FINANCIAL HOLDINGS, INC.
2019 Annual Report
to Shareholders
LETTER TO SHAREHOLDERS
MARCH 2020
Dear Fellow Shareholders
At CapStar, we aspire to be one of our industry’s great companies. In our pursuit of excellence, much has
been accomplished and our future opportunities are even greater. Over our young twelve-year history,
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- Nashville, Chattanooga/Cleveland and Knoxville. 2019 was a milestone year in which our company
reported record net income, earnings per share and its highest return on assets. CapStar’s net income
(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:85)(cid:82)(cid:178)(cid:87)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:90)(cid:72)(cid:85)(cid:72)(cid:3)(cid:79)(cid:68)(cid:85)(cid:74)(cid:72)(cid:79)(cid:92)(cid:3)(cid:68)(cid:87)(cid:87)(cid:85)(cid:76)(cid:69)(cid:88)(cid:87)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:82)(cid:88)(cid:81)(cid:71)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:3)(cid:84)(cid:88)(cid:68)(cid:79)(cid:76)(cid:87)(cid:92)(cid:30)(cid:3)(cid:82)(cid:88)(cid:87)(cid:86)(cid:87)(cid:68)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)
(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:80)(cid:82)(cid:85)(cid:87)(cid:74)(cid:68)(cid:74)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:55)(cid:85)(cid:76)(cid:16)(cid:49)(cid:72)(cid:87)(cid:3)(cid:79)(cid:72)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:71)(cid:76)(cid:89)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:30)(cid:3)(cid:68)(cid:81)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:88)(cid:70)(cid:70)(cid:72)(cid:86)(cid:86)(cid:73)(cid:88)(cid:79)(cid:3)(cid:68)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:74)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)
(cid:36)(cid:87)(cid:75)(cid:72)(cid:81)(cid:86)(cid:3)(cid:37)(cid:68)(cid:81)(cid:70)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:68)(cid:71)(cid:71)(cid:72)(cid:71)(cid:3)(cid:72)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:87)(cid:92)(cid:16)(cid:73)(cid:82)(cid:70)(cid:88)(cid:86)(cid:72)(cid:71)(cid:15)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:16)(cid:70)(cid:72)(cid:81)(cid:87)(cid:85)(cid:76)(cid:70)(cid:3)(cid:178)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)
centers in East Tennessee. Key highlights for 2019 include:
January
April
May
June(cid:3)
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CapStar successfully completes the systems conversion and rebranding of
Athens Federal Community Bank in McMinn, Monroe, Bradley and Loudon counties.
Tim Schools(cid:3)(cid:77)(cid:82)(cid:76)(cid:81)(cid:86)(cid:3)(cid:38)(cid:68)(cid:83)(cid:54)(cid:87)(cid:68)(cid:85)(cid:3)(cid:68)(cid:86)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:172)(cid:86)(cid:3)(cid:86)(cid:72)(cid:70)(cid:82)(cid:81)(cid:71)(cid:3)(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:40)(cid:50)(cid:17)
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Preferred Lender Status(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:72)(cid:86)(cid:87)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:88)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:3)(cid:70)(cid:68)(cid:81)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:74)(cid:85)(cid:68)(cid:80)(cid:17)
CapStar receives a Top 5-Star rating from Bauer Financial for the second consecutive year.
July
CapStar is recognized by The Tennessean as a 2019 Top Workplace.
October
Greenwich Associates selects CapStar as a 2019 Greenwich CX Leader in US Business
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Looking Ahead
As we move forward, CapStar has tremendous opportunities to continue to improve our performance.
Key focuses include:
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2. identifying organic and acquisition growth strategies, and
3. prudently and conservatively managing capital.
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service areas, and pursue acquisition opportunities of appropriately priced, well-managed
ell-managed
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franchise we have in place, our future is bright!
As we enter the second quarter of 2020, the world is faced with an unprecedented
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(cid:87)(cid:75)(cid:72)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:86)(cid:88)(cid:70)(cid:75)(cid:3)(cid:68)(cid:81)(cid:3)(cid:72)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17)(cid:3)(cid:55)(cid:82)(cid:3)(cid:71)(cid:68)(cid:87)(cid:72)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)
several proactive initiatives that we feel will best support our employees, clientts and
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together we will persevere.
(cid:44)(cid:81)(cid:3)(cid:70)(cid:79)(cid:82)(cid:86)(cid:76)(cid:81)(cid:74)(cid:15)(cid:3)(cid:44)(cid:3)(cid:90)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3)(cid:79)(cid:76)(cid:78)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:78)(cid:3)(cid:73)(cid:82)(cid:88)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:82)(cid:68)(cid:85)(cid:71)(cid:3)(cid:80)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:86)(cid:3)Julie Frist, Dick Thorrnburgh
and Claire Tucker for their many years of dedication to the board as they havee
(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:17)(cid:3)(cid:58)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:85)(cid:76)(cid:79)(cid:79)(cid:72)(cid:71)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:38)(cid:79)(cid:68)(cid:76)(cid:85)(cid:72)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:86)(cid:86)(cid:76)(cid:86)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:72)(cid:85)(cid:86)(cid:3)
(cid:76)(cid:81)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:71)(cid:72)(cid:89)(cid:72)(cid:79)(cid:82)(cid:83)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:72)(cid:86)(cid:3)(cid:68)(cid:70)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:17)(cid:3)
(cid:55)(cid:75)(cid:68)(cid:81)(cid:78)(cid:3)(cid:92)(cid:82)(cid:88)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:92)(cid:82)(cid:88)(cid:85)(cid:3)(cid:87)(cid:85)(cid:88)(cid:86)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:71)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:17)
Timothy K. Schools
President and CEO
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(cid:2) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
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)
Registrant’s telephone number, including area code (615) 732-6400
Title of each class
Securities registered pursuant to Section 12(b) of the Act:
Trading Symbol(s)
Name of each exchange on which
registered
Common Stock, $1.00 par value
per share
CSTR
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:2) NO (cid:2)
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:2) NO (cid:2)
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:2)NO (cid:2)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). YES (cid:2)NO (cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the 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:2)
(cid:3)
Accelerated filer
Small reporting company
(cid:2)
(cid:2)
Emerging growth company (cid:2)
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:3)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES (cid:2) NO (cid:2)
As of June 28, 2019, 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 $230,802,508, based on the closing sales price of
$15.15 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
Shares outstanding as of March 5, 2020
18,457,537
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement relating to the 2020 Annual Meeting of Shareholders, which will be filed within 120 days
after December 31, 2019, are incorporated by reference into Part III of this Annual Report on Form 10-K.
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business..................................................................................................................................
Risk Factors............................................................................................................................
Unresolved Staff Comments...................................................................................................
Properties................................................................................................................................
Legal Proceedings ..................................................................................................................
Mine Safety Disclosures.........................................................................................................
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities ...........................................................................................................
Selected Financial Data ..........................................................................................................
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................
Financial Statements and Supplementary Data ......................................................................
Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9.
Controls and Procedures.........................................................................................................
Item 9A.
Other Information...................................................................................................................
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Directors, Executive Officers and Corporate Governance .....................................................
Executive Compensation ........................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters...........................................................................................................
Certain Relationships and Related Transactions, and Director Independence .......................
Principal Accountant Fees and Services.................................................................................
Exhibits and Financial Statement Schedules ..........................................................................
Form 10-K Summary..............................................................................................................
Signatures ...............................................................................................................................
Page
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16
34
34
35
35
36
39
40
59
60
110
110
110
111
111
111
111
111
112
115
116
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,” “CSTR” and “CapStar Financial,” as used herein refer to CapStar
Financial Holdings, Inc., and its wholly owned subsidiary, CapStar Bank, which we sometimes refer to as “our bank
subsidiary,” “the bank” or “our bank”. References herein to the fiscal years 2015, 2016, 2017, 2018 and 2019 mean
our fiscal years ended on each of December 31, 2015, 2016, 2017, 2018 and 2019, respectively. References herein to
our “Target Market” includes the state of Tennessee and geographical areas within a 100-mile radius of any of our
branch locations.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933,
as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things,
statements relating to the Company’s assets business, cash flows, condition (financial or otherwise), credit quality,
financial performance, liquidity, short and long-term performance goals, prospects, results of operations, strategic
initiatives, the benefits, cost and synergies of completed acquisitions or dispositions, and the timing, benefits, costs
and synergies of future acquisitions, disposition and other growth opportunities. These statements are often, but not
always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,”
“will
likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “aspire,” “estimate,” “intend,” “plan,”
“project,” “projection,” “forecast,” “roadmap,” “goal,” “target,” “would,” and “outlook,” or the negative version of
those words or other comparable words of a future or forward-looking nature. These forward-looking statements are
not historical facts, and are based upon current expectations, estimates and projections about our industry,
management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently
uncertain and beyond our control. The inclusion of these forward-looking statements should not be regarded as a
representation by us or any other person that such expectations, estimates and projections will be achieved.
Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and
are subject to risks, assumptions and uncertainties that are difficult to predict and that are beyond our control.
Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date
of this Report, actual results may prove to be materially different from the results expressed or implied by the
forward-looking statements. There are or will be important factors that could cause our actual results to differ
materially from those indicated in these forward-looking statements, including, but not limited to, the following:
The Company may not capitalize on opportunities to enhance market share in certain markets and the Company’s
services may not be generally accepted in new markets; the ability of the Company to meet expectations regarding the
benefits, costs, synergies and financial and operational impact of the FCB Corporation (“FCB”) and the Bank of
Waynesboro (“BOW”) mergers; that regulatory, shareholder or other approvals required for the FCB and BOW
mergers will not be obtained or that other customary closing conditions will not be satisfied in a timely manner or at
all; reputational risks and the reaction of shareholders, customers, employees or other constituents of the Company to
the FCB and BOW mergers; the possibility that any of the anticipated benefits, costs, synergies and financial and
operational improvements of the FCB and BOW mergers will not be realized or will not be realized as expected; the
acceptance by customers of FCB and BOW of the Company’s products and services; the possibility that the FCB and
BOW merger integrations will be more expensive or take more time to complete than anticipated; economic
conditions (including interest rate environment, government economic and monetary policies, the strength of global
financial markets and inflation and deflation) that impact the financial services industry as a whole and/or our
business; the concentration of our business in our Target Market and the effect of changes in the economic, political
and environmental conditions on this market; increased competition in the financial services industry, locally,
regionally or nationally, which may adversely affect pricing and the other terms offered to our clients; an increase in
the cost of deposits, loss of deposits or a change in the deposit mix, which could increase our cost of funding; an
increase in the costs of capital, which could negatively affect our ability to borrow funds, successfully raise additional
capital or participate in strategic acquisition opportunities; our dependence on our management team and board of
directors and changes in our management and board composition; our reputation in the community; our ability to
execute our strategy to achieve our loan, ROAA and efficiency ratio goals, hire seasoned bankers, and achieve deposit
growth through organic growth and strategic acquisitions; credit risks related to the size of our borrowers and our
ability to adequately identify, assess and limit our credit risk; our concentration of large loans to a small number of
borrowers as well as to borrowers located within our Target Market; the significant portion of our loan portfolio that
ii
originated during the past two years and therefore may less reliably predict future collectability than older loans; the
adequacy of reserves (including our allowance for loan losses) and the appropriateness of our methodology for
calculating such reserves; non-performing loans and leases; non-performing assets; charge-offs, non-accruals,
troubled debt restructurings, impairments and other credit-related issues; adverse trends in the healthcare service
industry, which is an integral component of our Target Market’s economy and which could adversely affect the
business operations of certain of our key borrowers; our management of risks inherent in our commercial real estate
loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of our
collateral and our ability to sell collateral upon any foreclosure; our inability to realize operating efficiencies and tax
savings from the implementation of our strategic plan; 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 in the fair value of our investment securities that are beyond our control;
deterioration in the fiscal position of the U.S. government and downgrades in Treasury and federal agency securities;
potential exposure to fraud, negligence, computer theft and cyber-crime; the adequacy of our risk management
framework; our dependence on our information technology and telecommunications systems and the potential for any
systems failures or interruptions; threats to and breaches of our information technology systems and data security,
including cyber-attacks; our dependence upon outside third parties for the processing and handling of our records and
data; our ability to adapt to technological change; the financial soundness of other financial institutions; our exposure
to environmental liability risk associated with our lending activities; our engagement in derivative transactions; our
involvement from time to time in legal proceedings and examinations and remedial actions by regulators; our
involvement from time to time in litigation or other proceedings instituted by or against shareholders, customers,
employees or third parties and the cost of legal fees associated with such litigation or proceedings; the susceptibility of
our market to natural disasters and acts of God; and the effectiveness of our internal controls over financial reporting
and our ability to remediate any future material weakness in our internal controls over financial reporting.
The foregoing factors should not be construed as exhaustive and should be read in conjunction with the section entitled
“Risk Factors” included in 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
ITEM 1. BUSINESS
OVERVIEW
PART I
CapStar Financial Holdings, Inc., a Tennessee corporation, 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 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, (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; (iv) correspondent banking services to meet the needs of Tennessee’s smaller community banks and (v)
various retail and consumer products. Our operations are presently concentrated in Tennessee.
As of December 31, 2019, on a consolidated basis, we had total assets of $2.0 billion, total deposits of $1.7 billion,
total net loans of $1.4 billion, and shareholders’ equity of $273 million.
Core Operating Principles
We operate our business in conformity with our core principles which are, in order of priority:
(cid:120)
(cid:120)
(cid:120)
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 seek to improve our core profitability metrics
sheet management, economies of scale and expanded services.
through optimal balance
Strategic Growth - we seek to grow our loans, deposits and net
income by building long-term
relationships with our customers based on top quality service and leveraging our operating platform to
facilitate 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.
Recent Acquisitions and Expansion
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
On October 1, 2018, we completed our acquisition of Athens Bancshares Corporation (“Athens”), the bank holding
company for Athens Federal Community Bank, National Association (“Athens Federal”), headquartered in Athens,
Tennessee. We acquired all of the outstanding shares of common stock of Athens for approximately $92.9 million in
total consideration which was primarily comprised of the issuance of approximately 5.2 million shares of common
stock of our Company. At the time of the acquisition, Athens Federal had eight banking locations located throughout
the Eastern Tennessee corridor between Chattanooga and Knoxville, Tennessee. The operations of Athens are
included in our financial statements beginning October 1, 2018.
On January 23, 2020, we announced the signing of definitive merger agreements with FCB Corporation (“FCB”), its
wholly owned subsidiary The First National Bank of Manchester (“FNBM”), and The Bank of Waynesboro (“BOW”)
providing for FCB to merge with and into CapStar Financial Holdings, Inc. and for FNBM and BOW to merge with
and into CapStar Bank. Under the terms of the merger agreements, FCB and BOW shareholders will receive
3,634,218 CapStar common shares and $26.4 million in cash, subject to certain adjustments, totaling $85.1 million
based on the closing price of CapStar’s common stock on January 22, 2020. Pending regulatory and shareholder
approvals and the satisfaction of certain other customary closing conditions, the acquisition is expected to be finalized
in late second or early third quarter of 2020. As of December 31, 2019, FCB and BOW had total combined assets of
$467 million. Upon completion of the transaction, CapStar is expected to have total consolidated assets of
approximately $2.5 billion.
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 the type of loan product, the type of client and the 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.
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 the markets in which we serve. 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:
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(cid:120)
(cid:120)
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 a demonstrated propensity to repay the loan/the borrower’s
indebtedness/etc.;
2
(cid:120)
(cid:120)
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 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 in order to maintain a conservative and
well-diversified loan portfolio reflective of our assessment of various subsets within our market. 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.
Concentrations. We are a relationship-oriented, rather than a transaction-based, bank. Accordingly, substantially all
of our loans have been made to borrowers located in our Target Market. As of December 31, 2019, approximately
94% of the loans in our loan portfolio (measured by dollar amount) were made to borrowers who live or conduct
business in our Target Market, and a substantial portion of those loans are considered commercial and industrial loans,
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 our Target Market. We do have a limited number of loans secured by properties located outside of Tennessee, most
of which are made to borrowers who are well-known to us because they are headquartered or reside within Tennessee.
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, 2019, our
25 largest borrowing relationships (which may include multiple loans to one borrower or loans to multiple entities that
are affiliated due to common ownership) accounted for approximately 17% 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 delinquent or impaired, 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.
3
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 our Target Market.
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 our Target Market.
Correspondent Banking
We provide correspondent banking services to community banks located in our market. 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 $24.2 million of our total loans and $312.8 million of our total deposits as of
December 31, 2019. Loans made to community banks related to correspondent banking comprised 6% of commercial
and industrial loans as of December 31, 2019. Deposits from community banks related to correspondent banking
comprised 18% of total deposits as of December 31, 2019.
Correspondent banking provides a valuable funding source for the bank. In 2013, management identified a void in the
Tennessee 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
Mortgage banking generated $548.1 million in mortgage loan originations for the year ended December 31, 2019.
Mortgage loans are typically sold in the secondary market and are underwritten by the bank. Mortgage banking 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 in our Target Market. In particular, the Target Market consisted
of 65 financial institutions with over $64 billion in deposits as of June 30, 2019. We held the number 11 deposit market
share position at June 30, 2019 with 2.1% of the deposit market share. We compete for loans, deposits, and financial
services in our Target Market. 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
In most cases, our clients can initiate banking transactions from the
expand the convenience of banking with us.
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. Further, we closely monitor information
security for trends and new threats, including cybersecurity risks, and invest significant resources to continuously
improve the security and privacy of our systems and data. For more information, please see “– Supervision and
Regulation - Cybersecurity and Privacy”.
Employees
As of December 31, 2019, we had 289 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”), the Office of
the Comptroller of the Currency (“OCC”) 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 securitizations 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 are 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 primary federal regulators, 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 “Item 1.
Business—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, state law may place restrictions 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.
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.
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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.
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.
7
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 assessment rate is determined by the risk category
assigned to an institution based on the institution’s most recent supervisory and capital evaluations which are designed
to measure risk, with riskier institutions paying a higher assessment rate. 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 were 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. The final FICO assessment collection occurred in March
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. As of December 31, 2019 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.
8
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
Pursuant to the Dodd-Frank Act, under the adopted regulations, the Basel member central bank and federal bank
regulators approved the Basel Capital Adequacy Accord, or Basel III. The U.S. Basel III rule’s minimum capital to
risk-weighted assets, or RWA, requirements are as follows: (1) a common equity Tier 1 capital ratio of 4.5%, (2) a Tier
1 capital ratio of 6.0%, and (3) a total capital ratio of 8.0%. The minimum leverage ratio (Tier 1 capital to total assets)
is 4.0%. The rule also changed 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.
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 became fully phased in on January 1, 2019. A banking organization maintaining capital
levels in excess of the fully phased-in capital conservation buffer of 2.5% 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 requires 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. 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. With the capital conservation buffer fully phased in, the minimum capital requirements plus
the capital conservation buffer will exceed the prompt corrective action, or PCA, well-capitalized thresholds.
9
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 phased 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 Tier 1 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. As of December 31, 2019, 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,
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.
institutions in all
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 markets or product
offerings, 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.
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.
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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 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.
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.
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Commercial Real Estate Concentration
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 banking 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, 2019, our
bank’s total CRE loans represented 297% of its capital.
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.
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.
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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 CFPB 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 federal 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.
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, which
generally prohibits any “banking entity” from engaging in proprietary trading or retaining an ownership interest in,
In addition,
sponsoring, or having certain relationships with covered funds (i.e., hedge funds or private equity funds).
the Volcker Rule requires each regulated entity to establish an internal compliance program that is consistent with the
extent to which it engages in activities covered by the Volcker Rule.
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On October 8, 2019, the agencies finalized revisions to the Volcker Rule that, among other things, simplified and
streamlined compliance requirements for banking entities that do not have significant trading activities, while banking
entities with significant trading activity would become subject to more stringent compliance requirements. Further,
the revisions to the Volcker Rule implemented Section 203 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act (EGRRCPA), which amended the definition of “banking entity” to exclude certain
community banks from the definition of insured depository institution, the general result of which was to exclude such
banks and their affiliates and subsidiaries from the scope of the Volcker Rule. Under EGRRCPA, a community bank
and its affiliates are generally excluded from the definition of “banking entity” if the bank and all companies that
control the bank have total consolidated assets equal to $10 billion or less and trading assets and liabilities equal to five
percent or less of total consolidated assets. These revisions became effective on January 1, 2020, with a required
compliance date of January 1, 2021.
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 imposes principles-based restrictions that are broadly consistent with existing
interagency guidance on incentive-based compensation. Such institutions are 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 also imposes certain governance and recordkeeping
requirements on institutions of the Company’s and our bank’s size. The Federal Reserve reserves the authority to
impose more stringent requirements on institutions of the Company’s and our bank’s size. We do not expect this
proposal to significantly impact our business.
Cybersecurity and Privacy
Cybersecurity is a high-priority item for legislators and regulators at the federal and state levels, as well as
internationally. State and federal banking regulators have issued various policy statements and, in some cases,
regulations, emphasizing the importance of technology risk management and supervision. Such policy statements and
regulations indicate that financial institutions should design multiple layers of security controls to establish lines of
defense and to ensure that their risk management processes also address the risk posed by compromised customer
credentials, including security measures to reliably authenticate customers accessing internet-based services of the
financial institution. A financial institution’s management is expected to maintain sufficient business continuity
planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a
cyberattack involving destructive malware. A financial institution is expected to develop appropriate processes to
enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the
institution or its critical service providers fall victim to this type of cyberattack. These requirements, including state
regulatory rules such as the detailed and extensive cybersecurity rules issued in 2016 by the New York State
Department of Financial Services, may cause us to incur significant additional compliance costs and in some cases
may impact our growth prospects. Additionally, if we fail to observe federal or state regulatory guidance, we could be
subject to various regulatory sanctions, including financial penalties.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our
operations and store sensitive data. We employ an in-depth, layered, defensive approach that leverages people,
processes and technology to manage and maintain cybersecurity controls. We also employ a variety of preventative
and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any
suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from
cyberattacks is severe, as attacks are sophisticated and increasing in volume and complexity, and attackers respond
rapidly to changes in defensive measures. Our systems and those of our customers and third-party service providers
are under constant threat, and it is possible that we or they could experience a significant event in the future that could
adversely affect our business or operations. As cybersecurity threats continue to evolve, we may be required to expend
significant additional resources to continue to modify or enhance our protective measures or to investigate and
remediate any information security vulnerabilities. Financial expenditures may also be required to meet regulatory
changes in the information security and cybersecurity domains. Risks and exposures related to cybersecurity attacks
are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these
threats, as well as the expanding use of internet banking, mobile banking and other technology-based products and
services by us and our customers. See “Item 1A. – Risk Factors” in this Annual Report for a further discussion of risks
related to cybersecurity.
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Federal statutes and regulations, including the Gramm-Leach-Bliley Act (“GLBA”) and the Right to Financial Privacy
Act of 1978, limit our ability to disclose non-public information about consumers, customers and employees to
nonaffiliated third parties. Specifically, the GLBA requires us to disclose our privacy policies and practices relating to
sharing non-public information and enables retail customers to opt out of our ability to share information with
unaffiliated third parties under certain circumstances. The GLBA also requires us to implement a comprehensive
information security program that includes administrative, technical and physical safeguards to ensure the security and
confidentiality of customer records and information and, if applicable state law is more protective of customer privacy
than the GLBA, financial institutions, including our bank, will be required to comply with such state law. Other laws
and regulations impact our ability to share certain information with affiliates and non-affiliates for marketing and/or
non-marketing purposes. These regulations affect how consumer information is transmitted through diversified
financial companies and conveyed to outside vendors. In connection with the regulations governing the privacy of
consumer financial information, the federal banking agencies, including the FDIC, have adopted guidelines for
establishing information security standards and programs to protect such information.
Proposed or new legislation and regulations may also significantly increase our compliance cost and impede our
ability to grow into specific markets. There are a number of proposals that have either recently been adopted or are
currently pending before federal, state, and foreign legislative and regulatory bodies. For example, the European
Union adopted the General Data Protection Regulation (the “GDPR”), which became effective on May 25, 2018. In
addition, California recently passed the California Consumer Privacy Act of 2018 (the “CCPA”) on June 28, 2018.
Both the GDPR and the CCPA impose additional obligations on companies regarding the handling of personal data
and provide certain individual privacy rights to persons whose data is stored. In the event of a data breach, there are
mandatory reporting requirements that may hamper the ability to fully assess an incident prior to external reporting.
We must maintain awareness of additional legal and regulatory requirements that apply to existing and future subsets
of the customer base for protection against legal, reputational, and financial risk due to compliance failures.
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 reduced the U.S. federal tax rate for corporations from 35%
to 21% for U.S. taxable income and required a one-time remeasurement of deferred taxes to reflect their value at a
lower tax rate of 21%. The Tax Reform Act included 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.
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 and statements. 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, proxy statements and amendments to those reports and statements 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.
We have also posted our Corporate Governance Guidelines, Code of Ethics and Conflicts of Interest Policy for
directors, officers and employees, and the charters of our Audit Committee, Nominating Governance and Community
Affairs Committee, Compensation and Human Resources Committee, Credit Committee and Risk Committee of our
board of directors on the Corporate Governance section of our website at www.ir.capstarbank.com. We will make any
legally required disclosures regarding amendments to, or waivers of, provisions of our Corporate Governance
Guidelines, Code of Ethics and Conflicts of Interest Policy, or current committee charters on our website. We will also
provide a copy of our Corporate Governance Guidelines, Code of Ethics and Conflicts of Interest Policy, and any
committee charters without charge upon written request sent to 1201 Demonbreun Street, Suite 700, Nashville,
Tennessee 37203, Attention: Investor Relations.
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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
In addition, the following risks and other information in this Report or incorporated into this
part of your investment.
Report by reference, including our Consolidated Financial Statements and related notes and Managements
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. In addition, economic and other conditions in foreign countries could
affect the stability of global financial markets, which could hinder United States economic growth. As an example, the
recent outbreak of a novel coronavirus in Wuhan, China may result in the extended shutdown of certain businesses in
the region. Depending on future developments (including the extent of the virus’s spread and the measures, such as
quarantines and travel restrictions, taken to contain such spread), the outbreak may adversely affect economic
conditions in the United States generally and our markets in particular.
Weak economic conditions are characterized by numerous factors; such as 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 our Target Market, 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 our Target Market. As of
December 31, 2019, approximately 94% of the loans in our loan portfolio (measured by dollar amount) were made to
borrowers who live or conduct business in our Target Market. 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 our Target Market than those of larger, more
geographically diverse competitors. For example, the Nashville, Tennessee 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 our Target market, or existing or prospective borrowers or depositors in our Target Market 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 own or have companies or properties located
outside our Target Market. 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, internet banks, 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. Our
competitors may be able to offer more attractive interest rates and other financial terms than we choose or have the
capability to offer. Some of our non-bank competitors are not subject to the same extensive regulations we are and,
therefore, may have greater flexibility in competing for business.
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 our Target Market,
which is a highly competitive banking market. 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 the loss of their skills, knowledge of our market, years of industry experience and the
difficulty of promptly finding qualified personnel
to replace them. Additionally, our directors’ community
involvement and diverse and extensive local business relationships are important to our success.
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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 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
the costs associated with identifying and pursuing strategic transactions; 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, the availability of capital to fund growth
opportunities 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 our Target Market. Through our
branding, we communicate to the market about our company and the products and services we offer. 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, 2019, our 25 largest borrowing relationships
accounted for approximately 17% 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. To
mitigate this risk, we establish internal lending limits tied to the borrower’s risk profile, seek collateral, and involve
increasing levels of senior management and board involvement in the approval of large loan relationships.
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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, 2019, approximately 54% of our loan
portfolio had been originated since December 31, 2017, including new originations and renewals. In general, loans 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 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. 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. To mitigate this risk, we give enhanced scrutiny to leveraged
loan transactions, assess risk probabilities using benchmarks obtained from external rating agencies, and engage
higher levels of senior management and board involvement in the approval and ongoing review of leveraged loan
relationships.
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, 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 in a relatively short time period.
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, 2019,
approximately 9% 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
Pandemics which could result in the extended shutdown or restriction of certain healthcare related
businesses and services;
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. Weak
economic conditions or other market factors can result in increased vacancy rates for retail, office and industrial
property. 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 under adverse conditions. 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 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. We mitigate these risks both in our selection criteria for borrowers and project sponsors and in our
general practice of requiring cash equity contributions substantially in excess of Supervisory Loan to Value limits as
set forth in Appendix A of Part 365 – Interagency Guidelines for Real Estate Lending Policies.
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A prolonged downturn in the real estate market could result in losses and adversely affect our profitability.
As of December 31, 2019, approximately 27% of our loan portfolio was composed of non-owner occupied
commercial real estate loans, 12% of owner occupied commercial real estate loans, 18% consumer real estate loans,
and 10% 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.
than regulatory minimums to maintain an appropriate cushion against
The federal banking 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
is
commensurate with the perceived risk. Guidance from the Federal banking agencies 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.
loss that
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. 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;
fiscal policies; and
natural disasters.
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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, 2019, our ten largest non-brokered depositors accounted for approximately 13% 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, 2019
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, 2019, 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.
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
asset growth, new business transactions, cash flow, condition (financial or otherwise), liquidity, prospects and results
of operations.
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We are subject to interest rate risk, which could adversely affect our profits.
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. Our interest rate sensitivity profile
was asset sensitive as of December 31, 2019, meaning that our net interest income would increase more from rising
interest rates than from falling interest rates. However, many assumptions are used to model the impact of interest rate
fluctuations on our net interest income. Due to the inherent use of these estimates and assumptions, our 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.
Our banks 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 to be between 7% and 15% of our risked based capital,
depending upon the underlying risk rating of the borrower. 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.
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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 Target Market or in comparable markets or that would provide scale, low cost of funds, non-interest income
or products 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, difficulty, and uncertainty 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. In addition, we may not be successful in identifying prospective transactions, making it difficult to
implement our growth strategy. 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.
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.
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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.
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. Although we actively invest in the
security of our technological infrastructure, it is not feasible to defend against every risk posed by rapid technological
development and the increasing sophistication of cyber criminals. 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.
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Our risk management framework may not be effective in mitigating risks and/or losses to us.
information technology and legal. Our
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,
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. We may need to switch third-party
service providers from time-to-time, which could result in disruption to our business processes, damage to our
reputation and a breach of our data security measures. 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.
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. There is also no guarantee that any such investment in these products and
services will create additional efficiencies in our operations.
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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 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.
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.
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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.
Our Target Market is susceptible to floods, tornados and other natural disasters, adverse weather events, nuclear
fallout from nuclear plants in East Tennessee and acts of God, which may adversely affect our business and
operations.
Substantially all of our business and operations are located in our Target Market, which is an area that has recently
been damaged by floods and tornadoes and that is susceptible to other natural disasters, adverse weather events,
nuclear fallout from nuclear plants in East Tennessee 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. Further, the cost of any such compliance with Section 404 of the
Sarbanes-Oxley Act could be substantial and have a material effect on our cash flows and earnings. 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.
28
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.
We May Be Adversely Impacted By The Transition From LIBOR As A Reference Rate.
In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel
banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). This announcement
indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.
Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide
submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be
viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR, or what
the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial
instruments.
In particular, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee)
have, among other things, published recommended fall-back language for LIBOR-linked financial instruments,
identified recommended alternatives for certain LIBOR rates (e.g., the Secured Overnight Financing Rate as the
recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in
floating rate instruments. At this time, it is not possible to predict whether these specific recommendations and
proposals will be broadly accepted, whether they will continue to evolve, and what the effect of their implementation
may be on the markets for floating-rate financial instruments.
We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes
that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create considerable costs
and additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing
new rates will differ from those referencing LIBOR. The transition will change our market risk profiles, requiring
changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to
adequately manage this transition process with our customers could adversely impact our reputation. Although we are
currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage
the transition could have a material adverse effect on our business, financial condition and results of operations.
29
Changes in U.S. trade policies and other factors beyond our Companys control, including the imposition of tariffs
and retaliatory tariffs, may adversely impact our business, financial condition and results of operations.
There have been changes and discussions with respect to U.S. trade policies, legislation, treaties and tariffs, including
trade policies and tariffs affecting other countries, including China, the European Union, Canada and Mexico and
retaliatory tariffs by such countries. Tariffs and retaliatory tariffs have been imposed, and additional tariffs and
retaliation tariffs have been proposed. Such tariffs, retaliatory tariffs or other trade restrictions on products and
materials that our customers import or export, including among others, agricultural products, could cause the prices of
our customers’ products to increase which could reduce demand for such products, or reduce our customer margins,
and adversely impact their revenues, financial results and ability to service debt; which, in turn, could adversely affect
our financial condition and results of operations. In addition, to the extent changes in the political environment have a
negative impact on us or on the markets in which we operate our business, results of operations and financial condition
could be materially and adversely impacted in the future. It remains unclear what the U.S. Administration or foreign
governments will or will not do with respect to tariffs already imposed, additional tariffs that may be imposed, or
international trade agreements and policies. On October 1, 2018, the United States, Canada and Mexico agreed to a
new trade deal to replace the North American Free Trade Agreement, which was ratified by Mexico and the United
States but remains subject to ratification by the Canadian parliament, which may or may not occur by the end of 2020.
The full impact of this agreement on us, our customers and on the economic conditions in our markets is currently
unknown. A trade war or other governmental action related to tariffs or international trade agreements or policies has
the potential to negatively impact ours and/or our customers' costs, demand for our customers' products, and/or the
U.S. economy or certain sectors thereof and, thus, adversely impact our business, financial condition and results of
operations.
We are subject to risks associated with home equity products where we are in a second lien position that could
materially adversely affect our performance.
Risks associated with home equity products where we are in a second lien position could materially adversely affect
our performance. Home equity products, particularly those where we are in a second lien position, and particularly
those in certain geographic areas, may carry a higher risk of non-collection than other loans. Home equity lending
includes both home equity loans and lines of credit. Of our $121.1 million home equity portfolio at December 31,
2019, approximately $117.4 million were home equity lines of credit and $3.7 million were closed-end home equity
loans (primarily originated as amortizing loans). This type of lending, which is secured by a first or second mortgage
on the borrower's residence, allows customers to borrow against the equity in their home. Real estate market values at
the time of origination directly affect the amount of credit extended, and, in addition, past and future changes in these
values impact the depth of potential losses. Second lien position lending carries higher credit risk because any
decrease in real estate pricing may result in the value of the collateral being insufficient to cover the second lien after
the first lien position has been satisfied. As of December 31, 2019, approximately $68.8 million of our home equity
lines and loans were in a second lien position.
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.
30
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.
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 product offerings. 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,
Financial Protection Bureau and resulted in new regulations that are likely to increase our costs of operations.
tightened capital standards, created the Consumer
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.
31
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.
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
insurance assessments as determined according to the calculation described in “Supervision and
deposit
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.
32
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.
A future issuance or future issuances 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, 2019,
18,361,922 shares of our common stock were issued and outstanding, including 84,697 shares of restricted common
stock that have yet to vest. Those shares outstanding do not include the potential issuance, as of December 31, 2019, of
271,202 shares of our common stock subject to issuance upon exercise of outstanding stock options under the Stock
Incentive Plan, and 362,757 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.
Significant sales of our common stock by certain shareholders could affect the market value of our common stock.
On December 21, 2018, we filed a shelf registration statement (the “Shelf Registrations Statement”) with the SEC on
Form S-3 registering 3,652,094 shares of our common stock held by certain of our long-time shareholders,
representing about 20.7% of our total issued and outstanding common stock. The Shelf Registration Statement was
declared effective by the SEC on March 28, 2019. Accordingly, these shares represent a significant number of our
issued and outstanding shares of common stock, and, if sold in the market all at once or at about the same time, could
depress the market price of our common stock and could further affect our ability to raise equity capital. Further, we
cannot predict the size or the effect, if any, that sales of these shares, or the perception that such sales could occur, may
have on the market price of our shares of common stock or our ability to raise additional capital through the sale of
equity securities. Any significant sales of these shares could have a materially adverse impact on our affairs, assets,
business, cash flows, condition (financial or otherwise), credit quality, financial performance, liquidity, short- and
long-term performance goals, prospects and results of operations or the trading price of our 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 would likely be subordinate to the rights of the holders of any preferred
stock that we may issue in the future.
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.
33
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 $1.07 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, Suite 700, Nashville, Tennessee
The following table summarizes pertinent details of our retail bank branch locations and mortgage
37203.
origination offices as of March 6, 2020.
Location
CapStar Bank
1201 Demonbreun Street, Suite 700
Nashville, TN 37203
2321 Crestmoor Road
Nashville, TN 37215
2002 Richard Jones Road
Nashville, TN 37215
5500 Maryland Way, Suite 130
Brentwood, TN 37027
101 Springhouse Court
Hendersonville, TN 37075
885 Greenlea Blvd.
Gallatin, TN 37066
106 Washington Avenue
Athens, TN 37303
1103 Decatur Pike
Athens, TN 37303
523 Tennessee Avenue
Etowah, TN 37331
215 Warren Street
Madisonville, TN 37354
761 New Highway 68
Sweetwater, TN 37874
705 East Broadway
Lenoir City, TN 37771
3855 North Ocoee Street
Cleveland, TN 37312
950 25th Street
Cleveland, TN 37311
Owned/Leased
Lease Expiration
Type of Office
Leased
02/28/32
Building (Owned);
Land (Leased)
Building: N/A
Land: 02/15/28
Headquarters and Main
Retail Bank Branch
Retail Bank Branch
10/31/23
Mortgage Origination Office
09/30/23
Retail Bank Branch
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Retail Bank Branch
Retail Bank Branch
Retail Bank Branch
Retail Bank Branch
Retail Bank Branch
Retail Bank Branch
Retail Bank Branch
Retail Bank Branch
01/31/2022
Retail Bank Branch
12/31/2026
Retail Bank Branch
Leased
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
34
The Company leases certain premises and equipment under operating leases that expire at various dates, through 2032,
and in most instances include options to renew or extend at market rates and terms.
ITEM 3. LEGAL PROCEEDINGS
General
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, results of operations, or trading price of its common stock.
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 our common stock. The complaint alleges
that defendants violated Section 13(d) of the Exchange Act by filing materially false and misleading Schedules 13D
regarding defendants' acquisition of a minority stake (1,156,675 shares) of our common stock. It also alleged that
defendants violated the Change in Bank Control Act, 12 U.S.C. § 1817(j) (the "CBCA"), 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 our 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. The motion to
stay was denied by the court on May 21, 2018. On September 24, 2018, the court denied in part and granted in part
defendants' motion to dismiss, permitting our claims that defendants violated Tennessee Code Section 45-2-107 under
Section 13(d) of the Exchange Act to proceed.
Mr. Lawrence also filed an Interagency Notice of Change in Control pursuant to the CBCA with the Federal Reserve
on October 30, 2017 ( the “Notice”), seeking permission to acquire up to 15% of the outstanding voting shares of our
common stock. At the Federal Reserve's direction, on March 13, 2018, Mr. Lawrence requested that the Federal
Reserve suspend processing of this Notice. On November 6, 2018, the Federal Reserve notified us that it has
determined not to disapprove the Notice, subject to compliance by Mr. Lawrence and his affiliates with extensive
representations and commitments set forth in correspondence between Mr. Lawrence and the Federal Reserve. On
November 19, 2019, Mr. Lawrence filed an amended Schedule 13D in which he asserted that the Federal Reserve’s
determination not to disapprove his Notice has now expired, and in which Mr. Lawrence further stated that he “does
not presently intend to file a new Interagency Notice of Change in Control with the [Federal Reserve].”
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
35
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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 2019 and 2018 as reported on the Nasdaq Global Select Market.
2019:
First quarter
Second quarter
Third quarter
Fourth quarter
2018:
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
Price Per Share
High
Low
$
$
17.33
16.20
17.21
17.48
21.91
20.87
19.98
17.40
14.11
14.21
14.61
15.74
17.36
17.39
15.88
13.51
As of March 5, 2020 there were approximately 2,545 holders of record of shares of our 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, 2019.
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total
Total number of
shares purchased
(1)
Average price paid
per share
2,294
221
2,808
5,323
$
$
16.56
16.91
17.08
16.85
Total number of
shares purchased
as part of publicly
announced plan
(2)
—
—
—
—
Maximum amount
that may
yet be purchased
under the plan
$9.00 million
$9.00 million
$9.00 million
$9.00 million
(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.
For information regarding securities authorized for issuance under the Company’s equity compensation plans,
please see “Item 12. Security Ownership of Certain Beneficial Owners and Management And Related
Stockholder Matters”.
(2) On December 21, 2018, the board of directors approved the Company’s share repurchase program which
authorized the Company to repurchase up to $8 million of shares of common stock (the “Repurchase Program”).
On September 5, 2019, the Board approved an expansion of the Repurchase Program (the “Expanded Repurchase
Program”). Under the Expanded Repurchase Program, the amount of common stock that the Company is
authorized to repurchase has been increased from approximately $2.2 million to $11 million. The Expanded Share
Repurchase Program will terminate on the date on which the Expanded Maximum Dollar Amount of Common
Stock has been repurchased..
36
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 September 22, 2016 until December 31, 2019, 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 September 22, 2016 in shares of our common stock, the NASDAQ
Composite Index and the NASDAQ Bank Index and that dividends are reinvested into additional shares of common
stock at the same frequency with which dividends are paid on such shares during the applicable fiscal year. 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.
COMPARISON OF 39 MONTH CUMULATIVE TOTAL RETURN*
Among CapStar Financial Holdings, Inc., the NASDAQ Composite Index
and the NASDAQ Bank Index
$200
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
9/22/16
12/16
12/17
12/18
12/19
CapStar Financial Holdings, Inc.
NASDAQ Composite
NASDAQ Bank
*$100 invested on 9/22/16 in stock or 8/31/16 in index, including reinvestment of dividends.
Fiscal year ending December 31.
09/22/2016
12/31/2016
12/31/2017
12/31/2018
12/31/2019
NASDAQ Composite
Index (IXIC)
NASDAQ Bank Index
(BKX)
$
$
100
104
134
131
178
100
129
136
113
140
CapStar Financial
Holdings, Inc. (CSTR)
100
$
138
131
93
107
37
Dividend Policy
Holders of shares of our voting and non-voting common and preferred stock are only entitled to receive dividends
when, as and if declared by our board of directors out of funds legally available for dividends. 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
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 “Item 1.
Business—Supervision and Regulation—Bank Regulation and Supervision—Payment of Dividends.”
to Tennessee law, our bank may not, without
The following table shows the dividends that have been declared on our voting and non-voting common stock and
preferred stock with respect to the periods indicated below. Per share amounts are presented to the nearest cent.
(dollars in thousands, except share amounts and per share data)
2018:
Amount per share
Total cash
dividend
First quarter
Second quarter
Third quarter
Fourth quarter
2019:
First quarter
Second quarter
Third quarter
Fourth quarter
—
—
0.04
0.04
0.05
0.05
0.05
0.05
—
—
514
730
744
928
921
913
As of the date of this Report, only shares of our common stock are issued and outstanding.
Subject to the regulatory restrictions noted above and satisfactory financial results, the Company currently expects that
comparable cash dividends will continue to be paid in the future. 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
or in connection with the use of IPO proceeds. 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. During 2017, the Company provided
$10.0 million of the IPO proceeds as a capital contribution to the Bank for working capital purposes.
38
ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands, except per share data)
Balance Sheet Data (at period end):
Total assets
Total loans, net of unearned income
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
Cash dividends declared per share of common and
preferred stock
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
2019
2018
2017
2016
2015
$ 2,037,201
1,420,102
(12,604)
216,442
44,393
1,729,451
$ 1,963,883
1,429,794
(12,113)
247,542
46,048
1,570,008
$ 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
10,000
273,046
126,509
254,379
70,000
146,946
55,000
139,207
48,755
108,586
$
$
$
$
$
91,547
23,799
67,748
761
66,987
24,274
61,995
29,266
6,844
22,422
$
67,781
16,089
51,692
2,842
48,850
15,459
53,487
10,822
1,167
9,655
$
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
1.25
$
0.73
$
0.13
$
0.98
$
0.89
0.20
17,886,164
1.20
18,613,224
14.87
12.45
18,361,922
-
$
$
0.08
13,277,614
0.67
14,480,347
13.84
11.25
17,724,721
878,049
$
$
-
11,280,580
0.12
12,803,511
11.91
11.37
11,582,026
878,049
$
$
-
9,328,236
0.81
11,212,026
11.62
11.06
11,204,515
878,049
$
$
-
8,538,970
0.73
10,381,895
10.74
10.00
8,577,051
1,609,756
1.12%
8.49%
3.64%
1.21%
67.37%
0.89%
861.23%
0.12%
0.02%
13.45%
12.73%
12.73%
11.37%
0.63%
5.50%
3.55%
1.01%
79.65%
0.85%
582.84%
0.16%
0.39%
12.84%
12.13%
11.61%
11.06%
0.11%
1.05%
3.25%
0.80%
63.98%
1.45%
509.08%
0.20%
1.09%
12.52%
11.41%
10.70%
10.77%
0.72%
7.57%
3.22%
0.88%
66.86%
1.24%
321.42%
0.27%
0.15%
12.60%
11.61%
10.90%
10.46%
0.66%
7.08%
3.24%
0.78%
70.96%
1.25%
376.78%
0.24%
0.38%
11.42%
10.41%
8.89%
9.33%
(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 discussion and reconciliation of this measure to its most comparable GAAP measure.
On October 1, 2018, we completed our acquisition of Athens and Athens Federal. For more information, please see
“Item 1.—Business—Overview—Acquisitions”. The operations of Athens are included in our financial statements
beginning October 1, 2018. The acquisition and incorporation of Athens into our financial statements may materially
affect the comparability of the selected financial data provided for fiscal year 2018 as compared to previous years.
39
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, 2019, 2018 and 2017. 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
appearing under the caption “Part II., Item 8—Financial Statements, Supplementary Data and Financial Statement
Schedules” in this Report. 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, estimates 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 2017, 2018
and 2019 mean our fiscal years ended December 31, 2017, 2018, and 2019, respectively.
Overview
We completed 2019 with net income of $22.4 million, or $1.20 diluted net income per share, compared to net income
of $9.7 million, or $0.67 diluted net income per share, for 2018. Average loans for 2019 were $1.45 billion, a 27.9%
increase over 2018, and average deposits for 2019 were $1.67 billion, a 34.2% increase over 2018. The comparability
of our financial condition and performance has been impacted by our acquisition of Athens which we completed in
2018 and the passage of the Tax Cuts and Jobs Act in December 2017, in each case as discussed below.
We acquired Athens on October 1, 2018. On the acquisition date, the fair market value of Athens’ net assets was
$61.6 million, including $344.8 million in loans and $404.5 million in deposits. Net income for 2018 was reduced by
$9.8 million of pretax merger related charges related to this acquisition. The Athens acquisition further expanded our
franchise into the East Tennessee market.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Among other items, the Tax Cuts and Jobs Act
reduced the corporate statutory tax rate from 35% to 21%. As a result of such decrease, we recognized an increase in
income tax expense of $3.56 million in 2017 resulting from the revaluation of our deferred tax assets.
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 our overall profitability. Similarly, deposit volume is crucial to funding loans
and the rates paid on deposits directly impact our profitability. Business volumes are influenced by competition, new
business acquisition efforts and economic factors including market interest rates, business spending and consumer
confidence.
Net interest income increased $16.0 million, or 31.1%, to $67.7 million for 2019 compared to $51.7 million for 2018.
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 3.64% for 2019, compared with 3.55% for 2018.
Provision for loan losses was $0.8 million in 2019 compared to $2.8 million in 2018, a 73.2% decrease. This decrease
was primarily the result of lower charge-offs, which were $0.8 million in 2019 compared to $5.0 million in 2018. 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, 2019 was 0.89% of total loans, compared with 0.85% of total
loans at December 31, 2018.
40
Total noninterest income for 2019 increased $8.8 million, or 57.0%, to $24.3 million compared to $15.5 million for
2018, and comprised 21.0% of total revenues.
Total noninterest expense for 2019 increased $8.5 million, or 15.9%, to $62.0 million compared to $53.5 million for
2018. Our efficiency ratio for 2019 was 67.4% compared to 79.7% for 2018. The significant decrease in efficiency
ratio for 2019 is primarily attributable to $9.8 million of merger related charges included in noninterest expense for
2018, compared to just $2.7 million in 2019.
The Company’s effective tax rate increased to 23.4% for 2019 from 10.8% for 2018. The higher effective tax rate in
2019 compared to 2018 is mainly the result of the nontaxable life insurance death benefit proceeds received in 2018 as
well as a larger amount of excess tax benefits related to stock compensation in 2018.
Tangible common equity, a non-GAAP measure, is a measure of a company's capital which is useful in evaluating the
quality and adequacy of capital. Our ratio of tangible common equity to total tangible assets was 11.47% as of
December 31, 2019, compared with 10.39% at December 31, 2018. 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,
2019, 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, 2019, which is included elsewhere
in this Report.
41
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.
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
Year ended
December 31,
2019
2018
$ 91,547 $ 67,781
16,089
51,692
2,842
48,850
15,459
53,487
10,822
1,167
9,655
23,799
67,748
761
66,987
24,274
61,995
29,266
6,844
$ 22,422 $
2019-2018
Percent
Increase
(Decrease)
Year ended
December 31,
2017
51,515
9,652
41,863
12,870
28,993
10,908
33,765
6,136
4,635
1,501
35.1% $
47.9%
31.1%
(73.2)%
37.1%
57.0%
15.9%
170.4%
486.5%
132.2% $
2018-2017
Percent
Increase
(Decrease)
31.6%
66.7%
23.5%
(77.9)%
68.5%
41.7%
58.4%
76.4%
(74.8)%
543.2%
Basic net income per share of common stock
Diluted net income per share of common stock
$
$
1.25 $
1.20 $
0.73
0.67
71.2% $
79.1% $
0.13
0.12
461.5%
458.3%
Return on average assets was 1.12%, 0.63% and 0.11% for 2019, 2018 and 2017, respectively.
Return on average shareholders’ equity was 8.49%, 5.50% and 1.05% for 2019, 2018 and 2017, respectively.
42
The following sections provide a more detailed analysis of significant factors affecting our operating results.
Net Interest Income
The largest component of our net income is net interest income – the difference between the income earned on loans,
investment securities and other interest earning assets and interest expense on deposit accounts and other interest bearing
liabilities. Net interest income calculated on a tax-equivalent bais 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,
2019, 2018 and 2017:
Average
Outstanding
Balance
2019
Interest
Income/
Expense
Average
Yield/
Rate
For the Year Ended December 31,
2018
Interest
Income/
Expense
Average
Outstanding
Balance
Average
Yield/
Rate
Average
Outstanding
Balance
2017
Interest
Income/
Expense
Average
Yield/
Rate
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
Total interest-bearing liabilities
Noninterest-bearing
deposits
Total funding sources
Noninterest-bearing
liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
Net interest spread (4)
Net interest income/margin (5)
$ 1,451,821 $78,557
4,271
100,464
5.41% $ 1,134,836 $57,962
2,789
4.25%
58,250
5.11% $
4.79%
987,710 $43,531
2,070
49,466
4.41%
4.19%
176,647
5,374
3.04%
166,287
4,755
2.86%
166,538
4,092
2.46%
52,392
229,039
1,438
6,812
3.47%
3.14%
47,270
213,557
1,201
5,956
3.22%
2.94%
52,153
218,691
1,230
5,322
87,305
752
1,881
26
1,869,381 91,547
1,011
2.15%
3.52%
63
4.92% 1,463,580 67,781
54,454
2,483
551
1.85%
2.55%
41
4.65% 1,308,375 51,515
49,990
2,518
137,947
$ 2,007,328
65,336
$ 1,528,916
49,419
$ 1,357,794
3.63%
2.74%
1.10%
1.63%
3.99%
$
499,468
7,538
1.51% $
330,952
4,164
1.26% $
301,411
2,447
0.81%
494,587
361,956
7,266
7,542
1.47%
2.08%
424,052
227,760
5,446
3,940
1.28%
1.73%
378,640
194,892
3,188
2,445
0.84%
1.25%
1,356,011 22,346
1.65%
982,764 13,550
1.38%
874,943
8,080
0.92%
48,629
1,453
1,404,640 23,799
2.99%
2,539
1.69% 1,082,214 16,089
99,450
2.55%
1.49%
98,289
973,232
1,572
9,652
1.60%
0.99%
315,031
1,719,671
23,533
264,124
262,280
1,344,494
8,736
175,686
232,687
1,205,919
8,473
143,402
$ 2,007,328
$ 1,528,916
$ 1,357,794
$67,748
3.22%
3.64%
$51,692
3.17%
3.55%
$41,863
3.00%
3.25%
(1) Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan
fees, net of deferred loan costs.
(2) Taxable investment securities include restricted equity securities.
43
(3) Yields on tax exempt securities are shown on a tax equivalent basis.
(4) Net interest spread is the average yield on total interest-earning assets minus the average rate on total
interest-bearing liabilities.
(5) Net interest margin is net interest income calculated on a tax equivalent basis 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 earned or paid on these assets
and liabilities.
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
165
461
609
(44)
19,238
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
2,120
906
2,321
(1,297)
4,050
$ 15,188 $
2019 compared to 2018
2019 Compared to 2018
Increase (decrease) due to
Rate
Net
Volume
2018 Compared to 2017
Increase (decrease) due to
Rate
Net
Volume
$ 16,190 $ 4,405 $ 20,595 $ 6,484 $ 7,947 $ 14,431
719
2,022
1,482
(540)
368
351
296
323
619
(6)
670
664
72
395
261
7
4,528
1,254
914
1,281
211
3,660
237
856
870
(37)
23,766
3,374
1,820
3,602
(1,086)
7,710
(115)
(121)
49
(1)
6,779
240
382
412
19
1,053
85
755
410
24
9,487
1,477
1,876
1,084
947
5,384
868 $ 16,056 $ 5,726 $ 4,103 $
(30)
634
459
23
16,266
1,717
2,258
1,496
966
6,437
9,829
Our net interest income increased $16.1 million, or 31.1%, from 2018 to 2019 primarily due to increasing loan
volumes and interest rates rising at a faster pace than interest bearing liabilities. Our net interest margin was 3.64% and
3.55% for 2019 and 2018, respectively.
For 2019 and 2018, average loan yields increased from 5.11% to 5.41% 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, as well as realizing a full year of additional interest income related to the acquisition of Athens, including
additional interest income as a result of accretable yield. The full year average LIBOR – 1 month interest rate
increased from 2.02% in 2018 to 2.23% in 2019. Similarly, the full year average Bank Prime Loan Rate increased
from 4.90% in 2018 to 5.28% in 2019. Approximately 55% of our loan portfolio at December 31, 2019 was variable in
nature, a significant portion of which is indexed to 1 month LIBOR and the Bank Prime Loan Rate.
Average loans for 2019 increased 27.9% compared to 2018 as a result of the Athens acquisition, adding new bankers
in the Nashville MSA and continued focus on attracting new clients.
Average security yields increased from 2.94% to 3.14% for 2018 and 2019, 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 27 basis points for 2019 compared to 2018.
We funded our growth in loans through an increase in funding sources of 27.9% from 2018 to 2019. The primary
driver of our increased funding sources was growth in our deposits of 34.2% from 2018 to 2019 which was largely
driven by the Athens acquisition. Average non-interest bearing deposits increased 20.1% from 2018 to 2019.
44
The average rate paid on interest-bearing liabilities was 1.69% for 2019 compared to 1.49% for 2018. The majority
of this increase was due to increases in the Fed Funds rate. The full year average Fed Funds rate increased from 1.83%
in 2018 to 2.16% in 2019.
2018 compared to 2017
Our net interest income increased $9.8 million, or 23.5%, from 2017 to 2018 primarily due to increasing loan volumes
and interest rates rising at a faster pace than interest bearing liabilities. Our net interest margin was 3.55% and 3.25%
for 2018 and 2017, respectively.
For 2018 and 2017, average loan yields increased from 4.41% to 5.11% 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 December 31, 2017 to December 31, 2018, the LIBOR – 1 month interest rate increased from 1.56%
to 2.50%. Approximately 58% of our loan portfolio at December 31, 2018 was variable in nature and indexed to 1
month LIBOR.
Average loans for 2018 increased 14.9% compared to 2017 as a result of the Athens acquisition, adding new bankers
in the Nashville MSA and continued focus on attracting new clients.
Average security yields increased from 2.74% to 2.94% for 2017 and 2018, 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 66 basis points for 2018 compared to 2017.
We funded our growth in loans through an increase in funding sources of 11.5% from 2017 to 2018. The primary
driver of our increased funding sources was growth in our deposits of 12.4% from 2017 to 2018 which was largely
driven by the Athens acquisition. Average non-interest bearing deposits increased 12.7% from 2017 to 2018.
The average rate paid on interest-bearing liabilities was 1.49% for 2018 compared to 0.99% for 2017. The majority
of this increase was due to increases in the Fed Funds rate. The Fed Funds rate increased from 1.33% at December 31,
2017 to 2.40% at December 31, 2018. We passed along 50 basis points of the 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 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 0.89%, 0.85% and 1.45% at December 31, 2019, 2018 and 2017, respectively.
2019 compared to 2018
The provision for loan losses amounted to $0.8 million and $2.8 million for 2019 and 2018, 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.
Provision expense decreased for 2019 compared to 2018 due to decreased charge-offs. Charge-offs for 2019 were
$0.8 million compared to $5.0 million for 2018. Of the $5.0 million in charge offs during 2018, $4.6 million was
attributable to a single borrower.
Our allowance for loan losses as a percentage of total loans increased from 0.85% at December 31, 2018 to 0.89% at
December 31, 2019. This increase was largely due to our assessment of risk generally related to macro-economic,
geo-political conditions and asset quality. In addition, during 2019, we increased the look-back period, from which we
calculate peer bank historical loss experience, from 37 to 41 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, 2019. 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.
45
2018 compared to 2017
The provision for loan losses amounted to $2.8 million and $12.9 million for 2018 and 2017, respectively.
Provision expense decreased for 2018 compared to 2017 due to decreased charge-offs. Charge-offs for 2018 were
In particular, during the second quarter of 2017, we charged-off the
$5.0 million compared to $12.8 million for 2017.
loans associated with one specific borrower as credit quality deteriorated and 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.
Our allowance for loan losses as a percentage of total loans decreased from 1.45% at December 31, 2017 to 0.85% at
December 31, 2018. This decrease was largely due to the acquired Athens loan portfolio which was accounted for at
its fair value as of the acquisition date. A preliminary fair value discount of $4.8 million was applied to the Athens loan
portfolio. In addition, during 2018, we increased the look-back period, from which we calculate peer bank historical
loss experience, from 33 to 37 quarters.
Noninterest Income
In addition to net interest income, we generate recurring noninterest income. Our banking operations generate revenue
from service charges and fees on deposit accounts. We have mortgage banking activities that generates revenue from
the origination and sale of commercial real estate loans, and we have a
originating and selling mortgages,
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.
The following table sets forth the principal components of noninterest income for the periods indicated.
Year Ended
December 31,
2019
2018
2019-2018
Percent
Increase
(Decrease)
Year Ended
December 31,
2017
2018-2017
Percent
Increase
(Decrease)
Noninterest income:
Treasury management and other deposit service
charges
Net gain (loss) on sale of securities
Tri-Net fees
Mortgage banking income
Other noninterest income
Total noninterest income
2019 compared to 2018
$
3,135 $
(99)
2,785
9,467
8,986
2,150
3
1,503
5,653
6,150
$ 24,274 $ 15,459
45.8% $
(3400.0)%
85.3%
67.5%
46.1%
57.0% $
1,516
(66)
1,002
6,238
2,218
10,908
41.8%
(104.5)%
50.0%
(9.4)%
177.3%
41.7%
The increase in treasury management and other deposit service charges for 2019 was driven primarily by the
incremental increase in transaction volume related to our acquisition of Athens, as well as growth in the volume of our
commercial and consumer deposit accounts.
Tri-Net fees, implemented in the fourth quarter of 2016, is derived from the origination and sale of commercial real
estate loans to third-party investors. All of these loan sales transfer servicing rights to the buyer. The volume of loan
sales has increased through continued to growth and development.
46
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. Mortgage
origination fees will fluctuate from quarter to quarter as the rate environment changes. Mortgage banking income
increased 67.5% from 2018 to 2019 primarily due to a significantly higher volume of originations. Additionally,
during the second quarter of 2019, we implemented a hedging program for residential mortgage loans originated with
the intent to sell.
In connection with this program, we elected the fair value option for this portfolio. The fair value
adjustments for applicable loans held for sale and related derivative instruments at December 31, 2019 resulted in a
$1.1 million increase to mortgage banking income for 2019 when compared to 2018.
Other noninterest income primarily consists of loan related fees, interchange income and wealth management income.
The increase of $2.8 million from 2018 to 2019 was primarily due to organic growth and our acquisition of Athens.
2018 compared to 2017
The increase in treasury management and other deposit service charges for 2018 and 2017 was driven primarily our
acquisition of Athens and by transaction volume, which can fluctuate throughout and from year to year. Growth in
the volume of our commercial and consumer deposit accounts was the primary contributor to the increase.
Tri-Net fees has steadily increased since it was implemented.
Mortgage banking income decreased 9.4% from 2017 to 2018 due to a lower volume of originations.
The increase in other noninterest income of $3.9 million from 2017 to 2018 was primarily due to $2.0 million in
non-taxable life insurance death benefit proceeds recognized in 2018 and our acquisition of Athens.
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
Merger related expenses
Amortization of intangibles
Other operating
Total noninterest expense
Year Ended
December 31,
2019
2018
2019-2018
Percent
Increase
(Decrease)
Year Ended
December 31,
2017
2018-2017
Percent
Increase
(Decrease)
$
$
35,542 $ 28,586
3,835
6,961
1,608
2,102
2,336
3,345
2,471
3,723
1,028
591
9,803
2,654
465
1,655
5,422
3,355
61,995 $ 53,487
24.3% $
81.5%
30.7%
43.2%
50.7%
(42.5)%
100.0%
255.9%
61.6%
15.9% $
20,400
2,786
1,522
2,025
2,071
1,111
—
48
3,802
33,765
40.1%
37.7%
5.7%
15.4%
19.3%
(7.5)%
868.8%
(11.8)%
58.4%
47
2019 compared to 2018
The increase in salaries and employee benefits was driven primarily by the incremental increase in compensation costs
related to our acquisition of Athens and 2019 being the first full year of Athens’ related compensation costs being
recognized. At December 31, 2019, our associate base had slightly decreased to 289 compared to 295 at December 31,
2018.
Data processing and software expense increased from 2018 to 2019 primarily due to an increase in the volume of
transactions from organic growth, costs associated with running dual systems related to our acquisition of Athens and
insourcing certain IT related functions. The Athens related systems conversion was successfully completed during
the second quarter of 2019.
The increase in occupancy and equipment expense from 2018 to 2019 was largely attributable to increased
depreciation and other facilities related expenses associated with our acquisition of Athens as well as the increasing
cost of managing our IT network.
Amortization of intangibles increased from 2018 to 2019 due to the new core deposit intangible recorded in
connection with the Athens acquisition.
Our efficiency ratio was 67.4% and 79.7% for 2019 and 2018, respectively. The efficiency ratio is the ratio of
noninterest expense to the sum of net interest income and noninterest income and measures the amount of expense that
is incurred to generate a dollar of revenue. As expected, the efficiency ratio improved in 2019 due to the majority of
the non-recurring merger expenses incurred in 2018.
2018 compared to 2017
The increase in salaries and employee benefits was primarily the result of an increase in the number of employees in
2018 over 2017. At December 31, 2018, our associate base had expanded to 295 compared to 175 at December 31,
2017. Included in salaries and benefits are stock compensation and cash incentives, which increased over the prior
year by approximately $3.8 million due to retention of key employees and improved financial performance of the
Company.
Data processing and software expense increased from 2017 to 2018 primarily due to an increase in the volume of
transactions from organic growth and costs associated with running dual systems related to our acquisition of Athens.
We expect the Athens related systems conversion to occur during the second quarter of 2019.
The increase in equipment expense from 2017 to 2018 was related to the increasing cost of managing our IT network.
Merger related expenses relate to our acquisition of Athens. Amortization of intangibles increased from 2017 to 2018
due to the new core deposit intangible recorded in connection with the Athens acquisition.
Our efficiency ratio was 79.7% and 64.0% for 2018 and 2017, respectively. The efficiency ratio was negatively
impacted by merger expenses in 2018.
Income Taxes
2019 compared to 2018
We recorded income tax expense of $6.8 million and $1.2 million in 2019 and 2018, respectively. Our effective
income tax rate for 2019 and 2018 was 23.4% and 10.8%, 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 higher
effective tax rate in 2019 compared to 2018 is mainly the result of the nontaxable life insurance death benefit proceeds
received in 2018 as well as a larger amount of excess tax benefits related to stock compensation in 2018.
2018 compared to 2017
We recorded income tax expense of $1.2 million and $4.6 million in 2018 and 2017, respectively. Our effective
income tax rate for 2018 and 2017 was 10.8% and 75.5%, 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 and the 2017
tax law change. During 2018, the Company received $2.0 million in nontaxable life insurance death benefit proceeds
resulting in a lower effective tax rate for 2018 compared to 2017.
48
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 $3.6 million increase in income tax expense for 2017. If we were to
adjust this $3.6 million write-down out of income tax expense, our adjusted effective tax rate for 2017 would have
been 17.5%.
Financial Condition
2019 compared to 2018
Total assets increased $73.3 million, or 3.7%, from December 31, 2018 to December 31, 2019. Loans decreased from
$1.430 billion at December 31, 2018 to $1.420 billion at December 31, 2019, a 0.7% decrease. Loans held for sale
increased $110.6 million, or 192.0%, during 2019 which is primarily related to transaction volume of selling
residential and commercial real estate loans as a result of continued strong growth. Securities decreased $31.1
million, or 12.6%.
Total liabilities increased $54.7 million, or 3.2%, from December 31, 2018 to December 31, 2019. Deposits increased
from $1.570 billion at December 31, 2018 to $1.729 billion at December 31, 2019, a 10.2% increase. We paid down
our Federal Home Loan Bank advances $115.0 million, or 92.0%, from December 31, 2018 to December 31, 2019 as
we were able to rely more on deposit funding.
2018 compared to 2017
Total assets increased $619.5 million, or 46.1%, from December 31, 2017 to December 31, 2018. Loans grew from
$947.5 million at December 31, 2017 to $1.430 billion at December 31, 2018, a 50.9% increase. Loans held for sale
decreased $16.5 million, or 22.2%, during 2018 which is primarily related to the timing of selling residential and
Included in these changes is growth
commercial real estate loans. Securities increased $51.2 million, or 26.1%.
from our acquisition of Athens which included $473.0 million in total assets, primarily made up of $344.8 million in
loans and $67.4 million in securities.
Total liabilities increased $512.0 million, or 42.8%, from December 31, 2017 to December 31, 2018. Deposits
increased from $1.120 billion at December 31, 2017 to $1.570 billion at December 31, 2018, a 40.2% increase. We
increased our Federal Home Loan Bank advances $55.0 million, or 78.6%, from December 31, 2017 to December 31,
2018 to help fund loan growth. Total liabilities and deposits from our Athens acquisition were $411.4 million and
$404.5 million, respectively.
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.
49
Our investment portfolio totaled $216.4 million, $247.5 million, and $196.4 million at December 31, 2019, 2018 and
2017, respectively. Excluding investment securities acquired in our acquisition of Athens, our investment portfolio
has trended down over the past several years as we have redeployed these funds into higher-earning loans. See “Note
3 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, 2019 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
Fair
Value
Weighted
Average
Yield
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:
$
2,000
6,898
614
—
1,010
$ 10,522
2.3% $
—
3.6% 21,071
1.0% 87,949
0.0%
—
5.2%
8,159
3.4% $ 117,179
0.0% $
7,170
3.3% 17,796
2.6% 33,861
3,197
0.0%
5.0%
5,793
2.9% $ 67,817
1,161
2.3% $
4.1%
195
3.2% 16,255
—
2.6%
4.3%
—
3.4% $ 17,611
State and municipal securities
Total securities held to maturity
$
$
884
884
2.4% $
2.4% $
2,527
2,527
3.2% $
3.2% $
—
—
0.0% $
0.0% $
—
—
2.6%
2.8%
2.8%
2.8%
0.0%
0.0%
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:
Commercial real estate -
owner occupied
Commercial real estate -
non-owner occupied
Consumer real estate
Construction and land
development
Commercial and
industrial
Consumer
Other
Total gross loans and
leases
December 31, 2019
Amount Percent
December 31, 2018
Amount Percent
December 31,
2017
Amount Percent
December 31,
2016
Amount Percent
December 31,
2015
Amount Percent
$ 172,456
12.1% $ 141,864
9.9% $101,132
10.7% $106,735
11.4% $108,132
13.4%
387,443
256,097
27.3% 408,582
18.0% 253,562
28.6% 249,490
17.7% 102,581
26.3% 195,587
10.8% 97,015
20.9% 143,065
10.4% 93,785
17.7%
11.6%
143,111
10.1% 174,670
12.2% 82,586
8.7% 94,491
10.1% 52,522
6.5%
394,408
28,426
38,161
27.8% 404,600
25,615
2.0%
20,901
2.7%
28.3% 373,248
1.8%
6,862
1.5% 31,638
39.4% 379,620
0.7%
5,974
3.3% 55,829
40.6% 353,442
0.6%
8,668
6.0% 48,782
43.7%
1.1%
6.0%
$1,420,102 100.0% $1,429,794 100.0% $947,537 100.0% $935,251 100.0% $808,396 100.0%
Over the past five years, we have experienced significant growth in our loan portfolio. During 2015 and continuing
through 2019, we recognized growth in the commercial real estate loan classifications reflecting the development of
the Target Market in which we operate. The acquisition of Athens increased all loan classifications and provided
further diversity in our loan portfolio through more consumer oriented loan products.
50
Our primary focus has been on commercial and industrial and commercial real estate lending, which constituted 56%
of our loan portfolio as of December 31, 2019. Although we expect continued growth with respect to our loan
portfolio, we do not expect any significant changes over the foreseeable future in the composition of our loan portfolio
or in our emphasis on commercial lending. Our loan growth since inception has been reflective of the Target Market in
which 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 affiliated business rather than on the valuation and cash flows of the real estate from
unaffiliated tenants. Since 2009, our commercial and industrial and commercial real estate portfolios have continued
to experience strong growth, primarily due to implementation of our relationship-based banking model and the success
of our relationship 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 their employment by other financial institutions.
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, 2019.
December 31, 2019
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
$
$
$
47,648
12,443
37,175
113,032
10,856
5,343
226,497
39,789
186,708
226,497
$
$
$
Due in 1-5
years
361,295
36,332
64,182
233,402
17,074
25,553
737,838
Due after 5
years
150,956
207,322
41,754
47,974
496
7,265
455,767
$
$
$
Total
559,899
256,097
143,111
394,408
28,426
38,161
$ 1,420,102
408,017
329,821
737,838
186,967
268,800
455,767
634,773
785,329
$ 1,420,102
$
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.
51
We target small and medium sized businesses, the owners and operators of such businesses and other consumers and
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:120)
(cid:120)
(cid:120)
(cid:120)
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;
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;
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
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 a semi-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 4 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 greater than 89 days 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
$
$
2019
1,464
2,717
38
1,464
1,044
2,508
2018
2,078
1,391
214
2,078
988
3,066
$
$
December 31,
2017
$
$
2,695
1,206
231
2,695
—
2,695
2016
3,619
1,272
—
3,619
—
3,619
$
$
2015
2,689
125
—
2,689
216
2,905
$
$
0.10%
0.15%
0.28%
0.39%
0.33%
0.12%
0.16%
0.20%
0.27%
0.24%
52
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 all principal and interest is not expected in a timely manner. 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, 2019, 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. The effect of these changes is
assessed to determine if the loan should be classified as a Troubled Debt Restructure. 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 Accounting
Policies and Estimates” above and in Notes 1 and 4 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
2019
$1,420,102
1,451,821
Year ended December 31,
2017
$ 947,537
987,710
2018
$1,429,794
1,134,836
2016
$ 935,251
888,541
2015
$ 808,396
744,151
Allowance for loan and lease losses at beginning of period
Charge-offs:
12,113
13,721
11,634
10,132
11,282
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 average loans
$
—
39
—
455
164
140
798
23
20
—
380
82
23
528
270
761
12,604
$
—
—
—
4,831
84
39
4,954
22
4
—
395
75
8
504
4,450
2,842
12,113
$
—
—
—
12,769
—
—
12,769
9
—
—
1,865
112
—
1,986
10,783
12,870
13,721
350
—
—
956
146
—
1,452
52
—
—
23
50
—
125
1,327
2,829
11,634
$
—
173
—
3,033
—
—
3,206
31
68
—
299
7
—
405
2,801
1,651
10,132
$
0.89%
0.02%
0.85%
0.39%
1.45%
1.09%
1.24%
0.15%
1.25%
0.38%
53
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
and lease losses
December 31,
2019
Amount Percent
$ 3,599
1,231
December 31,
2018
Amount Percent
December 31,
2017
Amount Percent
December 31,
2016
Amount Percent
December 31,
2015
Amount Percent
28.6% $ 3,309
9.8% 1,005
27.3% $ 3,324
8.3% 1,063
24.2% $ 2,655
7.7% 1,013
22.8% $ 2,879
968
8.7%
2,058
5,074
222
420
16.3% 2,431
40.3% 5,036
105
1.8%
227
3.3%
20.1% 1,628
41.6% 7,209
91
0.9%
406
1.9%
11.9% 1,574
52.5% 5,618
76
0.7%
698
3.0%
13.5%
914
48.3% 4,693
103
0.7%
575
6.0%
28.4%
9.6%
9.0%
46.3%
1.0%
5.7%
$12,604
100.0% $12,113
100.0% $13,721
100.0% $ 11,634
100.0% $ 10,132
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
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.
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
2019
Average
Balance
Average
Rate
Paid
Year ended December 31,
2018
Average
Balance
Average
Rate
Paid
2017
Average
Balance
Average
Rate
Paid
$
315,031
499,468
444,685
49,902
267,509
94,447
$ 1,671,042
262,280
0.00% $
330,952
1.51%
409,055
1.62%
14,997
0.08%
177,366
2.21%
1.72%
50,395
1.34% $ 1,245,045
232,687
0.00% $
301,411
1.26%
375,688
1.33%
2,952
0.09%
155,788
1.76%
1.63%
39,104
1.09% $ 1,107,630
0.00%
0.81%
0.85%
0.15%
1.13%
1.76%
0.73%
Total average deposits increased 34.2% in 2019 compared to 2018 and increased 12.4% in 2018 compared to 2017.
Much of the growth in deposits in 2018 is related to our acquisition of Athens. However, we have been able to
increase average noninterest-bearing demand deposits each year as we focus on building and expanding client
relationships. The Target Market is a competitive market for deposits and we experienced some run-off in rate
sensitive deposits during 2018 and 2019.
The following table presents the maturities of our certificates of deposit as of December 31, 2019.
$100,000 or more
Less than $100,000
Total
December 31, 2019
Over six
through
twelve
months
Over twelve
months
Over three
through six
months
$
$
34,462
11,410
45,872
$
$
76,885
20,546
97,431
$
$
54,543
26,746
81,289
Total
$ 230,022
73,430
$ 303,452
Three
months or
less
64,132
14,728
78,860
$
$
54
Capital Adequacy
As of December 31, 2019, 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
Guidelines
10.0%
8.0%
6.5%
5.0%
December 31, 2019
13.5%
12.7%
12.7%
11.4%
See Note 15 to the “Notes to Consolidated Financial Statements” for additional information related to our capital
position.
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 our 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 products, 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, 2019, our EAR static simulation results indicated that our balance sheet is asset sensitive to parallel
shifts in interest rates. This indicates that our assets generally reprice faster than our liabilities, which results in a
favorable impact to net interest income when market interest rates increase and an unfavorable impact to net interest
income when market interest rates decline. Many assumptions are used to calculate the impact of interest rate
fluctuations on our net interest income, such as asset prepayments, non-maturity deposit price sensitivity and 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.
55
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
Liquidity Risk Management
Net interest income
change
1.9%
1.0
(4.1)
(8.3)
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 $213.1 million at December
31, 2019. We pledge portions of our investment securities portfolio to secure public fund deposits, derivative positions
and Federal Home Loan Bank (“FHLB”) advances. At December 31, 2019, total investment securities pledged for
these purposes comprised 32% of the estimated fair value of the entire investment portfolio, leaving $146.2 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, 2019, such deposits totaled $1.4 billion and represented 82% of our total deposits.
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, 2019, available credit from the FHLB totaled $201.4
million. Additionally, we had available federal funds purchased lines with correspondent banks totaling $107.5
million at December 31, 2019.
The principal source of cash for CapStar Financial is dividends paid to it as the sole shareholder of the Bank. At
December 31, 2019, the Bank was able to pay up to $35.8 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.
56
Contractual Obligations
The following table presents additional information about contractual obligations as of December 31, 2019, which by
their terms have contractual maturity and termination dates subsequent to December 31, 2019.
Contractual Obligations:
FHLB advances
Certificates of deposits $100,000 or more
Certificates of deposits less than $100,000
Lease liabilities
Total
Borrowings
Due in 1
year or less
$ 10,000 $
175,479
46,684
1,562
$ 233,725
$
Due after 1
through 3
years
Due after 3
through 5
years
Due after 5
years
Total
— $
— $
47,382
21,950
3,066
72,398
$
6,560
4,784
2,555
13,899
$
— $ 10,000
230,022
73,430
14,893
$ 328,345
601
12
7,710
8,323
The following table outlines our sources of short-term borrowed funds during the year ended December 31, 2019, and
the amount outstanding at the end of each period, the maximum amount, average amount and average interest rate that
we paid for each borrowing source during the period. The maximum month end balance represents the high
indebtedness of borrowed funds at any time during each of the periods shown. Stated period end rates are contractual
rates.
As of or for the year ended December 31, 2019
Ending balance
Stated
period end
rate
Maximum
month end
balance
Average for the period
Balance
Rate
$
10,000
2.05% $
170,000
$
49,000
2.45%
Short-term borrowed funds:
Short-term FHLB advances
Off-Balance Sheet Arrangements
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.
57
Our off-balance sheet arrangements are summarized in the following table for the periods indicated.
December 31,
2019
Contract or notional amount
December 31,
2018
December 31,
2017
Financial instruments whose contract amounts represent
credit risk:
Unused commitments to extend credit
Standby letters of credit
Total
Non-GAAP Financial Measures
$
$
672,933
9,634
682,567
$
$
707,675
12,273
719,948
$
$
584,494
11,552
596,046
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,
2019
273,046
(6,883)
(37,510)
—
228,653
$
$
December 31,
2018
254,379
(8,538)
(37,510)
(9,000)
199,331
$
$
December 31,
2017
146,946
(23)
(6,219)
(9,000)
131,704
$
$
December 31,
2016
139,207
(71)
(6,219)
(9,000)
123,917
$
$
December 31,
2015
108,586
(125)
(6,219)
(16,500)
85,742
$
$ 2,037,201
(6,883)
(37,510)
$ 1,992,808
$ 1,963,883
(8,538)
(37,510)
$ 1,917,835
$ 1,344,429
(23)
(6,219)
$ 1,338,187
$ 1,333,675
(71)
(6,219)
$ 1,327,385
$ 1,206,800
(125)
(6,219)
$ 1,200,456
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
13.40%
11.47%
12.95%
10.39%
10.93%
9.84%
10.44%
9.34%
9.00%
7.14%
$
18,361,922
14.87
12.45
$
17,724,721
13.84
11.25
$
11,582,026
11.91
11.37
$
11,204,515
11.62
11.06
$
8,577,051
10.74
10.00
58
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.
59
ITEM 8. FINANCIAL STATEMENTS, SUPPLEMENTARY DATA AND FINANCIAL STATEMENT
SCHEDULES
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)
61
62
63
64
65
66
67
60
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, 2019 and 2018, 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, 2019, and the related notes to the consolidated financial statements and schedules (collectively, the “consolidated
In our opinion, the consolidated financial statements present fairly, in all material respects,
financial statements”).
the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2019, 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.
/s/ Elliott Davis, LLC
We have served as the Company's auditor since 2017.
Franklin, Tennessee
March 6, 2020
61
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except share data)
December 31, 2019
December 31, 2018
$
$
$
$
$
$
$
17,726
83,368
175
101,269
213,129
3,313
168,222
1,420,102
(12,604)
1,407,498
19,184
13,689
5,792
37,510
6,883
1,044
59,668
2,037,201
312,096
607,211
506,692
303,452
1,729,451
10,000
24,704
1,764,155
17,967
76,714
10,762
105,443
243,808
3,734
57,618
1,429,794
(12,113)
1,417,681
18,821
12,038
5,964
37,510
8,538
988
51,740
1,963,883
289,552
434,921
497,108
348,427
1,570,008
125,000
14,496
1,709,504
—
878
18,362
17,592
—
207,083
46,218
1,383
273,046
2,037,201
$
133
211,789
27,303
(3,316)
254,379
1,963,883
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 $3,411 and $3,785
at December 31, 2019 and 2018, respectively
Loans held for sale (includes $30,740 and $0 measured
at fair value at December 31, 2019 and 2018, respectively)
Loans
Less allowance for loan losses
Loans, net
Premises and equipment, net
Restricted equity securities
Accrued interest receivable
Goodwill
Core deposit intangible, net
Other real estate owned, net
Other assets
Total assets
Liabilities and Shareholders’ Equity
Deposits:
Non-interest-bearing
Interest-bearing
Savings and money market accounts
Time
Total deposits
Federal Home Loan Bank advances
Other liabilities
Total liabilities
Shareholders’ equity:
Series A Nonvoting Noncumulative Perpetual Convertible
Preferred Stock, $1 par value; 5,000,000 shares authorized;
0 and 878,048 shares issued and outstanding at
December 31, 2019 and 2018, respectively
Common stock, voting, $1 par value; 20,000,000 shares authorized;
18,361,922 and 17,592,160 shares issued and outstanding
at December 31, 2019 and 2018, respectively
Common stock, nonvoting, $1 par value; 5,000,000 shares authorized;
0 and 132,561 shares issued and outstanding at December 31, 2019
and 2018, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of income tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
62
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
Net gain (loss) on sale of securities
Tri-Net fees, net
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
Merger related expenses
Amortization of intangibles
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,
2018
2019
2017
$
82,828
$
60,751
$
45,601
4,619
1,438
26
755
1,881
91,547
7,538
7,266
7,542
4
5
1,444
23,799
67,748
761
66,987
3,135
(99)
2,785
9,467
8,986
24,274
35,542
6,961
2,102
3,345
3,723
591
2,654
1,655
5,422
61,995
29,266
6,844
22,422
1.25
1.20
$
$
$
4,184
1,201
63
571
1,011
67,781
4,164
5,446
3,940
3
3
2,533
16,089
51,692
2,842
48,850
2,150
3
1,503
5,653
6,150
15,459
28,586
3,835
1,608
2,336
2,471
1,028
9,803
465
3,355
53,487
10,822
1,167
9,655
0.73
0.67
$
$
$
3,696
1,230
41
396
551
51,515
2,447
3,188
2,445
13
—
1,559
9,652
41,863
12,870
28,993
1,516
(66)
1,002
6,238
2,218
10,908
20,400
2,786
1,522
2,025
2,071
1,111
—
48
3,802
33,765
6,136
4,635
1,501
0.13
0.12
17,886,164
18,613,224
13,277,614
14,480,347
11,280,580
12,803,511
$
$
$
63
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
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 losses (gains) 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 (losses) gains on cash flow hedges:
Unrealized holding (losses) gains 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.
Year Ended December 31,
2018
2019
2017
$
22,422
$
9,655
$
1,501
6,321
99
(1,678)
4,742
—
—
—
(702)
878
(219)
(43)
4,699
27,121
$
(2,491)
(3)
652
(1,842)
14
(4)
10
263
920
(140)
1,043
(789)
8,866
$
4,855
66
(1,884)
3,037
190
(73)
117
(72)
863
(62)
729
3,883
5,384
$
64
—
—
—
—
—
—
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share data)
Preferred
stock
Common stock,
voting
Common stock,
nonvoting
Shares
Amount Shares Amount
Additional
paid-in Retained
earnings
capital
— $ — $ 116,143 $ 17,132 $
$
878 11,204,515 $ 11,205
35,714
—
36
—
154,050
154
—
—
—
—
—
—
55,186
55
132,561
133
(280)
1,061
857
339
—
—
—
—
Accumulated
other
comprehensive
loss
Total
shareholders’
equity
(6,151) $
139,207
—
—
—
—
(244)
1,061
1,011
527
—
—
—
—
—
—
878 11,449,465 $ 11,450
—
$
—
—
—
—
107,640
—
666,964
186,175
107
—
667
186
— 5,181,916
5,182
—
—
—
—
—
—
878 17,592,160 $ 17,592
—
—
—
$
—
—
—
132,561 $
—
—
—
—
259
1,501
(259)
—
—
1,501
—
—
133 $ 118,120 $ 18,892 $
—
3,883
(2,527) $
3,883
146,946
—
—
—
—
—
—
—
—
132,561 $
—
—
—
—
(552)
2,079
2,986
1,420
—
—
—
—
—
87,736
—
—
—
—
—
—
(445)
2,079
3,653
1,606
92,918
— (1,244)
—
9,655
—
—
—
—
—
133 $ 211,789 $ 27,303 $
—
—
(789)
(3,316) $
(1,244)
9,655
(789)
254,379
—
—
—
(8,721)
—
272,660
(878)
878,048
(9)
—
273
878
—
—
—
—
—
—
—
—
—
132,561
133 (132,561)
(133)
— (504,786)
(505)
—
—
—
—
—
—
—
—
— 18,361,922 $ 18,362
—
—
—
—
—
—
—
(295)
1,262
1,658
—
—
(7,331)
—
—
—
—
—
—
— (3,507)
— 22,422
—
—
—
—
—
—
—
—
(304)
1,262
1,931
—
—
(7,836)
(3,507)
22,422
4,699
1,383 $
4,699
273,046
Balance December 31, 2016
Net issuance of restricted
common stock
Stock-based compensation
expense
Excess tax benefit from
stock compensation
Net exercise of common
stock options
Reclassification of
accumulated other
comprehensive income due
to tax rate change
Net income
Other comprehensive
income
Balance December 31, 2017
Net issuance of restricted
common stock
Stock-based compensation
expense
Net exercise of common
stock options
Exercise of common stock
warrants
Issuance of common stock
in conjunction with Athens
acquisition, net of issuance
costs
Common and preferred
stock dividends declared
($0.04 per share)
Net income
Other comprehensive loss
Balance December 31, 2018
Net issuance of restricted
common stock
Stock-based compensation
expense
Net exercise of common
stock options
Conversion of preferred
stock to common stock
Conversion of non-voting
common stock to common
stock
Repurchase of common
stock
Common and preferred
stock dividends declared
($0.05 per share)
Net income
Other comprehensive
income
Balance December 31, 2019
$
—
— $ — $ 207,083 $ 46,218 $
—
—
—
See accompanying notes to consolidated financial statements.
65
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
2019
Year Ended December 31,
2018
2017
$
22,422
$
9,655
$
1,501
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
Net loss (gain) on sale of securities
Mortgage banking income
Tri-Net fees
Net gain on sale of loans
Net loss on disposal of premises and equipment
Net gain on sale of other real estate owned
Stock-based compensation
Deferred income tax expense
Origination of loans held for sale
Proceeds from loans held for sale
Cash payments arising from operating leases
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:
Maturities, prepayments and calls
Purchase of restricted equity securities
Net increase (decrease) in loans
Purchase of premises and equipment
Proceeds from sale of other real estate owned
Proceeds from sale of premises and equipment
Proceeds from BOLI death benefit
Cash received from acquisitions, net
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
Repurchase of common stock
Exercise of common stock options and warrants, net of repurchase of restricted shares
Termination of interest rate swap agreement
Common and preferred stock dividends paid
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:
Transfer of loans to other real estate
Loans charged off to the allowance for loan and lease losses
Conversion of preferred stock and non-voting common stock
Lease liabilities arising from obtaining right-of-use assets
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.
$
$
$
$
$
$
$
$
66
761
(3,737 )
2,883
807
99
(9,467 )
(2,785 )
(803 )
—
(3 )
1,262
2,585
(824,021 )
725,669
(1,786 )
(10,461 )
11,887
(84,688 )
(59,473 )
68,068
27,624
395
(1,651 )
13,782
(1,582 )
127
—
—
—
47,290
159,443
75,000
(190,000 )
(7,836 )
1,627
(1,503 )
(3,507 )
33,224
(4,174 )
105,443
101,269
24,216
716
$
$
2,842
(2,978)
1,028
1,007
(3)
(5,653)
(1,503)
(248)
—
—
2,079
1,175
(516,341)
540,448
—
1,395
682
33,585
(44,787)
38,322
19,245
—
(12)
(139,124)
(4,244)
—
—
3,416
12,053
(115,131)
45,622
125,000
(70,000)
—
4,814
—
(1,244)
104,192
22,646
82,797
105,443
15,378
1,716
$
$
180
798
1,011
13,512
$
$
$
$
— $
— $
4,954
— $
$
— $
— $
— $
— $
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
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 December 31, 2019 and 2018 and for each of the three years in the period
ended December 31, 2019 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. 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.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting. The accounts of an
acquired entity are included as of the date of acquisition, and any excess of purchase price over the fair value of the net
assets acquired is capitalized as goodwill. Under this method, all identifiable assets acquired, including purchased
loans, and liabilities assumed are recorded at fair value.
The Company typically issues common stock and/or pays cash for an acquisition, depending on the terms of the
acquisition agreement. The value of shares of common stock issued is determined based on the market price of the
stock as of the closing of the acquisition.
Nature of Operations
Through the Bank, the Company provides full banking services to consumer and corporate customers located
primarily 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.
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 and deferred tax assets.
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.
67
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 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.
Loans Held For Sale and Fair Value Option
The Company classifies loans as loans held for sale when originated with the intent to sell. As of April 1, 2019, the
Company elected the fair value option for all residential mortgage loans originated with the intent to sell. This election
allows for a more effective offset of the changes in fair values of the loans and the derivative instruments used to
economically hedge them without the burden of complying with the requirements for hedge accounting. The
Company has not elected the fair value option for other loans held for sale primarily because they are not economically
hedged using derivative instruments. The fair value of residential mortgage loans originated with the intent to sell is
based on traded market prices of similar assets. Other loans held for sale that are recorded at lower of cost or fair value
may be carried at fair value on a nonrecurring basis when the fair value is less than cost. For further information, see
Note 24 - Fair Value. The Company does not securitize mortgage loans.
If the Company sells loans with servicing
rights retained, the carrying value of the mortgage loan sold is reduced by the amount allocated to the servicing right.
Fair values of residential mortgage loans held for sale are based on traded market prices of similar assets. The changes
in fair value are recorded as a component of mortgage banking income and included gains of $0.6 million for the year
ended December 31, 2019. There were no loans held for sale recorded at fair value as of December 31, 2018. The
following table summarizes the difference between the fair value and the aggregate unpaid principal balance for
residential real estate loans held for sale as of December 31, 2019 (dollars in thousands):
December 31, 2019
Residential mortgage loans held for sale
Aggregate
Unpaid
Principal
Balance
Fair Value
Difference
$
30,740
$
30,178
$
562
68
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Tri-Net Fees
Tri-Net fees are derived from the origination, 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.
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
completion and operation and/or sale 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.
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CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
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 purchased credit 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.
Purchased credit 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.
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.
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CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
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.
Loans meeting any of the following criteria are individually evaluated for impairment: risk rated substandard (as
defined in Note 4), 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 33 quarter look-back period as of December 31, 2017. Subsequently, the Company increased
its look-back period for a total of 37 quarters and 41 quarters as of December 31, 2018 and 2019, respectively. 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.
Servicing Rights
When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the
income statement effect recorded in other noninterest income. Fair value is based on market prices for comparable
mortgage servicing contracts, when available or alternatively, is based on a valuation model that calculates the present
value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the
amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and
over the period of, the estimated future net servicing income of the underlying loans.
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CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount.
Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as
interest rate, loan type and investor type.
Impairment is recognized through a valuation allowance for an individual
grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a
portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as
an increase to income. Changes in valuation allowances are reported with other noninterest income on the income
statement and the associated asset is included in other assets on the Consolidated Balance Sheet. The fair values of
servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds
and default rates and losses.
Servicing fee income, which is reported on the income statement within other noninterest income, is recorded for fees
earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed
amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted
against loan servicing fee income. Net servicing fees totaled $340,000 and $102,000 for the years ended December
31, 2019 and 2018, respectively. There were no servicing fees for the year ended December 31, 2017. Late fees and
ancillary fees related to loan servicing are not material.
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 one 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.
Leases
In February 2016, the FASB issued a new accounting standard update (ASU 2016-02, Leases (Topic 842)), which
requires for all operating leases the recognition of a right-of-use ("ROU") asset and a corresponding lease liability, in
the Consolidated Balance Sheet. For short term leases (term of 12 months or less), a lessee is permitted to make an
accounting election not to recognize lease assets and lease liabilities. The lease cost will be allocated over the lease
term on a straight-line basis. There were further amendments, including practical expedients, with the issuance of
ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842” in January
2018. In July 2018, the FASB issued ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements", which
provides for the option to apply the new leasing standard to all open leases as of the adoption date, on a prospective
basis.
On January 1, 2019, the Company adopted the new accounting standard ASU 2016-02, Leases (Topic 842) and all the
related amendments ("new lease standard", "ASC 842" or "ASU 2016-02") utilizing the practical expedient to apply
the new lease standard as of January 1, 2019 on a prospective basis. The Company also elected the "package of
expedients" and elected as an accounting policy to exclude recording ROU assets and lease liabilities for leases that
meet the definition of short-term leases. In addition to excluding short-term leases, the Company has implemented an
accounting policy in which non-lease components are not separated from lease components in the measurement of
ROU assets and lease liabilities for all lease contracts. The Company recognized $12.8 million in ROU assets and
$13.4 million in lease liabilities as a result of applying the new lease standard as an adjustment to the opening
consolidated balance sheet on January 1, 2019. The ROU assets and lease liabilities are included in other assets and
other liabilities, respectively on the Consolidated Balance Sheet. The comparative information has not been restated
and continues to be reported under the accounting standards in effect for those periods. See Note 7—Leases for
additional disclosures related to leases.
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. Bank owned life insurance is included
in other assets on the Consolidated Balance Sheet.
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CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
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 and are included in other liabilities on the Consolidated Balance
Sheet.
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 six to ten 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 interest 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 interest 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, 2016 through 2019.
It is the Company’s
policy to recognize interest and/or penalties related to income tax matters in income tax expense.
73
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 $370,000, $383,000 and
$310,000 for the years ended December 31, 2019, 2018 and 2017, respectively and is included in other operating
expenses on the Consolidated Statements of Income.
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 may also utilize forward starting cash flow hedges to manage its future interest rate exposure. These
derivative contracts are 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.
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CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Commitments to fund mortgage loans “interest rate locks” to be sold into the secondary market and forward
commitments for the sale of mortgage-backed securities are accounted for as free standing derivatives. The fair value
of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is executed and is adjusted
for the expected exercise of the commitment before the loan is funded. Fair values of these mortgage derivatives are
estimated based on changes in mortgage interest rates from the date the interest rate on the loan is locked. The
Company enters into forward commitments for the sale of mortgage-backed securities when interest rate locks are
entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in
the fair values of these derivatives are included in mortgage banking income.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income
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 (loss) 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 $73,444,000, $63,890,000, and $43,940,000 at December 31, 2019, 2018 and 2017, 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, 2019, 2018 and 2017.
Subsequent Events
The Company has evaluated subsequent events for recognition and disclosure through March __, 2020, 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.
No antidilutive stock options were excluded from calculation for the years ended December 31, 2019, 2018 or
December 31, 2017.
75
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
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):
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
Recently Issued Accounting Pronouncements
ASU 2014-09, Revenue from Contracts with Customers
Year Ended December 31,
2018
2017
2019
$
$
$
$
22,422
17,886,164
1.25
22,422
17,886,164
727,060
18,613,224
1.20
$
$
$
$
9,655
13,277,614
0.73
9,655
13,277,614
1,202,733
14,480,347
0.67
$
$
$
$
1,501
11,280,580
0.13
1,501
11,280,580
1,522,931
12,803,511
0.12
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 was effective
for the Company for reporting periods beginning after December 15, 2017.
The Company applied 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 performed an assessment of our revenue
contracts related to revenue streams that are within the scope of the standard. Our accounting policies did not change
materially since the principles of revenue recognition from the ASU were largely consistent with existing guidance
and current practices applied by our businesses. We did not identify material changes to the timing or amount of
revenue recognition.
The Company records revenue from contracts with customers in accordance with Accounting Standards Codification
Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify
the contract with a customer, identify the performance obligations in the contract, determine the transaction price,
allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the
Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting
period that results from performance obligations satisfied in previous periods.
The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment
securities, and other financial instruments that are not within the scope of Topic 606. The Company evaluated the
nature of its contracts with customers and determined that further disaggregation of revenue from contracts with
customers into more granular categories beyond what is presented in the Consolidated Statements of Income was not
necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as
services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on
activity. Our accounting policies did not change materially since the principles of revenue recognition from the
Accounting Standards Update were largely consistent with existing guidance and current practices applied by our
business.
76
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
A description of the Company’s revenue streams accounted for under Topic 606 follows:
Treasury management and other deposit service charges: The Company earns fees from its deposit customers for
transaction based, account maintenance, and overdraft services. Transaction based fees are recognized at the time the
transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance
fees are earned over the course of a month, representing the period over which the Company satisfies its performance
obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits
are withdrawn from the customer’s account balance.
Included in other noninterest income are interchange fees, which the Company earns from debit
Interchange income:
cardholder transactions conducted through various payment networks.
Interchange fees from cardholder transactions
represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction
processing series provided to the cardholder.
Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the
property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances
the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligation
under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the
OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the
buyer.
In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on
sale if a significant financing component is present.
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 were
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
The Company adopted the guidance using the modified retrospective method and practical expedients for transition.
The practical expedients allow the Company to largely account for our existing leases consistent with current guidance
except for the incremental balance sheet recognition for lessees. The Company evaluated the new guidance and its
impact on the Company’s financial statements. Based on leases outstanding at December 31, 2018, the impact of
adoption on January 1, 2019 was recording a lease liability of approximately $13.4 million, a right-of-use asset of
approximately $12.8 million, and elimination of deferred rent of approximately $0.6 million.
ASU 2016-13, Financial Instruments Credit Losses
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model
for certain debt securities. The amendments were originally supposed to be effective for the Company for reporting
periods beginning after December 15, 2019 with early adoption permitted for all organizations for periods beginning
after December 15, 2018. However, in November 2019, the FASB issued ASU 2019-10, Financial Instruments
Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which
finalizes effective date delays for private companies, not-for-profit organizations, and certain smaller reporting
companies applying the credit losses standard. The Company has elected to delay implementation of the new standard
until 2023.
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. The Company does not expect these
amendments to have a material effect on its financial statements.
77
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated 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 were effective for the
Company for interim and annual periods beginning after December 15, 2018. Early adoption was permitted. The
Company adopted this standard December 1, 2017. 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 opted to early adopt this pronouncement on December 31, 2017, 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.
ASU 2018-07, Compensation Stock Compensation
In June 2018, the FASB amended the Compensation—Stock Compensation Topic of the Accounting Standards
Codification. The amendments expand the scope of Topic 718 to include share-based payment transactions for
acquiring goods and services from nonemployees. The guidance was effective for the Company for reporting periods
beginning after December 15, 2018. There was no material effect on the financial statements.
ASU 2019-04 ― Applicable to entities that hold financial instruments:
In April 2019, the FASB issued guidance that clarifies and improves areas of guidance related to the recently issued
standards on credit losses, hedging, and recognition and measurement of financial instruments. The amendments
related to credit losses will be effective for the Company for reporting periods beginning after December 15, 2019.
The amendments related to hedging were effective for the Company for interim and annual periods beginning after
December 15, 2018. The amendments related to recognition and measurement of financial instruments will be
effective for the Company for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
ASU 2019-05 ― Applicable to entities that hold financial instruments:
In May 2019, the FASB issued guidance to provide entities with an option to irrevocably elect the fair value option,
applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13, Measurement
of Credit Losses on Financial Instruments. The amendments will be effective for the Company upon adoption of ASU
2016-13 in fiscal year 2023. The Company does not expect these amendments to have a material effect on its financial
statements.
ASU 2019-12 ― Applicable to entities within the scope of Topic 740, Income Taxes:
In December 2019, the FASB issued guidance to simplify accounting for income taxes by removing specific technical
exceptions that often produce information investors have a hard time understanding. The amendments also improve
consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing
guidance. The amendments are effective for fiscal years beginning after December 15, 2020, including interim periods
within those fiscal years. Early adoption is permitted. The Company does not expect these amendments to have a
material effect on its financial statements.
NOTE 2 – ACQUISITIONS
On October 1, 2018, the Company acquired 100% of the outstanding common shares of Athens Bancshares Company
(“Athens”), the bank holding company for Athens Federal Community Bank, National Association (“Athens
Federal”). Under the terms of the acquisition, Athens common shareholders received 2.864 shares of the Company’s
common stock in exchange for each share of Athens common stock. With the acquisition, the Company further
expanded its franchise into the East Tennessee market. Athens’ results of operations were included in the Company’s
results beginning October 1, 2018. Acquisition related costs of $9,803,000 are included in the Company’s income
statement for the year ended December 31, 2018. The fair value of the common shares issued as part of the
consideration paid for Athens was determined by the closing price of the Company’s common shares immediately
preceding the acquisition date.
78
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Goodwill of $31,291,000 arising from the acquisition consisted largely of synergies and the cost savings resulting
from the combining of the operations of the companies. Goodwill associated with the Athens acquisition is not
amortizable for book or tax purposes. The following table summarizes the consideration paid for Athens and the
amounts of the assets acquired and liabilities assumed recognized at the acquisition date (in thousands):
Assets:
Cash and cash equivalents
Securities
Loans, gross
Allowance for loan losses
Premises and equipment, net
Core deposit intangible
Other
Total
Liabilities:
Deposits
Other
Total
Net identifiable assets acquired
Total cost of acquisition:
Value of stock issued
Value of rolled stock options
Total cost of acquisition
Goodwill recorded related to acquisition
As recorded by
Athens
Bancshares
Initial fair value
adjustments
Measurement
period
adjustments
As recorded by
CapStar
Financial
Holdings
$
$
$
$
12,053
67,342
349,597
(4,039)
7,637
2,758
29,566
464,914
404,027
5,363
409,390
$
$
$
$
$
$
$
—
84 (a)
(4,764) (b)
4,039 (c)
1,571 (d)
6,222 (e)
944 (f)
8,096
$
493 (g) $
1,500 (h)
1,993
$
86,538
6,380
92,918
— $
—
—
—
—
—
—
— $
— $
—
— $
$
$
$
12,053
67,426
344,833
—
9,208
8,980
30,510
473,010
404,520
6,863
411,383
61,627
92,918
31,291
(a) The amount represents the fair value adjustment of securities that were subsequently sold.
(b) The amount represents the adjustment of the net book value of Athens’ loans to their estimated fair value based on
interest rates and expected cash flows at the date of acquisition.
(c) The amount represents the removal of Athens’ existing allowance for loan losses.
(d) The amount represents the adjustment of the net book value of Athens’ premises and equipment to their estimated
fair value.
(e) The amount represents the net adjustment of removing Athens’ existing core deposit intangible from prior
acquisitions and recording the fair value of the core deposit intangible representing the intangible value of the
deposit base acquired and the fair value of the customer relationship.
(f) The amount represents the net adjustment of the fair value of mortgage servicing rights acquired and the deferred
tax asset recognized on the fair value adjustments on Athens acquired assets and assumed liabilities.
(g) The amount represents the adjustment necessary because the weighted average interest rate of Athens’ time
deposits exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be
amortized to reduce future interest expense over the life of the portfolio.
(h) The amount represents the liability assumed in connection with the merger agreement whereby the Company will
make a $1,500,000 charitable contribution to the Athens Foundation over a three year period.
79
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following unaudited pro forma financial information presents the combined results of the Company and Athens as
if the acquisition had occurred as of January 1, 2017, after giving effect to certain adjustments, including amortization
of the core deposit intangible, and related income tax effects. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had the Company and Athens constituted a single
entity during such periods (in thousands, except share data):
Net interest income
Noninterest income
Total revenue
Net income
Per share information:
Basic net income per share of common stock
Diluted net income per share of common stock
NOTE 3 – INVESTMENT SECURITIES
Pro forma combined
twelve months ended
December 31, 2018
66,935
$
20,692
87,627
Pro forma combined
twelve months ended
December 31, 2017
59,148
$
17,540
76,688
21,167
5,851
$
$
1.24
1.14
$
$
0.36
0.32
Investment securities have been classified in the balance sheet according to management’s intent. The Company’s
classification of securities at December 31, 2019 and 2018 was as follows (in thousands):
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
Total
Amortized
Cost
$ 10,421
44,053
137,305
3,325
14,839
$ 209,943
$
$
3,313
3,313
December 31, 2019
Gross
Gross
unrealized
unrealized
gains
(losses)
Estimated
fair value
Amortized
Cost
December 31, 2018
Gross
Gross
unrealized
unrealized
gains
(losses)
Estimated
fair value
$
$
$
$
4
1,927
1,834
—
141
3,906
98
98
$
$
$
$
(94) $ 10,331
45,960
(20)
138,679
(460)
3,197
(128)
(18)
14,962
(720) $ 213,129
$ 11,053
62,142
146,547
15,437
11,863
$ 247,042
— $
— $
3,411
3,411
$
$
3,734
3,734
$
$
$
$
— $
765
776
4
71
1,616
$
(347) $ 10,706
(981)
61,926
144,158
(3,165)
15,284
(157)
11,734
(200)
(4,850) $ 243,808
54
54
$
$
(3) $
(3) $
3,785
3,785
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.
80
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The amortized cost and fair value of debt and equity securities at December 31, 2019, 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
$
$
9,805
28,593
29,545
1,370
137,305
3,325
209,943
$
$
9,909
29,230
30,758
1,356
138,679
3,197
213,129
$
$
881
2,432
—
—
—
—
3,313
$
$
884
2,527
—
—
—
—
3,411
Results from sales of debt and equity securities were as follows (in thousands):
Proceeds
Gross gains
Gross losses
2019
Year ended December 31
2018
2017
$
$
68,068
49
(148)
$
38,322
116
(113)
46,762
124
(190)
The table above does not include activity from maturities, prepayments or calls on debt or equity securities.
Securities with a market value of $70,350,000 and $171,542,000 at December 31, 2019 and 2018, respectively, were
pledged to collateralize public deposits, derivative positions and Federal Home Loan Bank advances.
At December 31, 2019 and 2018 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.
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, 2019
U. S. government agency securities
State and municipal securities
Mortgage-backed securities
Asset-backed securities
Other debt securities
Total temporarily impaired securities
December 31, 2018
U. S. government agency securities
State and municipal securities
Mortgage-backed securities
Asset-backed securities
Other debt securities
Total temporarily impaired securities
Total
Less than 12 months
Gross
unrealized
losses
12 months or more
Gross
unrealized
losses
Estimated
fair value
6,694
$
2,356
30,570
—
3,012
$ 42,632
$
$
Estimated
fair value
1,637
(51) $
814
(12)
21,364
(136)
3,197
—
(16)
1,502
(215) $ 28,514
Estimated
fair value
8,331
3,170
51,934
3,197
4,514
(505) $ 71,146
(43) $
(8)
(324)
(128)
(2)
$
$
$
$
(347) $ 10,706
30,831
(772)
94,307
(3,148)
10,701
(12)
5,362
—
(4,279) $ 151,907
Gross
unrealized
losses
$
$
$
$
(94)
(20)
(460)
(128)
(18)
(720)
(347)
(984)
(3,165)
(157)
(200)
(4,853)
$
— $
13,455
7,075
8,262
5,362
$ 34,154
$
— $ 10,706
17,376
(212)
87,232
(17)
2,439
(145)
(200)
—
(574) $ 117,753
81
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
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, 2019. There were no other-than-temporary impairments for the
years ended December 31, 2019, 2018 or 2017.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31, 2019 and 2018 were as follows (in thousands):
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
Allowance for loan losses
Total loans, net
December 31, 2019
559,899
$
256,097
143,111
394,408
28,426
38,161
1,420,102
(12,604)
1,407,498
$
December 31, 2018
550,446
$
253,562
174,670
404,600
25,615
20,901
1,429,794
(12,113)
1,417,681
$
At December 31, 2019, variable-rate and fixed-rate loans totaled $785,329,000 and $634,773,000, respectively. At
December 31, 2018, variable-rate and fixed-rate loans totaled $827,491,000 and $602,404,000, 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.
82
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Loans not falling into the criteria above are considered to be pass-rated loans. The Company utilizes six loan grades
within the pass risk rating.
The following table provides the risk category of loans by applicable class of loans as of December 31, 2019 and 2018
(in thousands):
Non-impaired Loans
Special
Mention Substandard
Total
Non-impaired
Total Impaired
Loans
Total
December 31, 2019
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
December 31, 2018
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
Pass
$ 551,929 $
252,952
142,978
370,475
28,382
38,161
915 $
503
—
14,341
6
—
4,438 $
1,551
16
8,241
15
—
557,282 $
255,006
142,994
393,057
28,403
38,161
$1,384,877 $ 15,765 $
14,261 $ 1,414,903 $
$ 547,616 $
249,273
174,591
388,719
25,556
20,901
$1,406,656 $
177 $
1,676
52
7,790
1
—
9,696 $
1,262 $
1,691
19
6,545
27
—
549,055 $
252,640
174,662
403,054
25,584
20,901
9,544 $ 1,425,896 $
2,617 $ 559,899
256,097
1,091
143,111
117
394,408
1,351
28,426
23
38,161
—
5,199 $1,420,102
922
8
1,546
31
—
1,391 $ 550,446
253,562
174,670
404,600
25,615
20,901
3,898 $1,429,794
None of the Company’s loans had a risk rating of “Doubtful” as of December 31, 2019 or 2018.
The following tables detail the changes in the ALL for the years ending December 31, 2019, 2018 and 2017 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, 2019
Balance, beginning of period
Charged-off loans
Recoveries
Provision for loan losses
Balance, end of period
Year ended December 31, 2018
Balance, beginning of period
Charged-off loans
Recoveries
Provision for loan losses
Balance, end of period
Year ended December 31, 2017
Balance, beginning of period
Charged-off loans
Recoveries
Provision for loan losses
$
$
$
$
$
3,309 $ 1,005 $
—
23
267
(39)
20
245
3,599 $ 1,231 $
2,431 $
—
—
(373)
2,058 $
5,036 $
(455)
380
113
5,074 $
105 $ 227 $ 12,113
(798)
(164)
528
82
199
761
222 $ 420 $ 12,604
(140)
23
310
3,324 $ 1,063 $
—
22
(37)
—
4
(62)
3,309 $ 1,005 $
1,628 $
—
—
803
2,431 $
7,209 $
(4,831)
395
2,263
5,036 $
91 $ 406 $ 13,721
(4,954)
(84)
504
75
2,842
23
105 $ 227 $ 12,113
(39)
8
(148)
2,655 $ 1,013 $
1,574 $
5,618 $
—
9
660
—
—
50
— (12,769)
1,865
—
12,495
54
7,209 $
1,628 $
76 $ 698 $ 11,634
— (12,769)
—
—
112
1,986
(97)
12,870
(292)
91 $ 406 $ 13,721
Balance, end of period
$
3,324 $ 1,063 $
83
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, 2019 and 2018 follows (in
thousands):
Commercial
real estate
Consumer
real estate
Construction
and land
development
Commercial
and
industrial Consumer Other
Total
December 31, 2019
Allowance for Loan Losses:
Collectively evaluated for impairment
Individually evaluated for impairment
Acquired with deteriorated credit quality
Balances, end of period
$
$
3,599 $
—
—
3,599 $
1,231 $
—
—
1,231 $
2,058 $
—
—
2,058 $
5,074 $
—
—
5,074 $
222 $
—
—
222 $
420 $
—
—
420 $
12,604
—
—
12,604
Loans:
Collectively evaluated for impairment
Individually evaluated for impairment
Acquired with deteriorated credit quality
Balances, end of period
$ 557,282 $ 255,006 $
2,507
110
483
608
$ 559,899 $ 256,097 $
142,994 $ 393,057 $ 28,403 $ 38,161 $1,414,903
3,594
1,605
143,111 $ 394,408 $ 28,426 $ 38,161 $1,420,102
487
864
112
5
5
18
—
—
December 31, 2018
Allowance for Loan Losses:
Collectively evaluated for impairment
Individually evaluated for impairment
Loans acquired with deteriorated credit
quality
Balances, end of period
$
$
Loans:
3,309 $
—
1,005 $
—
2,431 $
—
5,036 $
—
105 $
—
227 $
—
12,113
—
—
3,309 $
—
1,005 $
—
2,431 $
—
5,036 $
—
105 $
—
227 $
—
12,113
Collectively evaluated for impairment
Individually evaluated for impairment
Acquired with deteriorated credit quality
Balances, end of period
$ 549,055 $ 252,640 $
1,278
113
183
739
$ 550,446 $ 253,562 $
174,662 $ 403,054 $ 25,584 $ 20,901 $1,425,896
2,278
1,620
174,670 $ 404,600 $ 25,615 $ 20,901 $1,429,794
817
729
—
31
—
—
—
8
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, 2019 and 2018 (dollars in
thousands):
December 31, 2019
December 31, 2018
Amount
Percent of total
loans
Amount
Percent of total
loans
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
$
Total allowance for loan and lease losses
$
3,599
1,231
2,058
5,074
222
420
12,604
0.25% $
0.09%
0.14%
0.36%
0.02%
0.03%
0.89% $
3,309
1,005
2,431
5,036
105
227
12,113
0.23%
0.07%
0.17%
0.35%
0.01%
0.02%
0.85%
84
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, 2019
and 2018 (in thousands):
December 31, 2019
Unpaid
principal
balance
Recorded
investment
Related
allowance
Recorded
investment
December 31, 2018
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
$
$
2,617
1,091
117
1,351
23
—
5,199
—
—
—
—
—
—
—
5,199
$
$
2,621
1,327
132
2,173
41
—
6,294
—
—
—
—
—
—
—
6,294
$
$
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
1,391
922
8
1,546
31
—
3,898
—
—
—
—
—
—
—
3,898
$
$
1,775
1,204
18
6,350
56
—
9,403
—
—
—
—
—
—
—
9,403
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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, 2019, 2018 and 2017 (in thousands):
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
Year Ended
December 31, 2019
Year Ended
December 31, 2018
Year Ended
December 31, 2017
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
$
$
2,574 $
1,037
119
824
23
—
4,577
—
—
—
—
—
—
—
4,577 $
313 $
105
4
440
2
—
864
—
—
—
—
—
—
—
864 $
1,198 $
185
94
5,557
7
—
7,041
—
—
—
—
—
—
—
7,041 $
158 $
—
2
121
—
—
281
—
—
—
—
—
—
—
281 $
1,258 $
—
—
—
—
—
1,258
—
—
—
2,077
—
—
2,077
3,335 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
There was no interest income recognized on a cash basis for impaired loans for the years ended December 31, 2019,
2018 or 2017.
85
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
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, 2019 and 2018
by class of loans (in thousands):
December 31, 2019
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
December 31, 2018
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
30 - 59
Days
Past Due
60 - 89
Days
Past Due
Greater Than
89 Days
Past Due
Total
Past Due
$
$
$
$
372
3,642
653
1,277
67
—
6,011
300
69
—
54
52
—
475
$
$
$
$
— $
— $
474
15
8
—
—
497
227
75
—
—
—
—
302
$
$
$
643
—
440
33
—
1,116
$
— $
775
—
—
43
—
818
$
372
4,759
668
1,725
100
—
7,624
527
919
—
54
95
—
1,595
Loans Not
Past Due
$
559,527
251,338
142,443
392,683
28,326
38,161
$ 1,412,478
$
549,919
252,643
174,670
404,546
25,520
20,901
$ 1,428,199
$
Total
559,899
256,097
143,111
394,408
28,426
38,161
$ 1,420,102
$
550,446
253,562
174,670
404,600
25,615
20,901
$ 1,429,794
The following table presents the recorded investment in non-accrual loans, past due loans over 89 days and accruing
and troubled debt restructurings by class of loans as of December 31, 2019 and 2018 (in thousands):
December 31, 2019
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
December 31, 2018
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
Non-Accrual
Past Due
Over 89 Days
and Accruing
Troubled Debt
Restructurings
$
$
$
$
— $
894
117
440
13
—
1,464
$
— $
1,187
19
817
55
—
2,078
$
— $
12
—
—
26
—
38
$
— $
214
—
—
—
—
214
$
2,446
—
—
271
—
—
2,717
1,391
—
—
—
—
—
1,391
As of December 31, 2019 and 2018 all loans classified as nonperforming were deemed to be impaired.
86
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
As of December 31, 2019 and 2018 the Company had recorded investments in TDR of $2.7 million and $1.4
million, respectively. The Company did not allocate a specific allowance for those loans at December 31, 2019 or
2018 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.
The following table presents loans by class modified as TDR that occurred during the year ended December 31, 2019
(in thousands). There were no TDR identified during the years ended December 31, 2018 or 2017.
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
Year Ended
December 31, 2019
Pre modification
outstanding
recorded
investment
Post modification
outstanding
recorded
investment, net of
related allowance
Number of
contracts
1
—
—
1
—
—
2
$
$
1,228
—
—
271
—
—
1,499
$
$
1,228
—
—
271
—
—
1,499
There were no TDR for which there was a payment default within the twelve months following the modification
during the years ended December 31, 2019, 2018 or 2017.
A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.
Acquired Loans
On October 1, 2018, the Company acquired Athens (see Note 2 for more information). As a result of the acquisition,
the Company recorded loans with a fair value of $344.8 million. Of those loans, $1.7 million were considered to be
purchased credit impaired (“PCI”) loans, which are loans for which it is probable at the acquisition date that all
contractually required payments will not be collected. The remaining loans are considered to be purchased
non-impaired loans and their related fair value discount or premium is recognized as an adjustment to yield over the
remaining life of each loan.
The following table relates to acquired Athens PCI loans and summarizes the contractually required payments, which
includes principal and interest, expected cash flows to be collected, and the fair value of acquired PCI loans at the
acquisition date (in thousands):
Contractually required payments
Nonaccretable difference
Cash flows expected to be collected at acquisition
Accretable yield
Fair value of PCI loans at acquisition date
Athens Bancshares
acquisition on October
1, 2018
$
$
3,151
(1,049)
2,102
(436)
1,666
87
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following table relates to acquired Athens purchased non-impaired loans and provides the contractually required
payments, fair value, and estimate of contractual cash flows not expected to be collected at the acquisition date (in
thousands):
Contractually required payments
Fair value of acquired loans at acquisition date
Contractual cash flows not expected to be collected
The following table presents changes in the carrying value of PCI loans (in thousands):
Balance at beginning of period
Change due to payments received and accretion
Change due to loan charge-offs
Other
Balance at end of period
The following table presents changes in the accretable yield for PCI loans (in thousands):
Balance at beginning of period
Accretion
Reclassification from (to) nonaccretable difference
Other, net
Balance at end of period
Athens Bancshares
acquisition on October
1, 2018
$
$
$
$
$
404,692
343,167
1,807
For the year ended
December 31, 2019
1,620
(15)
—
—
1,605
For the year ended
December 31, 2019
440
(570)
1,045
—
915
PCI loans had no impact on the ALL for the years ended December 31, 2019, 2018 or 2017.
Leases
The Company has entered into various direct finance leases. The leases are reported as part of other loans. The lease
terms vary from five years to six years. The components of the direct financing leases as of December 31, 2019 and
2018 were as follows (in thousands):
Total minimum lease payments receivable
Less:
Unearned income
Net leases
December 31, 2019
59
$
December 31, 2018
379
$
$
(1)
58
$
(19)
360
The future minimum lease payments receivable under the direct financing leases as of December 31, 2019 were as
follows (in thousands):
Year ending December 31:
2020
2021
2022
2023
2024
$
$
58
—
—
—
—
58
88
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 5 – LOAN SERVICING
Mortgage loans serviced for the Federal Home Loan Mortgage Corporation (“FHLMC”) are not reported as assets.
The principal balance of these loans at December 31, 2019 and 2018 was $196.9 million and $170.1 million,
respectively. These servicing rights were acquired in our acquisition of Athens. Custodial escrow balances
maintained in connection with serviced loans was $324,000 and $462,000 at December 31, 2019 and 2018,
respectively.
Activity for loan servicing rights and the related valuation allowance are summarized as follows (in thousands):
Loan servicing rights:
Balance at beginning of period
Additions
Disposals
Amortized to offset other noninterest income
Change in valuation allowance
Balance at end of period
Valuation allowance:
Balance at beginning of period
Additions expensed
Reductions credited to other noninterest income
Direct write-downs
Balance at end of period
NOTE 6 – PREMISES AND EQUIPMENT
For the year ended
December 31, 2019
$
$
$
$
1,736
381
—
(362)
(211)
1,544
—
—
—
(211)
(211)
Premises and equipment at December 31, 2019 and 2018 are summarized as follows (in thousands):
Land
Buildings
Leasehold improvements
Furniture and equipment
Fixed assets in process
Less accumulated depreciation and amortization
Range of
useful lives
Not applicable
39 years
1 to 17 years
1 to 7 years
Not applicable
December 31,
2019
December 31,
2018
$
$
4,303
13,331
939
4,633
—
23,206
(4,022)
19,184
$
$
2,997
9,965
939
3,730
4,023
21,654
(2,833)
18,821
Premises and equipment depreciation and amortization expense for the years ended December 31, 2019, 2018 and
2017 totaled $1,219,000, $516,000 and $401,000, respectively.
NOTE 7 – LEASES
The Company leases certain premises and equipment under operating leases that expire at various dates, through 2032,
and in most instances, include options to renew or extend at market rates and terms. At December 31, 2019, the
Company had lease liabilities totaling $12.5 million and right-of-use assets totaling $11.7 million related to these
leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. At
December 31, 2019, the weighted average remaining lease term for operating leases was 10.7 years and the weighted
average discount rate used in the measurement of operating lease liabilities was 3.52%.
89
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Lease costs were as follows (in thousands):
Operating lease cost
Short-term lease cost
Variable least cost
Total lease cost
December 31, 2019
$
$
1,868
—
—
1,868
Rent expense for the year ended December 31, 2018, prior to the adoption of ASU 2016-02 was $1,677,000.
There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the
year ended December 31, 2019 or 2018.
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total
operating lease liability is as follows (in thousands):
Lease payments due:
2020
2021
2022
2023
2024
2025 and thereafter
Total undiscounted cash flows
Discount on cash flows
Total lease liability
December 31, 2019
$
$
1,562
1,590
1,476
1,425
1,130
7,710
14,893
(2,442)
12,451
NOTE 8 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The change in goodwill during the years ended December 31, 2019 and 2018 was as follows (in thousands):
Beginning of year
Acquired goodwill
Impairment
End of year
2019
2018
37,510
—
—
37,510
$
$
6,219
31,291
—
37,510
$
$
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At October 31, 2019, 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, 2019 and 2018 were as follows (in thousands):
Amortized intangible assets:
Core deposit intangibles
December 31, 2019
December 31, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
9,267
$
(2,384) $
9,267
$
(729)
90
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Aggregate amortization expense was $1,655,000 for 2019, $465,000 for 2018 and $48,000 for 2017.
Estimated amortization expense for each of the next five years is as follows (in thousands):
Year ending December 31:
2020
2021
2022
2023
2024
Thereafter
Total
$
$
1,477
1,299
1,121
943
764
1,279
6,883
NOTE 9 – OTHER REAL ESTATE OWNED
Other real estate owned activity was as follows (in thousands):
Beginning balance
Additions due to acquisition of Athens Bancshares
Loans transferred to other real estate owned
Direct write-downs
Sales of other real estate owned
End of year
2019
2018
2017
$
$
988
—
180
—
(124)
1,044
$
$
— $
988
—
—
—
988
$
—
—
—
—
—
—
There was no valuation allowance allocated to properties held for the years ended December 31, 2019, 2018 and 2017.
Expenses related to other real estate owned during the years ended December 31, 2019, 2018 and 2017, respectively
include (in thousands):
Net (gain) loss on sales
Provision for unrealized losses
Operating expenses, net of rental income
Total
NOTE 10 – DEPOSITS
2019
2018
2017
$
$
(3) $
—
—
(3) $
— $
—
—
— $
—
—
—
—
Time deposits that exceed the FDIC deposit insurance limit of $250,000 at December 31, 2019 and 2018 were
$53,481,000 and $98,086,000, respectively.
Scheduled maturities of time deposits for the next five years and thereafter are as follows (in thousands):
Maturity:
2020
2021
2022
2023
2024
Thereafter
$
$
222,163
53,077
16,255
8,369
2,975
613
303,452
At December 31, 2019 and 2018, the Company had $148,000 and $193,000, respectively of deposit accounts in
overdraft status that were reclassified to loans in the accompanying balance sheets.
91
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 11 – FEDERAL HOME LOAN BANK ADVANCES
The Company had outstanding borrowings totaling $10,000,000 and $125,000,000 at December 31, 2019 and 2018,
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):
Year
2019
2020
2021
2022
2023
2024
Thereafter
Total
December 31, 2019
Amount
—
10,000
—
—
—
—
—
10,000
$
Interest Rates
—
2.05%
—
—
—
—
—
2.05% $
December 31, 2018
Amount
Interest Rates
125,000
—
—
—
—
—
—
125,000
2.48%
—
—
—
—
—
—
2.48%
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 $683.1 million under a blanket mortgage
collateral agreement. At December 31, 2019, the amount of available credit from the FHLB totaled $201.4 million.
NOTE 12 – 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, 2019 and 2018 (in thousands):
Year Ended December 31, 2019
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, 2018
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
Losses on
Cash Flow
Hedges
Unrealized Gains
and Losses
on Available
for Sale
Securities
Unrealized
Losses on
Securities
Transferred to
Held to Maturity
Total
$
(2,636) $
(680) $
— $
(3,316)
826
4,815
—
5,641
(869)
(43)
(2,679) $
(73)
4,742
4,062 $
—
—
— $
(942)
4,699
1,383
(3,679) $
1,162 $
(10) $
(2,527)
1,891
(1,844)
20
67
(848)
1,043
(2,636) $
2
(1,842)
(680) $
(10)
10
— $
(856)
(789)
(3,316)
$
$
$
92
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, 2019, 2018 and 2017 (in thousands):
Details about Accumulated Other
Comprehensive Income Components
Unrealized losses on cash flow hedges
Unrealized gains and (losses) on
available-for-sale securities
Unrealized losses on securities transferred
to held-to-maturity
Year Ended
December 31,
2019
Year Ended
December 31,
2018
Year Ended
December 31,
2017
Affected Line Item
in the Statement Where
Net Income is Presented
$
$
$
$
$
$
(635) $
(441) $
(243)
9
(869) $
(99) $
26
(73) $
— $
—
— $
(479)
72
(848) $
3
(1)
2
$
$
(14) $
4
(10) $
(430)
(429)
89
Interest expense - money market
Interest expense - Federal Home
Loan Bank advances
Income tax benefit
(770) Net of tax
(66) Net gain (loss) on sale of securities
25
Income tax (expense) benefit
(41) Net of tax
(190)
73
Interest income - securities
Income tax benefit
(117) Net of tax
NOTE 13 – INCOME TAXES
The components of income tax expense are summarized as follows (in thousands):
Current:
Federal
State
Deferred:
Federal
State
Total
2019
2018
2017
$
$
3,215
1,044
4,259
2,039
546
2,585
6,844
$
$
$
15
(23)
(8)
872
303
1,175
1,167
$
214
36
250
4,218
167
4,385
4,635
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 21% to income before income taxes) for the years ended December
31, 2019, 2018 and 2017 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
Nondeductible merger expenses
Other
Total
$
93
2019
2018
2017
$
6,146
$
2,272
$
2,086
1,256
(302)
(173)
84
(57)
—
—
(110)
6,844
$
221
(298)
(559)
93
(857)
—
281
14
1,167
$
134
(418)
(197)
86
(632)
3,562
—
14
4,635
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, 2019 and 2018 were as follows (in thousands):
December 31, 2019
December 31, 2018
Deferred tax assets:
Allowance for loan losses
Net operating loss carryforward
Organization and preopening costs
Stock-based compensation
Acquired loans
Unrealized loss on securities available-for-sale
Accrued contributions
Other
Deferred tax assets
Deferred tax liabilities:
Depreciation
Goodwill
Unrealized gain on securities available-for-sale
Amortization of core deposit intangible
Other
Deferred tax liabilities
Net deferred tax asset
$
$
2,935
738
359
200
871
—
247
189
5,539
804
154
833
1,052
568
3,411
2,128
$
$
2,795
2,002
457
835
1,319
845
207
685
9,145
645
81
—
1,398
411
2,535
6,610
At December 31, 2019, the Company had federal net operating loss carryforwards of approximately $3,011,000,
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, 2019 or 2018. As of December 31,
2019 and 2018 the Company had no accrued interest or penalties related to uncertain tax positions.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as
commitments to extend credit and standby letters of credit, which are not included in the accompanying financial
statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional
amount of those instruments. The Company uses the same credit policies in making such commitments as it does for
instruments that are included in the balance sheet.
The following table sets forth outstanding financial instruments whose contract amounts represent credit risk as of
December 31, 2019 and 2018 (in thousands):
Financial instruments whose contract amounts represent
credit risk:
Unused commitments to extend credit
Standby letters of credit
Total
Contract or notional amount
December 31, 2019
December 31, 2018
$
$
672,933
9,634
682,567
$
$
707,675
12,273
719,948
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, 2019, will not have a material impact on
the financial statements of the Company.
94
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 15 – 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 areas. The concentrations of credit by type of loan are set forth in Note 4 to the financial
statements.
At December 31, 2019 and 2018, the Company’s cash and due from banks, federal funds sold and interest-bearing
deposits in financial institutions aggregated $86,000,000 and $89,000,000, respectively, in excess of insured limits.
NOTE 16 – 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, 2019, the Company and the Bank met all regulatory capital adequacy requirements to which they are
subject.
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
regulators have established 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.
At December 31, 2019 and 2018, 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.
95
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The Company’s and the Bank’s capital amounts and ratios are presented in the following table (dollars in thousands):
At December 31, 2019:
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, 2018:
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
Actual
Minimum capital
requirement (1)
Amount
Ratio
Amount
Ratio
Minimum to be
well-capitalized (2)
Ratio
Amount
$ 237,857
224,443
13.45% $ 141,436
141,388
12.70
8.0%
8.0
N/A
176,735
225,074
211,660
12.73
11.98
106,077
106,041
225,074
195,160
225,074
211,660
12.73
11.04
11.37
10.70
79,558
79,531
79,201
79,150
6.0
6.0
4.5
4.5
4.0
4.0
N/A
141,388
N/A
114,878
N/A
98,938
$ 222,030
201,972
12.84% $ 138,336
138,294
11.68
8.0%
8.0
N/A
172,868
209,738
189,680
12.13
10.97
103,752
103,721
200,738
173,180
209,738
189,680
11.61
10.02
11.06
10.01
77,814
77,791
75,867
75,828
6.0
6.0
4.5
4.5
4.0
4.0
N/A
138,294
N/A
112,364
N/A
94,785
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
(1) For the calendar year 2019, the Company was required to maintain a capital conservation buffer of Tier 1
common equity capital in excess of minimum risk-based capital ratios by at least 1.875% 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.
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 $35.8 million and $22.2 million of dividends as of December
31, 2019 and 2018, respectively. The Bank paid the Company $3.5 million of dividends during 2019 and this amount
was paid out to shareholders by the Company during 2019.
96
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 17 – 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. During 2019, 132,561 shares of nonvoting common stock were converted to common stock. As a
result, at December 31, 2019, there were no shares of nonvoting common stock outstanding.
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. During 2019, 878,048 preferred shares were converted to common shares. As a
result, at December 31, 2019, there was no Series A Preferred Stock outstanding.
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 were exercisable at any time and expired ten years from the date of grant of July 14,
2008. As of December 31, 2019, all of these warrants have been exercised and none of these warrants remain
outstanding.
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 expired ten years from
date of grant of July 14, 2008. As of December 31, 2019, all of these warrants have been exercised and no 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 expired ten years from date of grant of
July 14, 2008. As of December 31, 2019, all of these warrants have been exercised and no warrants remain
outstanding.
NOTE 18 – 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.
Pursuant to the terms of the SARSA, we received a request from certain shareholders party to the SARSA to register
3,652,094 shares of our common stock on a registration statement on Form S-3 (the “Registration Statement”) in
December 2018. The Registration Statement was filed with the SEC on December 21, 2018. Subsequently, during
2019, the Corsair Funds exited their positions in the Company’s shares.
97
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 19 – 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. During
2018 the board of directors approved the addition of 400,000 shares of stock for issuance of stock incentives under the
Plan. Total shares issuable under the plan were 362,757 at December 31, 2019.
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
Restricted Shares
For the year ended December 31,
2018
2017
2019
$
$
1,262
(330)
932
$
$
2,079
(543)
1,536
$
$
1,061
(406)
655
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 2019
follows:
Nonvested Shares
Nonvested at beginning of period
Granted
Vested
Forfeited
Nonvested at end of period
Restricted
Shares
157,616
31,683
(83,062)
(21,540)
84,697
$
$
Weighted
Average
Grant Date
Fair Value
17.00
15.86
15.93
17.72
17.44
As of December 31, 2019, there was $1,564,000 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 1.6 years. The total
fair value of shares vested during the years ended December 31, 2019, 2018 and 2017 was $1,352,000, $2,804,000 and
$1,174,000, 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 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.
98
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The fair value of options granted was determined using the following weighted average assumptions as of the grant
date. The Company granted 50,000 options during 2019. There were no options granted during 2018.
Dividend yield
Expected term (in years)
Expected stock price volatility
Risk-free interest rate
A summary of the activity in stock options for 2019 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
Shares
507,903
50,000
(286,701)
—
271,202
271,086
214,952
Information related to stock options during 2019, 2018 and 2017 follows:
Intrinsic value of options exercised
Cash received from option exercises
Tax benefit realized from option exercises
Weighted average fair value of options granted
$
2019
2,478,086
1,930,737
103,847
5.35
2019
1.35%
6.50
29.55%
2.25%
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (years)
8.66
14.84
7.33
—
11.22
11.22
10.32
4.9
4.9
3.8
2018
7,654,738
6,897,845
846,725
—
$
2017
2,010,536
2,013,840
774,056
—
$
$
$
$
$
As of December 31, 2019, there was $216,000 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 2.4 years.
NOTE 20 – 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 21 – 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, 2019, 2018 and 2017, the Company contributed $874,000, $639,000 and $550,000, 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.
99
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 22 – 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.
Interest Rate Swaps Designated as Cash Flow Hedges
There were no interest rate swaps designated as cash flow hedges as of December 31, 2019. A forward starting interest
rate swap with a notional amount totaling $20 million as of December 31, 2018 was designated as a cash flow hedge of
certain liabilities and was determined to be fully effective during all periods presented. As such, no amount of
ineffectiveness was included in net income. Therefore, the aggregate fair value of the swaps was recorded in other
liabilities with changes in fair value recorded in other comprehensive income. The Company terminated the interest
rate swap during 2019, which resulted in a termination fee of $1.5 million. Cash flow swaps that have been terminated
resulting in cash settlement equal to previously unrealized gains or losses are included in accumulated other
comprehensive income and are being amortized to net income over the remaining contractual terms of the swaps.
Summary information about the interest-rate swaps designated as cash flow hedges was as follows (dollars in
thousands):
December 31,
2019
December 31,
2018
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
$
$
$
3.54%
20,000
— $
—
— 3 month LIBOR
4.5 years
—
(836)
— $
— $
(617)
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 $2,038,000 at December 31, 2018. There was no collateral posted to or
from the counterparties as of December 31, 2019.
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
Mortgage Banking Derivatives
December 31, 2019
December 31, 2018
Notional
amount
Estimated
fair value
Notional
amount
Estimated
fair value
$
$
45,053
45,053
90,106
$
$
(926) $
926
— $
29,126
29,126
58,252
$
$
24
(24)
—
The Company enters into various derivative agreements with customers in the form of interest-rate lock commitments
which are commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to
funding and the customers have locked into that interest rate. The derivatives are valued using a model that utilizes
market interest rates and other unobservable inputs. Changes in the fair value of these commitments due to
fluctuations in interest rates that are to be originated to our loans held for sale portfolio are economically hedged
through the use of forward sale commitments of mortgage-backed securities. The gains and losses arising from this
derivative activity are reflected in current period earnings under mortgage banking income. Interest rate lock
commitments are valued using a model with significant unobservable market parameters. Forward sale commitments
are valued based on quoted prices for similar assets in an active market with inputs that are observable.
100
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The net gains (losses) relating to mortgage banking derivative instruments included in mortgage banking income were
as follows (dollars in thousands):
Mortgage loan interest rate lock commitments
Mortgage-backed securities forward sales commitments
Total
For the year ended
December 31, 2019
$
$
648
(148)
500
There were no gains or losses relating to mortgage banking derivative instruments for the years ended December 31,
2018 and 2017.
The amount and fair value of mortgage banking derivatives included in the consolidated balance sheets was as follows
(dollars in thousands):
December 31, 2019
December 31, 2018
Notional
amount
Estimated
fair value
Notional
amount
Estimated
fair value
Included in other assets:
Mortgage loan interest rate lock commitments
Included in other liabilities:
Mortgage-backed securities forward sales
commitments
$
$
44,694
$
648
$
— $
38,500
$
148
$
— $
—
—
NOTE 23 – 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, 2019 or 2018. Activity within
these loans during the years ended December 31, 2019 and 2018 was as follows (in thousands):
Year ended December 31, 2019
Beginning of period
New commitments/draw downs
Repayments
End of period
Year ended December 31, 2018
Beginning of period
New commitments/draw downs
Repayments
End of period
Total
commitment
Total funded
commitment
$
$
$
$
44,812
9,336
(32,333)
21,815
49,409
3,631
(8,228)
44,812
$
$
$
$
15,445
2,515
(7,287)
10,673
21,890
1,038
(7,483)
15,445
Deposits from directors, executive officers, significant shareholders and their affiliates at December 31, 2019 and
2018 were $13.7 million and $11.4 million, respectively.
101
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 24 – 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:
Level 2:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability
to access as of the measurement date.
Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be
corroborated by observable market data.
Level 3:
Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions
that market participants would use in pricing an asset or liability.
The 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 carried at fair value at December 31, 2019 or 2018.
102
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Loans Held For Sale: Loans held for sale are carried at either fair value, if elected, or the lower of cost or fair value on
a pool-level basis. Origination fees and costs for loans held for sale recorded at lower of cost or market are capitalized
in the basis of the loan and are included in the calculation of realized gains and losses upon sale. Origination fees and
costs are recognized in earnings at the time of origination for loans held for sale that are recorded at fair value. Fair
value is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other
observable market data, such as outstanding commitments from third party investors (Level 2). There were no loans
held for sale carried at fair value at December 31, 2018.
Interest rate lock commitments that relate to the
Derivatives-Mortgage Loan Interest Rate Lock Commitments:
origination of mortgage loans that will be held for sale are recorded at fair value, determined as the amount that would
be required to settle each derivative instrument at the balance sheet date. The fair value of the interest rate lock
commitment is derived from the fair value of related mortgage loans, which is based on observable market data and
includes the expected net future cash flows related to servicing of the loans.
In estimating the fair value of an interest
rate lock commitment, the Company assigns a probability to the interest rate lock commitment based on an
expectation that it will be exercised and the loan will be funded (a “pull through” rate). The expected pull through
rates are applied to the fair value of the unclosed mortgage pipeline, resulting in a Level 3 fair value classification. The
pull through rate is a statistical analysis of our actual rate lock fallout history to determine the sensitivity of the
residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market
prices are applied based on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull through rate)
are applied accordingly. Significant increases (decreases) in the pull through rate in isolation result in a significantly
higher (lower) fair value measurement. Changes to the fair value of interest rate lock commitments are recognized
based on interest rate changes, changes in the probability that the commitment will be exercised, and the passage of
time.
Derivatives-Mortgage-Backed Securities Forward Sales Commitments: The Company utilizes mortgage-backed
securities forward sales commitments to hedge mortgage loan interest rate lock commitments. Mortgage-backed
securities forward sales commitments are recorded at fair value based on quoted prices for similar assets in an active
market with inputs that are observable, resulting in a Level 2 fair value classification.
.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
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
Loans held for sale
Derivative assets:
Non-hedging derivatives:
Interest rate swaps - customer related
Mortgage loan interest rate lock commitments
Liabilities:
Derivative liabilities:
Non-hedging derivatives:
Interest rate swaps - customer related
Mortgage-backed securities forward sales
commitments
Fair value measurements at December 31, 2019
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Carrying
Value
$
$
10,331
45,960
138,679
3,197
14,962
168,222
$
— $
—
—
—
—
—
10,331
45,960
138,679
3,197
14,962
168,222
926
648
(926)
(148)
—
—
—
—
926
—
(926)
(148)
—
—
—
—
—
—
—
648
—
—
103
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Fair value measurements at December 31, 2018
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
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
Derivatives:
Interest rate swaps - customer related
$
$
10,706
61,926
144,158
15,284
11,734
494
Liabilities:
Derivatives:
Interest rate swaps - customer related
Interest rate swaps - cash flow hedges
(494)
(836)
$
— $
—
—
—
—
10,706
61,926
144,158
15,284
11,734
—
—
—
494
(494)
(836)
—
—
—
—
—
—
—
—
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the nine months ended December 31, 2019 and 2018 (dollars in thousands):
Balance of recurring Level 3 assets at January 1st
Total gains or losses for the period:
Included in mortgage banking income
Balance of recurring Level 3 assets at December 31st
Mortgage Loan Interest Rate
Lock Commitments
2019
2018
$
$
— $
648
648
$
—
—
—
The following table presents quantitative information about recurring Level 3 fair value measurements at December
31, 2019 (dollars in thousands). There were no Level 3 fair value measurements at December 31, 2018.
December 31, 2019
Assets:
Non-hedging derivatives:
Mortgage loan interest rate lock
commitments
Fair
Value
Valuation
Technique(s)
Unobservable Input(s)
Range
(Weighted-
Average)
$
648 Consensus pricing
Origination
pull-through rate
68% - 95%
(83%)
There were no assets measured at fair value on a nonrecurring basis at December 31, 2019 and 2018.
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, 2019 and 2018
were as follows (in thousands):
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
Accrued interest receivable
Other assets
Financial liabilities:
December 31, 2019
December 31, 2018
Carrying
amount
Fair value
Carrying
amount
Fair value
Fair value
level of input
$ 101,094 $ 101,094 $
175
213,129
3,313
168,222
13,689
1,420,102
5,792
175
213,129
3,411
169,072
N/A
1,414,757
5,792
94,681 $
10,762
243,808
3,734
57,618
12,038
1,429,794
5,964
94,681
10,762
243,808
3,785
58,596
N/A
1,442,082
5,964
36,393
36,393
34,489
34,489
Level 1
Level 1
Level 2
Level 2
Level 2
N/A
Level 3
Level 2
Level 2 /
Level 3
Deposits
Federal Home Loan Bank advances
Other liabilities
1,729,451
10,000
1,394
1,730,206
10,014
1,394
1,570,008
125,000
2,753
1,572,880
126,548
2,753
Level 3
Level 2
Level 3
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
(a)
Cash and Due from Banks, Interest-Bearing Deposits in Financial Institutions
For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
(b)
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
In accordance with the adoption of ASU 2016-01, the fair value of loans is measured using an exit price notion.
Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the
underlying collateral.
(e)
Accrued interest receivable
The carrying amount of accrued interest approximates fair value.
(f)
Other Assets
Included in other assets are bank owned life insurance and certain interest rate swap agreements. The fair values
of interest rate swap agreements are based on independent pricing services that utilize pricing models with
observable market inputs. For bank owned life insurance, the carrying amount is based on the cash surrender
value and is a reasonable estimate of fair value.
105
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
(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)
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.
(i)
Other Liabilities
Included in other liabilities are accrued interest payable and certain interest rate swap agreements. The fair
values of interest rate swap agreements are based on independent pricing services that utilize pricing models
with observable market inputs. The carrying amounts of accrued interest approximate fair value.
(j)
Off-Balance Sheet Instruments
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’
credit standing. The fair value of commitments is not material.
(k)
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information
about the financial instruments. These estimates do not reflect any premium or discount that could result from
offering for sale at one time the 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 25 – 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, 2019 and 2018 (in thousands).
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, 2019
December 31, 2018
$
$
$
$
12,874
259,632
578
273,084
38
273,046
273,084
$
$
$
19,918
234,263
499
254,680
301
254,379
254,680
106
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Condensed Income Statements
Income - dividends from subsidiary
Expenses
Income before income taxes and equity in undistributed net income of subsidiary
Income tax benefit
Income before equity in undistributed net income of subsidiary
Equity in undistributed net income of subsidiary
Net income
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in other assets
Increase (Decrease) in other liabilities
Equity in undistributed net income of subsidiary
Net cash provided by operating activities
Cash flows from investing activities:
Cash received from acquisitions, net
Net cash provided by investing activities
Cash flows from financing activities:
Repurchase of common stock
Exercise of common stock options and warrants
Common and preferred stock dividends paid
Net cash provided by (used in) 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
Year Ended
December 31, 2019
3,530
$
1,083
2,447
(262)
2,709
19,713
22,422
$
Year Ended
December 31, 2018
1,225
$
1,054
171
(242)
413
9,242
9,655
$
Year Ended
December 31, 2019
Year Ended
December 31, 2018
$
22,422
$
9,655
(78)
(263)
(19,713)
2,368
—
—
(7,836)
1,931
(3,507)
(9,412)
(7,044)
19,918
12,874
$
(221)
181
(9,242)
373
1,421
1,421
—
5,260
(1,244)
4,016
5,810
14,108
19,918
$
107
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 26 – QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following is a summary of quarterly financial results (unaudited) for 2019, 2018 and 2017:
2019
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 tax expense
Income tax expense
Net income
Net income per share, basic
Net income per share, diluted
2018
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 (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted
2017
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 (loss) before income tax expense
Income tax expense (benefit)
Net income (loss)
Net income (loss) per share, basic
Net income (loss) per share, diluted
First Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
22,967
5,965
17,002
886
16,116
4,735
14,725
6,126
1,346
4,780
0.27
0.25
13,744
2,898
10,846
678
10,168
3,088
9,580
3,676
483
3,193
0.27
0.25
11,979
2,047
9,932
3,405
6,527
2,133
8,376
284
(47)
331
0.03
0.03
$
$
$
$
$
$
$
$
$
$
$
$
23,158
6,150
17,008
—
17,008
7,032
16,470
7,570
1,814
5,756
0.33
0.31
15,354
3,767
11,587
169
11,418
2,765
10,005
4,178
665
3,513
0.30
0.27
$
$
$
$
$
$
$
$
$
12,891
2,320
10,571
9,690
881
2,666
8,217
(4,670)
(1,328)
(3,342) $
(0.30) $
(0.26) $
23,216
6,060
17,156
(125)
17,281
6,788
15,531
8,538
2,072
6,466
0.36
0.35
15,782
4,239
11,543
481
11,062
3,218
10,070
4,210
554
3,656
0.30
0.28
13,521
2,678
10,843
(195)
11,038
3,372
8,475
5,935
1,516
4,419
0.39
0.35
$
$
$
$
$
$
$
$
$
$
$
$
22,205
5,624
16,581
—
16,581
5,719
15,266
7,034
1,613
5,421
0.30
0.29
22,900
5,184
17,716
1,514
16,202
6,387
23,832
(1,243)
(535)
(708)
(0.04)
(0.04)
13,124
2,606
10,518
(30)
10,548
2,736
8,699
4,585
4,494
91
0.01
0.01
108
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 27 – SUBSEQUENT EVENTS
On January 23, 2020, we announced the signing of definitive merger agreements with FCB Corporation (“FCB”), its
wholly owned subsidiary The First National Bank of Manchester (“FNBM”), and The Bank of Waynesboro (“BOW”)
providing for FCB to merge with and into CapStar Financial Holdings, Inc. and for FNBM and BOW to merge with
and into CapStar Bank. Under the terms of the merger agreements, FCB and BOW shareholders will receive
3,634,218 CapStar common shares and $26.4 million in cash, subject to certain adjustments, totaling $85.1 million
based on the closing price of CapStar’s common stock on January 22, 2020. Pending regulatory and shareholder
approvals and the satisfaction of certain other customary closing conditions, the acquisition is expected to be finalized
in late second or early third quarter of 2020. As of December 31, 2019, FCB and BOW had total combined assets of
$467 million.
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 Report, 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, 2019, 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
The management of the Company is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company's internal control system was designed to provide reasonable assurance to the
Company's management and Board of Directors regarding the preparation and fair presentation of the financial
statements. As of December 31, 2019, 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 there were no material
weaknesses in the Company’s internal control over financial reporting and that the Company maintained effective
internal control over financial reporting as of December 31, 2019.
Attestation Report of the Registered Public Accounting Firm
Elliott Davis, LLC, the Company’s independent registered public accounting firm, audited the consolidated financial
statements of the Company included in this Report. Their report is included in “Part II, Item 8.—Financial Statements,
Supplementary Data and Financial Statement Schedules” under the heading “Report of Independent Registered Public
Accounting Firm.” This Annual Report does not include an attestation report of the Company's independent registered
public accounting firm on the Company’s internal control over financial reporting due to a transition period
established by rules of the Securities and Exchange Commission for an Emerging Growth Company.
ITEM 9B. OTHER INFORMATION
Not applicable.
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 2020 Annual Meeting of Shareholders which will be filed with the SEC
within 120 days of December 31, 2019.
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 2020 Annual Meeting of Shareholders which will be filed with the SEC
within 120 days of December 31, 2019.
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,
2019:
Plan Category
Equity compensation plans approved by shareholders:
CapStar Financial Holdings, Inc. Stock Incentive Plan
Equity compensation plans not approved by shareholders
Total
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)
Number of shares
remaining
available for
future issuances
under equity
compensation
plans (excluding
shares reflected
in column (a))
(c)
271,202 (1)$
—
271,202 (1)$
11.22
—
11.22
362,757
—
362,757
(1) Represents 271,202 shares of common stock subject to issuance upon exercise of issued and outstanding stock
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 2020 Annual Meeting of Shareholders which will be filed with the SEC
within 120 days of December 31, 2019.
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 2020 Annual Meeting of Shareholders which will be filed with the SEC
within 120 days of December 31, 2019.
ITEM 14. PRINCIPAL ACCOUNTANT 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 2020 Annual Meeting of Shareholders which will be filed with the SEC
within 120 days of December 31, 2019.
111
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The following is a list of documents filed as a part of this Report:
(1)
Financial Statements
The following consolidated financial statements of CapStar and its subsidiary and related reports of
our independent registered public accounting firm are incorporated into this Item 15 by reference
from Part II - Item 8, pages 60 through 109.
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Income for the years ended December 2019, 2018, and 2017
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018
and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, 2017
Notes to Consolidated Financial Statements
(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.
112
Exhibit
Number
2.1
2.2
2.3
2.4
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)
Agreement and Plan of Merger, dated as of June 11, 2018, by and between CapStar Financial Holdings,
Inc. and Athens Bancshares Corporation (incorporated by reference herein to Exhibit 2.1 to the
Company’s Current Report on Form 8-K filed on June 14, 2018)
Agreement and Plan of Merger, dated as of January 23, 2020, by and between CapStar Financial Holdings,
Inc. and FCB Corporation (incorporated by reference herein to Exhibit 2.1 to the Company’s Current
Report on Form 8-K filed on January 29, 2020)
Plan of Bank Merger, dated as of January 23, 2020, by and among CapStar Financial Holdings, Inc.,
CapStar Bank and The Bank of Waynesboro (incorporated by reference herein to Exhibit 2.2 to the
Company’s Current Report on Form 8-K filed on January 29, 2020)
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)
Amended and Restated Bylaws of Capstar Financial Holdings, Inc. (incorporated by reference herin to
Exhibit 3.1 to the Company’s Current Report on Form 8-K on October 28, 2019)
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)
4.3
Description of Registrant’s Securities, registered pursuant to Section 12 of the Securities Exchange Act of
1934*
10.1†
10.2†
10.3†
10.4†
Executive Employment Agreement, dated May 13, 2019, between CapStar Financial Holdings, Inc.,
CapStar Bank, and Timothy K. Schools (incorporated by reference herein to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed on May 17, 2019)
Non-Qualified Stock Option Agreement, dated May 22, 2019, between CapStar Financial Holdings, Inc.,
CapStar Bank, and Timothy K. Schools (incorporated by reference herein to Exhibit 10.3 to the
Company’s Quarterly Report on Form 10-Q filed on August 7, 2019)
Fourth Amended and Restated Executive Employment Agreement between CapStar Financial Holdings,
Inc., CapStar Bank and Robert B. Anderson, dated as of December 28, 2018 (incorporated by reference
herein to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 4, 2019)
CapStar Financial Holdings, Inc. Restricted Stock Agreement between CapStar Financial Holdings, Inc.
and Robert B. Anderson, dated as of December 28, 2018 (incorporated by reference herein to Exhibit 10.3
to the Company’s Current Report on Form 8-K filed on January 4, 2019)
10.5†
Promissory Note between CapStar Bank and Robert B. Anderson, dated December 28, 2018 (incorporated
by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on January 4, 2019)
113
10.6†
10.7†
10.8†
10.9†
Second Amended and Restated Executive Employment Agreement between CapStar Bank and
Christopher Tietz, dated as of December 28, 2018 (incorporated by reference herein to Exhibit 10.5 to the
Company’s Current Report on Form 8-K filed on January 4, 2019)
CapStar Financial Holdings, Inc. Restricted Stock Agreement between CapStar Financial Holdings, Inc.
and Christopher Tietz, dated as of December 28, 2018 (incorporated by reference herein to Exhibit 10.6 to
the Company’s Current Report on Form 8-K filed on January 4, 2019)
Promissory Note between CapStar Bank and Christopher Tietz, dated December 28, 2018 (incorporated
by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on January 4, 2019)
Eighth Amended and Restate Executive Employment Agreement, dated May 13, 2019, between CapStar
Financial Holdings, Inc., CapStar Bank, and Claire W. Tucker (incorporated by reference herein to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on May 17, 2019)
10.10† 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)
10.11†
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)
10.12†
Second Amendment to the CapStar Financial Holdings, Inc. Stock Incentive Plan (incorporated by
reference herein to Appendix A to the Company’s Definitive Proxy Statement filed on March 19, 2018)
10.13† 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)
10.14† 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)
10.15† 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)
10.16† 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)
10.17
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)
10.18† Athens Bancshares Corporation 2010 Equity Incentive Plan and related form agreement (incorporated by
reference herein to Exhibit 4.5 to the Company’s Registration Statement on Form S-8 (File Number
333-227625) filed on October 1, 2018)
10.19
Securities Purchase Agreement, dated September 9, 2019, between CapStar Financial Holdings, Corsair
III Financial Services Capital Partners, L.P., and Corsair III Financial Services Offshore 892 Partners, L.P.
(incorporated by reference herein to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
September 9, 2019)
114
21.1
Subsidiaries of CapStar Financial Holdings, Inc.*
23.1
31.1
31.2
32.1
32.2
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.*
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.
115
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 6, 2020
CAPSTAR FINANCIAL HOLDINGS, INC.
By: /s/ Timothy K. Schools
Timothy K. Schools
President and 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.
Signature
/s/ Timothy K. Schools
Timothy K. Schools
/s/ Robert B. Anderson
Robert B. Anderson
/s/ Dennis C. Bottorff
Dennis C. Bottorff
/s/ L. Earl Bentz
L. Earl Bentz
/s/ Jeffrey L. Cunningham
Jeffrey L. Cunningham
/s/ Thomas R. Flynn
Thomas R. Flynn
/s/ Julie D. Frist
Julie D. Frist
/s/ Louis A. Green III
Louis A. Green III
/s/ Myra NanDora Jenne
Myra NanDora Jenne
/s/ Dale W. Polley
Dale W. Polley
/s/ Stephen B. Smith
Stephen B. Smith
/s/ James S. Turner, Jr.
James S. Turner, Jr.
/s/ Toby S. Wilt
Toby S. Wilt
Title
Date
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
March 6, 2020
Director, President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer and Chief Administrative Officer
(Principal Financial Officer and Principal Accounting Officer)
Chairman
Director
Director
Director
Vice Chair
Director
Director
Vice Chair
Director
Director
Director
116
FINANCIAL HOLDINGS, INC.