conditions or other events could also negatively affect the level or cost
of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet
contractual obligations and fund asset growth and new business transactions at a reasonable cost, in a timely manner
and without adverse consequences. For example, we rely on deposits, federal funds purchased and advances from
the Federal Home Loan Bank of Cincinnati (“FHLB”) to fund our operations. Although we have historically been
able to replace maturing deposits and advances if desired, we may not be able to replace such funds in the future if,
among other things, our financial condition, the financial condition of the FHLB or market conditions were to
change. In such a circumstance, we may seek additional borrowings to achieve our long-term business objectives;
however, they may not be available to us on favorable terms or at all.
Additionally, whole loan sale agreements may require us to repurchase or substitute mortgage loans, or indemnify
buyers against losses, in the event we breach representations or warranties to purchasers, guarantors and insurers,
including government-sponsored entities, about the mortgage loans and the manner in which they were originated.
In addition, we may be required to repurchase mortgage loans as a result of early payment default of the borrower on
a mortgage loan. If repurchase and indemnity demands increase and such demands are valid claims and are in excess
of our provision for potential losses, our liquidity, results of operations and financial condition may be adversely
affected.
21
Any substantial, unexpected or prolonged change in the level or cost of liquidity could have a material adverse effect
on our ability to meet deposit withdrawals and other client needs, which could have a material adverse effect on our
assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of operations.
We are subject to interest rate risk, which could adversely affect our profits, and we do not have a history of
operating in a rising interest rate environment.
Our profits, like that of most financial institutions, depends to a large extent on our net interest income, which is the
difference between our interest income on interest-earning assets, such as loans and investment securities, and our
interest expense on interest-bearing liabilities, such as deposits and borrowings. We have positioned our asset
portfolio to benefit in a higher interest rate environment, but this may not remain true in the future. We have
managed the growth of our bank since inception in an economic environment characterized by historically low
interest rates. Our ability to continue that performance in a rising rate environment is not a certainty. Our interest
sensitivity profile was asset sensitive as of December 31, 2017, meaning that our net interest income would increase
more from rising interest rates than from falling interest rates. However, because we do not have a history of
operating in a rising interest rate environment, we have no historical data on which to model the actual effect of
rising interest rates on our assets and liabilities. As a result, these models may not be an accurate indicator of how
our interest income will be affected by changes in interest rates.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions
and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the
Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only
the interest we receive on loans and securities and the interest we pay on deposits and borrowings but could also
affect our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the
average duration of our assets. If the interest rates paid on deposits and other borrowings increase at a faster rate
than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could
be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other
investments fall more quickly than the interest rates paid on deposits and other borrowings.
In addition, an increase in interest rates could also have a negative impact on our results of operations by reducing
the ability of borrowers to repay their current loan obligations. These circumstances could not only result in
increased loan defaults, foreclosures and charge-offs, but also necessitate further increases to the allowance for loan
losses which could have a material adverse effect on our assets, business, cash flow, condition (financial or
otherwise), liquidity, prospects and results of operations.
Changes in monetary policy and government responses to adverse economic conditions such as inflation and
deflation may have an adverse effect on our business, financial condition and results of operations.
Our financial condition and results of operations are affected by credit policies of monetary authorities, particularly
the Board of Governors of the Federal Reserve System. Actions by monetary and fiscal authorities, including the
Federal Reserve, could lead to inflation, deflation, or other economic phenomena that could adversely affect our
financial performance. The primary impact of inflation on our operations most likely will be reflected in increased
operating costs. Conversely, deflation generally will tend to erode collateral values and diminish loan quality.
22
Our bank’s size presents multiple challenges that may restrict our growth and prevent us from effectively
implementing our business strategy, such as our regulatory and internal lending limits and our ability to
effectively leverage our infrastructure to implement our business strategy.
We are limited in the amount our bank can loan in the aggregate to a single borrower or related borrowers by the
amount of the bank’s capital. CapStar Bank is a Tennessee-chartered bank and therefore is subject to the legal
lending limits of the state of Tennessee and federal law. Tennessee and federal legal lending limits are safety and
soundness measures intended to prevent one person or a relatively small and economically related group of persons
from borrowing an unduly large amount of a bank’s funds. They are also intended to safeguard a bank’s depositors
by diversifying the risk of loan losses among a relatively large number of credit-worthy borrowers engaged in
various types of businesses. Under Tennessee law, total loans and extensions of credit to a borrower generally may
not exceed 15% of our bank’s capital, surplus and undivided profits. However, such loans may be in excess of that
percentage, but not above 25%, if each loan in excess of 15% is first submitted to and approved in advance in
writing by the board of directors and a record is kept of such written approval and reported to the board of directors
quarterly. We have also established an internal limit on loans to one borrower between 7% and 15% of our risked
based capital, depending upon the underlying risk rating. Loans in excess of our internal limit are noted as a policy
exception and require acknowledgment by our bank’s full board of directors. Based upon our bank’s current capital
levels, the amount it may lend is significantly less than that of many of our larger competitors and may discourage
potential borrowers who have credit needs in excess of the bank’s lending limit from doing business with us. Our
bank accommodates larger loans by selling participations in those loans to other financial institutions, but this
strategy may not always be available. If we are unable to compete effectively for loans from our target clients, we
may not be able to effectively implement our business strategy, which could have a material adverse effect on our
assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of operations.
Our growth strategy involves strategic acquisitions, and we may not be able to overcome risks associated with
such transactions.
We plan to continue to explore opportunities to acquire other financial institutions and businesses in or around our
existing Nashville market or in comparable markets or that would involve lines of business that are additive to our
existing products and services. Our acquisition activities could be material to our business and involve a number of
risks, including the following:
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the need to raise new capital;
the time and expense associated with identifying and evaluating potential acquisitions and negotiating
potential transactions, resulting in our management’s attention being diverted from the operation of our
existing business;
the lack of history among our management team in working together on acquisitions and related
integration activities;
the time, expense and difficulty of integrating the operations and personnel of the combined businesses;
an inability to realize expected synergies or returns on investment;
failure to discover the existence of liabilities during the due diligence process;
exposure to unknown or contingent liabilities for which we may not be indemnified;
potential disruption of our ongoing banking business; and
a loss of key employees or key clients following an acquisition.
We may not be successful in overcoming these risks or any other problems encountered in connection with potential
acquisitions. Our inability to overcome these risks could have an adverse effect on our ability to implement our
business strategy and enhance shareholder value, which, in turn, could have a material adverse effect on our assets,
business, cash flow, condition (financial or otherwise), liquidity, prospects and results of operations.
23
Our continued pace of growth may require us to raise additional capital in the future to fund such growth, and
the unavailability of additional capital on terms acceptable to us could adversely affect us or our growth.
We believe that we have sufficient capital to meet our capital needs for our immediate growth plans. However, we
will continue to need capital to support our longer-term growth plans. If capital is not available on favorable terms
when we need it, we may have to either issue common stock or other securities on less than desirable terms or
reduce our rate of growth until market conditions become more favorable. Either of such events could have a
material adverse effect on our assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and
results of operations.
The fair value of our investment securities could fluctuate because of factors outside of our control, which could
have a material adverse effect on us.
Factors beyond our control could significantly affect the fair value of our investment securities. These factors
include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect
to the underlying securities, and changes in market interest rates and continued instability in the capital markets.
Any of these factors, among others, could cause other-than-temporary impairments, or OTTI, and realized and/or
unrealized losses in future periods and declines in earnings and/or other comprehensive income (loss), which could
materially and adversely affect our assets, business, cash flow, condition (financial or otherwise), liquidity,
prospects and results of operations. The process for determining whether impairment of a security is OTTI usually
requires complex, subjective judgments about the future financial performance and liquidity of the issuer, any
collateral underlying the security as well as the Company’s intent and ability to hold the security for a sufficient
period of time to allow for any anticipated recovery in fair value in order to assess the probability of receiving all
contractual principal and interest payments on the security. Our failure to assess any impairments or losses with
respect to our securities could have a material adverse effect on our assets, business, cash flow, condition (financial
or otherwise), liquidity, prospects and results of operations.
Deterioration in the fiscal position of the U.S. federal government and downgrades in the U.S. Department of the
Treasury and federal agency securities could adversely affect us and our banking operations.
The long-term outlook for the fiscal position of the U.S. federal government is uncertain, as illustrated by the 2011
downgrade by certain rating agencies of the credit rating of the U.S. government and federal agencies.
However, in addition to causing economic and financial market disruptions, any future downgrade, failure to raise
the U.S. statutory debt limit, or deterioration in the fiscal outlook of the U.S. federal government, could, among
other things, materially adversely affect the market value of the U.S. and other government and governmental
agency securities that we hold, the availability of those securities as collateral for borrowing, and our ability to
access capital markets on favorable terms. In particular, such events could increase interest rates and disrupt
payment systems, money markets, and long-term or short-term fixed income markets, adversely affecting the cost
and availability of funding, which could negatively affect our profitability. Also, the adverse consequences of any
downgrade could extend to those to whom we extend credit and could adversely affect their ability to repay their
loans. Any of these developments could have a material adverse effect on our assets, business, cash flow, condition
(financial or otherwise), liquidity, prospects and results of operations.
We are subject to losses resulting from fraudulent and negligent acts on the part of loan applicants, our
borrowers, other third parties, and our employees.
When we originate loans, we rely heavily upon information supplied by third parties, including the information
contained in the loan application, property appraisal, title information and employment and income documentation.
If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected
prior to loan funding, the fair value of the loan may be significantly lower than expected. Whether a
misrepresentation is made by the loan applicant, the borrower, another third party or one of our employees, we
generally bear the risk of loss associated with the misrepresentation. The persons and entities involved in such a
misrepresentation are often difficult to locate, and we are often unable to collect any monetary losses that we have
suffered from them.
24
We may bear costs associated with the proliferation of computer theft and cyber-crime.
We necessarily collect, use and hold sensitive data concerning individuals and businesses with whom we have a
banking relationship. Threats to data security, including unauthorized access and cyber-attacks, rapidly emerge and
change, exposing us to additional costs for protection or remediation and competing time constraints to secure our
data in accordance with client expectations and statutory and regulatory requirements. It is not feasible to defend
against every risk being posed by changing technologies as well as criminals intent on committing cyber-crime,
particularly given their increasing sophistication. Patching and other measures to protect existing systems and
servers could be inadequate, especially on systems that are being retired. Controls employed by our information
technology department and third-party vendors could prove inadequate. We could also experience a breach by
intentional or negligent conduct on the part of our employees or other internal sources, software bugs or other
technical malfunctions, or other causes. As a result of any of these threats, our client accounts may become
vulnerable to account takeover schemes or cyber-fraud. Our systems and those of our third-party vendors may also
become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from network
failures, viruses and malware, power anomalies or outages, natural disasters and catastrophic events.
A breach of our security or the security of our third-party vendors that results in unauthorized access to our data
could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation,
damages, fines and penalties, client notification requirements, significant increases in compliance costs, and
reputational damage, any of which could individually or in the aggregate have a material adverse effect on our
assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of operations.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework is comprised of various processes, systems and strategies and is designed to
manage the types of risk to which we are subject, including, among others, credit, liquidity, capital, financial
performance, asset/liability, operational, compliance and regulatory, Community Reinvestment Act, or CRA,
strategic and reputational, information technology and legal. Our framework also includes financial or other
modeling methodologies that involve management assumptions and judgment. Our risk management framework
may not be effective under all circumstances, including if our management fails to follow our credit policies and
procedures, and thus, it may not adequately mitigate any risk or loss to us. If our framework is not effective, we
could suffer unexpected losses and our assets, business, cash flow, condition (financial or otherwise), liquidity,
prospects and results of operations could be materially and adversely affected. We may also be subject to potentially
adverse regulatory consequences.
We depend on our information technology and telecommunications systems, and any systems failures or
interruptions could adversely affect our operations and financial condition.
We rely heavily on communications and information systems to conduct our business. Any failure or interruption in
the operation of these systems could impair or prevent the effective operation of our client relationship management,
general ledger, deposit, lending or other functions. While we have policies and procedures designed to prevent or
limit the effect of a failure or interruption in the operation of our information systems, there can be no assurance that
any such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed. The
occurrence of any failures or interruptions impacting our information systems could damage our reputation, result in
a loss of clients, and expose us to additional regulatory scrutiny, civil litigation, and possible financial liability, any
of which could have a material adverse effect on our financial condition and results of operations.
We are dependent upon outside third parties for the processing and handling of our records and data.
We rely on software developed by third-party vendors to process various transactions. In some cases, we have
contracted with third parties to run their proprietary software on our behalf. These systems include, but are not
limited to, general ledger, payroll, employee benefits, loan and deposit processing, and securities portfolio
accounting. For example, one vendor provides our core banking system through a service bureau arrangement.
While we perform a review of controls instituted by the applicable vendors over these programs in accordance with
industry standards and perform our own testing of user controls, we rely on the continued maintenance of controls
by these third-party vendors, including safeguards over the security of client data. We may incur a temporary
disruption in our ability to conduct business or process transactions, or incur damage to our reputation, if the third-
party vendor fails to adequately maintain internal controls or institute necessary changes to systems. Such a
disruption or breach of security may have a material adverse effect on our business. In addition, we may not be able
to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms or at all.
25
We encounter technological change continually and have fewer resources than certain of our competitors to
invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new
technology-driven products and services. In addition to serving clients better, the effective use of technology
increases efficiency and enables financial institutions to reduce costs. Our success will depend in part on our ability
to address our clients’ needs by using technology to provide products and services that will satisfy client demands
for convenience, as well as to create additional efficiencies in our operations. Certain of our competitors have
substantially greater resources to invest in technological improvements than us, and in the future, we may not be
able to implement new technology-driven products and services timely, effectively or at all or be successful in
marketing these products and services to our clients. As these technologies are improved in the future, we may, in
order to remain competitive, be required to make significant capital expenditures, which may increase our overall
expenses and have a material adverse effect on our net income.
We may be adversely affected by the lack of soundness of other financial institutions.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial
soundness of other financial institutions. Financial services companies are interrelated as a result of trading,
clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and
through transactions with counterparties in the financial services industry, including brokers and dealers,
commercial banks, investment banks, and other institutional clients. Defaults by, or even rumors or questions about,
one or more financial services companies, or the financial services industry generally, have led to market-wide
liquidity problems in the past and could lead to losses or defaults by us or by other institutions in the future. These
losses or defaults could have a material adverse effect on our assets, business, cash flow, condition (financial or
otherwise), liquidity, prospects and results of operations.
We are subject to environmental liability risk associated with our lending activities.
In the course of our business, we may purchase real estate, or we may foreclose on and take title to real estate. As a
result, we could be subject to environmental liabilities with respect to these properties. We may be held liable to a
governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs
incurred by these parties in connection with environmental contamination or may be required to investigate or clean
up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or
remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site,
we may be subject to common law claims by third parties based on damages and costs resulting from environmental
contamination emanating from the property. Any significant environmental liabilities could have a material adverse
effect on our assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of
operations.
By engaging in derivative transactions, we are exposed to additional credit and market risk.
We use interest rate swaps to help manage our interest rate risk from recorded financial assets and liabilities when
they can be demonstrated to effectively hedge a designated asset or liability and the asset or liability exposes us to
interest rate risk or risks inherent in client related derivatives. Hedging interest rate risk is a complex process,
requiring sophisticated models and routine monitoring, and is not a perfect science. As a result of interest rate
fluctuations, hedged assets and liabilities will appreciate or depreciate in market value. The effect of this unrealized
appreciation or depreciation will generally be offset by income or loss on the derivative instruments that are linked
to the hedged assets and liabilities. We also have derivatives that result from a service we provide to certain
qualifying clients approved through our credit process, and therefore, are not used to manage interest rate risk in our
assets or liabilities. By engaging in derivative transactions, we are exposed to credit and market risk. If the
counterparty fails to perform, credit risk exists to the extent of the fair value gain in the derivative. Market risk exists
to the extent that interest rates change in ways that are significantly different from what we expected when we
entered into the derivative transaction. The existence of credit and market risk associated with our derivative
instruments could adversely affect our net interest income and, therefore, could have a material adverse effect on our
assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of operations.
26
We are or may become involved from time to time in suits, legal proceedings, information-gathering requests,
investigations and proceedings by governmental and self-regulatory agencies that may lead to adverse
consequences.
Many aspects of our business involve substantial risk of legal liability. From time to time, we are, or may become,
the subject of lawsuits and related legal proceedings, governmental and self-regulatory agency information-
gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by bank
regulatory agencies, the Securities and Exchange Commission, or SEC, and law enforcement authorities. The results
of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages,
adverse judgments, settlements, fines, injunctions, restrictions on the way in which we conduct our business, or
reputational harm.
Although we establish accruals for legal proceedings when information related to the loss contingencies represented
by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, we
may not have accruals for all legal proceedings where we face a risk of loss. In addition, due to the inherent
subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not
represent the ultimate loss to us from the legal proceedings or government or other inquiries. Thus, our ultimate
losses may be higher, and possibly materially so, than the amounts accrued for legal loss contingencies, which could
adversely affect our financial condition and results of operations.
The Nashville MSA is susceptible to floods, tornados and other natural disasters, adverse weather events and acts
of God, which may adversely affect our business and operations.
Substantially all of our business and operations are located in the Nashville MSA, which is an area that has recently
been damaged by floods and tornadoes and that is susceptible to other natural disasters, adverse weather events and
acts of God. Natural disasters, adverse weather events and acts of God can disrupt our operations, cause widespread
property damage, and severely depress the local economies in which we operate. Any economic decline as a result
of natural disasters, adverse weather events or acts of God can reduce the demand for loans and our other client
solutions as well as client ability to repay such loans. In addition, the rates of delinquencies, foreclosures,
bankruptcies and losses on loan portfolios may increase substantially, as uninsured property losses or sustained job
interruption or loss may materially impair the ability of borrowers to repay their loans. Moreover, the value of real
estate or other collateral that secures the loans could be materially and adversely affected by natural disasters,
adverse weather events or acts of God. Therefore, natural disasters, adverse weather events or acts of God could
result in decreased revenue and loan losses that have a material adverse effect on our assets, business, cash flow,
condition (financial or otherwise), liquidity, prospects and results of operations.
Our internal controls over financial reporting may not be effective, and our independent registered public
accounting firm may not be able to certify as to their effectiveness, which could have a significant and adverse
effect on our business and reputation.
We are not currently required to comply with SEC rules that implement Section 404 of the Sarbanes-Oxley Act and
are, therefore, not required to make a formal assessment of the effectiveness of our internal controls over financial
reporting for that purpose. We will be required to comply with these rules upon ceasing to be an emerging growth
company, as defined in the JOBS Act.
When evaluating our internal controls over financial reporting, we may identify material weaknesses that we may
not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act. In addition, if we fail to achieve and maintain the adequacy
of our internal controls, as such standards are modified, supplemented, or amended from time to time, we may not
be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act. We cannot be certain as to the timing of
completion of our evaluation, testing, and any remediation actions or the impact of the same on our operations. If we
are not able to implement the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or with
adequate compliance, our independent registered public accounting firm may issue an adverse opinion due to
ineffective internal controls over financial reporting, and we may be subject to sanctions or investigations by
regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to
a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs in
improving our internal control system and hiring additional personnel. Any such action could negatively affect our
results of operations and cash flows.
27
Uncertainties in the interpretation and application of the Tax Reform Act could materially affect our tax
obligations and effective tax rate.
The Tax Reform Act significantly changes how corporations in the United States are taxed. The Tax Reform Act
requires complex computations to be performed that were not previously required by U.S. tax law, significant
judgments to be made in interpretation of the provisions of the Tax Reform Act and significant estimates in
calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S.
Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions
of the Tax Reform Act will be applied or otherwise administered that is different from our interpretation. As a result,
we have recorded a provisional estimate on the effect of the Tax Reform Act on our deferred tax assets in our
financial statements. As additional regulatory guidance is issued by the applicable taxing authorities, as accounting
treatment is clarified, as we perform additional analysis on the application of the Tax Reform Act, and as we refine
estimates in calculating the effect, our final analysis, which will be recorded in the period completed, may be
different from our current provisional amounts, which could materially affect our tax obligations and effective tax
rate. The impact of the Tax Reform Act on our shareholders is uncertain and could be adverse. This Report does not
discuss the manner in which the Tax Reform Act might affect our shareholders. Accordingly, we encourage our
shareholders to consult with their own legal and tax advisors with respect to the Tax Reform Act and the potential
tax consequences of investing in our common stock.
Risks Related to Our Industry
We are subject to extensive regulation that could limit or restrict our business activities and impose financial
requirements, such as minimum capital requirements, and could have a material adverse effect on our
profitability.
We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by
various federal and state agencies including the Federal Reserve and the TDFI. Regulatory compliance is costly and
restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and
interest rates charged, transactions with affiliates, treatment of our clients, and interest rates paid on deposits. We are
also subject to financial requirements prescribed by our regulators such as minimum capitalization guidelines, which
require us to maintain adequate capital to support our growth. Violations of various laws, even if unintentional, may
result in significant fines or other penalties, including restrictions on branching or bank acquisitions and other activities.
Recently, banks generally have faced increased regulatory sanctions and scrutiny particularly with respect to the
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act,
or USA Patriot Act, and other statutes relating to anti-money laundering compliance and client privacy. Recent
legislation has substantially changed, and increased, federal regulation of financial institutions, and there may be
significant future legislation (and regulations under existing legislation) that could have a further material effect on
bank holding companies like us and banks like CapStar Bank.
The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the
effects of these changes on our business and profitability. Because government regulation greatly affects the
business and financial results of all commercial banks and bank holding companies, our cost of compliance could
adversely affect our ability to operate profitably.
Federal and state regulators periodically examine our business and may require us to remediate adverse
examination findings or may take enforcement action against us.
The Federal Reserve and the TDFI periodically examine our business, including our compliance with laws and
regulations. If, as a result of an examination, the Federal Reserve or the TDFI were to determine that our financial
condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our
operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number
of different remedial actions as they deem appropriate. These actions include the power to require us to remediate
any such adverse examination findings.
28
In addition, these agencies have the power to take enforcement action against us to enjoin “unsafe or unsound”
practices, to require affirmative action to correct any conditions resulting from any violation of law or regulation or
unsafe or unsound practice, to issue an administrative order that can be judicially enforced, to direct an increase in
our capital, to direct the sale of subsidiaries or other assets, to limit dividends and distributions, to restrict our
growth, to assess civil monetary penalties against us or our officers or directors, to remove officers and directors
and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to
terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory enforcement
action against us could have a material adverse effect on our assets, business, cash flow, condition (financial or
otherwise), liquidity, prospects and results of operations.
We are subject to numerous fair lending laws designed to protect consumers and failure to comply with these
laws could lead to a wide variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations
prohibit discriminatory lending practices by financial institutions. The U.S. Department of Justice, federal banking
agencies, and other federal agencies are responsible for enforcing these laws and regulations. A successful
regulatory challenge to an institution’s compliance with fair lending laws and regulations could result in a wide
variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and
acquisitions activity, restrictions on expansion, and restrictions on entering new lines of business. Private parties
may also have the ability to challenge an institution’s performance under fair lending laws in private class action
litigation. Such actions could have a material adverse effect on our assets, business, cash flow, condition (financial
or otherwise), liquidity, prospects and results of operations.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money
laundering statutes and regulations.
The Bank Secrecy Act, the USA Patriot Act and other laws and regulations require financial institutions, among
other duties, to institute and maintain an effective anti-money laundering program and to file reports such as
suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-
money laundering requirements. The federal banking agencies and Financial Crimes Enforcement Network are
authorized to impose significant civil money penalties for violations of those requirements and have recently
engaged in coordinated enforcement efforts against banks and other financial service providers with the U.S.
Department of Justice, Drug Enforcement Administration and Internal Revenue Service, or IRS. We are also subject
to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control, or OFAC. If our
policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and
regulatory actions, which may include restrictions on our ability to pay dividends and the requirement to obtain
regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to
maintain and implement adequate programs to combat money laundering and terrorist financing could also have
serious reputational consequences for us. Any of these circumstances could have a material adverse effect on our
assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of operations.
Financial reform legislation has, among other things, tightened capital standards, created the Consumer
Financial Protection Bureau and resulted in new regulations that are likely to increase our costs of operations.
As final rules and regulations implementing the Dodd-Frank Act have been adopted, this law has significantly
changed the current bank regulatory framework and affected the lending, deposit, investment, trading and operating
activities of banks and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a
broad range of new implementing rules and regulations and to prepare numerous studies and reports for Congress.
The federal agencies are given significant discretion in drafting the implementing rules and regulations, and
consequently, many of the details and much of the impact of the Dodd-Frank Act depends on the rules and
regulations that implement it.
Among many other changes, the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand
deposits effective one year after the date of its enactment, thus allowing businesses to have interest-bearing checking
accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact
on our interest expense. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for
banks, savings institutions and credit unions to $250,000 per depositor. The Dodd-Frank Act also directs the federal
banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks.
29
The Dodd-Frank Act created the Consumer Financial Protection Bureau, or the CFPB, with broad powers to
supervise and enforce consumer financial protection laws. The CFPB has broad rule-making authority for a wide
range of consumer protection laws that apply to all banks, including the authority to prohibit “unfair, deceptive or
abusive” acts and practices.
As noted above, many aspects of the Dodd-Frank Act are subject to rulemaking and take effect over several years,
making it difficult to anticipate the overall financial impact on us. However, compliance with the Dodd-Frank Act
and its implementing regulations will result in additional operating and compliance costs that could have a material
adverse effect on our assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results
of operations.
We are required to act as a source of financial and managerial strength for our bank in times of stress.
Under federal law and long-standing Federal Reserve policy, we are expected to act as a source of financial and
managerial strength to our bank, and to commit resources to support our bank if necessary. We may be required to
commit additional resources to our bank at times when we may not be in a financial position to provide such
resources or when it may not be in our, or our shareholders’ or creditors,’ best interests to do so. A requirement to
provide such support is more likely during times of financial stress for us and our bank, which may make any capital
we are required to raise to provide such support more expensive than it might otherwise be. In addition, any capital
loans we make to our bank are subordinate in right of repayment to deposit liabilities of our bank. In the event of our
bankruptcy, any commitment by us to a federal banking regulator to maintain the capital of our bank will be
assumed by the bankruptcy trustee and entitled to priority of payment over general unsecured creditor claims.
Our FDIC deposit insurance premiums and assessments may increase.
The deposits of our bank are insured by the FDIC up to legal limits and, accordingly, subject it to the payment of
FDIC deposit insurance assessments as determined according to the calculation described in “Supervision and
Regulation—Bank Regulation and Supervision—FDIC Insurance and Other Assessments.” High levels of bank
failures since the financial crisis and increases in the statutory deposit insurance limits have increased resolution
costs to the FDIC and put significant pressure on the Deposit Insurance Fund. In order to maintain a strong funding
position and restore the reserve ratios of the Deposit Insurance Fund following the financial crisis, the FDIC
increased deposit insurance assessment rates and charged special assessments to all FDIC-insured financial
institutions. Further increases in assessment rates or special assessments may occur in the future, especially if there
are significant additional financial institution failures. Any future special assessments, increases in assessment rates
or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue
certain business opportunities, which could have a material adverse effect on our assets, business, cash flow,
condition (financial or otherwise), liquidity, prospects and results of operations.
Risks Related to Our Common Stock
Even though our common stock is currently traded on the Nasdaq Stock Market's Global Select Market, it has
less liquidity than many other stocks quoted on a national securities exchange.
The trading volume in our common stock on the Nasdaq Global Select Market has been relatively low when
compared with larger companies listed on the Nasdaq Global Select Market or other stock exchanges. Because of
this, it may be more difficult for stockholders to sell a substantial number of shares for the same price at which
stockholders could sell a smaller number of shares.
We cannot predict the effect, if any, that future sales of our common stock in the market, or the availability of shares
of common stock for sale in the market, will have on the market price of our common stock. We can give no
assurance that sales of substantial amounts of common stock in the market, or the potential for large amounts of
sales in the market, would not cause the price of our common stock to decline or impair our future ability to raise
capital through sales of our common stock.
The market price of our common stock has fluctuated significantly, and may fluctuate in the future. These
fluctuations may be unrelated to our performance. General market or industry price declines or overall market
volatility in the future could adversely affect the price of our common stock, and the current market price may not be
indicative of future market prices.
30
A future issuance of stock could dilute the value of our common stock.
Our charter permits us to issue up to an aggregate of 25 million shares of common stock. As of December 31, 2017,
11,582,026 shares of our common stock were issued and outstanding, including 187,253 shares of restricted
common stock that have yet to vest. Those shares outstanding do not include the potential issuance, as of December
31, 2017, of 878,049 shares of our common stock that are issuable upon conversion of shares of our Series A
Preferred Stock. 804,800 shares of our common stock subject to issuance upon exercise of outstanding stock
options under the Stock Incentive Plan, 213,869 shares of our common stock that are issuable pursuant to exercise of
outstanding warrants, and 154,867 additional shares of our common stock that were reserved for issuance under the
Stock Incentive Plan. A future issuance of any new shares of our common stock would, and equity-related
securities could, cause further dilution in the value of our outstanding shares of common stock.
We have the ability to incur debt and pledge our assets, including our stock in our bank, to secure that debt.
We have the ability to incur debt and pledge our assets to secure that debt. Absent special and unusual
circumstances, a holder of indebtedness for borrowed money has rights that are superior to those of holders of our
common stock. For example, interest must be paid to a lender before dividends can be paid to our shareholders, and,
in the case of liquidation, our borrowings must be repaid before we can distribute any assets to our shareholders.
Furthermore, we would have to make principal and interest payments on our indebtedness, which could reduce our
profitability or result in net losses on a consolidated basis even if our bank were profitable.
The rights of our common shareholders are subordinate to the rights of the holders of our Series A Preferred
Stock and any debt securities that we may issue and may be subordinate to the holders of any other class of
preferred stock that we may issue in the future.
As of December 31, 2017, we have 878,049 shares of Series A Preferred Stock outstanding. These shares have
certain rights that are senior to our common stock. Holders of our Series A Preferred Stock are entitled to receive,
when, as and if declared by our board of directors, cash dividends to the same extent and on the same basis as cash
dividends as declared by our board of directors with respect to common stock. Such dividends on shares of Series A
Preferred Stock are payable on the same dates as dividends on shares of common stock but prior to the payment of
any dividends on shares of common stock. In the event of our bankruptcy, dissolution or liquidation, the holders of
our Series A Preferred Stock are entitled to receive a liquidation preference of $10.25 per share of Series A
Preferred Stock, plus any amount equal to all dividends declared and unpaid thereon, before any distributions can be
made to the holders of our common stock.
Our charter authorizes our board of directors to issue an aggregate of up to five million shares of preferred stock
without any further action on the part of our shareholders. Our board of directors also has the power, without
shareholder approval, to set the terms of any series of preferred stock that may be issued, including voting rights,
dividend rights, and preferences over our common stock with respect to dividends or in the event of a dissolution,
liquidation or winding up and other terms. Accordingly, you should assume that any shares of preferred stock that
we may issue in the future will also be senior to our common stock. In the event that we issue preferred stock in the
future that has preference over our common stock with respect to payment of dividends or upon our liquidation,
dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our
common stock, the rights of the holders of our common stock or the market price of our common stock could be
adversely affected.
We and our bank are subject to capital and other legal and regulatory requirements which restrict our ability to
pay dividends.
We are subject to certain restrictions on the payment of cash dividends as a result of banking laws, regulations and
policies. In addition, because our bank is our only material asset, our ability to pay dividends to our shareholders
depends on our receipt of dividends from the bank, which is also subject to restrictions on dividends as a result of
banking laws, regulations and policies.
31
We are an “emerging growth company,” and the reduced regulatory and reporting requirements applicable to
emerging growth companies may make our common stock less attractive to investors.
We are an “emerging growth company,” as described in the JOBS Act. For as long as we continue to be an emerging
growth company we may take advantage of reduced regulatory and reporting requirements that are otherwise
generally applicable to public companies. These include, without limitation, not being required to comply with the
auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced financial reporting
requirements, reduced disclosure obligations regarding executive compensation, a potential exemption from new
auditing standards adopted by the Public Company Accounting Oversight Board and exemptions from the
requirements of holding non-binding advisory votes on executive compensation and golden parachute payments.
We may take advantage of these provisions for up to five years, unless we earlier cease to be an emerging growth
company, which would occur if our annual gross revenue exceeds $1.0 billion, if we issue more than $1.0 billion in
non-convertible debt in a three-year period, or if the market value of our common stock held by non-affiliates
exceeds $700.0 million as of any June 30 before that time, in which case we would no longer be an emerging growth
company as of the following December 31. Investors may find our common stock less attractive if we rely on these
reduced regulatory and reporting requirements, which may result in a less active trading market and increased
volatility in our stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters and main branch office is located at 1201 Demonbreun Street, Nashville, Tennessee 37203. The
following table summarizes pertinent details of our retail bank branch locations and mortgage origination offices as
of February 26, 2018.
Location
CapStar Bank
1201 Demonbreun Street, Suite 700
Nashville, TN 37203
Owned/Leased
Lease Expiration
Type of Office
Leased
02/28/32
Headquarters and Main
Retail Bank Branch
2321 Crestmoor Road
Nashville, TN 37215
2002 Richard Jones Road
Nashville, TN 37215
1600 Westgate Circle, Suite 150
Brentwood, TN 37027
5500 Maryland Way, Suite 130
Brentwood, TN 37027
101 Springhouse Court
Hendersonville, TN 37075
885 Greenlea Blvd.
Gallatin, TN 37066
Building (Owned);
Land (Leased)
Building: N/A
Land: 02/15/28
Retail Bank Branch
Leased
Leased
Leased
Owned
Owned
10/31/18
Mortgage Origination Office
09/14/18
Mortgage Origination Office
09/30/18
Retail Bank Branch
N/A
N/A
Retail Bank Branch
Retail Bank Branch
32
ITEM 3. 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. However, based upon available information and in
consultation with legal counsel, management does not expect the ultimate disposition of any or a combination of
these actions to have a material adverse effect on the Company’s assets, business, cash flow, condition (financial or
otherwise), liquidity, prospects and\or results of operations.
Litigation Against Gaylon M. Lawrence & The Lawrence Group
On October 31, 2017, CapStar filed a complaint, captioned CapStar Financial Holdings, Inc. v. Gaylon M.
Lawrence & The Lawrence Group, Case No. 3:17-cv-01421, in the U.S. District Court for the Middle District of
Tennessee, in connection with Mr. Lawrence and The Lawrence Group’s acquisition of CapStar stock. The
complaint alleges that defendants violated Section 13(d) of the Securities Exchange Act of 1934 by filing materially
false and misleading Schedules 13D regarding defendants’ acquisition of a minority stake (1,156,675 shares) of
CapStar stock. It also alleged that defendants violated the Change in Bank Control Act, 12 U.S.C. § 1817(j), by
attempting to acquire control of CapStar without first receiving approval from the Federal Reserve, and also that
defendants violated Tennessee Code Section 45-2-107 by controlling banks without having registered as a bank
holding company.
By order dated December 18, 2017, the court granted CapStar’s motion for expedited discovery, which is presently
underway. Defendants have filed a motion to dismiss the action as well as a separate motion to stay, both of which
remain pending.
Mr. Lawrence has also filed an Interagency Notice of Change in Control pursuant to the Change in Bank Control
Act with the Federal Reserve on October 30, 2017, seeking permission to acquire up to 15% of the outstanding
voting shares of CapStar’s common stock. The Company has protested that notice. The Federal Reserve has twice
extended the processing of Mr. Lawrence’s filing.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
33
PART II
ITEM 5.
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
CapStar Financial’s common stock is traded on the Nasdaq Global Select Market under the symbol “CSTR” and has
traded on that market since September 22, 2016. Prior to that time, there was no established public trading market
for our stock. The following table shows the high and low sales price information for our common stock for each
full quarter in 2017 and 2016 as reported on the Nasdaq Global Select Market.
2017:
First quarter
Second quarter
Third quarter
Fourth quarter
2016:
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
Price Per Share
High
Low
22.05 $
19.53
19.62
22.22
— $
—
—
22.35
18.52
16.96
16.00
18.73
—
—
—
15.90
As of February 26, 2018 there were 1,750 holders of record of shares of our common stock and one holder of record
of shares of our non-voting common stock.
The following table shows information related to the repurchase of shares of common stock by the Company during
the three months ended December 31, 2017.
Total number of
shares purchased
(1)
Average price paid
per share
Total number of
shares purchased
as part of publicly
announced plan
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total
571 $
27
153,956
154,554 $
20.34
18.98
21.79
21.78
Maximum
number
of shares that may
yet be purchased
under the plan
—
—
—
—
—
—
—
—
(1) Activity represents shares of common stock withheld to pay purchase price and taxes due upon vesting of
restricted shares and exercise of stock options and warrants.
34
Stock Performance Graph
The following stock performance graph compares total shareholders return on our common stock for the period
beginning at the close of trading on January 1, 2017 until December 31, 2017, with the cumulative total return of the
NASDAQ Composite Index and the NASDAQ Bank Index for the same period. Cumulative total return is
computed by dividing the difference between the share price of our common stock at the end and the beginning of
the measurement period by the share price of our common stock at the beginning of the measurement period. The
performance graph assumes $100 is invested on December 31, 2016 in shares of our common stock, the NASDAQ
Composite Index and the NASDAQ Bank Index. Historical stock price performance is not necessarily indicative
of future stock price performance. The information in this paragraph and the following stock performance graph
shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C,
other than as provided in Item 201 of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act, except
to the extent that we specifically request that such information be treated as soliciting material or specifically
incorporate it by reference into a filing under the Securities Act or the Exchange Act.
CSTR (CapStar Financial Holdings, Inc.)
IXIC (NASDAQ Composite Index)
BKX (NASDAQ Bank Index)
Dividend Policy
$
12/31/2016
12/31/2017
100 $
100
100
97
128
116
Holders of shares of our common stock are only entitled to receive dividends when, as and if declared by our board
of directors out of funds legally available for dividends. We have not paid any cash dividends on our capital stock
since inception. As a Tennessee corporation, we are not permitted to pay dividends if, after giving effect to such
payment, we would not be able to pay our debts as they become due in the usual course of business or our total
assets would be less than the sum of our total liabilities plus any amounts needed to satisfy any preferential rights if
we were dissolving.
Because we are a bank holding company and do not engage directly in business activities of a material nature, our
ability to pay any dividends on our common stock depends, in large part, upon our receipt of dividends from our
bank, which is also subject to numerous limitations on the payment of dividends under federal and state banking
laws, regulations and policies. Pursuant to Tennessee law, our bank may not, without the prior approval of the
Commissioner of the TDFI, pay any dividends to us in a calendar year in excess of the total of our bank’s net
income for that year plus the retained net income for the preceding two years. For additional information,
see “Business—Supervision and Regulation—Bank Regulation and Supervision—Payment of Dividends.”
35
Our ability to pay dividends to our shareholders in the future will depend on regulatory restrictions and our liquidity
and capital requirements, as well as our earnings and financial condition, the general economic climate, contractual
restrictions, our ability to service any equity or debt obligations senior to our common stock and other factors
deemed relevant by our board of directors.
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 $2.1
million of offering expenses paid to third parties, the Company received net proceeds of approximately $21.6
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 initial public offering. 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.
36
ITEM 6. SELECTED FINANCIAL DATA
Balance Sheet Data (at period end):
Total assets
Total loans
Allowance for loan losses
Investment securities
Goodwill and core deposit intangible
Total deposits
FHLB advances and securities sold under repurchase
agreements
Shareholders' equity
Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Net income before income tax expense
Income tax expense
Net income
Per Share Data:
Net income per share, basic
Weighted average shares - basic
Net income per share, diluted
Weighted average shares - diluted
Book value per share of common stock
Tangible book value per share of common stock (1)
Total shares of common stock outstanding
Total shares of preferred stock outstanding
Performance Ratios:
Return on average assets
Return on average equity
Net interest margin
Non-interest income to average assets
Efficiency ratio
Asset Quality Data:
Allowance for loan losses to total loans
Allowance for loan losses to non-performing loans
Non-performing assets to total assets
Net charge-offs to average loans
Capital ratios (CapStar Financial Holdings, Inc.):
Total risk based capital
Tier 1 risk based capital
Common equity tier 1 capital
Leverage
2017
2016
2015
2014
2013
$ 1,344,429
947,537
(13,721)
196,380
6,242
1,119,866
$ 1,333,675
935,251
(11,634)
229,219
6,290
1,128,723
$ 1,206,800
808,396
(10,132)
216,477
6,344
1,038,461
$ 1,128,395
713,077
(11,282)
280,449
6,398
981,057
$ 1,008,709
626,382
(8,459)
300,396
284
879,090
70,000
146,946
55,000
139,207
48,755
108,586
34,837
102,651
$
$
51,515
9,652
41,863
12,870
28,993
10,908
33,765
6,136
4,635
1,501
$
45,395
6,931
38,464
2,829
35,635
11,084
33,129
13,590
4,493
9,097
$
40,504
5,731
34,773
1,651
33,122
8,884
30,977
11,029
3,470
7,559
$
38,287
5,871
32,416
3,869
28,547
7,419
28,562
7,404
2,412
4,992
29,494
96,191
41,157
6,577
34,581
938
33,642
1,946
25,431
10,157
3,749
6,408
$
0.13
11,280,580
$
0.12
12,803,511
11.91
$
$
11.37
11,582,026
878,049
$
0.98
9,328,236
$
0.81
11,212,026
11.62
$
$
11.06
11,204,515
878,049
$
0.89
8,538,970
$
0.73
10,381,895
10.74
$
$
10.00
8,577,051
1,609,756
$
0.59
8,456,386
$
0.49
10,281,044
10.17
$
$
9.41
8,471,516
1,609,756
$
0.75
8,583,105
$
0.62
10,409,750
9.54
$
$
9.51
8,353,087
1,609,756
0.11%
1.05%
3.20%
0.80%
63.98%
1.45%
509.08%
0.20%
1.09%
12.52%
11.41%
10.70%
10.77%
0.72%
7.57%
3.17%
0.88%
66.86%
1.24%
321.42%
0.27%
0.15%
12.60%
11.61%
10.90%
10.46%
0.66%
7.08%
3.19%
0.78%
70.96%
1.25%
376.78%
0.24%
0.38%
11.42%
10.41%
8.89%
9.33%
0.47%
4.94%
3.20%
0.70%
71.70%
1.58%
145.80%
0.74%
0.15%
11.54%
10.32%
8.55%
8.56%
0.62%
6.46%
3.45%
0.19%
69.62%
1.35%
129.11%
0.79%
0.11%
12.19%
11.14%
0.00%
8.96%
(1)
This measure is not recognized under GAAP and is therefore considered to be a non-GAAP measure. See Non-GAAP
Financial Measures — Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a
reconciliation of this measure to its most comparable GAAP measure.
37
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of our financial condition and our results of operations as of and for the years ended
December 31, 2017, 2016 and 2015. 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 together with our Consolidated Financial
Statements, the notes to our Consolidated Financial Statements and the other financial information included
elsewhere in this Report. 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 sections entitled “Risk
Factors” and “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this Report. 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 per share data or when otherwise
specifically noted. Unless specifically noted in this Report, all references in this section to the fiscal years 2015,
2016 and 2017 mean our fiscal years ended December 31, 2015, 2016, and 2017, respectively.
Overview
We completed 2017 with net income of $1.5 million, a decrease of 83.5% from 2016. The decrease in our net
income was primarily due to a higher provision for loan losses, resulting from $10.8 million of net charged-off loans
recognized during 2017, and a $3.6 million write-down of our deferred tax assets resulting from the Tax Cuts and
Jobs Act of 2017 (“Tax Reform Act”) that was signed into law in December 2017. The decrease in our net income
was partially offset by higher net interest income resulting from continued loan growth. Diluted net income per
share of common stock for 2017 was $0.12, an 85.2% decrease from 2016. Average loans for 2017 were $987.7
million, an 11.2% increase over 2016. Average deposits for 2017 were $1.108 billion, a 0.9% increase over 2016.
Our primary revenue source is net interest income and fees from various financial services provided to customers.
Net interest income is the difference between interest income earned on loans, investment securities and other
interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume
and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to
funding loans and the rates paid on deposits directly impact profitability. Business volumes are influenced by
competition, new business acquisition efforts and economic factors including market interest rates, business
spending and consumer confidence.
Net interest income increased $3.4 million, or 8.8%, for 2017 compared to 2016. The positive effects of increased
volumes and yields on earning assets were partially offset by the negative effects of increasing deposit costs. Net
interest margin increased to 3.20% for 2017, compared with 3.17% for 2016.
In response to the assessment of risk in the loan portfolio, including net loan growth and charge-offs, we recorded a
$12.9 million provision for loan losses during 2017, compared to a $2.8 million provision during 2016. The increase
from 2016 was caused primarily by deterioration in the credit quality of commercial and industrial loans to one
borrower. The provision for loan losses represents a charge to earnings necessary to establish an allowance for
loan losses that, in management’s evaluation, is adequate to provide coverage for the estimated probable inherent
losses on outstanding loans. Our allowance for loan losses at December 31, 2017 was 1.45% of total loans,
compared with 1.24% of total loans at December 31, 2016.
Total noninterest income for 2017 decreased $0.2 million, or 1.6%, compared to 2016, and comprised 17% of total
revenues.
Total noninterest expense for 2017 increased $0.6 million, or 1.9%, compared to 2016. Our efficiency ratio for 2017
was 64.0% compared to 66.9% for 2016.
The Company’s effective tax rate increased to 75.5% for 2017 from 33.1% for 2016. The increase in the effective
tax rate is due to a $3.6 million write-down of our deferred tax assets resulting from the Tax Reform Act.
38
Tangible common equity (TCE), a non-GAAP measure, is a measure of a company's capital which is useful in
evaluating the quality and adequacy of capital. The ratio of tangible common equity to total tangible assets was
9.84% as of December 31, 2017, compared with 9.34% at December 31, 2016. See “Non-GAAP Financial
Measures” for a discussion of and reconciliation to the most directly comparable U.S. GAAP measure.
The following sections provide more details on subjects presented in this overview.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared based on the application of certain accounting policies, the
most significant of which are described in Note 1 to our Consolidated Financial Statements for the year ended
December 31, 2017, which are contained elsewhere in this Report. Certain of these policies require numerous
estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may
materially and adversely affect our reported results and financial position for the current period or future periods.
The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to
be recorded at, or adjusted to reflect, fair value. Assets carried at fair value inherently result in more financial
statement volatility. Fair values and information used to record valuation adjustments for certain assets and
liabilities are either based on quoted market prices or are provided by other independent third-party sources, when
available. When such information is not available, management estimates valuation adjustments based upon
historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
Management evaluates our estimates and assumptions on an ongoing basis. Changes in underlying factors,
assumptions or estimates in any of these areas could have a material impact on our future financial condition and
results of operations.
We have identified the following accounting policies and estimates that, due to the difficult, subjective or complex
judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our financial
statements to those judgments and assumptions, are critical to an understanding of our financial condition and results
of operations. We believe that the judgments, estimates and assumptions used in the preparation of our financial
statements are reasonable and appropriate.
Allowance for Loan Losses
We record estimated probable inherent credit losses in the loan portfolio as an allowance for loan losses. The
methodologies and assumptions for determining the adequacy of the overall allowance for loan losses involve
significant judgments to be made by management. Some of the more critical judgments supporting our allowance for
loan losses include judgments about the credit-worthiness of borrowers, estimated value of underlying collateral,
assumptions about cash flow, determination of loss factors for estimating credit losses, and the impact of current
events, conditions, and other factors impacting the level of inherent losses. Under different conditions or using
different assumptions, the actual or estimated credit losses ultimately realized by us may be different from our
estimates. In determining the allowance, we estimate losses on individual impaired loans and on groups of loans that
are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly basis, we assess
the risk inherent in our loan portfolio based on qualitative and quantitative trends in the portfolio, including the
internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio,
industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified
weaknesses, and the impacts of local, regional, and national economic factors on the quality of the loan portfolio.
Based on this analysis, we may record a provision for loan losses in order to maintain the allowance at appropriate
levels. For a more complete discussion of the methodology employed to calculate the allowance for loan losses, see
Note 1 to our Consolidated Financial Statements for the year ended December 31, 2017, which is included
elsewhere in this Report.
Investment Securities Impairment
We assess on a quarterly basis whether there have been any events or economic circumstances to indicate that a
security with respect to which there is an unrealized loss is impaired on an other-than-temporary basis. In any
instance, we would consider many factors, including the severity and duration of the impairment, our intent and
ability to hold the security for a period of time sufficient for a recovery in value, recent events specific to the issuer
or industry, and, for debt securities, external credit ratings and recent downgrades. Securities with respect to which
there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value.
39
Income Taxes
Deferred income tax assets and liabilities are computed using the asset and liability method, which recognizes a
liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts
attributable to events recognized in the financial statements. A valuation allowance may be established to the extent
necessary to reduce the deferred tax asset to a level at which it is “more likely than not” that the tax asset or benefit
will be realized. Realization of tax benefits depends on having sufficient taxable income, available tax loss
carrybacks or credits, the reversal of taxable temporary differences and/or tax planning strategies within the reversal
period, and that current tax law allows for the realization of recorded tax benefits.
Business Combinations
Assets purchased and liabilities assumed in a business combination are recorded at their fair value. The fair value of
a loan portfolio acquired in a business combination requires greater levels of management estimates and judgment
than the remainder of purchased assets or assumed liabilities. When the loans have evidence of credit deterioration
since origination and it is probable at the date of acquisition that the Company will not collect all contractually
required principal and interest payments, the loans are considered impaired, and the expected cash flows in excess of
the amount paid are recorded as interest income over the remaining life of the loan. The excess of the loan’s
contractual principal and interest over expected cash flows is not recorded. We must estimate expected cash flows at
each reporting date. Subsequent decreases to the expected cash flows will generally result in a provision for loan
losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior
charges and adjusted accretable yield which will have a positive impact on interest income. Purchased loans without
evidence of credit deterioration are recorded at their initial fair value and adjusted as necessary for subsequent
advances, pay downs, amortization or accretion of any premium or discount on purchase, charge-offs and additional
provisions that may be required.
Results of Operations
The following is a summary of our results of operations:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Noninterest expense
Net income before income taxes
Income tax expense
Net income
$ 51,515 $ 45,395
6,931
38,464
2,829
35,635
11,084
33,129
13,590
4,493
9,097
9,652
41,863
12,870
28,993
10,908
33,765
6,136
4,635
1,501 $
$
Year ended
December 31,
2017
2016
2017-2016
Percent
Increase
(Decrease)
2016-2015
Increase
(Decrease)
Year ended Percent
December 31,
2015
40,504
5,731
34,773
1,651
33,122
8,884
30,977
11,029
3,470
7,559
12.1%
20.9%
10.6%
71.4%
7.6%
24.8%
6.9%
23.2%
29.5%
20.3%
13.5% $
39.3%
8.8%
354.9%
(18.6)%
(1.6)%
1.9%
(54.8)%
3.2%
(83.5)% $
Basic net income per share of common stock
Diluted net income per share of common stock
$
$
0.13 $
0.12 $
0.98
0.81
(86.7)% $
(85.2)% $
0.89
0.73
10.1%
11.0%
Return on average assets was 0.11%, 0.72% and 0.66% for 2017, 2016 and 2015, respectively.
Return on average shareholders’ equity was 1.05%, 7.57% and 7.08% for 2017, 2016 and 2015, respectively.
The following sections provide a more detailed analysis of significant factors affecting our operating results.
40
Net Interest Income
The largest component of our net income is net interest income – the difference between the income earned on interest-
earning assets and the interest paid on deposits and borrowed funds used to support our assets. Net interest income
divided by total average interest-earning assets represents our net interest margin. The major factors that affect net
interest income and net interest margin are changes in volumes, the yield on interest-earning assets and the cost of
interest-bearing liabilities. Our margin can also be affected by economic conditions, the competitive environment, loan
demand and deposit flow. Our ability to respond to changes in these factors by using effective asset-liability
management techniques is critical to maintaining the stability of the net interest margin and our net interest income.
The following table sets 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 years ended December 31,
2017, 2016 and 2015:
Interest-Earning Assets
Loans (1)
Loans held for sale
Securities:
Taxable investment
securities (2)
Investment securities
exempt from federal
income tax (3)
Total securities
Cash balances in other
banks
Funds sold
Total interest-earning assets
Noninterest-earning assets
Total assets
Interest-Bearing Liabilities
Interest bearing deposits:
Interest-bearing
transaction accounts
Savings and money
market deposits
Time deposits
Total interest-beraring
deposits
Borrowings and repurchase
agreements
Average
Outstanding
Balance
2017
Interest
Income/
Expense
Average
Yield/
Rate
For the Year Ended December 31,
2016
Interest
Income/
Expense
Average
Outstanding
Balance
Average
Yield/
Rate
Average
Outstanding
Balance
2015
Interest
Income/
Expense
Average
Yield/
Rate
$
987,710 $43,531
49,466 2,070
4.41% $
4.19%
888,541 $38,450
47,303 1,763
4.33% $
3.73%
744,151 $33,722
29,324 1,123
4.53%
3.83%
166,561 4,078
2.45%
176,977 3,729
2.11%
220,167 4,421
2.01%
52,130 1,244
218,691 5,322
2.39%
2.43%
47,353 1,158
224,330 4,887
2.45%
2.18%
40,160 1,080
260,327 5,501
2.69%
2.11%
551
49,990
41
2,518
1,308,375 51,515
276
1.10%
19
1.63%
3.94% 1,213,474 45,395
51,147
2,153
140
0.54%
18
0.89%
3.74% 1,091,039 40,504
54,143
3,094
0.26%
0.60%
3.71%
49,419
$ 1,357,794
49,289
$ 1,262,763
49,721
$ 1,140,760
$
301,411 2,447
0.81% $
269,113 1,489
0.55% $
143,939
748
0.52%
378,640 3,188
194,892 2,445
0.84%
1.25%
445,873 2,859
193,881 2,085
0.64%
1.08%
465,622 2,733
197,535 2,031
0.59%
1.03%
874,943 8,080
0.92%
908,867 6,433
0.71%
807,096 5,512
0.68%
98,289 1,572
973,232 9,652
1.60%
0.99%
498
32,371
941,238 6,931
1.54%
0.74%
219
39,581
846,677 5,731
0.55%
0.68%
Total interest-bearing liabilities
Noninterest-bearing
deposits
Total funding sources
Noninterest-bearing
liabilities
Shareholders’ equity
232,687
1,205,919
8,473
143,402
Total liabilities and
shareholders’ equity
Net interest spread (4)
Net interest income/margin (5)
$ 1,357,794
189,270
1,130,508
12,132
120,123
176,577
1,023,254
10,779
106,727
$ 1,262,763
$ 1,140,760
$41,863
2.95%
3.20%
$38,464
3.00%
3.17%
$34,773
3.04%
3.19%
41
(1) Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred
loan fees, net of deferred loan costs.
Taxable investment securities include restricted equity securities.
(2)
(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.
The following table reflects, for the periods indicated, the changes in our net interest income due to changes in the
volume of interest-earning assets and interest-bearing liabilities and the associated rates paid or earned on these
assets and liabilities.
2017 Compared to 2016
Increase (decrease) due to
Rate
Volume
2016 Compared to 2015
Increase (decrease) due to
Rate
Net
Net
Volume
Interest-Earning Assets
Loans
Loans held for sale
Securities:
Taxable investment securities
Investment securities exempt from federal
income tax
Total securities
Cash Balances In Other Banks
Funds Sold
Total interest-earning assets
$ 4,291 $
81
790 $ 5,081 $ 6,544 $ (1,815) $
(48)
227
688
308
4,729
640
(219)
568
349
(867)
175
(692)
117
(102)
(6)
3
4,267
(31)
537
280
19
1,853
86
435
274
22
6,120
193
(674)
(8)
(6)
6,544
(115)
60
144
6
(1,653)
78
(614)
136
—
4,891
Interest Bearing Liabilities
Interest-bearing transaction accounts
Savings and money market deposits
Time deposits
Borrowings and repurchase agreements
Total interest-bearing liabilities
Net Interest Income
179
(431)
11
1,015
774
$ 3,493 $
2017 compared to 2016
779
760
348
60
1,947
91
242
91
319
743
(94) $ 3,399 $ 6,087 $ (2,396) $
958
329
359
1,075
2,721
651
(116)
(38)
(40)
457
742
126
53
279
1,200
3,691
Our net interest income increased $3.4 million, or 8.8%, from 2016 to 2017 primarily due to increasing loan
volumes, partially offset by the negative effects of increasing interest-bearing liabilities volumes and costs.
Our net interest margin was 3.20% and 3.17% for 2017 and 2016, respectively. The increase in net interest margin
was primarily due to growth of our interest-earning assets at a higher pace than our interest-bearing liabilities.
For 2017 and 2016, average loan yields increased from 4.33% to 4.41% which was primarily driven by increases in
short-term interest rate indexes affecting the variable rate portion of our loan portfolio, offset by competitive pricing
pressures. From September 30, 2016 to December 31, 2017, the LIBOR – 1 month interest rate increased from
0.53% to 1.56%. Approximately 65% of our loan portfolio is variable in nature and indexed to 1 month LIBOR.
Average loans for 2017 increased 11.2% compared to 2016 as a result of adding new bankers in the Nashville MSA
and continued focus on attracting new clients.
Average security yields increased from 2.18% to 2.43% for 2016 and 2017, respectively, primarily due to increases
in the LIBOR rate on the variable rate portion of our securities portfolio. The resulting yield on average interest-
earning assets increased 20 basis points for 2017 compared to 2016.
42
We funded our growth in loans through an increase in funding sources of 6.7% from 2016 to 2017 and shifting
investment securities to higher yielding loans. The primary driver of our increased funding sources was growth in
our average non-interest bearing deposits of 22.9% from 2016 to 2017.
The average rate paid on interest-bearing liabilities was 0.99% for 2017 compared to 0.74% for 2016. The
majority of this increase was due to increases in the Fed Funds rate. The Fed Funds rate increased from 0.50% at
September 30, 2016 to 1.50% at December 31, 2017. We passed along a portion of this rate increase to our clients.
We believe margin expansion over both the short and the long term will be challenging due to continued pressure on
earning asset yields. Loan pricing for creditworthy borrowers is very competitive in the Nashville MSA and has
limited our ability to increase pricing on new and renewed loans over the last year. We anticipate that this
challenging competitive environment will continue in 2018. However, we believe our net interest income should
increase in 2018 compared to 2017 primarily due to increases in average loans. We anticipate funding these
increased earning assets by continuing to grow deposits.
2016 compared to 2015
Our net interest income increased $3.7 million, or 10.6%, from 2015 to 2016, primarily due to increasing loan
volumes, partially offset by the negative effects of increasing interest-bearing liabilities volumes and costs.
Our net interest margin was 3.17% and 3.19% for 2016 and 2015, respectively. The decrease in net interest margin
from 2015 to 2016 was primarily due to declining loan yields.
Average loan yields declined from 4.53% in 2015 to 4.33% in 2016 primarily due to lower rates on new loan
production as compared to the average rate on the existing loan portfolio, driven by continued competitive pricing
pressures associated with securing the business of credit-worthy borrowers in the Nashville MSA.
Average loans increased 19.4% from 2015 to 2016, as a result of adding new bankers in the Nashville MSA and
continued focus on attracting new clients.
Average security yields increased from 2.11% to 2.18% for 2015 and 2016, respectively, primarily due to increases
in the LIBOR rate on the variable rate portion of our securities portfolio. The resulting yield on average interest-
earning assets increased 3 basis points for 2016 compared to 2015.
We funded our growth in loans through an increase in funding sources of 10.5% from 2015 to 2016 and shifting
investment securities to higher yielding loans. The primary driver of our increased funding sources was growth in
our average non-interest bearing deposits of 7.2% from 2015 to 2016.
The average rate paid on interest-bearing liabilities was 0.74% for 2016 compared to 0.68% for 2015. The majority
of the increase from 2015 to 2016 was due to increases in the Fed Funds rate. We passed along a portion of this rate
increase to our clients.
Provision for Loan losses
Our policy is to maintain an allowance for loan losses at a level sufficient to absorb estimated probable incurred
losses inherent in the loan portfolio. The allowance is increased by a provision for loan losses, which is a charge to
earnings, and is decreased by charge-offs and increased by loan recoveries. Our allowance for loan losses as a
percentage of total loans was 1.45%, 1.24% and 1.25% at December 31, 2017, 2016 and 2015, respectively.
2017 compared to 2016
The provision for loan losses amounted to $12.9 million and $2.8 million for 2017 and 2016, respectively. 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.
43
Provision expense increased for 2017 compared to 2016 due to increased net charge-offs. Net charge-offs for 2017
were $10.8 million compared to $1.3 million for 2016. This increase was 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, net of recoveries, amounted to $9.1
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 was 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 2017 compared to 2016.
Our allowance for loan losses as a percentage of total loans increased from 1.24% at December 31, 2016 to 1.45% at
December 31, 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 2017, we increased the look-back period, from which we calculate
peer bank historical loss experience, from 28 to 33 quarters. 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.
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 December 31, 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, 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.
2016 compared to 2015
The provision for loan losses amounted to $2.8 million and $1.7 million for 2016 and 2015, respectively. Provision
expense increased during 2016 over 2015 due primarily to increased loan growth. Our average loan growth for 2016
and 2015 was 19.4% and 9.1%, respectively.
Noninterest Income
In addition to net interest margin, we generate recurring noninterest income from our lines of business. 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 originating and selling mortgages, a line of business that originates and sells
commercial real estate loans, and we have a revenue-sharing relationship with a registered broker-dealer, which
generates wealth management fees. In addition to these types of recurring noninterest income, we own insurance on
several key employees and record income on the increase in the cash surrender value of these policies.
44
The following table sets forth the principal components of noninterest income for the periods indicated.
Year Ended
December 31,
2017
2016
2017-2016
Percent
Increase
(Decrease)
2016-2015
Year Ended Percent
December 31,
2015
Increase
(Decrease)
Noninterest income:
Treasury management and other deposit service
charges
Loan commitment fees
Net gain (loss) on sale of securities
Tri-Net fees
Mortgage banking income
Other noninterest income
Total noninterest income
2017 compared to 2016
$
1,516 $
771
(66)
1,002
6,238
1,447
1,108
1,118
121
125
7,375
1,237
$ 10,908 $ 11,084
36.8% $
(31.0)%
(154.5)%
701.6%
(15.4)%
17.0%
(1.6)% $
910
822
55
—
5,962
1,135
8,884
21.8%
36.0%
120.0%
100.0%
23.7%
9.0%
24.8%
The increase in treasury management and other deposit service charges for 2017 and 2016 is driven primarily by
transaction volume, which can fluctuate throughout and from year to year.
Growth in the volume of our
commercial deposit accounts was the primary contributor to the increase.
Similarly, loan commitment fees fluctuate based on customer activity and the timing of one-time, transaction related
loan fees.
Tri-Net fees represent 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 originated in our markets 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 15.4% from 2016 to 2017 due to lower profit
margins on loans sold and a lower volume of originations.
2016 compared to 2015
The increase in treasury management and other deposit service charges for 2016 and 2015 is driven primarily by
Growth in the volume of our
transaction volume, which can fluctuate throughout and from year to year.
commercial deposit accounts was the primary contributor to the increase.
Similarly, loan commitment fees fluctuate based on customer activity and the timing of one-time, transaction related
loan fees.
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. 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 increased 23.7% in 2016 compared to 2015 due to
increased purchase activity related to low mortgage rates and a vibrant residential real estate market in the Nashville
MSA.
45
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.
Noninterest expense:
Salaries and employee benefits
Data processing and software
Professional fees
Occupancy
Equipment
Regulatory fees
Other operating
Total noninterest expense
2017 compared to 2016
Year Ended
December 31,
2017
2016
2017-2016
Percent
Increase
(Decrease)
2016-2015
Year Ended Percent
December 31, Increase
(Decrease)
2015
$
$
20,400 $ 20,461
2,373
2,786
1,554
1,522
1,498
2,025
1,743
2,071
1,091
1,111
4,409
3,850
33,765 $ 33,129
(0.3)% $
17.4%
(2.1)%
35.2%
18.8%
1.8%
(12.7)%
1.9% $
19,278
2,317
1,469
1,538
1,598
915
3,862
30,977
6.1%
2.4%
5.8%
(2.6)%
9.1%
19.2%
14.2%
6.9%
The largest increase between 2016 and 2017 within noninterest expense was related to the new lease of our
corporate headquarters which we moved into in the first quarter of 2017. This new lease resulted in an increase in
occupancy expense of 35.2%.
Data processing and software expense increased from 2016 to 2017 due to an increase in the volume of transactions
and implementation of new software in our mortgage banking line of business.
The increase in equipment expense from 2016 to 2017 is related to the increasing cost of managing our IT network.
A decrease in other operating expense of 12.7%, in 2017 compared to 2016 was primarily due to the fact that we did
not have to significantly adjust contingent consideration expense in 2017. Our contingent consideration expense is
the result of our acquisition of Farmington Financial Group, LLC in 2014. As mortgage origination volumes
change from our original estimates the resulting increase or decrease in contingent consideration is recorded in other
operating expense.
Our efficiency ratio (ratio of noninterest expense to the sum of net interest income and noninterest income) was
64.0% and 66.9% for 2017 and 2016, respectively. The efficiency ratio measures the amount of expense that is
incurred to generate a dollar of revenue. The efficiency ratio was positively impacted by growth in our net interest
income and noninterest income that outpaced our increases in expenses. For 2017, our revenue base (net interest
income plus noninterest income) grew at rate of approximately three times our noninterest expense.
2016 compared to 2015
The largest increase between 2015 and 2016 within noninterest expense was related to employee costs as salaries
and employee benefits increased due to our expanded presence in the Nashville MSA. At December 31, 2016, the
number of our full-time equivalent employees had increased to 170 as compared to 162 at December 31, 2015.
The increase in equipment expense from 2015 to 2016 is related to the increasing cost of managing our IT network.
Regulatory fees increased 19.2% in 2016 compared to 2015 primarily as a result of increasing FDIC insurance
expense. The FDIC modified the way insurance assessments are calculated and this change took place in the third
quarter of 2016, increasing our expense compared to prior periods.
An increase in other operating expense of 14.2%, in 2016 compared to 2015 was primarily the result of increasing
contingent consideration expenses associated with our mortgage line of business.
Our efficiency ratio was 66.9% and 71.0% for 2016 and 2015, respectively. The efficiency ratio was positively
impacted by growth in our net interest income and noninterest income that outpaced our increases in expenses. For
2016, our revenue base (net interest income plus noninterest income) grew at rate of approximately two times our
noninterest expense.
46
Income Taxes
2017 compared to 2016
We recorded income tax expense of $4.6 million and $4.5 million in 2017 and 2016, respectively. Our effective
income tax rate for 2017 and 2016 was 75.5% and 33.1%, respectively. Our effective tax rate differs from the
statutory tax rate by our investments in municipal securities, 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 and the 2017 tax law change.
On December 22, 2017, the Tax Reform Act was enacted into law. The Tax Reform Act provides for significant
changes to the U.S. tax code that impact businesses. Effective January 1, 2018, the U.S. federal tax rate for
corporations was reduced from 35% to 21%, for U.S. taxable income and requires a one-time re-measurement of
deferred taxes to reflect their value at a lower tax rate of 21%. Accordingly, the Company re-measured its deferred
tax assets based on the rates at which they are expected to reverse in the future, which is generally 21%. As a result
of the reduction in the corporate income tax rate, the Company is required to revalue its net deferred tax assets to
account for the future impact of lower corporate tax rates on this deferred amount and record any change in the
value of such assets as a one-time, non-cash charge on its income statement.
As a result of the Tax Reform Act, we recorded a $3.56 million increase in income tax expense for 2017. If we
adjust this $3.56 million write-down out of income tax expense, our adjusted effective tax rate for 2017 would have
been 17.5%. This lower adjusted effective tax rate is due to lower taxable income and recognition of excess tax
benefits related to stock compensation. However, the Company is still analyzing certain aspects of the Tax Reform
Act and refining its calculations, which could potentially affect the measurement of these balances or potentially
give rise to new deferred tax amounts.
We are required to recognize the effect of the tax law changes in the period of enactment, such as re-measuring our
deferred tax assets as well as reassessing the net realizability of our deferred tax assets. In December 2017, the SEC
staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one
year of the enactment date. Since the Tax Reform Act was passed late in the fourth quarter of 2017, and ongoing
guidance and accounting interpretation is expected over the next 12 months, we consider the accounting of the
deferred tax re-measurements, and other items to be incomplete due to the forthcoming guidance and our ongoing
analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period
in accordance with SAB 118.
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. We adopted the new guidance in the first
quarter of 2017. As a result, our income tax expense was reduced by $0.7 million in 2017.
2016 compared to 2015
We recorded income tax expense of $4.5 million and $3.5 million in 2016 and 2015, respectively. Our effective
income tax rate for 2016 and 2015 was 33.1%, and 31.5%, respectively. Our effective tax rate differs from the
statutory tax rate by our investments in municipal securities, 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. The increase in effective tax rate in 2016 from 2015 is primarily the result of our utilization of one-
time tax credits in 2015.
Financial Condition
2017 compared to 2016
Total assets increased $10.7 million, or 0.8%, from December 31, 2016 to December 31, 2017. Loans and leases
grew from $935.3 million at December 31, 2016 to $947.5 million at December 31, 2017, a 1.3% increase. Loans
held for sale increased $32.0 million, or 75.9%, during 2017 as we implemented a new line of business related to
originating and selling commercial real estate loans. These increases were offset by a decrease in securities of
$32.8 million, or 14.3%, as we sold out of lower yielding securities to fund loan growth.
47
Total liabilities increased $3.0 million, or 0.3%, from December 31, 2016 to December 31, 2017. Deposits decreased
from $1.129 billion at December 31, 2016 to $1.120 billion at December 31, 2017, a 0.8% decrease, due primarily to
decreases in money market deposits. Growth in non-interest bearing deposits was $104.0 million between December
31, 2016 and December 31, 2017, or 52.6%, as we continue to become the primary bank for our customers. We
increased our Federal Home Loan Bank advances $15.0 million, or 27.3%, from December 31, 2016 to December
31, 2017 to help fund loan growth.
2016 compared to 2015
Total assets increased $126.9 million, or 10.5%, from December 31, 2015 to December 31, 2016. Loans and leases
grew from $808.4 million at December 31, 2015 to $935.3 million at December 31, 2016, a 15.7% increase. All of
this growth was organic.
Total liabilities increased $96.3 million, or 8.8%, from December 31, 2015 to December 31, 2016. Deposits
increased from $1.038 billion at December 31, 2015 to $1.129 billion at December 31, 2016, an 8.8% increase, due
primarily to growth in our correspondent banking deposits.
Investment Securities
The primary purpose of our investment portfolio is to provide another source of interest income, as well as liquidity
management. In managing the composition of the balance sheet, we seek a balance between earnings sources and
credit and liquidity considerations. We manage our investment portfolio according to a written investment policy
approved by our board of directors. Balances in our investment portfolio are subject to change over time based on
our funding needs and interest rate risk management objectives. Our liquidity levels take into account anticipated
future cash flows and all available sources of credit, and are maintained at levels we believe are appropriate to
assure future flexibility in meeting our anticipated funding needs.
Our investment portfolio consists primarily of securities issued by U.S. government-sponsored agencies, obligations
of states and political subdivisions, mortgage-backed securities, asset-backed securities and other debt securities, all
with varying contractual maturities. However, these maturities do not necessarily represent the expected life of the
securities as some of these securities may be called or paid down without penalty prior to their stated maturities. The
investment portfolio is regularly reviewed by the Asset Liability Management committee, or ALCO, of the bank to
ensure an appropriate risk and return profile as well as for adherence to the investment policy.
Our investment portfolio totaled $196.4 million, $229.2 million and $216.5 million at December 31, 2017, 2016 and
2015 respectively. Our investment portfolio has trended down over the past several years as we have redeployed
these funds into higher-earning loans. See “Note 2 to our Consolidated Financial Statements” for additional
information on our investment securities.
The following table presents the fair value of our securities as of December 31, 2017 by their stated maturities (this
maturity schedule excludes security prepayment and call features), as well as the weighted average yields for each
maturity range.
Due in one year or
less
Due in one year to
five years
Due in five years to
ten years
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
Due after ten years
Weighted
Average
Yield
Fair
Value
Securities available for sale:
U. S. government agency
securities
State and municipal securities
Mortgage-backed securities
Asset-backed securities
Other debt securities
$
Total securities available for sale $
Securities held to maturity:
State and municipal securities
Total securities held to maturity
$
$
—
3,965
—
—
—
3,965
—
0.0% $
27,047
3.4%
69,983
0.0%
—
0.0%
0.0%
4,107
3.4% $ 101,137
0.0% $ 11,277
18,110
2.4%
26,067
2.3%
12,661
0.0%
5.6%
1,300
2.2% $ 69,415
—
2.4% $
3,876
2.9%
10,512
2.8%
3,716
2.2%
5.9%
—
2.6% $ 18,104
—
—
0.0% $
0.0% $
2,422
2,422
2.8% $
2.8% $
1,426
1,426
2.6% $
2.6% $
—
—
0.0%
2.1%
3.1%
2.2%
0.0%
2.7%
0.0%
0.0%
48
Loans and Leases
Loans and leases are our largest category of earning assets and typically provide higher yields than other types of
earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks that we attempt to
control and counterbalance.
The composition of gross loans and leases at December 31 for each of the past five years and the percentage of each
classification to total loans are summarized as follows:
December 31,
2016
Amount Percent
December 31,
December 31,
2015
2017
Amount Percent
Amount Percent
$350,622 37.0% $302,322 32.3% $251,197 31.0% $219,793 30.8% $182,392 29.1%
102,581 10.8% 97,015 10.4% 93,785 11.6% 82,167 11.5% 63,893 10.2%
Commercial real estate
Consumer real estate
Construction and land
82,586
4.8%
development
373,248 39.4% 379,620 40.5% 353,442 43.6% 332,914 46.6% 312,527 49.8%
Commercial and industrial
1.3%
Consumer
Other
4.9%
Total gross loans and leases $947,882 100.0% $936,218 100.0% $809,811 100.0% $714,592 100.0% $627,627 100.0%
December 31,
2013
Amount Percent
December 31,
2014
Amount Percent
0.6%
8,668
6.1% 50,197
1.1%
7,910
6.2% 25,615
1.1%
7,939
3.6% 30,659
0.7%
5,974
3.4% 56,796
8.7% 94,491 10.1% 52,522
6,862
31,983
6.5% 30,217
6.5% 46,193
Over the past five years, we have experienced significant growth in our loan portfolio, although the relative
composition of our loan portfolio has not changed significantly over that time. In 2016 and 2017, we did recognize
growth in the construction and land development and commercial real estate loan classifications reflecting the
development of the Nashville MSA in which we operate.
Our primary focus has been on commercial and industrial and commercial real estate lending, which constituted
76% of our loan portfolio as of December 31, 2017. 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
market we serve. The commercial real estate category includes owner-occupied commercial real estate loans which
are similar in many ways to our commercial and industrial lending in that these loans are generally made to
businesses on the basis of the cash flows of the business rather than on the valuation of the real estate. At December
31, 2017, approximately 28% of the outstanding principal balance of our commercial real estate loans was secured
by owner-occupied properties. Since 2009, our commercial and industrial and commercial real estate portfolios have
continued to experience strong growth, primarily due to implementation of our relationship-based banking model
and the success of our relationship managers in transitioning commercial banking relationships from other local
financial institutions and in competing for new business from attractive small to mid-sized commercial clients.
Many of our larger commercial clients have lengthy relationships with members of our senior management team or
our relationship managers that date back to former institutions.
49
The repayment of loans is a source of additional liquidity for us. The following table details maturities and
sensitivity to interest rate changes for our loan portfolio at December 31, 2017.
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total gross loans
Interest rate sensitivity
Fixed interest rates
Floating or adjustable interest rates
Total gross loans
$
$
$
Due in 1 year
or less
December 31, 2017
Due in 1-5
years
187,534 $
9,609
51,889
253,616
2,787
21,816
527,251 $
Due after 5
years
112,727 $
87,822
12,059
52,308
—
4,573
269,489 $
Total
350,622
102,581
82,586
373,248
6,862
31,983
947,882
50,361 $
5,150
18,638
67,324
4,075
5,594
151,142 $
17,992
133,150
151,142 $
185,963
341,288
527,251 $
135,799
133,690
269,489 $
339,754
608,128
947,882
The information presented in the table above is based upon the contractual maturities of the individual loans, which
may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit
approval, as well as modification of terms at their maturity. Consequently, we believe that this treatment presents
fairly the maturity structure of the loan portfolio.
Asset Quality
One of our key objectives is to maintain a high level of asset quality in our loan portfolio. We utilize disciplined and
thorough underwriting processes that collaboratively engage our seasoned and experienced business bankers, credit
underwriters and portfolio managers in the analysis of each loan request. Based upon our aggregate exposure to any
given borrower relationship, we employ scaled review of loan originations that may involve senior credit officers,
our Chief Credit Officer, our bank’s Credit Committee or, ultimately, our full board of directors. In addition, we
have adopted underwriting guidelines to be followed by our lending officers that require senior management review
of proposed extensions of credit exceeding certain thresholds. When delinquencies exist, we monitor the levels of
such delinquencies for any negative or adverse trends. Our loan review procedures include approval of lending
policies and underwriting guidelines by the board of directors of our bank, an independent loan review, approval of
larger credit relationships by our bank’s Credit Committee and loan quality documentation procedures. Like other
financial institutions, we are subject to the risk that our loan portfolio will be subject to increasing pressures from
deteriorating borrower credit due to general economic conditions.
We target small and medium sized businesses, the owners and operators of such businesses and other high net worth
individuals as loan clients. Because of their size, these borrowers may be less able to withstand competitive or
economic pressures than larger borrowers in periods of economic weakness. If loan losses occur at a level where the
allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease. We use an
independent consulting firm to review our loans for quality in addition to the reviews that may be conducted
internally and by bank regulatory agencies as part of their examination process. Our bank has procedures and
processes in place intended to assess whether losses exceed the potential amounts documented in our bank’s
impairment analyses and to reduce potential losses in the remaining performing loans within our loan portfolio.
These procedures and processes include the following:
(cid:129) we monitor the past due and overdraft reports on a weekly basis to identify deterioration as early as
possible and the placement of identified loans on the watch list;
(cid:129) we perform quarterly credit reviews for all watch list/classified loans, including formulation of action
plans. When a workout is not achievable, we move to collection/foreclosure proceedings to obtain control
of the underlying collateral as rapidly as possible to minimize the deterioration of collateral and/or the loss
of its value;
(cid:129) we require updated financial information, global inventory aging and interest carry analysis where
appropriate for existing borrowers to help identify potential future loan payment problems; and
50
(cid:129) we generally limit loans for new construction to established builders and developers that have an
established record of turning their inventories, and we restrict our funding of undeveloped lots and land.
Our bank 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. Our bank analyzes loans individually by classifying
each loan as to credit risk. This analysis includes all commercial loans and consumer relationships with an
outstanding balance greater than $500,000, individually. This analysis is performed on a regular basis by the
relationship managers 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 risk rating of each loan in the sample.
See “Note 3 to our Consolidated Financial
Statements” for a table that provides the risk category of loans by applicable class of loans.
Non-Performing Loans and Assets
Information summarizing non-performing assets, including non-accrual loans follows.
$
Non-accrual loans
Troubled debt restructurings
Loans past due 90 days or more and still accruing
Non-performing loans
Foreclosed real estate
Non-performing assets
Non-performing loans as a percentage of total
loans
Non-performing assets as a percentage of total
assets
$
2017
2016
December 31,
2015
2014
2013
2,695
1,206
231
2,695
—
2,695
$
$
3,619
1,272
—
3,619
—
3,619
$
$
2,689
125
—
2,689
216
2,905
$
$
7,738
2,618
—
7,738
575
8,313
$
$
6,552
—
—
6,552
1,451
8,003
0.28%
0.39%
0.33%
1.09%
1.05%
0.20%
0.27%
0.24%
0.74%
0.79%
The balance of non-performing assets can fluctuate due to changes in economic conditions. We have established a
policy to discontinue accruing interest on loans (that is, place the loans on non-accrual status) after they have
become 90 days delinquent as to payment of principal or interest, unless the loans are considered to be well-
collateralized and are in the process of collection. Consumer loans and any accrued interest are typically charged off
no later than 180 days past due. In addition, a loan will not be placed on non-accrual status before it becomes 90
days delinquent unless management believes that the collection of interest is not expected. Interest previously
accrued but uncollected on such loans is reversed and charged against interest income when the receivable is
determined to be uncollectible. If we believe that a loan will not be collected in full, we will increase the allowance
for loan losses to reflect management’s estimate of any potential exposure or loss. Generally, payments received on
non-accrual loans are applied directly to principal. As of December 31, 2017, there were not any loans, outside of
those included in the table above, that cause management to have serious doubts as to the ability of borrowers to
comply with present repayment terms.
Due to the weakening credit status of a borrower, we may elect to formally restructure certain loans to facilitate a
repayment plan that seeks to minimize the potential losses, if any, that we might incur. These loans are considered
troubled debt restructurings. Loans that have been restructured that are on non-accruing status as of the date of
restructuring, are included in the nonperforming loan balances as discussed above and are classified as impaired
loans. Loans that have been restructured that are on accrual status as of the restructure date are not included in
nonperforming loans; however, such loans are still considered impaired.
Allowance for Loan Losses (allowance)
Our allowance for loan losses represents our estimate of probable inherent credit losses in the loan portfolio. We
determine the allowance based on an ongoing evaluation of risk as it correlates to potential losses within the
portfolio. Increases in the allowance are made by charges to the provision for loan losses. Loans deemed to be
uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to our
allowance. The judgments and estimates associated with our allowance determination are described under “Critical
51
Accounting Policies and Estimates” above and in Notes 1 and 3 to the “Notes to Consolidated Financial
Statements.”
The following table presents a summary of changes in the allowance for loan losses for the periods and dates
indicated.
Total loans outstanding, net of unearned income
Average loans outstanding, net of unearned income
Allowance for loan and lease losses at beginning of
period
Charge-offs:
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total charge-offs
Recoveries:
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total recoveries
Net charge-offs
Provision for loan and lease losses
Allowance for loan and lease losses at period end
Allowance for loan and lease losses to period end loans
Net charge-offs to YTD average loans
$
2017
$ 947,537
987,710
Year ended December 31,
2015
$ 808,396
744,151
2016
$ 935,251
888,541
2014
$ 713,077
682,218
2013
$ 626,382
636,123
11,634
10,132
11,282
8,459
8,214
—
—
—
12,769
—
—
12,769
350
—
—
956
146
—
1,452
—
173
—
3,033
—
—
3,206
92
57
—
816
182
—
1,147
9
—
—
1,865
112
—
1,986
10,783
12,870
13,721
$
1.45%
1.09%
52
—
—
23
50
—
125
1,327
2,829
11,634
$
1.24%
0.15%
31
68
—
299
7
—
405
2,801
1,651
10,132
$
1.25%
0.38%
—
21
—
52
28
—
101
1,046
3,869
11,282
$
1.58%
0.15%
1
593
36
290
273
—
1,193
—
23
—
381
96
—
500
693
938
8,459
1.35%
0.11%
See “Provision for Loan losses” above for discussion of the changes in the provision for loan losses.
While no portion of our allowance is in any way restricted to any individual loan or group of loans and the entire
allowance is available to absorb losses from any and all loans, the following tables represent management’s
allocation of our allowance to specific loan categories for the periods indicated.
Commercial real estate
Consumer real estate
Construction and land
development
Commercial and industrial
Consumer
Other
Total allowance for loan
losses
December 31,
December 31,
2015
2017
Amount Percent
Amount Percent
$ 3,324 24.2% $ 2,655 22.8% $ 2,879 28.4% $ 1,535 13.6% $ 1,408 16.6%
8.1%
1,063
December 31,
2013
Amount Percent
December 31,
2014
Amount Percent
December 31,
2016
Amount Percent
7.7% 1,013
5.5%
8.7%
9.6%
688
968
621
1,628 11.9% 1,574 13.5%
3.9%
7,209 52.5% 5,618 48.3% 4,693 46.3% 8,540 75.7% 5,870 69.4%
1.0%
0.9%
0.7%
0.9%
0.7%
3.0%
0.7%
6.0%
1.0%
5.7%
103
575
91
406
75
103
76
698
81
80
3.6%
9.0%
332
914
408
$13,721 100.0% $11,634 100.0% $10,132 100.0% $ 11,282 100.0% $ 8,459 100.0%
Changes in the allocation of the allowance from year to year in various categories are influenced by the level of net
charge-offs in respective categories and other factors including, but not limited to, an evaluation of the impact of
current economic conditions and trends, risk allocations tied to specific loans or groups of loans and changes in
52
qualitative allocations. Management believes that allocations for each loan category are reasonable and reflective of
risk inherent in the portfolio.
Deposits
Client deposits are the primary funding source for our loan growth. The following table presents the average balance
and average rate paid on deposits for each of the following categories for the periods indicated.
2017
Average
Balance
Average
Rate
Paid
Year ended December 31,
2016
Average
Balance
Average
Rate
Paid
2015
Average
Balance
Average
Rate
Paid
Types of Deposits:
Noninterest-bearing demand deposits
Interest-bearing demand deposits
Money market accounts
Savings accounts
Time deposits, $100,000 and over
Time deposits, less than $100,000
Total deposits
$
232,687
301,411
375,688
2,952
155,788
39,104
$ 1,107,630
0.00% $
189,270
0.81%
269,113
0.85%
443,378
0.15%
2,495
1.13%
149,674
44,207
1.76%
0.73% $ 1,098,137
0.00% $
0.55%
0.64%
0.15%
0.89%
1.69%
0.59% $
176,577
143,939
461,473
4,149
150,434
47,101
983,673
0.00%
0.52%
0.59%
0.33%
0.83%
1.66%
0.56%
Total average deposits declined 0.9% in 2017 compared to 2016 and increased 11.6% in 2016 compared to 2015.
The Nashville MSA is a competitive market for deposits and we experienced some run-off in rate sensitive deposits
during 2017. However, we have been able to increase noninterest-bearing demand deposits each year as we focus
on building and expanding client relationships.
The following table presents the maturities of our certificates of deposit as of December 31, 2017.
December 31, 2017
Over six
through
twelve
months
Over three
through six
months
Over twelve
months
Total
22,434 $
1,246
23,680 $
12,196 $
14,002
26,198 $
29,355 $ 140,480
16,675
35,717
46,030 $ 176,197
Three
months or
less
76,495 $
3,794
80,289 $
$
$
$100,000 or more
Less than $100,000
Total
Capital Adequacy
As of December 31, 2017, CapStar Financial’s capital ratios were as follows.
Total risk-based capital
Tier 1 risk-based capital
Common equity tier 1 capital
Tier 1 leverage
Well Capitalized December 31, 2017
10.0%
8.0%
6.5%
5.0%
12.5%
11.4%
10.7%
10.7%
On September 21, 2016, the SEC declared effective our registration statement on Form S-1 registering shares of our
common stock. On September 27, 2016, we completed the initial public offering of 2,972,750 shares 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 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 $21.6 million from the offering, after deducting the underwriting discounts
and offering expenses. We did not receive any proceeds from the sale of shares by the selling shareholders.
See Note 13 to the “Notes to Consolidated Financial Statements” for additional information related to our capital
position.
53
Market and Liquidity Risk Management
Our objective is to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the
framework of established liquidity, loan, investment, borrowing, and capital policies. Our ALCO is charged with the
responsibility of monitoring these policies, which are designed to ensure an acceptable composition of asset/liability
mix. Two critical areas of focus for ALCO are interest rate sensitivity and liquidity risk management.
Interest Rate Simulation Sensitivity Analysis
Managing interest rate risk is fundamental for the financial services industry. 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.
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 December 31, 2017, 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. 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 by the specified
amounts.
Increase 200bp
Increase 100bp
Decrease 100bp
Decrease 200bp
Net interest income
change
8.2%
4.3
(8.4)
(18.3)
54
Liquidity Risk Management
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. 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, available-for-sale marketable investment
securities and federal funds sold. The fair value of the available-for-sale investment portfolio was $192.6 million at
December 31, 2017. We pledge portions of our investment securities portfolio to secure public fund deposits,
derivative positions and Federal Home Loan Bank advances. At December 31, 2017, total investment securities
pledged for these purposes comprised 57% of the estimated fair value of the entire investment portfolio, leaving
$84.5 million of unpledged securities.
We have a large base of non-maturity customer deposits, defined as demand, savings, and money market deposit
accounts. At December 31, 2017, such deposits totaled $912.7 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.
Other sources of funds available to meet daily needs include FHLB advances. As a member of 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 December 31, 2017, available credit from the FHLB totaled
$115.0 million. Additionally, we had available federal funds purchased lines with correspondent banks totaling
$110.0 million at December 31, 2017.
The principal source of cash for CapStar Financial is dividends paid to it as the sole shareholder of the Bank. At
December 31, 2017, the Bank was able to pay up to $19.3 million in dividends to CapStar Financial without
regulatory approval subject to the ongoing capital requirements of the Bank.
Accordingly, management believes that our funding sources are at sufficient levels to satisfy our short-term and
long-term liquidity needs.
55
Contractual Obligations
The following table presents additional information about contractual obligations as of December 31, 2017, which
by their terms have contractual maturity and termination dates subsequent to December 31, 2017.
Contractual Obligations:
FHLB advances
Certificates of deposits $100,000 or more
Certificates of deposits less than $100,000
Operating leases
Total
Off-Balance Sheet Arrangements
Due in 1
year or less
$ 70,000 $
111,125
19,042
1,179
$ 201,346 $
Due after 1
through 3
years
Due after 3
through 5
years
Due after 5
years
Total
— $
— $
14,543
12,826
952
28,321 $
14,709
3,724
951
19,384 $
— $ 70,000
103 140,480
35,717
125
11,510
14,592
11,738 $ 260,789
In the normal course of business, we enter into various transactions that, in accordance with GAAP, are not included
in our consolidated balance sheets. 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 the following table for the periods indicated.
December 31,
2017
Contract or notional amount
December 31,
2016
December 31,
2015
Financial instruments whose contract amounts represent
credit risk:
Unused commitments to extend credit
Standby letters of credit
Total
$
$
584,494 $
11,552
596,046 $
508,990 $
10,886
519,876 $
384,837
13,450
398,287
56
Non-GAAP Financial Measures
This Report includes the following financial measures that have been prepared other than in accordance with
generally accepted accounting principles in the United States (“non-GAAP financial measures”): tangible common
equity, tangible common equity to total tangible assets and tangible common equity per share. The Company
believes that these non-GAAP financial measures (i) provide useful information to management and investors that is
supplementary to its financial condition, results of operations and cash flows computed in accordance with 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 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 book value per share of common stock to the most directly comparable GAAP financial
measures.
Total equity
Less core deposit intangible
Less goodwill
Less preferred equity
Tangible common equity
Total assets
Less core deposit intangible
Less goodwill
Total tangible assets
December 31,
2017
146,946
$
December 31,
2016
139,207
December 31,
2015
108,586
December 31,
2014
102,651
December 31,
2013
$
(23)
(6,219)
(9,000)
$
131,704
$
(71)
(6,219)
(9,000)
$
123,917
$
(125)
(6,219)
(16,500)
$
85,742
$
(179)
(6,219)
(16,500)
$
79,753
96,191
(233)
(51)
(16,500)
79,407
$
$ 1,344,429
$ 1,333,675
$ 1,206,800
$ 1,128,395
(23)
(6,219)
(71)
(6,219)
(125)
(6,219)
(179)
(6,219)
$ 1,338,187
$ 1,327,385
$ 1,200,456
$ 1,121,997
$ 1,008,709
(233)
(51)
$ 1,008,425
Total shareholders' equity to total assets
Tangible common equity ratio
Total shares of common stock outstanding
Book value per share of common stock
Tangible book value per share of common stock
10.93%
9.84%
10.44%
9.34%
9.00%
7.14%
9.10%
7.11%
9.54%
7.87%
11,582,026
11.91
$
11.37
11,204,515
11.62
$
11.06
8,577,051
10.74
$
10.00
8,471,516
10.17
$
9.41
8,353,087
9.54
$
9.51
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements are discussed in Note 1 to the “Notes to Consolidated Financial
Statements” in this Report.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is included in Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Market and Liquidity Risk Management – Interest Rate Simulation
Sensitivity Analysis” and is incorporated herein by reference.
57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page(s)
59
60
61
62
63
64
65
58
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of CapStar Financial Holdings, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CapStar Financial Holdings, Inc. and its
subsidiary (the “Company”) as of December 31, 2017, 2016 and 2015 and the related consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended
December 31, 2017, and the related notes to the consolidated financial statements and schedules (collectively, the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2017, 2016, and 2015, and the results of
its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting under PCAOB standards. As part of our audits we
are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly,
we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that
our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2017.
Franklin, Tennessee
March 8, 2018
/s/ Elliott Davis, LLC
59
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except share data)
Assets
Cash and due from banks
Interest-bearing deposits in financial institutions
Federal funds sold
Total cash and cash equivalents
Securities available-for-sale, at fair value
Securities held-to-maturity, fair value of $3,848, $49,731, and $46,459
at December 31, 2017, 2016 and 2015, respectively
Loans held for sale
Loans
Less allowance for loan losses
Loans, net
Premises and equipment, net
Restricted equity securities
Accrued interest receivable
Goodwill
Core deposit intangible
Other real estate owned
Deferred tax assets
Bank owned life insurance
Other assets
Total assets
Liabilities and Shareholders’ Equity
Deposits:
Non-interest-bearing
Interest-bearing
Savings and money market accounts
Time
Total deposits
Securities sold under repurchase agreements
Federal Home Loan Bank advances
Accrued interest payable
Other liabilities
Total liabilities
Shareholders’ equity:
December 31,
2017
December 31,
2016
December 31,
2015
$
$
$
9,506 $
68,572
4,719
82,797
192,621
3,759
74,093
947,537
(13,721)
933,816
5,884
8,806
4,084
6,219
23
—
6,553
22,479
3,295
1,344,429 $
301,742 $
274,681
367,246
176,197
1,119,866
—
70,000
323
7,294
1,197,483
9,134 $
54,323
16,654
80,111
182,355
46,864
42,111
935,251
(11,634)
923,617
5,350
6,032
3,942
6,219
71
—
12,956
21,900
2,147
1,333,675 $
197,788 $
299,621
447,686
183,628
1,128,723
—
55,000
212
10,533
1,194,468
8,265
85,190
6,730
100,185
173,383
43,094
35,729
808,396
(10,132)
798,264
4,896
5,414
3,030
6,219
125
216
12,850
21,299
2,096
1,206,800
190,580
189,983
437,215
220,683
1,038,461
3,755
45,000
177
10,821
1,098,214
Series A convertible preferred stock, $1 par value; 5,000,000
shares authorized; 878,049 shares issued and outstanding at
December 31, 2017 and 2016; 1,609,756 shares issued and
outstanding at December 31, 2015
Common stock, voting, $1 par value; 20,000,000 shares authorized;
11,449,465, 11,204,515, and 8,577,051 shares issued and
outstanding at December 31, 2017, 2016 and 2015, respectively
Common stock, nonvoting, $1 par value; 5,000,000 shares authorized;
132,561 shares issued and outstanding at December 31, 2017; no
shares issued and outstanding at December 31, 2016 or 2015
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of income tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
878
878
1,610
11,450
11,205
8,577
133
118,120
18,892
(2,527)
146,946
1,344,429 $
—
116,143
17,132
(6,151)
139,207
1,333,675 $
—
95,278
8,035
(4,914)
108,586
1,206,800
$
See accompanying notes to consolidated financial statements.
60
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except share data)
Interest income:
Loans, including fees
Securities:
Taxable
Tax-exempt
Federal funds sold
Restricted equity securities
Interest-bearing deposits in financial institutions
Total interest income
Interest expense:
Interest-bearing deposits
Savings and money market accounts
Time deposits
Federal funds purchased
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Treasury management and other deposit service charges
Loan commitment fees
Net gain (loss) on sale of securities
Tri-Net fees
Mortgage banking income
Other noninterest income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Data processing and software
Professional fees
Occupancy
Equipment
Regulatory fees
Other operating
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Per share information:
Basic net income per share of common stock
Diluted net income per share of common stock
Weighted average shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
Year Ended December 31,
2016
2015
2017
$
45,601 $
40,213 $
34,845
3,682
1,244
41
396
551
51,515
2,447
3,188
2,445
13
—
1,559
9,652
41,863
12,870
28,993
1,516
771
(66)
1,002
6,238
1,447
10,908
20,400
2,786
1,522
2,025
2,071
1,111
3,850
33,765
6,136
4,635
1,501 $
3,448
1,158
19
281
276
45,395
1,489
2,859
2,085
22
1
475
6,931
38,464
2,829
35,635
1,108
1,118
121
125
7,375
1,237
11,084
20,461
2,373
1,554
1,498
1,743
1,091
4,409
33,129
13,590
4,493
9,097 $
0.13 $
0.12 $
0.98 $
0.81 $
4,153
1,080
18
268
140
40,504
748
2,733
2,032
24
15
179
5,731
34,773
1,651
33,122
910
822
55
—
5,962
1,135
8,884
19,278
2,317
1,469
1,538
1,598
915
3,862
30,977
11,029
3,470
7,559
0.89
0.73
11,280,580
12,803,511
9,328,236
11,212,026
8,538,970
10,381,895
$
$
$
61
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Year Ended December 31,
2016
2015
2017
$
1,501
$
9,097 $
7,559
4,855
(1,181)
(121)
499
(803)
167
(64)
103
(946)
(55)
383
(618)
167
(64)
103
66
(1,884)
3,037
190
(73)
117
(72)
(330)
(1,486)
863
(62)
729
3,883
5,384
$
416
(623)
(537)
(1,237)
7,860 $
37
(117)
(1,566)
(2,081)
5,478
$
Net income
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period
Reclassification adjustment for (gains) losses included in
net income
Tax effect
Net of tax
Unrealized losses on securities transferred to held-to-maturity:
Reclassification adjustment for losses included in
net income
Tax effect
Net of tax
Unrealized gains (losses) on cash flow hedges:
Unrealized holding losses arising during the period
Reclassification adjustment for losses included in
net income
Tax effect
Net of tax
Other comprehensive income (loss)
Comprehensive income
See accompanying notes to consolidated financial statements.
62
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share data)
Preferred
Common stock,
voting
Common stock,
nonvoting
Amount Shares Amount capital
— $
paid-in Retained
earnings
476 $
94,928 $
Additional
— $
1,610 8,471,516 $ 8,471
stock Shares
Accumulated
other
comprehensive
loss
Total
shareholders’
equity
(2,833) $
102,652
Balance December 31, 2014
$
Issuance of restricted common
stock, net of forfeitures and
withholdings to satisfy employee
tax obligations
Stock-based compensation
expense
Excess tax benefit from stock
compensation
Exercise of common stock
options, net of withholdings to
satisfy employee tax obligations
Net income
Other Comprehensive loss
Balance December 31, 2015
$
Issuance of restricted common
stock, net of forfeitures and
withholdings to satisfy employee
tax obligations
Stock-based compensation
expense
Excess tax benefit from stock
compensation
Exercise of common stock
options, net of withholdings to
satisfy employee tax obligations
Issuance of common stock
Conversion of preferred stock
Exercise of common stock
warrants
Net income
Other Comprehensive loss
Balance December 31, 2016
$
Issuance of restricted common
stock, net of forfeitures and
withholdings to satisfy employee
tax obligations
Stock-based compensation
expense
Exercise of common stock
options, net of withholdings to
satisfy employee tax obligations
Exercise of common stock
warrants
Reclassification of accumulated
other comprehensive income due
to tax rate change
Net income
Other Comprehensive income
Balance December 31, 2017
$
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
104,535
105
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
1,610 8,577,051 $ 8,577
1,000
—
—
—
—
—
— $
—
99,560
100
—
—
—
—
—
—
—
—
—
—
8,125
— 1,688,049
731,707
(732)
8
1,688
732
100,023
—
—
—
100
—
—
—
—
878 11,204,515 $ 11,205
—
—
—
—
—
—
— $
(105)
438
8
—
—
—
—
—
—
—
438
8
9
—
—
95,278 $
—
7,559
—
8,035 $
—
—
(2,081)
(4,914) $
10
7,559
(2,081)
108,586
(133)
842
61
88
19,875
—
—
—
—
—
—
—
—
—
—
—
—
—
—
132
—
—
—
9,097
—
—
—
— $ 116,143 $ 17,132 $
—
—
(1,237)
(6,151) $
—
35,714
36
—
—
(280)
—
—
—
—
—
1,061
—
154,050
154
—
—
857
—
55,186
55 132,561
133
339
—
—
—
—
—
—
—
—
—
—
—
—
—
—
878 11,449,465 $ 11,450 132,561 $
—
—
—
—
—
—
259
—
—
1,501
—
—
—
—
—
133 $ 118,120 $ 18,892 $
(259)
—
3,883
(2,527) $
—
1,501
3,883
146,946
(33)
842
61
96
21,563
—
232
9,097
(1,237)
139,207
(244)
1,061
1,011
527
See accompanying notes to consolidated financial statements.
63
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year Ended December 31,
2016
2015
2017
$
1,501
$
9,097 $
7,559
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses
Accretion of discounts on acquired loans and deferred fees
Depreciation and amortization
Net amortization of premiums on investment securities
Securities (gains) losses, net
Mortgage banking income
Tri-Net fees
Net (gain) loss on sale of loans
Net (gain) loss on disposal of premises and equipment
Net (gain) loss on sale of other real estate owned
Stock-based compensation
Excess tax benefit from stock compensation
Deferred income tax (benefit) expense
Origination of loans held for sale
Proceeds from loans held for sale
Net (increase) decrease in accrued interest receivable and other assets
Net increase (decrease) in accrued interest payable and other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Activities in securities available-for-sale:
Purchases
Sales
Maturities, prepayments and calls
Activities in securities held-to-maturity:
Purchases
Maturities, prepayments and calls
Purchase of restricted equity securities
Net increase in loans
Purchase of premises and equipment
Proceeds from the sale of premises and equipment
Proceeds from sale of other real estate
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Net increase (decrease) in deposits
Proceeds from Federal Home Loan Bank advances
Payments on Federal Home Loan Bank advances
Issuance of common stock
Exercise of common stock options and warrants, net of repurchase of restricted
shares
Excess tax benefit from stock compensation
Termination of interest rate swap agreement
Net decrease in repurchase agreements
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosures of cash paid:
Interest paid
Income taxes
Supplemental disclosures of noncash transactions:
Loans charged off to the allowance for loan and lease losses
Securities transferred from held-to-maturity to available-for-sale
Loans transferred from held-for-sale to held-for-investment
See accompanying notes to consolidated financial statements.
$
$
$
$
$
64
12,870
(1,533)
450
1,259
66
(6,238)
(1,002)
(113)
137
—
1,061
—
4,385
(565,372)
540,123
(1,760)
(2,448)
(16,614)
(30,525)
46,762
18,828
—
1,560
(2,774)
(20,916)
(1,075)
3
—
11,863
(8,857)
135,000
(120,000)
—
1,294
—
—
—
7,437
2,686
80,111
82,797
9,540
1,047
12,769
41,665
507
$
$
$
$
$
2,829
(1,677)
422
1,527
(121)
(7,375)
(125)
—
—
(157)
842
(61)
(295)
(522,038)
523,156
(1,537)
1,814
6,301
(81,946)
46,700
23,644
(5,337)
1,656
(618)
(126,505)
(814)
—
373
(142,847)
90,262
55,000
(45,000)
21,563
295
61
(1,954)
(3,755)
116,472
(20,074)
100,185
80,111 $
6,897 $
4,114
1,452 $
— $
— $
1,651
(2,237)
506
1,467
(55)
(5,962)
—
—
(28)
4
438
(8)
508
(422,323)
407,941
101
1,091
(9,347)
(57,704)
90,446
28,152
—
833
(349)
(95,884)
(31)
233
355
(33,949)
57,404
25,000
—
—
10
8
(1,793)
(11,082)
69,547
26,251
73,934
100,185
5,768
2,082
3,206
—
—
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements as of and for the periods ended December 31, 2017, 2016 and 2015 include
CapStar Financial Holdings, Inc. and it’s wholly owned subsidiary, CapStar Bank (the “Bank”, together referred to
as the “Company”). Significant intercompany transactions and accounts are eliminated in consolidation. The
financial statements as of and for the year ended December 31, 2015 only include CapStar Bank because the share
exchange pursuant to which CapStar Financial Holdings, Inc., a bank holding company and a Tennessee
corporation, became the parent company of CapStar Bank had not yet taken place. 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 “Share Exchange”).
The consolidated financial statements of the Company have been prepared in conformity with U.S. generally
accepted accounting principles (“GAAP”) and conform to general practices within the banking industry.
Nature of Operations
Through the Bank, the Company provides full banking services to consumer and corporate customers located
primarily in Davidson, Sumner, Williamson, and the surrounding counties in Tennessee. The Bank operates under a
state bank charter and is a member of the Federal Reserve System. As a state member bank, the Bank is subject to
regulations of the Tennessee Department of Financial Institutions, the Board of Governors of the Federal Reserve
System (the “Federal Reserve”), and the Federal Deposit Insurance Corporation.
Initial Public Offering
On September 21, 2016, the Securities and Exchange Commission (“SEC”) declared effective our registration
statement on Form S-1 registering the shares of our common stock. On September 27, 2016, we completed the initial
public offering of 2,972,750 shares 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 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 $21.6 million from the
offering, after deducting the underwriting discounts and commissions and offering expenses. We did not receive any
proceeds from the sale of shares by the selling shareholders.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible
to significant change relate to the determination of the allowance for loan losses, determination of impairment of
intangible assets, including goodwill, the valuation of our investment portfolio, deferred tax assets and estimated
liabilities.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks,
interest-bearing deposits in financial institutions and federal funds sold. Generally, federal funds sold are purchased
and sold for one-day periods. The Company maintains deposits in excess of the federal insurance amounts with
other financial institutions. Management makes deposits only with financial institutions it considers to be financially
sound.
65
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Securities
The Bank accounts for securities under the provisions of Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 320, Investments – Debt and Equity Securities. Under the provisions of
FASB ASC 320, securities are to be classified in three categories and accounted for as follows:
Securities Held to Maturity - Debt securities are classified as held to maturity securities when the Bank has the
positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized
cost.
Trading Securities - Debt and equity securities that are bought and held principally for the purpose of selling them in
the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included
in earnings. No securities have been classified as trading securities.
Securities Available for Sale - Debt and equity securities not classified as either held to maturity securities or trading
securities are classified as available for sale securities. Securities available for sale are carried at estimated fair value
with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’
equity in other comprehensive income (loss).
Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are
amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where
prepayments are anticipated. Realized gains and losses from the sales of securities are recorded on the trade date and
determined using the specific-identification method.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and
more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized
loss position, management considers the extent and duration of the unrealized loss, the financial condition and near-
term prospects of the issuer and any collateral underlying the relevant security. Management also assesses whether it
intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position
before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the
entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt
securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as
follows: (1) OTTI related to credit loss, which must be recognized in the income statement and (2) OTTI related to
other factors, which is recognized in other comprehensive income (loss). The credit loss is defined as the difference
between the present value of the cash flows expected to be collected and the amortized cost basis. For equity
securities, the entire amount of impairment is recognized through earnings.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or
fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as
a valuation allowance and charged to earnings. 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 gain on sale of loans, net of related costs such as commission expenses. The Company does
not securitize mortgage loans and does not retain the servicing for loans sold.
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 statements 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.
66
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Loans
The Company has six classes of loans for financial reporting purposes: commercial real estate, consumer real estate,
construction and land development, commercial and industrial, consumer and other. The appropriate classification is
determined based on the underlying collateral utilized to secure each loan.
Commercial real estate loans are categorized as such based on investor exposures where repayment is
largely dependent upon the operation, refinance, or sale of the underlying real estate. Commercial real
estate also includes owner occupied commercial real estate.
Consumer real estate consists primarily of 1-4 family residential properties including home equity lines of
credit.
Construction and land development loans include loans where the repayment is dependent on the
successful operation of the related real estate project. Construction and land development loans include 1-4
family construction projects and commercial construction endeavors such as warehouses, apartments, office
and retail space and land acquisition and development.
Commercial and industrial loans include loans to business enterprises issued for commercial, industrial
and/or other professional purposes.
Consumer loans include all loans issued to individuals not included in the consumer real estate class.
Other loans include all loans not included in the classes of loans above and leases.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are
reported at the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs,
and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees,
net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method
without anticipating prepayments.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well
secured and in process of collection. Consumer loans and any accrued interest is typically charged off no later than
180 days past due. Past-due status is based on contractual terms of the loan. In all cases, loans are placed on
nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful and collection
is highly questionable. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual
status.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest
received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to
accrual status. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to
zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are
returned to accrual status when all the principal and interest amounts contractually due are brought current and
future payments are reasonably assured. Loans can also be returned to accrual status when they become well secured
and in the process of collection.
Acquired Loans
Acquired loans are accounted for under the acquisition method of accounting. The acquired loans are recorded at
their estimated fair values as of the acquisition date. Fair value of acquired loans is determined using a discounted
cash flow model based on assumptions regarding the amount and timing of principal and interest payments,
estimated prepayments, estimated default rates, estimated loss severity in the event of defaults, and current market
rates. Estimated credit losses are included in the determination of fair value; therefore, an allowance for loan losses
is not recorded on the acquisition date.
An acquired loan is considered impaired when there is evidence of credit deterioration since origination and it is
probable at the date of acquisition that the Bank will be unable to collect all contractually required payments.
67
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Acquired impaired loans are accounted for individually or aggregated into pools of loans based on common risk
characteristics such as loan type and risk rating. The Company estimates the amount and timing of expected cash
flows for each loan or pool, and the expected cash flows in excess of amount paid (fair value) is recorded as interest
income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual
principal and interest over expected cash flows is not recorded (nonaccretable difference). Over the life of the loan
or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the
carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is
greater than the carrying amount, it is recognized as part of future interest income. There are no acquired impaired
loans at December 31, 2017.
Acquired non-impaired loans are recorded at their initial fair value and adjusted for subsequent advances, pay
downs, amortization or accretion of any premium or discount on purchase, charge-offs and additional provisioning
that may be required.
Allowance for Loan losses
The allowance for loan losses (“ALL”) is maintained at a level that management believes to be adequate to absorb
expected loan losses inherent in the loan portfolio as of the balance sheet date. The allowance for loan losses is a
valuation allowance for estimated credit losses inherent in the loan and lease portfolio, increased by the provision
for loan losses and decreased by charge-offs, net of recoveries. Quarterly, the Company estimates the allowance
required using peer group loss experience, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions, and other factors. The Company’s
historical loss experience is based on the actual loss history by class of loan for comparable peer institutions due to
the Company’s limited loss history. Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged
against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries are credited to the allowance for loan losses.
The Company also considers the results of the external independent loan review when assessing the adequacy of the
allowance and incorporates relevant loan review results in the loan impairment and overall adequacy of allowance
determinations. Furthermore, regulatory agencies periodically review the Company’s allowance for loan losses and
may require the Company to record adjustments to the allowance based on their judgment of information available
to them at the time of their examinations.
Additional considerations are included in the determination of the adequacy of the allowance based on the
continuous review conducted by relationship managers and credit department personnel. The Company’s loan policy
requires that each customer relationship wherein total exposure exceeds $1.5 million be subject to a formal credit
review at least annually. Should these reviews identify potential collection concerns, appropriate adjustments to the
allowance may be made.
The allowance consists of specific and general components as discussed below. While the allowance consists of
separate components, these terms are primarily used to describe a process. Both portions of the allowance are
available to provide for inherent losses in the entire portfolio.
Specific Component
The specific component relates to loans that are individually determined to be impaired when, based on current
information and events, it is probable that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession,
and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings
(“TDRs”) and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
68
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Loans meeting any of the following criteria are individually evaluated for impairment: risk rated substandard (as
defined in Note 3), on non-accrual status or past due greater than 90 days. If a loan is impaired, a portion of the
allowance is allocated based on the present value of estimated future cash flows using the loan’s existing rate or at
the fair value of collateral less costs to sell if repayment is expected solely from the collateral. Changes to the
valuation allowance are recorded as a component of the provision for loan losses.
TDRs are individually evaluated for impairment and included in the separately identified impairment disclosures.
TDRs are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If
a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral less
costs to sell.
General Component
The general component of the allowance for loan losses covers loans that are collectively evaluated for impairment.
Large groups of homogeneous loans are collectively evaluated for impairment, and accordingly, they are not
included in the separately identified impairment disclosures. The general allowance component also includes loans
that are individually identified for impairment evaluation but are not considered impaired. The general component is
based on historical loss experience adjusted for current factors. Due to the Company’s limited loss history, the
historical loss experience is based on the actual loss history by class of loan for comparable peer institutions.
The Company utilized a 24 quarter look-back period as of December 31, 2015 and a 28 quarter look-back period as
of December 31, 2016. Subsequently, the Company increased its look-back period for a total of 33 quarters as of
December 31, 2017. In the current economic environment, management believes the extension of the look-back
period was necessary in order to capture sufficient loss observations to develop a reliable loss estimate of credit
losses. This 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.
The actual loss experience is supplemented with other environmental factors that capture changes in trends,
conditions, and other relevant factors that may cause estimated credit losses as of the evaluation date to differ from
historical loss experience. The allocation for environmental factors is by nature subjective. These amounts represent
estimated probable inherent credit losses, which exist but have not been captured in the historical loss experience.
The environmental factors 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.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control
over transferred assets is deemed to be surrendered when the assets have been isolated from the Bank, the transferee
obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and the Company does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed
principally by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are
amortized by the straight-line method based on the shorter of the asset lives or the expected lease terms. Useful lives
for premises and equipment range from three to thirty-nine years.
These assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from
future undiscounted cash flows. If impaired, the assets are recorded at fair value.
The Company is the lessee with respect to several office locations. All such leases are accounted for as operating
leases within the accompanying financial statements. These leases include rent escalation clauses. The Company
expenses the costs associated with these escalating payments over the life of the expected lease term using the
straight-line method. As of December 31, 2017, the deferred liability associated with these escalating rentals was
approximately $560,000 and is included in other liabilities in the accompanying balance sheets.
69
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Bank Owned Life Insurance
The Bank has purchased life insurance policies on certain key executives. Bank owned life insurance is recorded at
the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender
value adjusted for other charges or other amounts due that are probable at settlement.
Securities Sold under Agreements to Repurchase
The Bank enters into sales of securities under agreements to repurchase at a specified future date. Such repurchase
agreements are considered financing arrangements and, accordingly, the obligation to repurchase assets sold is
reflected as a liability in the balance sheets of the Bank. Repurchase agreements are collateralized by debt securities
which are owned and under the control of the Bank.
Goodwill and Other Intangible Assets
Goodwill resulting from business combinations is generally determined as the excess of the fair value of the
consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the
net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a
purchase business combination and determined to have an indefinite useful life are not amortized, but tested for
impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill
impairment test should be performed. The Company has selected October 31st as the date to perform the annual
impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their
estimated residual values. Goodwill is the only intangible asset with an indefinite life on the balance sheet.
Other intangible assets consist of core deposit intangible assets arising from whole bank acquisitions and are
amortized on an accelerated method over their estimated useful lives, which range from five to six years.
Other Real Estate Owned
Other real estate owned (“OREO”) includes assets that have been acquired in satisfaction of debt through
foreclosure and are recorded at estimated fair value less the estimated cost of disposition. Fair value is based on
independent appraisals and other relevant factors. Valuation adjustments required at foreclosure are charged to the
allowance for loan losses. Subsequent to foreclosure, additional losses resulting from the periodic revaluation of the
property are charged to other real estate expense. Costs of operating and maintaining the properties and any gains or
losses recognized on disposition are also included in other real estate expense. Improvements made to properties are
capitalized if the expenditures are expected to be recovered upon the sale of the properties.
Restricted Equity Securities
The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the
level of borrowings and other factors, and may invest additional amounts. FHLB stock is carried at cost, classified as
a restricted equity security, and periodically evaluated for impairment based on an assessment of the ultimate
recovery of par value. Both cash and stock dividends are reported as income.
The Bank is also a member of the Federal Reserve System, and as such, holds stock of the Federal Reserve Bank of
Atlanta (“Federal Reserve Bank”). Federal Reserve Bank stock is carried at cost, classified as a restricted equity
security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock
dividends are reported as income.
Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax
assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A
valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the
“more likely than not” test, no tax benefit is recorded. The Company’s tax returns remain open to audit under the
statute of limitations by the IRS and various states for the years ended December 31, 2014 through 2017. It is the
Company’s policy to recognize interest and/or penalties related to income tax matters in income tax expense.
70
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Stock-Based Compensation
Stock-based compensation expense is recognized based on the fair value of the portion of stock-based payment
awards that are ultimately expected to vest, reduced for estimated forfeitures. Forfeitures are estimated at the time of
grant and revised, if necessary, in subsequent periods, if actual forfeitures differ from those estimates. A Black-
Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company’s
common stock at the date of grant is used for restricted stock awards. Compensation expense is recognized over the
required service period, generally defined as the vesting period. For awards with graded vesting, compensation
expense is recognized on a straight-line basis over the requisite service period for the entire award. For awards with
performance vesting criteria, anticipated performance is projected to determine the number of awards expected to
vest, and the corresponding aggregate expense is adjusted to reflect the elapsed portion of the performance period.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was approximately $310,000, $252,000 and
$310,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.
Derivative Instruments
Derivative instruments are recorded on the balance sheet at their respective fair values. The accounting for changes
in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies
as part of a hedging relationship. If the derivative instrument is not designated as a hedge, the gain or loss on the
derivative instrument is recognized in earnings in the period of change.
The Bank enters into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing
needs. Upon entering into these arrangements to meet customer needs, the Bank enters into offsetting positions with
large U.S. financial institutions in order to minimize risk to the Bank. These swaps are derivatives, but are not
designated as hedging instruments.
The Bank also has forward starting cash flow hedges to manage its future interest rate exposure. These derivative
contracts have been designated as hedges and, as such, changes in the fair value of these derivative instruments are
recorded in other comprehensive income (loss). The Bank prepares written hedge documentation for all derivatives
which are designated as hedges. The written hedge documentation includes identification of, among other items, the
risk management objective, hedging instrument, hedged item and methodologies for assessing and measuring hedge
effectiveness and ineffectiveness, along with support for management’s assertion that the hedge will be highly
effective.
The effective portion of the changes in the fair value of a derivative that is highly effective and that has been
designated and qualifies as a cash flow hedge are initially recorded in accumulated other comprehensive income
(loss) and subsequently reclassified into earnings in the same period during which the hedged item affects earnings.
The ineffective portion, if any, would be recognized in current period earnings.
The Bank discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting
changes in the cash flows of the hedged item, the derivative is settled or terminates, or treatment of the derivative as
a hedge is no longer appropriate or intended. When hedge accounting is discontinued, subsequent changes in fair
value of the derivative are recorded as non-interest income. When a cash flow hedge is discontinued but the hedged
cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other
comprehensive income (loss) are amortized into earnings over the same periods which the hedged transactions will
affect earnings.
Cash flows resulting from the derivative financial instruments that are accounted for as hedges are classified in the
cash flow statement in the same category as the cash flows of the items being hedged.
71
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive
income (loss) includes unrealized gains and losses on securities available for sale, unrealized gains and losses on
securities transferred to held to maturity and unrealized gains and losses on cash flow hedges which are also
recognized as separate components of equity. The Bank’s policy is to release the income tax effects of items in
accumulated other comprehensive income when the item is realized.
Fair Value Measurements
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could significantly affect these estimates.
Restriction on Cash Balances
Regulation D of the Federal Reserve Act requires that banks maintain reserve balances with their applicable Federal
Reserve Bank based principally on the type and amount of their deposits. The Bank was required to have a reserve
balance of $43,940,000, $40,902,000, and $27,105,000 at December 31, 2017, 2016 and 2015, respectively. The
reserve balance that the Bank must maintain at the Federal Reserve Bank of Atlanta is included in interest-bearing
deposits in financial institutions as of December 31, 2017, 2016 and 2015.
Subsequent Events
The Company has evaluated subsequent events for recognition and disclosure through March 8, 2018, which is the
date the financial statements were available to be issued.
Income Per Common Share
Basic net income per share available to common stockholders (“EPS”) is computed by dividing net income available
to common stockholders by the weighted average shares of common stock outstanding for the period. Diluted EPS
reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or
converted. The difference between basic and diluted weighted average shares outstanding is attributable to
convertible preferred stock, common stock options and warrants. The dilutive effect of outstanding convertible
preferred stock, common stock options and warrants is reflected in diluted EPS by application of the treasury stock
method.
For the year ended December 31, 2015, approximately 203,000 of antidilutive stock options were excluded from the
diluted earnings per share of common stock calculation under the treasury stock method. No antidilutive stock
options were excluded from calculation for the years ended December 31, 2017 and December 31, 2016.
The following is a summary of the basic and diluted earnings per share calculation for each of the following years
(in thousands except share data):
Year Ended December 31,
2016
2015
2017
1,501 $
$
11,280,580
0.13 $
$
9,097 $
9,328,236
0.98 $
7,559
8,538,970
0.89
1,501 $
$
11,280,580
1,522,931
7,559
8,538,970
1,842,925
12,803,511 11,212,026 10,381,895
0.73
$
9,097 $
9,328,236
1,883,790
0.81 $
0.12 $
Basic net income per share calculation:
Numerator – Net income
Denominator – Average common shares outstanding
Basic net income per share
Diluted net income per share calculation:
Numerator – Net income
Denominator – Average common shares outstanding
Dilutive shares contingently issuable
Average diluted common shares outstanding
Diluted net income per share
72
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Recently Issued Accounting Pronouncements
ASU 2014-09, Revenue from Contracts with Customers
In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The
core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and
services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance
will be effective for the Company for reporting periods beginning after December 15, 2017.
The Company will apply the guidance using a modified retrospective approach. The Company's revenue is
comprised of net interest income and noninterest income. The scope of the guidance explicitly excludes net interest
income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and
derivatives. Accordingly, the majority of our revenues will not be affected. The Company has performed an
assessment of our revenue contracts related to revenue streams that are within the scope of the standard. Our
accounting policies will not change materially since the principles of revenue recognition from the ASU are largely
consistent with existing guidance and current practices applied by our businesses. We have not identified material
changes to the timing or amount of revenue recognition. Based on the updated guidance, we do anticipate changes in
our disclosures associated with our revenues. We will provide qualitative disclosures of our performance obligations
related to our revenue recognition and we continue to evaluate disaggregation for significant categories of revenue
in the scope of the guidance.
ASU 2016-02, Leases
In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain
aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
Early adoption is permitted.
We expect to adopt the guidance using the modified retrospective method and practical expedients for transition.
The practical expedients allow us to largely account for our existing leases consistent with current guidance except
for the incremental balance sheet recognition for lessees. We have started an initial evaluation of our leasing
contracts and activities. We have also started developing our methodology to estimate the right-of use assets and
lease liabilities, which is based on the present value of lease payments (the December 31, 2017 future minimum
lease payments were $14.6 million). We do not expect a material change to the timing of expense recognition, but
we are early in the implementation process and will continue to evaluate the impact. We are evaluating our existing
disclosures and may need to provide additional information as a result of adoption of the ASU.
ASU 2016-13, Financial Instruments – Credit Losses
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment
model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning
after December 15, 2019. Early adoption is permitted for all organizations for periods beginning after December 15,
2018.
The Company will apply the amendments to the ASU through a cumulative-effect adjustment to retained earnings as
of the beginning of the year of adoption. While early adoption is permitted beginning in first quarter 2019, we do not
expect to elect that option. We are evaluating the impact of the ASU on our consolidated financial statements. In
addition to our allowance for loan losses, we will also record an allowance for credit losses on debt securities instead
of applying the impairment model currently utilized. The amount of the adjustments will be impacted by each
portfolio's composition and credit quality at the adoption date as well as economic conditions and forecasts at that
time.
73
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated 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.
ASU 2017-09, Scope of Modification Accounting
In May 2017, the FASB amended the requirements in the Compensation—Stock Compensation Topic of the
Accounting Standards Codification related to changes to the terms or conditions 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. The amendments will be effective for the Company for annual
periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is
permitted. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB amended the requirements of the Derivatives and Hedging Topic of the Accounting
Standards Codification to improve the financial reporting of hedging relationships to better portray the economic
results of an entity’s risk management activities in its financial statements. The amendments will be effective for the
Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The
Company adopted this standard December 1, 2017. However, there was no material effect on the financial
statements.
ASU 2018-02, Income Statement: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income
In February 2018, the FASB Issued (2018-02), Income Statement (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income, which allows Companies to reclassify the stranded effects
in other comprehensive income to retained earnings as a result of the change in the tax rates under the Tax Reform
Act. The Company has opted to early adopt this pronouncement by retrospective application to each period in which
the effect of the change in the tax rate under the Tax Cuts and Jobs Act is recognized. The Company made an
election to reclassify income tax effects of the Tax Reform Act, amounting to approximately $259,000, from
accumulated other comprehensive income to retained earnings. The impact of the reclassification from other
comprehensive income to retained earnings is included in the Statement of Changes in Shareholders’ Equity.
74
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 2 – INVESTMENT SECURITIES
Investment securities have been classified in the balance sheet according to management’s intent. The Company’s
classification of securities at December 31, 2017, 2016 and 2015 was as follows (in thousands):
December 31, 2017
Gross
Gross
unrealized
unrealized
(losses)
gains
Amortized
Cost
Estimated
fair value
Amortized
Cost
December 31, 2016
Gross
Gross
unrealized
unrealized
(losses)
gains
Estimated
fair value
Securities available for sale:
U. S. government agency
securities
State and municipal securities
Mortgage-backed securities
Asset-backed securities
Other debt securities
Total
Securities held to maturity:
State and municipal securities
Mortgage-backed securities
Other debt securities
Total
$ 11,433 $
51,790
108,236
16,575
5,326
$ 193,360 $
12 $
1,430
40
—
81
1,563 $
9,517 $
(168) $ 11,277 $
28,480
52,998
(222)
(1,714) 106,562 126,637
16,377
21,620
—
5,407
(2,302) $ 192,621 $ 186,254 $
(198)
—
— $
65
17
—
—
82 $
(143) $
(632)
9,374
27,913
(2,059) 124,595
20,473
(1,147)
—
—
(3,981) $ 182,355
$
$
3,759 $
—
—
3,759 $
89 $
—
—
89 $
— $
—
—
— $
3,848 $ 36,842 $
4,687
5,335
3,848 $ 46,864 $
—
—
2,784 $
79
11
2,874 $
— $ 39,626
4,766
—
(7)
5,339
(7) $ 49,731
Securities available for sale:
U. S. government agency
securities
State and municipal
securities
Mortgage-backed securities
Asset-backed securities
Other debt securities
Total
Securities held to maturity:
State and municipal
securities
Mortgage-backed securities
Other debt securities
Total
December 31, 2015
Gross
Gross
unrealized
unrealized
(losses)
gains
Amortized
Cost
Estimated
fair value
$
19,562 $
16 $
(36) $
19,542
13,776
119,828
22,814
—
$ 175,980 $
99
13
—
—
128 $
(7)
13,868
(1,461) 118,380
21,593
(1,221)
—
—
(2,725) $ 173,383
$
$
37,005 $
6,089
—
43,094 $
3,245 $
120
—
3,365 $
— $
—
—
— $
40,250
6,209
—
46,459
During the third quarter of 2013, approximately $36,789,000 of available for sale securities were transferred to the
held to maturity category. The transfers of the securities into the held to maturity category from the available for sale
category were made at fair value at the date of transfer. The unrealized holding loss at the date of the transfer
continues to be reported in a separate component of shareholders’ equity and is being amortized over the remaining
life of the securities as an adjustment of yield in a manner consistent with the amortization of the premiums and
discounts.
During the fourth quarter of 2017, approximately $41,665,000 of held to maturity securities were transferred to the
available for sale category. The Company was able to make the transfer due to early adoption of ASU 2017-12,
Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The transfers of the
securities into the available for sale category from the held to maturity category were made at fair value at the date
of transfer.
75
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The amortized cost and fair value of debt and equity securities at December 31, 2017, by contractual maturity, are
shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a
single maturity date are shown separately.
Due in less than one year
Due one to five years
Due five to ten years
Due beyond ten years
Mortgage-backed securities
Asset-backed securities
Available-for-sale
Held-to-maturity
Amortized
cost
Estimated
fair value
Amortized
cost
Estimated
fair value
$
$
3,909 $
30,470
30,179
3,991
108,236
16,575
193,360 $
3,965 $
31,154
30,687
3,876
106,562
16,377
192,621 $
— $
2,383
1,376
—
—
—
3,759 $
—
2,422
1,426
—
—
—
3,848
Results from sales of debt and equity securities were as follows (in thousands):
Proceeds
Gross gains
Gross losses
2017
Year ended December 31
2016
2015
$
46,830 $
121
(190)
33,752 $
216
(146)
85,390
261
(206)
The table above does not include activity from maturities, prepayments or calls on debt or equity securities.
Securities with a market value of $111,970,000, $133,297,000 and $146,921,000 at December 31, 2017, 2016 and
2015, respectively, were pledged to collateralize public deposits, derivative positions and Federal Home Loan Bank
advances.
At December 31, 2017, 2016 and 2015, there were no holdings of securities of any one issuer, other than the U.S.
Government and its agencies, in an amount greater than 10% of shareholders’ equity.
76
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following tables show the Company’s securities with unrealized losses, aggregated by major security type and
length of time in a continuous unrealized loss position (in thousands):
December 31, 2017
U. S. government agency securities
State and municipal securities
Mortgage-backed securities
Asset-backed securities
Other debt securities
Total temporarily impaired securities
December 31, 2016
U. S. government agency securities
State and municipal securities
Mortgage-backed securities
Asset-backed securities
Other debt securities
Total temporarily impaired securities
December 31, 2015
U. S. government agency securities
State and municipal securities
Mortgage-backed securities
Asset-backed securities
Total temporarily impaired securities
Less than 12 months
Gross
unrealized
losses
Estimated
fair value
12 months or more
Gross
unrealized
losses
Estimated
fair value
Total
Estimated
fair value
Gross
unrealized
losses
$
7,375 $
7,490
29,832
—
—
$ 44,697 $
(90) $
(106)
(322)
—
—
1,912 $
5,798
67,813
16,377
—
(518) $ 91,900 $
(78) $
(116)
(1,392)
(198)
—
9,287 $
13,288
97,645
16,377
—
(1,784) $ 136,597 $
$
9,374 $
20,279
110,563
—
2,029
$ 142,245 $
(143) $
(632)
(1,955)
—
(7)
— $
—
4,150
20,473
—
(2,737) $ 24,623 $
— $
—
9,374 $
20,279
(104) 114,713
20,473
2,029
(1,251) $ 166,868 $
(1,147)
—
$ 13,100 $
3,099
97,154
—
$ 113,353 $
(36) $
(7)
(1,068)
—
— $
—
16,260
21,593
(1,111) $ 37,853 $
— $ 13,100 $
3,099
—
(393) 113,414
(1,221)
21,593
(1,614) $ 151,206 $
(168)
(222)
(1,714)
(198)
—
(2,302)
(143)
(632)
(2,059)
(1,147)
(7)
(3,988)
(36)
(7)
(1,461)
(1,221)
(2,725)
Declines in the fair value of securities below their cost that are deemed to be other-than-temporary are reflected in
earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment of
available for sale securities related to other factors is recognized in other comprehensive income (loss). In estimating
other-than-temporary impairment losses, management considers, among other things, the length of time and the
extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer
and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any
anticipated recovery in fair value. The unrealized losses shown above are primarily due to increases in market rates
over the yields available at the time of purchase of the underlying securities and not credit quality. Because the
Company does not intend to sell these securities and it is more likely than not that the Company will not be required
to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company does not
consider these securities to be other than temporarily impaired at December 31, 2017. There were no other-than-
temporary impairments for the years ended December 31, 2017, 2016 or 2015.
77
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31, 2017, 2016 and 2015 were as follows (in thousands):
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
Less net unearned income
Allowance for loan losses
December 31,
2017
350,622 $
102,581
82,586
373,248
6,862
31,983
947,882
(345)
947,537
(13,721)
933,816 $
December 31,
2016
302,322 $
97,015
94,491
379,620
5,974
56,796
936,218
(967)
935,251
(11,634)
923,617 $
December 31,
2015
251,197
93,785
52,522
353,442
8,668
50,197
809,811
(1,415)
808,396
(10,132)
798,264
$
$
At December 31, 2017, variable-rate and fixed-rate loans totaled $608,128,000 and $339,754,000, respectively. At
December 31, 2016, variable-rate and fixed-rate loans totaled $546,848,000 and $389,370,000, respectively. At
December 31, 2015, variable-rate and fixed-rate loans totaled $401,800,000 and $408,011,000, respectively.
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 by the relationship managers 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.
78
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following table provides the risk category of loans by applicable class of loans as of December 31, 2017, 2016
and 2015 (in thousands):
Performing Loans
December 31, 2017
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
December 31, 2016
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
December 31, 2015
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
Special
Mention Substandard
Total
Performing
Total Impaired
Loans
Pass
— $
$ 349,415 $
—
102,571
—
82,586
349,494 11,193
—
6,849
31,983
—
$ 922,898 $ 11,193 $
— $ 349,415 $
10 102,581
82,586
—
11,073 371,760
6,862
31,983
11,096 $ 945,187 $
13
—
Total
1,207 $ 350,622
— 102,581
— 82,586
1,488 373,248
—
6,862
— 31,983
2,695 $ 947,882
— $
$ 301,012 $
—
96,722
94,491
—
349,857 11,035
—
5,958
56,796
—
$ 904,836 $ 11,035 $
— $ 301,012 $
97,015
293
94,491
—
16,419 377,311
5,974
56,796
16,728 $ 932,599 $
16
—
$ 249,249 $
93,181
52,522
338,106
8,543
50,197
$ 791,798 $
— $
—
—
6,230
—
—
6,230 $
— $ 249,249 $
93,181
—
52,522
—
9,106 353,442
8,543
50,197
9,106 $ 807,134 $
—
—
1,310 $ 302,322
— 97,015
— 94,491
2,309 379,620
—
5,974
— 56,796
3,619 $ 936,218
1,948 $ 251,197
604 93,785
— 52,522
— 353,442
8,668
125
— 50,197
2,677 $ 809,811
None of the Company’s loans had a risk rating of “Doubtful” as of December 31, 2017, 2016 or 2015.
79
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following tables detail the changes in the ALL for the years ending December 31, 2017, 2016 and 2015 by loan
classification (in thousands):
Commercial
real estate
Consumer
real estate
Construction
and land
development
Commercial
and
industrial
Consumer Other Total
Year ended December 31, 2017
Balance, beginning of period
Charged-off loans
Recoveries
Provision for loan losses
Balance, end of period
Year ended December 31, 2016
Balance, beginning of period
Charged-off loans
Recoveries
Provision for loan losses
Balance, end of period
Year ended December 31, 2015
Balance, beginning of period
Charged-off loans
Recoveries
Provision for loan losses
Balance, end of period
$
$
$
$
$
$
2,655 $ 1,013 $
—
—
50
3,324 $ 1,063 $
—
9
660
1,574 $
—
—
54
1,628 $
5,618 $
(12,769)
1,865
12,495
7,209 $
76 $ 698 $ 11,634
— — (12,769)
112 —
1,986
(97) (292) 12,870
91 $ 406 $ 13,721
2,879 $
(350)
52
74
968 $
—
—
45
2,655 $ 1,013 $
914 $
—
—
660
1,574 $
4,693 $
(956)
23
1,858
5,618 $
103 $ 575 $ 10,132
(1,452)
(146) —
125
50 —
69 123
2,829
76 $ 698 $ 11,634
1,535 $
—
31
1,313
2,879 $
621 $
(173)
68
452
968 $
408 $
—
—
506
914 $
8,540 $
(3,033)
299
(1,113)
4,693 $
75 $ 103 $ 11,282
(3,206)
— —
405
7 —
1,651
21 472
103 $ 575 $ 10,132
80
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
A breakdown of the ALL and the loan portfolio by loan category at December 31, 2017, 2016 and 2015 follows (in
thousands):
Commercial
real estate
Consumer
real estate
Construction
and land
development
Commercial
and
industrial
Consumer Other Total
December 31, 2017
Allowance for Loan Losses:
Collectively evaluated for impairment
Individually evaluated for impairment
Balances, end of period
$
$
3,324 $
—
3,324 $
1,063 $
—
1,063 $
1,628 $
—
1,628 $
7,109 $
100
7,209 $
91 $
—
91 $
406 $ 13,621
—
100
406 $ 13,721
Loans:
Collectively evaluated for impairment
Individually evaluated for impairment
Balances, end of period
$ 349,415 $ 102,581 $
—
$ 350,622 $ 102,581 $
1,207
82,586 $ 371,760 $
1,488
82,586 $ 373,248 $
—
6,862 $ 31,983 $945,187
2,695
6,862 $ 31,983 $947,882
—
—
December 31, 2016
Allowance for Loan Losses:
Collectively evaluated for impairment
Individually evaluated for impairment
Balances, end of period
$
$
2,655 $
—
2,655 $
1,013 $
—
1,013 $
1,574 $
—
1,574 $
5,118 $
500
5,618 $
76 $
—
76 $
698 $ 11,134
—
500
698 $ 11,634
Loans:
Collectively evaluated for impairment
Individually evaluated for impairment
Balances, end of period
$ 301,012 $ 97,015 $
—
$ 302,322 $ 97,015 $
1,310
94,491 $ 377,311 $
2,309
94,491 $ 379,620 $
—
5,974 $ 56,796 $932,599
3,619
5,974 $ 56,796 $936,218
—
—
December 31, 2015
Allowance for Loan Losses:
Collectively evaluated for impairment
Individually evaluated for impairment
Balances, end of period
$
$
2,314 $
565
2,879 $
968 $
—
968 $
914 $
—
914 $
4,693 $
—
4,693 $
103 $
—
103 $
9,567
575 $
—
565
575 $ 10,132
Loans:
Collectively evaluated for impairment
Individually evaluated for impairment
Balances, end of period
$ 249,249 $ 93,181 $
604
$ 251,197 $ 93,785 $
1,948
52,522 $ 353,442 $
—
52,522 $ 353,442 $
—
8,543 $ 50,197 $807,134
2,677
8,668 $ 50,197 $809,811
125
—
The following table presents the allocation of the ALL for each respective loan category with the corresponding
percentage of loans in each category to total loans, net of deferred fees as of December 31, 2017, 2016 and 2015
(dollars in thousands):
December 31, 2017
December 31, 2016
December 31, 2015
Percent of total
loans, net of
deferred fees
Amount
Percent of total
loans, net of
deferred fees
Amount
Percent of total
loans, net of
deferred fees
Amount
$
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
3,324
1,063
1,628
7,209
91
406
0.35% $
0.11
0.17
0.76
0.01
0.04
2,655
1,013
1,574
5,618
76
698
0.28% $
0.11
0.17
0.60
0.01
0.07
2,879
968
914
4,693
103
575
Total allowance for loan and
lease losses
$
13,721
1.45% $
11,634
1.24% $
10,132
81
0.36%
0.12
0.11
0.58
0.01
0.07
1.25%
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following table presents information related to impaired loans as of and for the years ended December 31, 2017,
2016 and 2015 (in thousands):
December 31, 2017
Unpaid
principal
balance
Recorded
investment
Related
allowance
Recorded
investment
Related
allowance
Recorded
investment
December 31, 2016
Unpaid
principal
balance
December 31, 2015
Unpaid
principal
balance
Related
allowance
With no related allowance
recorded:
Commercial real estate
Consumer real estate
Construction and land
development
Commercial and industrial
Consumer
Other
Subtotal
With an allowance recorded:
Commercial real estate
Consumer real estate
Construction and land
development
Commercial and industrial
Consumer
Other
Subtotal
Total
$
$
1,207 $
—
1,645 $
—
— $
—
1,310 $
—
1,686 $
—
—
—
—
—
1,207
—
—
—
—
1,645
—
—
—
—
—
1,488
—
—
1,488
2,695 $
—
2,770
—
—
2,770
4,415 $
—
—
—
—
—
—
—
—
100
—
—
100
100 $
—
—
—
—
1,310
—
—
—
—
1,686
—
—
—
—
—
2,309
—
—
2,309
3,619 $
—
2,921
—
—
2,921
4,607 $
— $
—
—
—
—
—
—
—
—
—
500
—
—
500
500 $
— $
604
— $
681
—
—
125
—
729
—
—
125
—
806
1,948
—
1,948
—
—
—
—
—
1,948
2,677 $
—
—
—
—
1,948
2,754 $
—
—
—
—
—
—
—
565
—
—
—
—
—
565
565
The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to
immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs.
The following table presents information related to the average recorded investment and interest income recognized
on impaired loans for the years ended December 31, 2017, 2016 and 2015 (in thousands):
Year Ended
December 31, 2017
Year Ended
December 31, 2016
Year Ended
December 31, 2015
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
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Subtotal
With an allowance recorded:
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Subtotal
Total
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
655 $
302
—
—
63
—
1,020
974
—
—
1,155
—
—
2,129
3,149 $
— $
—
—
—
—
—
—
—
—
—
44
—
—
44
44 $
42 $
357
—
594
63
—
1,056
2,015
262
568
1,309
—
—
4,154
5,210 $
—
—
—
—
5
—
5
—
—
—
—
—
—
—
5
$
$
1,258 $
—
—
—
—
—
1,258
—
—
—
2,077
—
—
2,077
3,335 $
82
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
There was no interest income recognized on a cash basis for impaired loans for the years ended December 31, 2017,
2016 or 2015.
Non-accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that
are collectively evaluated for impairment and individually classified impaired loans. Impaired loans include
commercial loans that are individually evaluated for impairment and deemed impaired (i.e., individually classified
impaired loans) as well as TDRs for all loan classifications.
The following table presents the aging of the recorded investment in past-due loans as of December 31, 2017, 2016
and 2015 by class of loans (in thousands):
30 - 59
Days
Past Due
$
60 - 89
Days
Past Due
Greater Than
89 Days
Past Due
Total
Past Due
Loans Not
Past Due
December 31, 2017
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
December 31, 2016
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
December 31, 2015
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
$
$
$
$
$
— $
—
—
1,967
—
—
1,967 $
— $
81
—
—
—
—
81 $
— $
100
—
—
—
—
100 $
Total
350,622
102,581
82,586
373,248
6,862
31,983
947,882
302,322
97,015
94,491
379,620
5,974
56,796
936,218
251,197
93,785
52,522
353,442
8,668
50,197
809,811
— $
—
—
209
—
—
209 $
— $
282
—
—
—
—
282 $
— $
54
—
—
—
—
54 $
— $
218
—
—
13
—
231 $
— $
—
—
—
—
—
— $
1,948 $
616
—
—
125
—
2,689 $
— $
218
—
2,176
13
—
2,407 $
— $
363
—
—
—
—
363 $
1,948
770
—
—
125
—
2,843 $
350,622 $
102,363
82,586
371,072
6,849
31,983
945,475 $
302,322 $
96,652
94,491
379,620
5,974
56,796
935,855 $
249,249 $
93,015
52,522
353,442
8,543
50,197
806,968 $
83
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following table presents the recorded investment in non-accrual loans, past due loans over 90 days and accruing
and troubled debt restructurings (“TDR”) by class of loans as of December 31, 2017, 2016 and 2015 (in thousands):
December 31, 2017
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
December 31, 2016
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
December 31, 2015
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
Past Due Over
90
Days and
Accruing
Troubled Debt
Restructurings
Non-Accrual
$
$
$
$
$
$
1,207 $
—
—
1,488
—
—
2,695 $
1,310 $
—
—
2,309
—
—
3,619 $
1,948 $
616
—
—
125
—
2,689 $
— $
218
—
—
13
—
231 $
— $
—
—
—
—
—
— $
— $
—
—
—
—
—
— $
1,206
—
—
—
—
—
1,206
1,272
—
—
—
—
—
1,272
—
—
—
—
125
—
125
As of December 31, 2017 and 2016, all loans classified as nonperforming were deemed to be impaired. As of
December 31, 2015, a $12,000 loan was on non-accrual status and was not deemed to be impaired.
As of December 31, 2017, 2016 and 2015 the Company had recorded investments in TDR of $1.2 million, $1.3
million and $0.1 million, respectively. The Company did not allocate a specific allowance for those loans at
December 31, 2017, 2016 or 2015 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 Company’s loan policy. Loans accounted for as
TDR are individually evaluated for impairment.
84
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following table presents loans by class modified as TDR that occurred during the years ended December 31,
2016 and 2015 (in thousands). There were no TDR identified during the year ended December 31, 2017.
Year Ended
December 31, 2016
Year Ended
December 31, 2015
Pre
modification
outstanding
recorded
investment
Number of
contracts
Post
modification
outstanding
recorded
investment,
net of
related
allowance
Pre
modification
outstanding
recorded
investment
Number of
contracts
Post
modification
outstanding
recorded
investment,
net of
related
allowance
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
1 $
—
—
—
—
—
1 $
1,948 $
—
—
—
—
—
1,948 $
1,170
—
—
—
—
—
1,170
— $
—
—
—
1
—
1 $
— $
—
—
—
125
—
125 $
—
—
—
—
125
—
125
The following table presents loans by class modified as TDR for which there was a payment default within twelve
months following the modification during the years ended December 31, 2016 and 2015 (in thousands). There
were no TDR for which there was a payment default within the twelve months following the modification during the
year ended December 31, 2017.
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
Year Ended
December 31, 2016
Year Ended
December 31, 2015
Number of
contracts
Recorded
investment
Number of
contracts
Recorded
investment
— $
—
—
—
1
—
1 $
—
—
—
—
124
—
124
— $
—
—
1
—
—
1 $
—
—
—
—
—
—
—
The consumer loan TDR that subsequently defaulted during the year ended December 31, 2016 had no specific
reserve in the ALL and resulted in a $0.1 million charge-off. The commercial and industrial loan TDR that
subsequently defaulted during the year ended December 31, 2015 had a $2.4 million specific reserve in the ALL and
resulted in a $2.5 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
At December 31, 2017, 2016 and 2015, the Company had no purchased loans, for which there was, at acquisition,
evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually
required payments would not be collected.
85
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Accretable yield, or income expected to be collected, was as follows for the years ended December 31 (in
thousands):
Balance at January 1
New loans purchased
Accretion of income
Reclassifications from nonaccretable difference
Disposals
Balance at December 31
2017
2016
2015
$
$
— $
—
—
—
—
— $
— $
—
—
—
—
— $
(190)
—
499
(309)
—
—
Purchased impaired loans had no impact on the ALL for the year ended December 31, 2017 or 2016. For those
purchased impaired loans disclosed above, the Company reduced the allowance for loan losses by $173,000 during
the year ended December 31, 2015.
Leases
The Company has entered into various direct finance leases. The leases are reported as part of other loans. The lease
terms vary from two to six years. The components of the direct financing leases as of December 31, 2017, 2016 and
2015 were as follows (in thousands):
Total minimum lease payments receivable
Less:
Unearned income
Net leases
December 31,
2017
December 31,
2016
December 31,
2015
$
$
714 $
2,567 $
5,215
(49)
665 $
(96)
2,471 $
(321)
4,894
The future minimum lease payments receivable under the direct financing leases as of December 31, 2017 were as
follows (in thousands):
Year ending December 31:
2018
2019
2020
2021
2022
$
$
235
227
212
40
—
714
NOTE 4 – PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2017, 2016 and 2015 are summarized as follows (in thousands):
Range of
useful lives
Not applicable $
39 years
2 to 15 years
3 to 7 years
Not applicable
December 31,
2017
December 31,
2016
December 31,
2015
1,180 $
3,586
777
2,659
—
8,202
(2,318)
5,884 $
1,180 $
3,586
1,171
2,055
774
8,766
(3,416)
5,350 $
1,180
3,586
1,174
2,332
—
8,272
(3,376)
4,896
Land
Buildings
Leasehold improvements
Furniture and equipment
Leasehold improvements in process
Less accumulated depreciation and amortization
$
86
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Premises and equipment depreciation and amortization expense for the years ended December 31, 2017, 2016 and
2015 totaled $401,000, $360,000 and $493,000, respectively.
The Company leases certain properties under noncancelable lease arrangements. The leases have various terms, and
maturity dates, including extensions through 2032. The leases have various other terms including payments for
common area maintenance, escalation increases over the term of the lease and various renewal options. Rent
expense related to these leases for 2017, 2016 and 2015 totaled $1,521,000, $1,016,000 and $1,018,000 respectively.
Future minimum payments under these operating leases as of December 31, 2017 are as follows (in thousands):
Year ending December 31:
2018
2019
2020
2021
2022
Thereafter
$
$
1,179
952
951
968
985
9,557
14,592
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The change in goodwill during the years ended December 31, 2017, 2016 and 2015 was as follows (in thousands):
Beginning of year
Acquired goodwill
Impairment
End of year
2017
2016
2015
$
$
6,219 $
—
—
6,219 $
6,219 $
—
—
6,219 $
6,219
—
—
6,219
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At October 31, 2017, the
Company’s reporting unit had positive equity and the Company elected to perform a qualitative assessment to
determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including
goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting
unit exceeded its carrying value, resulting in no impairment.
Acquired Intangible Assets
Acquired intangible assets at December 31, 2017, 2016 and 2015 were as follows (in thousands):
December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
December 31, 2016
December 31, 2015
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Amortized intangible assets:
Core deposit intangibles
$
287 $
(264) $
287 $
(216) $
287 $
(162)
Aggregate amortization expense was $48,000 for 2017 and $54,000 for 2016 and 2015.
87
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Estimated amortization expense for each of the next five years is as follows (in thousands):
Year ending December 31:
2018
2019
2020
2021
2022
$
23
—
—
—
—
NOTE 6 – OTHER REAL ESTATE OWNED
Other real estate owned activity was as follows (in thousands):
Beginning balance
Loans transferred to other real estate owned
Direct write-downs
Sales of other real estate owned
End of year
2017
2016
2015
— $
—
—
—
— $
216 $
—
—
(216)
— $
575
—
—
(359)
216
$
$
Other real estate owned is presented net of the valuation allowance which is allocated to the specific properties held.
Activity in the valuation allowance was as follows during the years ended December 31, 2017, 2016 and 2015,
respectively (in thousands):
Beginning balance
Additions/(recoveries) charged/(credited) to expense
Reductions from sales of other real estate owned
Direct write-downs
End of year
2017
2016
2015
— $
—
—
—
— $
450 $
—
(450)
—
— $
450
—
—
—
450
$
$
Expenses related to other real estate owned during the years ended December 31, 2017, 2016 and 2015, respectively
include (in thousands):
Net (gain) loss on sales
Provision for unrealized losses
Operating expenses, net of rental income
Total
NOTE 7 – DEPOSITS
2017
2016
2015
$
$
— $
—
—
— $
(157) $
—
14
(143) $
4
—
30
34
Time deposits that exceed the FDIC deposit insurance limit of $250,000 at December 31, 2017, 2016 and 2015 were
$54,460,000, $51,070,000 and $84,248,000, respectively.
88
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Scheduled maturities of time deposits for the next five years and thereafter are as follows (in thousands):
Maturity:
2018
2019
2020
2021
2022
Thereafter
$
$
130,001
20,489
6,893
2,893
15,696
225
176,197
At December 31, 2017, 2016 and 2015, the Company had $19,000, $41,000 and $216,000, respectively of deposit
accounts in overdraft status that were reclassified to loans in the accompanying balance sheets.
NOTE 8 – FEDERAL HOME LOAN BANK ADVANCES
The Company had outstanding borrowings totaling $70,000,000, $55,000,000 and $45,000,000 at December 31,
2017, 2016 and 2015, respectively, via various advances. These advances are non-callable; interest payments are due
monthly, with principal due at maturity.
The following is a summary of the contractual maturities and average effective rates of outstanding advances
(dollars in thousands):
December 31, 2017
December 31, 2016
December 31, 2015
Year
2016
2017
2018
2019
2020
2021
2022
Thereafter
Total
Amount
$
Interest
Rates
Amount
$
—
—
70,000
—
—
—
—
—
70,000
$
—
—
1.66%
—
—
—
—
—
1.66% $
—
55,000
—
—
—
—
—
—
55,000
Interest
Rates
Amount
—
$
0.80%
—
—
—
—
—
—
0.80% $
45,000
—
—
—
—
—
—
—
45,000
Interest
Rates
0.57%
—
—
—
—
—
—
—
0.57%
Advances from the FHLB are collateralized by investment securities with a market value of $4.1 million, FHLB
stock and certain commercial and residential real estate mortgage loans totaling $397.4 million under a blanket
mortgage collateral agreement. At December 31, 2017, the amount of available credit from the FHLB totaled
$115.0 million.
89
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following were changes in accumulated other comprehensive income (loss) by component, net of tax, for the
years ended December 31, 2017, 2016 and 2015 (in thousands):
Year Ended December 31, 2017
Beginning Balance
Other comprehensive income (loss) before
reclassification, net of tax
Amounts reclassified for securities transferred
from held-to-maturity to available-for-sale
Amounts reclassified from accumulated other
comprehensive income (loss), net of tax
Net current period other comprehensive income (loss)
Reclassification of accumulated other comprehensive
income due to tax rate change
Ending Balance
Year Ended December 31, 2016
Beginning Balance
Other comprehensive income (loss) before
reclassification, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss), net of tax
Net current period other comprehensive income (loss)
Ending Balance
Year Ended December 31, 2015
Beginning Balance
Other comprehensive income (loss) before
reclassification, net of tax
Amounts reclassified from accumulated other
comprehensive income (loss), net of tax
Net current period other comprehensive income (loss)
Ending Balance
Gains and
and Losses
Losses on on Available
Cash Flow
Hedges
$
Unrealized Gains Unrealized
Losses on
Securities
Transferred to
Held to Maturity
(1,212) $
for Sale
Securities
(4,241) $
(698) $
Total
(6,151)
1,499
3,077
235
4,811
—
(1,086)
1,086
—
(770)
729
(167)
(3,679) $
$
(41)
1,950
(90)
1,162 $
(117)
1,204
(928)
3,883
(2)
(10) $
(259)
(2,527)
$
(3,704) $
105 $
(1,315) $
(4,914)
(121)
(416)
(537)
(4,241) $
$
(878)
75
(803)
(698) $
206
(793)
(103)
103
(1,212) $
(444)
(1,237)
(6,151)
$
(2,139) $
724 $
(1,418) $
(2,833)
(1,542)
(23)
(1,565)
(3,704) $
$
(653)
34
(619)
105 $
206
(1,989)
(103)
103
(1,315) $
(92)
(2,081)
(4,914)
90
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following were significant amounts reclassified out of each component of accumulated other comprehensive
income (loss) for the years ended December 31, 2017, 2016 and 2015 (in thousands):
Details about Accumulated Other
Comprehensive Income Components
Unrealized losses on cash flow hedges
Year Ended Year Ended Year Ended
December 31,
December 31,
2015
2016
December 31,
2017
Affected Line Item
in the Statement Where
Net Income is Presented
$
(430) $
(151) $
Unrealized gains and (losses) on
available-for-sale securities
$
$
$
Unrealized losses on securities transferred
to held-to-maturity
$
$
(429)
89
(770) $
(66) $
25
(41) $
(190) $
73
(117) $
(265)
—
(416) $
121 $
(46)
75 $
(167) $
64
(103) $
(37) Interest expense - money market
Interest expense - Federal Home
Loan Bank advances
—
14 Income tax benefit
(23) Net of tax
55 Net gain (loss) on sale of securities
(21) Income tax (expense) benefit
34 Net of tax
(167) Interest income - securities
64 Income tax benefit
(103) Net of tax
NOTE 10 – INCOME TAXES
The components of income tax expense are summarized as follows (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Total
2017
2016
2015
$
$
214 $
36
250
4,218
167
4,385
4,635 $
4,029 $
759
4,788
(395)
100
(295)
4,493 $
2,794
168
2,962
314
194
508
3,470
A reconciliation of actual income tax expense in the financial statements to the “expected” tax expense (computed
by applying the statutory federal income tax rate of 34% to income before income taxes) for the years ended
December 31, 2017, 2016 and 2015 is as follows (in thousands):
Computed "expected" tax expense
State income taxes, net of effect of federal income
taxes
Tax-exempt interest income
Earnings on bank owned life insurance contracts
Disallowed expenses
Excess tax benefits related to stock compensation
Write-down of deferred tax assets due to tax reform
Other
Total
$
91
2017
2016
2015
$
2,086 $
4,621 $
3,750
134
(418)
(197)
86
(632)
3,562
14
4,635 $
567
(394)
(204)
60
—
—
(157)
4,493 $
239
(367)
(213)
71
—
—
(10)
3,470
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
As a result of the Tax Cuts and Jobs Act of 2017 that was signed into law December 2017, the Company revalued its
net deferred tax asset position. This revaluation resulted in a $3.6 million decrease in net deferred tax assets and a
corresponding increase to income tax expense for the year ended December 31, 2017.
Significant items that gave rise to deferred taxes at December 31, 2017, 2016 and 2015 were as follows (in
thousands):
Deferred tax assets:
Allowance for loan losses
Depreciation
Net operating loss carryforward
Organization and preopening costs
Stock-based compensation
Acquired loans
Acquired deposits
Nonaccrual interest
Write-downs of other real estate
Accrued incentive compensation
Reserve for contingencies
Accrued contributions
Unrealized loss on securities available-for-sale
Unrealized loss on securities held-to-maturity
Cash flow hedge
Accrued vacation
Other
Deferred tax assets
Deferred tax liabilities:
Prepaid expenses
Depreciation
Goodwill
Amortization of core deposit intangible
Deferred tax liabilities
Net deferred tax asset
December 31,
2017
December 31,
2016
December 31,
2015
$
$
3,227 $
—
843
557
672
124
22
25
—
—
496
169
193
4
359
45
134
6,870
134
39
138
6
317
6,553 $
4,320 $
326
1,548
987
1,071
224
60
39
—
688
1,061
197
1,493
752
588
54
51
13,459
133
—
343
27
503
12,956 $
3,787
341
1,705
1,142
941
401
109
60
171
694
462
140
995
816
1,209
53
75
13,101
—
—
204
47
251
12,850
At December 31, 2017, the Company had federal net operating loss carryforwards of approximately $4,013,000,
which expire at various dates from 2030 to 2032. Deferred tax assets are fully recognized because the benefits are
more likely than not to be realized based on management’s estimation of future taxable earnings.
There were no significant unrecognized income tax benefits as of December 31, 2017, 2016 or 2015. As of
December 31, 2017, 2016 and 2015 the Company had no accrued interest or penalties related to uncertain tax
positions.
NOTE 11 – 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.
92
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following table sets forth outstanding financial instruments whose contract amounts represent credit risk as of
December 31, 2017, 2016 and 2015 (in thousands):
December 31,
2017
Contract or notional amount
December 31,
2016
December 31,
2015
Financial instruments whose contract amounts represent
credit risk:
Unused commitments to extend credit
Standby letters of credit
Total
$
$
584,494 $
11,552
596,046 $
508,990 $
10,886
519,876 $
384,837
13,450
398,287
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 December 31, 2017, will not have a material
impact on the financial statements of the Company.
NOTE 12 – CONCENTRATION OF CREDIT RISK
Substantially all of the Company’s loans, commitments, and standby letters of credit have been granted to customers
in the Company’s market area. The concentrations of credit by type of loan are set forth in Note 3 to the financial
statements.
At December 31, 2017, 2016 and 2015, the Company’s cash and due from banks, federal funds sold and interest-
bearing deposits in financial institutions aggregated $38,000,000, $25,000,000 and $14,000,000, respectively, in
excess of insured limits.
NOTE 13 – REGULATORY MATTERS AND RESTRICTIONS ON DIVIDENDS
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 Companying Supervision’s capital
guidelines for U.S. Banks (Basel III rules) became effective for the Company 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 December 31, 2017, the Company and the Bank met all regulatory capital
adequacy requirements to which they are subject.
regulators have established
The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of “prompt corrective
action” to resolve the problems of undercapitalized insured depository institutions. Under this system, federal
banking
five capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to
represent overall financial condition. Federal banking regulators are required to take various mandatory supervisory
actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized
categories. The severity of the action depends upon the capital category in which the institution is placed. For
example, institutions in all three undercapitalized categories are automatically restricted from paying distributions
and management fees, whereas only an institution that is significantly undercapitalized or critically undercapitalized
is restricted in its compensation paid to senior executive officers. Generally, subject to a narrow exception, the
banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.
93
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
At December 31, 2017, 2016 and 2015, the Company and the Bank were well capitalized under the regulatory
framework for prompt corrective action. There have been no conditions or events since that notification that
management believes have changed the Company’s or the Bank’s category.
The Company’s and the Bank’s capital amounts and ratios are presented in the following table (dollars in
thousands). Only the Bank’s capital amounts and ratios are presented at December 31, 2015 because the share
exchange had not yet occurred.
At December 31, 2017:
Total capital to risk-weighted assets:
CapStar Financial Holdings, Inc.
CapStar Bank
Tier I capital to risk-weighted assets:
CapStar Financial Holdings, Inc.
CapStar Bank
Common equity Tier 1 capital to risk
weighted assets:
CapStar Financial Holdings, Inc.
CapStar Bank
Tier I capital to average assets:
CapStar Financial Holdings, Inc.
CapStar Bank
At December 31, 2016:
Total capital to risk-weighted assets:
CapStar Financial Holdings, Inc.
CapStar Bank
Tier I capital to risk-weighted assets:
CapStar Financial Holdings, Inc.
CapStar Bank
Common equity Tier 1 capital to risk
weighted assets:
CapStar Financial Holdings, Inc.
CapStar Bank
Tier I capital to average assets:
CapStar Financial Holdings, Inc.
CapStar Bank
At December 31, 2015:
Total capital to risk-weighted assets:
Tier I capital to risk-weighted assets:
Common equity Tier 1 capital to risk
weighted assets:
Tier I capital to average assets:
Actual
Minimum capital
requirement (1)
Amount Ratio
Amount Ratio
Minimum to be
well-capitalized (2)
Amount Ratio
$ 156,176
142,138
12.5% $ 99,932
99,928
11.4
8.0%
8.0
$ N/A
124,909
142,276
128,238
11.4
10.3
74,949
74,946
133,445
111,907
142,276
128,238
10.7
9.0
10.7
9.6
56,212
56,209
53,218
53,215
6.0
6.0
4.5
4.5
4.0
4.0
N/A
99,928
N/A
81,191
N/A
66,519
$ 149,616
126,718
12.6% $ 95,028
95,028
10.7
8.0%
8.0
$ N/A
118,785
137,909
115,011
11.6
9.7
71,271
71,271
129,528
99,130
137,909
115,011
10.9
8.3
10.5
8.7
53,453
53,453
52,727
52,727
6.0
6.0
4.5
4.5
4.0
4.0
N/A
95,028
N/A
77,210
N/A
65,909
N/A
10.0
N/A
8.0
N/A
6.5
N/A
5.0
N/A
10.0
N/A
8.0
N/A
6.5
N/A
5.0
$ 116,047
105,749
11.4% $ 81,224
10.4
60,918
8.0% $ 101,530
6.0
81,224
10.0%
8.0
90,272
105,749
8.9
9.3
45,688
45,328
4.5
4.0
65,994
56,660
6.5
5.0
(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.
94
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Under Tennessee banking law, the Bank is subject to restrictions on the payment of dividends. Banking regulations
limit the amount of dividends that may be paid without prior approval of the Tennessee Department of Financial
Institutions. Under these regulations, the amount of dividends that may be paid in any calendar year without prior
approval of the Tennessee Department of Financial Institutions is limited to the current year’s net income, combined
with the retained net income of the preceding two years, subject to the capital requirements described above. The
Bank’s payment of dividends may also be affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that
deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking
practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may
not pay any dividends if payment would cause it to become undercapitalized or if it already is undercapitalized.
Moreover, the federal agencies have issued policy statements that provide that Company holding companies and
insured banks should generally only pay dividends out of current operating earnings.
Based on these regulations, the Bank was eligible to pay $19.3 million, $22.1 million and $19.0 million of dividends
as of December 31, 2017, 2016 and 2015, respectively. The Bank paid the Company $1.5 million of dividends
during 2016. No dividend payments were made by the Company during 2017.
NOTE 14 – NONVOTING AND SERIES A PREFERRED STOCK AND STOCK WARRANTS
Nonvoting Common Stock
The Company has authorized 5,000,000 shares of its common stock as nonvoting common stock. The nonvoting
common stock has the same rights and privileges as the common stock other than the nonvoting designation. Under
certain conditions, as outlined in the Company’s charter, the nonvoting stock may be converted, on a one-to-one
basis, to common stock. In conjunction with the Company’s initial public offering, 79,166 shares of nonvoting
common stock were issued and simultaneously converted to common stock on a one-to-one basis as further
described under “Warrants” below. At December 31, 2017 there were 132,561 shares of nonvoting common stock
outstanding. There were no shares of nonvoting common stock outstanding as of December 31, 2016 or 2015.
Preferred Stock
In conjunction with its initial capital issuance in 2008, the Bank issued 1,609,756 shares of Series A Preferred Stock
to certain shareholders. During 2016, coinciding with the Company’s initial public offering, 731,707 preferred
shares were converted to common shares.
The Series A Preferred Stock contains a liquidation preference and certain antidilution provisions. Holders of Series
A Preferred Stock also have certain consent rights with respect to changes to the Company’s charter or bylaws that
would materially adversely affect the preferences, rights and powers of such stock and the right to receive certain
financial reports. The Series A Preferred Stock is noncumulative, perpetual and, except as otherwise provided below
or pursuant to Tennessee law, nonvoting. Holders of Series A Preferred Stock participate equally in dividends paid
on the common stock on an as converted basis. In addition, the Series A Preferred Stock is convertible to nonvoting
common stock upon the occurrence of certain underwritten public offerings and certain transfers or proposed
transfers by the Company’s organizing shareholders.
Warrants
In conjunction with the issuance of the 1,609,756 shares of the Series A Preferred Stock, the holders of such stock
were issued 500,000 warrants to purchase shares of the Company’s nonvoting common stock at a purchase price of
$10.25 per share. The warrants are exercisable at any time and expire ten years from the date of grant of July 14,
2008. As of December 31, 2017, 500,000 warrants have been exercised on a cashless basis, resulting in the issuance
of 211,727 shares of nonvoting common stock. During 2016, 79,166 shares of nonvoting common stock were
converted to common stock on a one-to-one basis. As of December 31, 2017, none of these warrants remain
outstanding.
95
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
As part of the initial capital issuance in 2008, each organizer of the Company (“Organizers”) who became a director
of the Company received a warrant to purchase, at the purchase price of $10.00 per share, 10,000 shares of the
Company’s common stock. These warrants were issued in compliance with the FDIC’s policy on noncash
compensation in recognition of the Organizers considerable contribution of time, expertise, and capital. The
Company issued warrants to purchase 60,000 shares of common stock to these organizers. The warrants expire ten
years from date of grant of July 14, 2008. As of December 31, 2017, no warrants have been exercised and 60,000
warrants remain outstanding.
In addition, each subscriber for shares who is a Tennessee resident or any entity controlled by a Tennessee resident
and invested a minimum of $500,000 in the offering, received a warrant to purchase additional shares of common
stock equal to 5% of accepted subscriptions at the purchase price of $10.00 per share. The Company issued warrants
to purchase 238,319 shares of common stock to these subscribers. The warrants expire ten years from date of grant
of July 14, 2008. As of December 31, 2017, 84,450 of these warrants have been exercised and 153,869 warrants
remain outstanding.
NOTE 15 – SHAREHOLDERS’ AGREEMENT
On August 22, 2016, the Company entered into the Second Amended and Restated Shareholders’ Agreement (the
“SARSA”) with certain of its shareholders. Other than with respect to registration rights and rights and obligations
with respect to indemnification, the SARSA will remain in effect until June 30, 2018 unless earlier terminated by the
shareholders that are party to the SARSA. Among other matters, the SARSA (i) permits Corsair III Financial
Services Capital Partners, L.P. and Corsair III Financial Services Offshore 892 Partners, L.P. (the “Corsair Funds”)
to recommend one nominee to the Nominating, Governance and Community Affairs Committee of the boards of
directors of the Company and our bank for election to such boards, subject to any required regulatory and
shareholder approvals, (ii) provides “demand” registration rights to the Corsair Funds and those shareholders, other
than the Corsair Funds, that hold, individually or in the aggregate, at least 500,000 shares of registrable securities
and (iii) provides “piggyback” registration rights to all shareholders that are parties to the SARSA.
NOTE 16 – STOCK OPTIONS AND RESTRICTED SHARES
During 2008, the board of directors of the Company approved the CapStar Bank 2008 Stock Incentive Plan.
Following the formation of CapStar Financial Holdings, Inc. in 2016, and in connection with the Share Exchange,
the outstanding awards of restricted stock and stock options under the CapStar Bank 2008 Stock Incentive Plan were
exchanged for similar awards of restricted stock and stock options issued by CapStar Financial Holdings, Inc. under
the Stock Incentive Plan (the “Plan”), which the board of directors adopted in 2016. The Plan provides for the grant
of stock-based incentives, including stock options, restricted stock units, performance awards and restricted stock, to
employees, directors and service providers that are subject to forfeiture until vesting conditions have been satisfied
by the award recipient under the terms of the award. The Plan is intended to help align the interests of employees
and our shareholders and reward our employees for improved Company performance. The Plan reserved 1,569,475
shares of stock for issuance of stock incentives. Stock incentives include both restricted stock and stock option
grants. Total shares issuable under the plan are 154,867 at December 31, 2017.
The Company has recognized stock-based compensation expense, within salaries and employee benefits for
employees, and within other non-interest expense for directors, in the consolidated statements of income as follows
(in thousands):
Stock-based compensation expense before income taxes
Less: deferred tax benefit
Reduction of net income
For the year ended December 31,
2016
2015
2017
$
$
1,061 $
(406)
655 $
842 $
(322)
520 $
438
(168)
270
96
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Restricted Shares
Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the
issue date. 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
2017 follows:
Nonvested Shares
Nonvested at beginning of period
Granted
Vested
Forfeited
Nonvested at end of period
Restricted
Shares
199,641 $
52,233
(61,021)
(3,600)
187,253 $
Weighted
Average
Grant Date
Fair Value
12.34
19.16
12.37
13.57
14.21
As of December 31, 2017, there was $1,625,000 of total unrecognized compensation cost related to nonvested
shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.0
years. The total fair value of shares vested during the years ended December 31, 2017, 2016 and 2015 was
$1,174,000, $513,000 and $184,000, respectively.
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 no
current plans to pay dividends. 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.
The fair value of options granted was determined using the following weighted average assumptions as of the grant
date. There were no options granted during 2017.
Dividend yield
Expected term (in years)
Expected stock price volatility
Risk-free interest rate
Pre-vest forfeiture rate
2016
2015
—
7.48
17.20%
1.66%
10.25%
—
7.29
21.26%
1.86%
10.33%
97
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
A summary of the activity in stock options for 2017 follows:
Outstanding at beginning of period
Granted
Exercised
Forfeited or expired
Outstanding at end of period
Fully vested and expected to vest
Exercisable at end of period
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (years)
Shares
1,006,000 $
—
(201,200)
—
804,800 $
800,590 $
756,050 $
10.48
—
10.01
—
10.59
10.50
10.50
2.4
2.4
2.1
Information related to stock options during 2017, 2016 and 2015 follows:
Intrinsic value of options exercised
Cash received from option exercises
Tax benefit realized from option exercises
Weighted average fair value of options granted
$
2017
2,010,536 $
2,013,840
774,056
—
2016
2015
53,756 $
96,306
20,583
3.16
1,410
10,000
900
3.20
As of December 31, 2017, there was $102,000 of total unrecognized compensation cost related to nonvested stock
options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.6 years.
NOTE 17 – EMPLOYMENT CONTRACTS
The Company has entered into employment contracts with certain senior executives with various expiration dates.
Most of the contracts have an option for annual renewal by mutual agreement. The agreements specify that in certain
terminating events the Company will be obligated to provide certain benefits and pay each of the senior executives
severance based on their annual salaries. These terminating events include termination of employment without
“Cause” (as defined in the agreements) or in certain other circumstances specified in the agreements.
NOTE 18 – EMPLOYEE BENEFIT PLANS
The Company has a Retirement Savings 401(k) Plan in which employees may participate. The Company has elected
a safe harbor 401(k) plan and as such is required to make an annual contribution of 3% of the employees’ salaries
annually. An employee does not have to contribute to receive the employer contribution. In addition, the Company
may make an additional discretionary contribution up to 6% of the employees’ salaries annually. For the years ended
December 31, 2017, 2016 and 2015, the Company contributed $550,000, $536,000 and $469,000, respectively, to
the 401(k) Plan.
The Company also has a Health Reimbursement Plan in place to offset the cost of healthcare deductibles for
employees. At the end of the year, up to one-half of the unused balance in the employee’s account will be available
for the following year up to a maximum of the deductible for that employee.
NOTE 19 – DERIVATIVE INSTRUMENTS
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.
98
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Interest Rate Swaps Designated as Cash Flow Hedges
Forward starting interest rate swaps with notional amounts totaling $20 million as of December 31, 2017 and 2016
and $35 million as of December 31, 2015, 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):
Notional amounts
Weighted average pay rates
Weighted average receive rates
Weighted average maturity
Fair value
Amount of unrealized loss recognized in accumulated
other comprehensive income, net of tax
December 31,
2017
December 31,
2016
December 31,
2015
$
20,000
$
3.54%
20,000
$
3.54%
35,000
3.67%
3 month LIBOR
5.5 years
3 month LIBOR
6.5 years
(1,375) $
(1,535) $
3 month LIBOR
7.4 years
(3,158)
(849) $
(947) $
(1,949)
$
$
Cash flows began on these forward starting interest rate swaps in 2017. As such, $233,000 of interest expense was
recorded on these swap transactions during 2017.
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 $2,503,000 at December 31, 2017. There was no collateral posted
from the counterparties to the Company as of December 31, 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 risk to the Company. A summary of the Company’s customer related interest rate swaps is as
follows (in thousands):
Interest rate swap agreements:
Pay fixed/receive variable swaps
Pay variable/receive fixed swaps
Total
December 31, 2017
December 31, 2016
December 31, 2015
Notional
amount
Estimated
fair value
Notional
amount
Estimated
fair value
Notional
amount
Estimated
fair value
$
$
41,863 $
41,863
83,726 $
55 $
(55)
— $
41,254 $
41,254
82,508 $
460 $
(460)
— $
45,675 $
45,675
91,350 $
(726)
726
—
99
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 20 – RELATED PARTY
The Company may enter into loan transactions with certain directors, executive officers, significant shareholders,
and their affiliates. Such transactions were made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the same time for comparable transactions with persons
not affiliated with the Company, and did not, in the opinion of management, involve more than normal credit risk or
present other unfavorable features. None of these loans were impaired at December 31, 2017, 2016 or 2015. Activity
within these loans during the years ended December 31, 2017, 2016 and 2015 was as follows (in thousands):
Year ended December 31, 2017
Beginning of period
New commitments/draw downs
Repayments
End of period
Year ended December 31, 2016
Beginning of period
New commitments/draw downs
Repayments
End of period
Year ended December 31, 2015
Beginning of period
New commitments/draw downs
Repayments
End of period
Total
commitment
Total funded
commitment
$
$
$
$
$
$
31,076 $
21,203
(2,870)
49,409 $
27,501 $
4,805
(1,230)
31,076 $
27,484 $
17
—
27,501 $
20,325
4,320
(2,755)
21,890
17,770
4,692
(2,137)
20,325
20,067
1,966
(4,263)
17,770
Deposits from directors, executive officers, significant shareholders and their affiliates at December 31, 2017, 2016
and 2015 were $10.8 million, $8.8 million and $12.7 million, respectively.
One director provided consulting services to the Company. The Company incurred $10,000, $19,000 and $19,000 of
expense related to these services in 2017, 2016 and 2015, respectively. In addition, the Company also paid
approximately $95,000 to a shareholder of the Company for the lease of one of the Bank’s branches in 2017, 2016
and 2015.
NOTE 21 – 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.
100
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The Company 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 Company’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.
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 at December 31, 2017 or 2016.
Loans Held For Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-
level basis. The fair value of loans held for sale 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 loans held for sale carried at fair value at December 31, 2017 or 2016.
101
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Fair value measurements at December 31, 2017
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
Significant
observable unobservable
inputs
(Level 2)
inputs
(Level 3)
Carrying
Value
Assets:
Securities available-for-sale:
U.S. government-sponsored agencies
Obligations of states and political subdivisions
Mortage-backed securities-residential
Asset-backed securities
Other debt securities
Total securities available-for-sale
Derivatives:
Interest rate swaps - customer related
Liabilities:
Derivatives:
Interest rate swaps - customer related
Interest rate swaps - cash flow hedges
Total derivatives
$
$
$
$
$
11,277 $
52,998
106,562
16,377
5,407
192,621 $
— $
—
—
—
—
— $
11,277 $
52,998
106,562
16,377
5,407
192,621 $
184 $
— $
184 $
(184) $
(1,375)
(1,559) $
— $
—
— $
(184) $
(1,375)
(1,559) $
Fair value measurements at December 31, 2016
—
—
—
—
—
—
—
—
—
—
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
Significant
observable unobservable
inputs
(Level 2)
inputs
(Level 3)
Carrying
Value
Assets:
Securities available-for-sale:
U.S. government-sponsored agencies
Obligations of states and political subdivisions
Mortage-backed securities-residential
Asset-backed securities
Total securities available-for-sale
Derivatives:
Interest rate swaps - customer related
Liabilities:
Derivatives:
Interest rate swaps - customer related
Interest rate swaps - cash flow hedges
Total derivatives
9,374 $
27,913
124,595
20,473
182,355 $
— $
—
—
—
— $
9,374 $
27,913
124,595
20,473
182,355 $
460 $
— $
460 $
(460) $
(1,535)
(1,995) $
— $
—
— $
(460) $
(1,535)
(1,995) $
—
—
—
—
—
—
—
—
—
$
$
$
$
$
102
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Fair value measurements at December 31, 2015
Quoted
prices
in active
markets for
identical
assets
(Level 1)
Significant
other
Significant
observable unobservable
inputs
(Level 2)
inputs
(Level 3)
Carrying
Value
Assets:
Securities available-for-sale:
U.S. government-sponsored agencies
Obligations of states and political subdivisions
Mortage-backed securities-residential
Asset-backed securities
Total securities available-for-sale
Derivatives:
Interest rate swaps - customer related
Liabilities:
Derivatives:
Interest rate swaps - customer related
Interest rate swaps - cash flow hedges
Total derivatives
$
$
$
$
$
19,542 $
13,868
118,380
21,593
173,383 $
— $
—
—
3,526
3,526 $
19,542 $
13,868
118,380
18,067
169,857 $
726 $
— $
726 $
(726) $
(3,158)
(3,884) $
— $
—
— $
(726) $
(3,158)
(3,884) $
—
—
—
—
—
—
—
—
—
Assets measured at fair value on a nonrecurring basis are summarized below (in thousands):
Fair value measurements at December 31, 2017
Assets:
Impaired loans:
Carrying
Value
Quoted prices
in active
markets for
identical
assets
(level 1)
Significant
other
Significant
observable unobservable
inputs
(level 2)
inputs
(level 3)
Commercial and industrial
$
1,388 $
—
$
— $
1,388
Fair value measurements at December 31, 2016
Assets:
Impaired loans:
Carrying
Value
Quoted prices
in active
markets for
identical
assets
(level 1)
Significant
other
Significant
observable unobservable
inputs
(level 2)
inputs
(level 3)
Commercial and industrial
$
1,809 $
— $
— $
1,809
103
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Fair value measurements at December 31, 2015
Quoted prices
in active
markets for
identical
assets
(level 1)
Significant
other
Significant
observable unobservable
inputs
(level 2)
inputs
(level 3)
Carrying
Value
Assets:
Impaired loans:
Commercial and industrial
Other real estate owned:
$
1,383 $
— $
— $
1,383
Construction and land development
216
—
—
216
The following table presents quantitative information about Level 3 fair value measurements for assets measured at
fair value on a nonrecurring basis at December 31, 2017, 2016 and 2015 (dollars in thousands):
December 31, 2017
Impaired loans:
Fair
Value
Valuation
Technique(s)
Unobservable
Input(s)
Range
(Weighted-
Average)
Commercial and industrial
$
1,388
Sales comparison
approach
Appraisal
discounts
15%
December 31, 2016
Impaired loans:
Fair
Value
Valuation
Technique(s)
Unobservable
Input(s)
Range
(Weighted-
Average)
Commercial and industrial
$
1,809
Sales comparison
approach
Appraisal
discounts
20%
December 31, 2015
Impaired loans:
Commercial real estate
Other real estate:
Construction and land development
Fair
Value
Valuation
Technique(s)
$
1,383
Sales comparison
approach
Sales comparison
approach
216
Unobservable
Input(s)
Range
(Weighted-
Average)
Appraisal
discounts
Appraisal
discounts
20%
15%
104
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Fair Value of Financial Instruments
The carrying value and estimated fair values of the Company’s financial instruments at December 31, 2017, 2016
and 2015 were as follows (in thousands):
December 31, 2017
December 31, 2016
Carrying
Carrying
amount
Fair value
amount
Fair value
Fair value
level of
input
Financial assets:
Cash and due from banks, interest-bearing
deposits in
financial institutions
Federal funds sold
Securities available-for-sale
Securities held-to-maturity
Loans held for sale
Restricted equity securities
Loans, net of unearned income
Accrued interest receivable
Bank owned life insurance
Other assets
Financial liabilities:
Deposits
Federal Home Loan Bank advances
Accrued interest payable
Other liabilities
$
78,078 $
4,719
192,621
3,759
74,093
8,806
947,537
4,084
22,479
184
78,078 $
4,719
192,621
3,848
75,549
N/A
944,037
4,084
22,479
184
63,456 $
16,654
182,355
46,864
42,111
6,032
935,251
3,942
21,900
460
63,456 Level 1
16,654 Level 1
182,355 Level 2
49,731 Level 2
42,302 Level 2
N/A
N/A
934,628 Level 3
3,942 Level 2
21,900 Level 2
460 Level 2
1,119,866 1,065,669 1,128,723 1,088,758 Level 3
54,989 Level 2
212 Level 2
5,349 Level 3
55,000
212
5,349
69,980
323
3,349
70,000
323
3,349
Financial assets:
Cash and due from banks, interest-bearing deposits in
financial institutions
Federal funds sold
Securities available-for-sale
Securities held-to-maturity
Loans held for sale
Restricted equity securities
Loans, net of unearned income
Accrued interest receivable
Bank owned life insurance
Other assets
Financial liabilities:
Deposits
Securities sold under repurchase agreements
Federal Home Loan Bank advances
Accrued interest payable
Other liabilities
December 31, 2015
Carrying
amount
Fair value
Fair value
level of input
$
93,455 $
6,730
173,383
43,094
35,729
5,414
798,264
3,030
21,299
726
93,455
6,730
173,383
46,459
36,552
N/A
806,030
3,030
21,299
726
1,038,460
3,755
45,000
177
6,536
1,035,978
3,755
44,926
177
6,536
Level 1
Level 1
Level 2
Level 2
Level 2
N/A
Level 3
Level 2
Level 2
Level 2
Level 3
Level 1
Level 2
Level 2
Level 3
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
105
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(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.
(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
The fair value of the Company’s loan portfolio includes a credit risk assumption in the determination of the
fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market
participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair
valued using a segmented approach. The Company 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. Fair values for impaired loans are estimated using discounted cash flow models
or based on the fair value of the underlying collateral. For other loans, fair values are estimated using
discounted cash flow models, using current 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
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.
(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 is estimated by discounted cash flow
models, using current market interest rates offered on certificates with similar remaining maturities.
(h)
Securities Sold under Repurchase Agreements
The securities sold under repurchase agreements are payable upon demand. For this reason, the carrying
amount is a reasonable estimate of fair value.
(i)
Federal Home Loan Bank Advances
The fair value of fixed rate Federal Home Loan Bank Advances is estimated using discounted cash flow
models, using current market interest rates offered on certificates, advances and other borrowings with similar
remaining maturities.
(j)
Accrued Interest Receivable/Payable
The carrying amounts of accrued interest approximate fair value.
(k)
Other Liabilities
Included in other liabilities are certain interest rate swap agreements, the cash flow hedge relationships and
contingent consideration. 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
106
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
inputs. The fair value of contingent consideration is estimated by a discounted cash flow model that utilizes
various unobservable inputs.
(l)
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.
(m)
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 Company’s entire holdings of a particular instrument.
Because no market exists for a significant portion of the Company’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.
NOTE 22 – PARENT COMPANY ONLY FINANCIAL INFORMATION
The following information presents the condensed balance sheet, statement of income, and cash flows of CapStar
Financial Holdings, Inc. as of and for the year ended December 31, 2017 and 2016 (in thousands). CapStar
Financial Holdings, Inc. had no activity until the Share Exchange in February 2016, as described in Note 1.
Condensed Balance Sheets
Assets
Cash and cash equivalents
Investment in consolidated subsidiary
Other assets
Total assets
Liabilities and Shareholders’ Equity
Other liabilities
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31, 2017 December 31, 2016
$
$
$
$
$
14,108
132,909
61
147,078 $
132
146,946
147,078 $
22,952
116,310
—
139,262
55
139,207
139,262
107
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Condensed Income Statements
Year Ended
Year Ended
Income - dividends from subsidiary
Expenses
Income before income taxes and equity in undistributed net income of subsidiary
Income tax benefit
Income (loss) before equity in undistributed net income of subsidiary
Equity in undistributed net income of subsidiary
Net income
$
December 31, 2017 December 31, 2016
1,500
$
742
758
(259)
1,017
7,366
8,383
—
879
(879)
(256)
(623)
2,124
1,501 $
$
Condensed Statements of Cash Flows
Year Ended
Year Ended
December 31, 2017 December 31, 2016
$
1,501
$
8,383
(62)
77
—
(2,124)
(608)
(10,000)
(10,000)
—
1,764
—
1,764
(8,844)
22,952
14,108 $
—
55
(61)
(7,366)
1,011
—
—
21,563
317
61
21,941
22,952
—
22,952
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Increase in other assets
Increase in other liabilities
Excess tax benefit from stock compensation
Equity in undistributed net income of subsidiary
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Investments in subsidiary
Net cash used in investing activities
Cash flows from financing activities:
Issuance of common stock
Exercise of common stock options and warrants, net of repurchase of restricted
shares
Excess tax benefit from stock compensation
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
108
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 23 – QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following is a summary of quarterly financial results (unaudited) for 2017, 2016 and 2015:
First Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2017
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Noninterest income
Noninterest expense
Net income (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted
2016
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Noninterest income
Noninterest expense
Net income before income tax expense
Income tax expense
Net income
Net income per share, basic
Net income per share, diluted
2015
Interest income
Interest expense
Net interest income
Provision for loan and lease losses
Net interest income after provision for loan and lease losses
Noninterest income
Noninterest expense
Net income before income tax expense
Income tax expense
Net income
Net income per share, basic
Net income per share, diluted
$
$
$
$
$
$
$
$
$
$
$
$
$
11,979
2,047
9,932
3,405
6,527
2,133
8,376
284
(47)
$
331
$
0.03
$
0.03
10,598
1,642
8,956
937
8,019
2,371
8,010
2,380
796
1,584
0.18
0.15
9,620
1,450
8,170
136
8,034
1,912
7,718
2,228
659
1,569
0.18
0.15
$
$
$
$
$
$
$
$
$
12,891
2,320
10,571
9,690
881
2,666
8,217
(4,670)
(1,328)
(3,342) $
(0.30) $
(0.26) $
10,915
1,714
9,201
183
9,018
2,568
7,951
3,635
1,159
2,476
0.29
0.23
9,810
1,461
8,349
585
7,764
2,419
7,331
2,852
990
1,862
0.22
0.18
$
$
$
$
$
$
$
$
$
13,521
2,678
10,843
(195)
11,038
3,372
8,475
5,935
1,516
4,419
0.39
0.35
11,875
1,749
10,126
1,639
8,487
3,191
8,527
3,151
1,042
2,109
0.24
0.20
10,803
1,386
9,417
580
8,837
2,635
8,605
2,867
831
2,036
0.24
0.20
$
$
$
$
$
$
$
$
$
$
$
13,124
2,606
10,518
(30)
10,548
2,736
8,699
4,585
4,494
91
0.01
0.01
12,007
1,827
10,180
70
10,110
2,954
8,642
4,422
1,495
2,927
0.26
0.23
10,271
1,434
8,837
350
8,487
1,918
7,323
3,082
990
2,092
0.24
0.20
109
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation,
under the supervision and with the participation of its management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In
designing and evaluating the disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management was required to apply judgment in evaluating its controls and
procedures. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2017, that have materially
affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
As of December 31, 2017, management assessed the effectiveness of the Company's internal control over financial
reporting based on the criteria for effective internal control over financial reporting established in “Internal Control-
Integrated Framework,” issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway
Commission in 2013. This assessment included controls over the preparation of the schedules equivalent to the basic
financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding
Companies (Form FR Y-9C) to meet the reporting requirements of Section 112 of the Federal Deposit Insurance
Corporation Improvement Act. Based on the assessment management determined that the Company maintained
effective internal control over financial reporting as of December 31, 2017.
Attestation Report of the Registered Public Accounting Firm
Elliott Davis, LLC, the independent registered public accounting firm, audited the consolidated financial statements
of the Company included in this Annual Report on Form 10-K. Their report is included in Part II, Item 8. Exhibits
and Financial Statements under the heading “Report of Independent Registered Public Accounting Firm.” This
Annual Report on Form 10- K does not include an attestation report of the Company's registered public accounting
firm due to a transition period established by rules of the Securities and Exchange Commission for an Emerging
Growth Company.
ITEM 9B. OTHER INFORMATION
Amendment to Employment Agreement for Ms. Tucker
Ms. Tucker’s employment agreement is being amended and restated so as to include a change in control provision
identical to those currently afforded Messrs. Anderson and Hogan. For a termination occurring within 12 months of
a change in control, as defined in the employment agreement, Ms. Tucker would receive payments equal to two
times her base salary (payable in 24 equal monthly installments) and continuation of benefits for 24 months from
termination, unless employment was terminated with cause or by reason of disability or the executive resigned
without good reason, as defined in her employment agreement.
110
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item will be presented in, and is incorporated herein by reference to, CapStar
Financial’s Definitive Proxy Statement for the 2018 Annual Meeting of Shareholders which will be filed with the
SEC within 120 days of December 31, 2017.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be presented in, and is incorporated herein by reference to, CapStar
Financial’s Definitive Proxy Statement for the 2018 Annual Meeting of Shareholders which will be filed with the
SEC within 120 days of December 31, 2017.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table summarizes information concerning the Company’s equity compensation plans at December 31,
2017:
Number of shares
Plan Category
Equity compensation plans approved by shareholders:
Number of shares
to be issued
upon
exercise of
outstanding
options,
warrants
and rights
(a)
Weighted
average exercise
price of
outstanding
options,
warrants
and rights
(b)
remaining
available for
future issuances
under equity
compensation
plans (excluding
shares reflected
in column (a))
(c)
CapStar Financial Holdings, Inc. Stock Incentive Plan
Equity compensation plans not approved by shareholders
Total
______________________________________
(1) Represents 804,800 shares of common stock subject to issuance upon exercise of issued and outstanding stock
804,800 $
—
804,800 $
10.59
—
10.59
154,867
—
154,867
options.
The other information required by this Item will be presented in, and is incorporated herein by reference to, CapStar
Financial’s Definitive Proxy Statement for the 2018 Annual Meeting of Shareholders which will be filed with the
SEC within 120 days of December 31, 2017.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item will be presented in, and is incorporated herein by reference to, CapStar
Financial’s Definitive Proxy Statement for the 2018 Annual Meeting of Shareholders which will be filed with the
SEC within 120 days of December 31, 2017.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be presented in, and is incorporated herein by reference to, CapStar
Financial’s Definitive Proxy Statement for the 2018 Annual Meeting of Shareholders which will be filed with the
SEC within 120 days of December 31, 2017.
111
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The following is a list of documents filed as a part of this Report:
PART IV
(1)
Financial Statements
Included herein at pages 58 through 109.
(2)
Financial Statement Schedules
All schedules for which provision is made in Regulation S-X are either not required to be included
herein under the related instructions, are inapplicable or the related information is included in the
footnotes to the applicable financial statements and, therefore, have been omitted.
(3)
Exhibits
See Item 15(b) of this Report.
(b)
Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index at the end of
this Item 15.
(c)
Financial Statement Schedules.
See Item 15(a)(2) of this Report.
Exhibit
Number
2.1
3.1
3.2
4.1
4.2
EXHIBIT INDEX
Description
Agreement and Plan of Share Exchange, dated as of December 1, 2015, between CapStar Bank and
CapStar Financial Holdings, Inc. (incorporated by reference herein to Exhibit 2.1 to the Company’s
Registration Statement on Form S-1 (File Number 333-213367) filed on August 29, 2016)
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)
Bylaws of CapStar Financial Holdings, Inc. (incorporated by reference herein to Exhibit 3.2 to the
Company’s Registration Statement on Form S-1 (File Number 333-213367) filed on August 29, 2016)
Form of Common Stock Certificate (incorporated by reference herein to Exhibit 4.1 to Amendment No.
2 to the Company’s Registration Statement on Form S-1 (File Number 333-213367) filed on September
20, 2016)
Second Amended and Restated Shareholders’ Agreement, dated as of August 22, 2016, among CapStar
Financial Holdings, Inc., CapStar Bank, Corsair III Financial Services Capital Partners, L.P., Corsair III
Financial Services Offshore 892 Partners, L.P., North Dakota Investors, LLC and certain other persons
named therein (incorporated by reference herein to Exhibit 4.2 to the Company’s Registration
Statement on Form S-1 (File Number 333-213367) filed on August 29, 2016)
10.1†
Fifth Amended and Restated Executive Employment Agreement between CapStar Financial Holdings,
Inc. and Claire W. Tucker, dated as of June 27, 2016 (incorporated by reference herein to Exhibit 10.1
to the Company’s Registration Statement on Form S-1 (File Number 333-213367) filed on August 29,
2016)
112
10.2†
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
Third Amended and Restated Executive Employment Agreement between CapStar Financial Holdings,
Inc. and Robert B. Anderson, dated as of May 31, 2016 (incorporated by reference herein to Exhibit
10.2 to the Company’s Registration Statement on Form S-1 (File Number 333-213367) filed on August
29, 2016)
Third Amended and Restated Executive Employment Agreement between CapStar Bank and Dandridge
W. Hogan, dated as of June 23, 2016 (incorporated by reference herein to Exhibit 10.3 to the
Company’s Registration Statement on Form S-1 (File Number 333-213367) filed on August 29, 2016)
Executive Employment Agreement between CapStar Bank and Christopher Tietz, dated as of June 28,
2016 (incorporated by reference herein to Exhibit 10.4 to the Company’s Registration Statement on
Form S-1 (File Number 333-213367) filed on August 29, 2016)
CapStar Financial Holdings, Inc. Stock Incentive Plan (incorporated by reference herein to Exhibit
10.5 to the Company’s Registration Statement on Form S-1 (File Number 333-213367) filed on August
29, 2016)
CapStar Financial Holdings, Inc. form of Restricted Stock Agreement (incorporated by reference
herein to Exhibit 10.6 to the Company’s Registration Statement on Form S-1 (File Number 333-
213367) filed on August 29, 2016)
CapStar Financial Holdings, Inc. form of Non-Qualified Stock Option Agreement (incorporated by
reference herein to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File Number
333-213367) filed on August 29, 2016)
CapStar Financial Holdings, Inc. form of Restricted Stock Agreement to replace awards of CapStar
Bank Restricted Stock (incorporated by reference herein to Exhibit 10.8 to the Company’s Registration
Statement on Form S-1 (File Number 333-213367) filed on August 29, 2016)
CapStar Financial Holdings, Inc. form of Non-Qualified Stock Option Agreement to replace awards of
CapStar Bank Options (incorporated by reference herein to Exhibit 10.9 to the Company’s Registration
Statement on Form S-1 (File Number 333-213367) filed on August 29, 2016)
Form of Common Stock Purchase Warrant Agreement (incorporated by reference herein to Exhibit
10.10 to the Company’s Registration Statement on Form S-1 (File Number 333-213367) filed on August
29, 2016)
Form of Non-Voting Common Stock Warrant (incorporated by reference herein to Exhibit 10.11 to the
Company’s Registration Statement on Form S-1 (File Number 333-213367) filed on August 29, 2016)
Termination Agreement, dated April 26, 2017, by and between CapStar Financial Holdings, Inc. and
Dale W. Polley (incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed on April 26, 2017)
10.13†
First Amendment to the CapStar Financial Holdings, Inc. Stock Incentive Plan (incorporated by
reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 30, 2017)
11
21.1
23.1
31.1
Earnings Per Share Computation (included in Note 1 to the Consolidated Financial Statements in this
Report)
Subsidiaries of CapStar Financial Holdings, Inc.*
Consent of Elliott Davis, LLC*
Certification of Chief Executive Officer 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.*
113
31.2
32.1
32.2
Certification of Chief Financial Officer 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.*
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, as amended.**
Certification of Chief Financial Officer 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
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 Annual Report on Form 10-K.
Furnished with this Annual Report on Form 10-K.
Represents a management contract or a compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
None
114
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 8, 2018
CAPSTAR FINANCIAL HOLDINGS, INC.
By: /s/ Claire W. Tucker
Claire W. Tucker
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Title
Date
Director, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Robert B. Anderson
Robert B. Anderson
Chief Financial Officer and Chief Administrative Officer
(Principal Financial Officer and Principal Accounting Officer)
Signature
/s/ Claire W. Tucker
Claire W. Tucker
/s/ Dennis C. Bottorff
Dennis C. Bottorff
/s/ L. Earl Bentz
L. Earl Bentz
/s/ Thomas R. Flynn
Thomas R. Flynn
/s/ Julie D. Frist
Julie D. Frist
/s/ Louis A. Green III
Louis A. Green III
/s/ Dale W. Polley
Dale W. Polley
/s/ Stephen B. Smith
Stephen B. Smith
/s/ Richard E. Thornburgh
Richard E. Thornburgh
/s/ James S. Turner, Jr.
James S. Turner, Jr.
/s/ Toby S. Wilt
Toby S. Wilt
March 8, 2018
March 8, 2018
March 8, 2018
March 8, 2018
March 8, 2018
Chairman
Director
Director
Vice Chair
March 8, 2018
Director
March 8, 2018
Vice Chair
March 8, 2018
March 8, 2018
March 8, 2018
March 8, 2018
March 8, 2018
Director
Director
Director
Director
115
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CapStar Bank is a Nashville-headquartered,
full-service bank dedicated to the people and
communities we serve. Using client-focused,
collaborative bankers, we listen, respond and act
on behalf of each client to create an authentic
banking relationship.
OUR MISSION:
To help each client achieve their financial
goals and to continually demonstrate that
at CapStar Bank, you matter to us.
OUR VALUES:
We are committed to Integrity:
Being respectful, honest and accountable
We believe in Teamwork:
Top talent building something great together
and having fun along the way
We are committed to Results:
Passionately pursuing our goals to
exceed expectations
We are committed to Service:
Giving back to the communities in
which we operate
We’re Listening
The CapStar Building
1201 Demonbreun Street
Suite 700
Nashville, TN 37203