FINANCIAL HOLDINGS, INC.
2021
Annual Report
TO OUR BUSINESS
PARTNERS,
Three years ago, we embarked on a journey to become “one of Tennessee’s great banks.” We envisioned
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all we do … and winning!
Simple, Focused and Disciplined Business Model
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We are focused. And, we are disciplined in everything we do.
d
Target Customer
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businesses, professionals, commercial real estate investors and relationship retail.
Strategy
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Delivery
Employees are our most important asset. We work tirelessly to attract and retain
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customer experience.
!
Goals
We are a sales organization (cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:75)(cid:68)(cid:83)(cid:83)(cid:72)(cid:81)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:69)(cid:68)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74)(cid:17)(cid:3)(cid:50)(cid:88)(cid:85)(cid:3)(cid:74)(cid:82)(cid:68)(cid:79)(cid:3)(cid:76)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:3)
meaningful relationships and operate in a manner that generates high returns on
capital and stable growth in book value per share.
Annualized Loan Production
$296M
(cid:21)(cid:19)(cid:20)(cid:28)
$445M
(cid:21)(cid:19)(cid:21)(cid:19)
$674M
(cid:21)(cid:19)(cid:21)(cid:20)
$1B
(cid:23)(cid:52)(cid:21)(cid:20)
2021 Performance
Four Strategic Objectives
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we have communicated and are executing four strategic objectives. These objectives have allowed our
employees to engage in new ways and inspired creative outcomes, making us better teammates and a
better company. It is exciting to celebrate the tremendous progress that has been achieved. It is equally
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1. (cid:40)(cid:81)(cid:75)(cid:68)(cid:81)(cid:70)(cid:72)(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:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:76)(cid:86)(cid:87)(cid:72)(cid:81)(cid:70)(cid:92)
2. Accelerate organic growth
3. Maintain sound risk management
4. Execute disciplined capital allocation
Four Key Drivers
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To ensure success, we believe it is important for all employees to understand our purpose, what our goals
are, how we are doing, and how each employee’s unique job can positively impact results. We measure
what matters. In the spirit of simplicity and focus, we track and communicate four key ratios we feel are the
key drivers of our performance – the algebra of banking.
Revenue
Growth
Net Interest
Margin
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Ratio
Net
Charge-Offs
(cid:42)(cid:82)(cid:68)(cid:79)(cid:29)(cid:3)(cid:33)(cid:32)(cid:3)(cid:24)(cid:8)
(cid:42)(cid:82)(cid:68)(cid:79)(cid:29)(cid:3)(cid:33)(cid:32)(cid:3)(cid:22)(cid:17)(cid:25)(cid:19)(cid:8)
(cid:42)(cid:82)(cid:68)(cid:79)(cid:29)(cid:3)(cid:31)(cid:32)(cid:3)(cid:24)(cid:24)(cid:8)
(cid:42)(cid:82)(cid:68)(cid:79)(cid:29)(cid:3)(cid:31)(cid:32)(cid:3)(cid:19)(cid:17)(cid:21)(cid:24)(cid:8)
2021 Key Results
• Record revenue of $133.9 million
• Record pre-tax pre-provision income to assets(cid:20) of 1.94%
• Record net income of $48.7 million
• Record return on tangible equity(cid:20) of 15.53%
• Record earnings per share(cid:20) of $2.21
• Record tangible book value per share growth of 12.2%
• Record return on assets(cid:20) of 1.57%
• Record total risk-based capital of 16.29%
2021 Key Accomplishments
•
•
•
d
Record total
deposit, noninterest deposit, and loan balances
d
Record total
loan production and commercial loan pipeline
Record deposit service charges and Interchange, SBA, Tri-Net, and Wealth Management revenues
• Government Guaranteed Lending division ranked second in metro Nashville and third across
Tennessee based on total production
• (cid:36)(cid:88)(cid:87)(cid:75)(cid:82)(cid:85)(cid:76)(cid:93)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)sizable share repurchase
•
(cid:40)(cid:86)(cid:87)(cid:68)(cid:69)(cid:79)(cid:76)(cid:86)(cid:75)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:54)(cid:82)(cid:88)(cid:87)(cid:75)(cid:72)(cid:68)(cid:86)(cid:87)(cid:72)(cid:85)(cid:81)(cid:3)(cid:54)(cid:70)(cid:75)(cid:82)(cid:82)(cid:79)(cid:3)(cid:82)(cid:73)(cid:3)(cid:37)(cid:68)(cid:81)(cid:78)(cid:76)(cid:81)(cid:74) CapStar Diversity Scholarship
• (cid:50)(cid:85)(cid:74)(cid:68)(cid:81)(cid:76)(cid:70)(cid:3)(cid:72)(cid:91)(cid:83)(cid:68)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)Chattanooga
(cid:11)(cid:20)(cid:12)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:81)(cid:82)(cid:81)(cid:16)(cid:42)(cid:36)(cid:36)(cid:51)(cid:3)(cid:178)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:80)(cid:72)(cid:68)(cid:86)(cid:88)(cid:85)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:3)(cid:42)(cid:36)(cid:36)(cid:51)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:80)(cid:72)(cid:87)(cid:85)(cid:76)(cid:70)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:86)(cid:72)(cid:3)(cid:76)(cid:87)(cid:72)(cid:80)(cid:86)(cid:30)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:3)(cid:88)(cid:86)(cid:72)(cid:3)(cid:68)(cid:3)(cid:69)(cid:79)(cid:72)(cid:81)(cid:71)(cid:72)(cid:71)(cid:3)
(cid:86)(cid:87)(cid:68)(cid:87)(cid:88)(cid:87)(cid:82)(cid:85)(cid:92)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:21)(cid:25)(cid:17)(cid:20)(cid:23)(cid:8)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:91)(cid:70)(cid:79)(cid:88)(cid:71)(cid:72)(cid:3)(cid:80)(cid:72)(cid:85)(cid:74)(cid:72)(cid:85)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:76)(cid:87)(cid:72)(cid:80)(cid:86)(cid:17)
Advantageous Position in Attractive Markets
(cid:38)(cid:82)(cid:80)(cid:69)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:76)(cid:80)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:74)(cid:76)(cid:70)(cid:3)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:76)(cid:81)(cid:74)(cid:15)
the company has an inherent advantage of operating in the best
markets within one of the nation’s best states. With our recent
(cid:72)(cid:91)(cid:83)(cid:68)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:76)(cid:81)(cid:87)(cid:82)(cid:3)(cid:38)(cid:75)(cid:68)(cid:87)(cid:87)(cid:68)(cid:81)(cid:82)(cid:82)(cid:74)(cid:68)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:82)(cid:89)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:21)(cid:20)(cid:15)(cid:3)(cid:90)(cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:81)(cid:82)(cid:90)
located in the three fastest growing and most dynamic markets in
(cid:55)(cid:72)(cid:81)(cid:81)(cid:72)(cid:86)(cid:86)(cid:72)(cid:72)(cid:17)(cid:3)(cid:43)(cid:76)(cid:86)(cid:87)(cid:82)(cid:85)(cid:76)(cid:70)(cid:68)(cid:79)(cid:79)(cid:92)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:82)(cid:88)(cid:87)(cid:75)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:178)(cid:87)(cid:72)(cid:71)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:178)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)
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and all indications are it will continue well into the future.
In 4Q21, CapStar entered
Chattanooga, where today
we have approximately
$100 million in loan growth.
A multiplier to strong organic growth is the
high level of disruption occurring from both
large and small acquisitions. The disruption to
customers and employees is enormous.
As of the writing of this letter, the state’s largest headquartered bank which has served its customers well
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(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:68)(cid:70)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:83)(cid:82)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:68)(cid:81)(cid:81)(cid:82)(cid:88)(cid:81)(cid:70)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:70)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:3)(cid:68)(cid:3)(cid:87)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:71)(cid:82)(cid:88)(cid:86)(cid:3)(cid:82)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:88)(cid:81)(cid:76)(cid:87)(cid:92)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:38)(cid:68)(cid:83)(cid:54)(cid:87)(cid:68)(cid:85)(cid:17)
$2.0
(cid:37)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49)
$2.7
(cid:37)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49)
LOANS
DEPOSITS
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2021 Financial Highlights
$48.7 MILLION
NET INCOME
$2.21
(cid:40)(cid:51)(cid:54)(cid:20)
1.94%
PTPP/A(cid:20)
1.57%
(cid:53)(cid:50)(cid:36)(cid:36)(cid:20)
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non-accrual
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
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 ☐ NO ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
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 file
☐
☐
Accelerated filer
Small reporting company
Emerging growth company
☒
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ☐ NO ☒
As of June 30, 2021, 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 $440,483,172 based on the closing sales price of $20.50 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 February 24, 2022
22,226,070
Portions of the registrant’s Definitive Proxy Statement relating to the 2022 Annual Meeting of Shareholders (the "2022 Proxy Statement"), which will be filed within 120 days after December
31, 2021, are incorporated by reference into Part III of this Annual Report on Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:59)(cid:80)(cid:65)(cid:71)(cid:69)(cid:0)(cid:73)(cid:78)(cid:84)(cid:69)(cid:78)(cid:84)(cid:73)(cid:79)(cid:78)(cid:65)(cid:76)(cid:76)(cid:89)(cid:0)(cid:76)(cid:69)(cid:70)(cid:84)(cid:0)(cid:66)(cid:76)(cid:65)(cid:78)(cid:75)(cid:61)(cid:0)
Terminology
Cautionary Note Regarding Forward-looking statements
Summary of Material Risks
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions That Prevent Inspections
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
Exhibit and Financial Statements
Form 10-K Summary
Signatures
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i
TERMINOLOGY
Unless this Annual Report on Form 10-K (this “Report”) indicates otherwise or the context otherwise requires, the terms “we,” “our,”
“us,” “Company,” “CapStar,” “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 2019, 2020 and 2021 mean our fiscal years ended on each of December 31, 2019, 2020 and 2021, 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:
•
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•
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•
•
the continuing effects of the COVID-19 (and variants of that virus) pandemic upon us, our customers, employees, and third-
party service providers, and the ultimate extent of the impacts of the pandemic on our business, including on our credit
quality, business operations and liquidity, as well as its impact on general economic and financial market conditions;
deterioration in general business and economic conditions, or turbulence in domestic or global financial markets, which
could adversely affect CapStar’s revenues and the values of our assets and liabilities, reduce the availability of funding,
affect credit quality, and increase stock price volatility;
the inability to capitalize on opportunities to enhance market share in certain markets and the risk that the Company’s
services may not be generally accepted in new markets;
economic conditions (including interest rate environment, government economic and monetary policies, the strength of
global financial markets and inflation and deflation) that impact the financial services industry as a whole and/or our
business;
the concentration of our business in our target markets and the effect of changes in the economic, political and environmental
conditions on this market;
increased competition in the financial services industry, locally, regionally or nationally, which may adversely affect pricing
and the other terms offered to our clients;
an increase in the cost of deposits, loss of deposits or a change in the deposit mix, which could increase our cost of funding;
an increase in the costs of capital, which could negatively affect our ability to borrow funds, successfully raise additional
capital or participate in strategic acquisition opportunities;
our dependence on our management team and board of directors and changes in our management and board composition;
our reputation in the community; our ability to execute our strategy to achieve our loan, return on average assets and
efficiency ratio goals, hire seasoned bankers, and achieve deposit growth through organic growth and strategic acquisitions;
credit risks related to the size of our borrowers and our ability to adequately identify, assess and limit our credit risk;
the significant portion of our loan portfolio that originated during the past two years and therefore may less reliably predict
ii
future collectability than older loans;
the adequacy of reserves (including our allowance for loan losses) and the appropriateness of our methodology for
calculating such reserves;
non-performing loans, leases and other non-performing assets;
charge-offs, non-accruals, troubled debt restructurings, impairments and other credit-related issues;
our management of risks inherent in our commercial real estate loan portfolio, and the risk of a prolonged downturn in the
real estate market, which could impair the value of our collateral and our ability to sell collateral upon any foreclosure;
changes in secondary market conditions for underwriting or repurchase of secondary mortgages;
continued compliance and adherence to underwriting and servicing of Government Guaranteed Loans;
our inability to realize operating efficiencies and tax savings from the implementation of our strategic plan;
our ability to comply with existing and changing governmental legislation and regulation, including Basel guidelines, capital
requirements, accounting regulation or standards and other applicable laws and regulations;
the loss of large depositor relationships, which could force us to fund our business through more expensive and less stable
sources;
operational and liquidity risks associated with our business, including liquidity risks inherent in correspondent banking;
volatility in interest rates and our overall management of interest rate risk, including managing the sensitivity of our interest-
earning assets and interest-bearing liabilities to interest rates, and the impact to our earnings from a change in interest rates;
the potential for our Bank’s regulatory lending limits and other factors related to our size to restrict our growth and prevent
us from effectively implementing our business strategy;
our ability to identify and thereafter consummate strategic acquisitions that may be necessary in order to achieve our goals;
the sufficiency of our capital, including sources of capital and the extent to which we may be required to raise additional
capital to meet our goals;
fluctuations in the fair value of our investment securities that are beyond our control;
deterioration in the fiscal position of the U.S. government and downgrades in Treasury and federal agency securities;
potential exposure to fraud, negligence, computer theft and cyber-crime;
the adequacy of our risk management framework;
our dependence on our information technology and telecommunications systems and the potential for any systems failures
or interruptions;
threats to and breaches of our information technology systems and data security, including cyber-attacks; our dependence
upon outside third parties for the processing and handling of our records and data;
our ability to adapt to technological change;
the financial soundness of other financial institutions;
our exposure to environmental liability risk associated with our lending activities;
our engagement in derivative transactions;
our involvement from time to time in legal proceedings and examinations and remedial actions by regulators;
our involvement from time to time in litigation or other proceedings instituted by or against shareholders, customers,
employees or third parties and the cost of legal fees associated with such litigation or proceedings;
the susceptibility of our market to natural disasters and acts of God; and
the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness
•
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iii
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.
iv
SUMMARY OF MATERIAL RISKS
An investment in our securities involves risks, including those summarized below. For a more complete discussion of the material risks
facing our business, see Item 1A—Risk Factors.
Risks Related to Our Business
• Our business, financial condition, and results of operations may be adversely affected by global pandemics, including the
recent COVID-19 pandemic and future variants.
• 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 are concentrated in our Target Market, and we are more sensitive than our more geographically
diversified competitors to adverse changes in the local economy.
•
Competition from financial institutions and other financial service providers may adversely affect our profitability.
• 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.
Credit and Interest Rate Risks
• We target small and medium sized businesses as loan clients, who may have greater credit risk than larger borrowers.
•
Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.
• We may not be able to adequately assess and limit our credit risk, which could adversely affect our profitability.
•
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 allowance for loan losses may prove to be insufficient to absorb losses inherent in our loan portfolio.
• Our commercial real estate loan portfolio exposes us to credit risks that may be greater than the risks related to other types of
loans.
• A prolonged downturn in the real estate market could result in losses and adversely affect our profitability.
•
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.
• 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.
• 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.
• We have several large depositor relationships, the loss of which could force us to fund our business through more expensive
and less stable sources.
Correspondent banking introduces unique risks, which could affect our liquidity.
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.
•
•
• We are subject to interest rate risk, which could adversely affect our profits.
•
•
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.
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.
Strategic Risks
• 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.
• Our bank’s size presents multiple challenges that may restrict our growth and prevent us from effectively implementing our
business strategy, such as our regulatory and internal lending limits and our ability to effectively leverage our infrastructure
to implement our business strategy.
v
• Our growth strategy involves strategic acquisitions, and we may not be able to overcome risks associated with such
transactions.
• 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.
Operational Risks
• 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.
• 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.
• We may bear costs associated with the proliferation of computer theft and cyber-crime.
• Our risk management framework may not be effective in mitigating risks and/or losses to us.
• We depend on our information technology and telecommunications systems, and any systems failures or interruptions could
adversely affect our operations and financial condition.
• We are dependent upon outside third parties for the processing and handling of our records and data.
• We encounter technological change continually and have fewer resources than certain of our competitors to invest in
technological improvements.
• We may be adversely affected by the lack of soundness of other financial institutions
• We are subject to environmental liability risk associated with our lending activities.
•
By engaging in derivative transactions, we are exposed to additional credit and market risk.
• 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.
• 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.
• 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.
• Uncertainties in the interpretation and application of the Tax Reform Act could materially affect our tax obligations and
effective tax rate.
• We may be adversely impacted by the transition from LIBOR as a reference rate.
•
Changes in U.S. trade policies and other factors beyond our Company’s control, including the imposition of tariffs and
retaliatory tariffs, may adversely impact our business, financial condition and results of operations.
Regulatory and Compliance Risks
• 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.
•
Federal and state regulators periodically examine our business and may require us to remediate adverse examination findings
or may take enforcement action against us.
• 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.
• We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes
and regulations.
•
Financial reform legislation has, among other things, tightened capital standards, created the Consumer Financial Protection
Bureau and resulted in new regulations that are likely to increase our costs of operations.
• We are required to act as a source of financial and managerial strength for our bank in times of stress.
• Our FDIC deposit insurance premiums and assessments may increase.
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.
vi
• A future issuance or future issuances of stock could dilute the value of our common stock.
•
Significant sales of our common stock by certain shareholders could affect the market value 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.
•
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.
• We and our bank are subject to capital and other legal and regulatory requirements which restrict our ability to pay dividends.
General Risks
• 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.
vii
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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) Mortgage
banking products and services, (iv) private banking and wealth management services for the owners and operators of
our business clients and other high net worth individuals; (v) correspondent banking services to meet the needs of
Tennessee’s smaller community banks and (vi) various retail and consumer products. Our operations are presently
concentrated in Tennessee.
As of December 31, 2021, on a consolidated basis, we had total assets of $3.1 billion, total deposits of $2.7 billion,
total net loans of $1.9 billion, and shareholders’ equity of $380.1 million.
Core Operating Principles
We operate our business in conformity with our core principles which are, in order of priority:
•
•
•
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 achieve strong profitability metrics through optimal balance sheet management,
prudent expense management, and disciplined capital allocation.
Strategic Growth - We seek to grow revenue and net income by building long-term relationships with our
customers based on top quality service.
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.
1
Acquisitions and Expansion
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 July 1, 2020, we completed our acquisition of FCB Corporation (“FCB”), the bank holding company for the First
National Bank of Manchester. We acquired all of the outstanding shares of common stock of FCB for approximately
3.0 million shares of common stock of our Company. At the time of acquisition, Manchester had four banking
locations throughout middle Tennessee. The operations of Manchester are included in our financial statements
beginning July 1, 2020.
On July 1, 2020, we completed our acquisition of the Bank of Waynesboro (“BOW”). We acquired all of the
outstanding shares of common stock of BOW for approximately 0.7 million shares of common stock of our Company.
At the time of acquisition, BOW had six banking locations throughout Southern Tennessee. The operations of BOW
are included in our financial statements beginning July 1, 2020.
In addition to acquisitions, we seek opportunities to expand our presence organically when we identify a strong
banking team in a market with attractive economic characteristics and market demographics where we believe we can
achieve accelerated growth of loans and deposits while deploying capital in a disciplined manner. Prior to entering a
new market, historically we have identified and built a team of experienced, successful bankers with market-specific
knowledge to lead the bank’s operations in that market. Generally, we or members of our senior management team
are familiar with these individuals based on prior work experience and reputation, and strongly believe in the ability
of such individuals to successfully execute our business model. Ideal geographic areas for expansion include those
with successful, experienced bankers with strong reputations in the market and economic attributes necessary to drive
quality lending and deposit opportunities. During the fourth quarter ended December 31, 2021, the Company
announced the hiring of a team of nine experienced financial professionals to grow market share and serve clients in
Chattanooga, TN.
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 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.
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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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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.;
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 and credit underwriters 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 joint line and credit
authorization, 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, 2021, approximately
73% 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, 2021, 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 15% 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 Policy 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 bankers and our credit department 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 of 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
process to mitigate the risk of loss. Executive management regularly reviews the status of the watch list and classified
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assets portfolio as well as the larger credits in the portfolio. Our collections department 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. We do not rely on brokered deposits as a meaningful source of funding.
Our ability to gather deposits is an important aspect of our business franchise, and we believe this is a significant
driver of our success. Our largest sources of deposits are NOW, Demand Deposit Accounts, 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 are held primarily by clients in our Target Market.
Deposit rates are reviewed regularly by pricing committee as we continuously seek to price our deposit products and
services 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. 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 deposits comprised approximately
$408.5 million or 15% of our total deposits as of December 31, 2021.
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 $0.9 billion in mortgage loan originations for the year ended December 31, 2021.
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 84 financial institutions with over $114 billion in deposits as of June 30, 2021. We held the number 9 deposit market
share position at June 30, 2021 with 2.5% 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
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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. Changes
in regulation, technology and product delivery systems have resulted in an increasingly competitive environment. We
expect to continue to face increasing competition from online and traditional financial institutions seeking to attract
customers by providing access to similar services and products; however, 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.
Information and Technology
We continually adapt to the changing technological needs and wants of our clients by investing in our electronic
banking platform. We use a combination of online and mobile banking channels to attract and retain clients and expand
the convenience of banking with us. In most cases, our clients can initiate banking transactions from the convenience
of their personal computer or smart phone, reducing the number of in-branch visits necessary to conduct routine
banking transactions. The remote transactions available to our clients include remote image deposit, bill payment,
external and internal transfers, ACH origination and wire transfer. We believe that our investments in technology and
innovation are consistent with our clients’ needs and will support future migration of our clients’ transactions to these
and other developing electronic banking channels. 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”. The Company also has an Information Technology (IT) Steering Committee comprised of internal managers
representing various divisions of the Company. The Committee oversees IT strategic and investment priorities and
the Company’s Information Security Program. The Committee regularly reports to the Risk Committee of the Board
through distribution of meeting minutes and other presentations and communication, including a comprehensive
overview of the Company’s cyber and information security program annually.
Human Capital
As of December 31, 2021, we had 397 total employees. As a service-oriented business, our long-term success depends
on our people and we are committed to taking a multi-dimensional approach to talent and culture. Our people and
culture are critical to the Company’s long-term success.
As such, our talent vision and strategy focus on:
Talent Vision, Strategy and Development
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Enabling talent and performance management that generates career opportunities and creates future
leaders of the organization.
Empathy towards others that gives us a unique understanding and ability to provide internal and external
service excellence.
Supporting a healthy work-life balance by offering generous paid time off for vacation (four weeks per
year), holidays (including birthday), and sick leave.
Delivering a competitive compensation package, including medical, dental and vision benefits; paid life,
disability, and long-term care insurance; and 401(k) employer contribution.
Diversity, Equity and Inclusion- At CapStar, we cultivate and advance diversity in all forms as part of building a strong
culture, a culture in which inclusion and belonging are paramount, and where all of our colleagues strive to be open
and inclusive leaders and teammates. Our culture is what unifies our colleagues across our diverse business model,
ensures we are best positioned to serve our diverse clients and propels our continuous evolution. We are proud to be
an Equal Opportunity Employer and enforce those values throughout all of our operations. We prohibit discrimination
in hiring or advancement against any individual on the basis of race, color, religion, gender, sex, national origin, age,
marital status, pregnancy, physical or mental disability, genetics, veteran status, sexual orientation, or any other
characteristic protected by applicable law.
Oversight- Transparency and accountability are critical to driving our recruiting and development practices. We are
committed to advancing the leadership of our Board through the inclusion of female and diverse directors, as detailed
in the Company’s Nominating and Corporate Governance Committee Charter. With more than 20% female
representation, the Company was recognized nationally for its commitment to board diversity by the 2020 Women on
Boards education and awareness campaign as one of only 52% of Russell 3000 companies earning the distinction.
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We employ Gallup Engagement Surveys to gauge employee satisfaction and solicit feedback from team members on
ways management can improve the working environment and development of team members. Management has
specific goals developed through these surveys and is encouraged to constantly improve the work environment and
team member satisfaction and retention.
None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining
agreement.
Environmental Matters
The Company knows that we are responsible for protecting our planet and understands that reducing our business’s
carbon footprint is key to a sustainable future. We are committed to measuring and minimizing our collective impact
on the environment while contributing to environmental stewardship and responsible business operations. We have
embedded environmental sustainability throughout our products, services, operations, and culture to drive efficiencies
and responsible resource use while creating comfortable, safe, and healthy workplaces for our stakeholders. We do
this by focusing on LED conversions and timely replacement of HVAC systems in our existing buildings and the
installation of the most energy efficient alternatives in connection with new construction. Further, we mandate the
recycling of shred waste as well as striving to optimize building occupancy to limit the adverse impact of unnecessary
expansion. Additionally, we drive reductions in our carbon footprint through the utilization of technology and digital
channels, including payments, credit, savings, remittances, online and mobile banking, and imaging systems. We also
promote the use of electronic deposit account statements, loan, tax and other notices, and eSign technology, which
support efficiency and paper reduction.
We impact the environment through our operations and through the financing of the operations of other companies
that could pose risks to the environment. CapStar works hard to ensure that our lending activities do not encourage
business activities that could cause irreparable damage to our reputation or the environment. As a result, we try to
conduct business responsibly and actively work with stakeholders to best serve our various constituents. In general,
we evaluate each credit or transaction on its individual merits, with larger deals receiving more attention and deeper
analysis. Our underwriting process regularly looks at governance issues and seeks to incorporate relevant industry
risks.
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
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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.
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
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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.
Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the
business of banking include:
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factoring accounts receivable;
making, acquiring, brokering or servicing loans and usual related activities in connection with the
foregoing;
leasing personal or real property under certain conditions;
operating a non-bank depository institution, such as a savings association;
engaging in trust company functions in a manner authorized by state law;
financial and investment advisory activities;
discount securities brokerage activities;
underwriting and dealing in government obligations and money market instruments;
providing specified management consulting and counseling activities;
performing selected data processing services and support services;
acting as an agent or broker in selling credit life insurance and other types of insurance in connection with
credit transactions; and
performing selected insurance underwriting activities.
The Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to
terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding
company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or
stability of it or any of its bank subsidiaries.
Support of Subsidiary Institutions
The Federal Deposit Insurance Act and Federal Reserve policy require a bank holding company to serve as a source
of financial and managerial strength to its bank subsidiaries. As a result of a bank holding company’s source of strength
obligation, a bank holding company may be required to provide funds to a bank subsidiary in the form of subordinate
capital or other instruments which qualify as capital under bank regulatory rules. Any loans from the holding company
to such subsidiary banks likely would be unsecured and subordinated to such bank’s depositors and perhaps to other
creditors of the bank.
Repurchase or Redemption of Securities
A bank holding company is generally required to give the Federal Reserve prior written notice of any purchase or
redemption of its own then outstanding equity securities if the gross consideration for the purchase or redemption,
when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months,
is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may disapprove such a
purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would
violate any law, regulation, Federal Reserve order or directive, or any condition imposed by, or written agreement
with, the Federal Reserve. The Federal Reserve has adopted an exception to this approval requirement for well-
capitalized bank holding companies that meet certain conditions.
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Bank Regulation and Supervision
Our bank is subject to extensive federal and state banking laws and regulations that impose restrictions on and provide
for general regulatory oversight of the operations of our bank. These laws and regulations are generally intended to
protect the safety and soundness of our bank and our bank’s depositors, rather than our shareholders. The following
discussion describes the material elements of the regulatory framework that applies to our bank.
Since our bank is a commercial bank chartered under the laws of the state of Tennessee and is a member of the Federal
Reserve System, it is primarily subject to the supervision, examination and reporting requirements of the Federal
Reserve and the TDFI. The Federal Reserve and the TDFI regularly examine our bank’s operations and have the
authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both
regulatory agencies have the power to take enforcement action to prevent the development or continuance of unsafe
or unsound banking practices or other violations of law. Our bank’s deposits are insured by the FDIC to the maximum
extent provided by law. Our bank is also subject to numerous federal and state statutes and regulations that affect its
business, activities and operations.
Branching
Under current Tennessee law, our bank may open branch offices throughout Tennessee with the prior approval of, or
prior notice to, the TDFI and the Federal Reserve. In addition, with prior regulatory approval, our bank may acquire
branches of existing banks located in Tennessee. Under federal law, our bank may establish branch offices with the
prior approval of the Federal Reserve. While prior law imposed various limits on the ability of banks to establish new
branches in states other than their home state, the Dodd-Frank Act allows a bank to branch into a new state by setting
up a new branch if, under the laws of the state in which the branch is to be located, a state bank chartered by that state
would be permitted to establish the branch. This makes it much simpler for banks to open de novo branches in other
states.
FDIC Insurance and Other Assessments
The Bank pays deposit insurance assessments to the Deposit Insurance Fund, which is determined through a risk-
based assessment system. The Bank’s deposit accounts are currently insured by the Deposit Insurance Fund, generally
up to a maximum of $250,000 per separately insured depositor. The Bank pays assessments to the FDIC for such
deposit insurance. Under the current assessment system, the 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, 2021 the Bank had a CRA rating
of “Satisfactory.”
Interest Rate Limitations
Interest and other charges collected or contracted for by our bank are subject to applicable state usury laws and federal
laws concerning interest rates.
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Federal Laws Applicable to Consumer Credit and Deposit Transactions
Our bank’s loan and deposit operations are subject to a number of federal consumer protection laws, including:
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the Federal Truth in Lending Act, governing disclosures of credit terms to consumer borrowers;
the Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the
public and public officials to determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the communities it serves;
the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, color, religion, national
origin, sex, marital status or certain other prohibited factors in all aspects of credit transactions;
the Fair Credit Reporting Act, or FCRA, governing the use and provision of information to credit reporting
agencies;
the Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected
by debt collectors;
the Service Members Civil Relief Act, governing the repayment terms of, and property rights underlying,
secured obligations of persons in military service;
the Gramm-Leach-Bliley Act, governing the disclosure and safeguarding of sensitive non-public personal
information of our clients;
the Right to Financial Privacy Act, imposing a duty to maintain confidentiality of consumer financial
records and prescribes procedures for complying with administrative subpoenas of financial records;
the Electronic Funds Transfer Act governing automatic deposits to and withdrawals from deposit accounts
and clients’ rights and liabilities arising from the use of automated teller machines and other electronic
banking services; and
the rules and regulations of the CFPB and various federal agencies charged with the responsibility of
implementing these federal laws.
Capital Adequacy
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.
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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, 2021, our bank qualified for
the “well capitalized” category.
Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other
discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action
depends upon the capital category in which the institution is placed. For example, institutions in all three
undercapitalized categories are automatically restricted from paying distributions and management fees, whereas only
an institution that is significantly undercapitalized or critically undercapitalized is restricted in its compensation paid
to senior executive officers. Generally, subject to a narrow exception, the banking regulator must appoint a receiver
or conservator for an institution that is critically undercapitalized.
An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is
required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding
company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various
limitations. The controlling holding company’s obligation to fund a capital restoration plan is limited to the lesser of
(i) 5% of an undercapitalized subsidiary’s assets at the time it became undercapitalized and (ii) the amount required
to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing
its average total assets, making acquisitions, establishing any branches or engaging in any new 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, 2021, our bank’s total CRE loans represented
217% of total 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.
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,
sponsoring, or having certain relationships with covered funds (i.e., hedge funds or private equity funds). In addition,
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.
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.
The Company has an Information Technology (IT) Steering Committee comprised of internal managers representing
various divisions of the Company. The Committee oversees IT strategic and investment priorities and the Company’s
Information Security Program. The Committee regularly reports to the Risk Committee of the Board through
distribution of meeting minutes and other presentations and communication, including a comprehensive overview of
the Company’s cyber and information security program annually.
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
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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.
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 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.
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, Risk Committee, Nominating and
Corporate Governance Committee, Community Affairs Committee, and Compensation and Human Resources
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
part of your investment. In addition, the following risks and other information in this Report or incorporated into this
Report by reference, including our Consolidated Financial Statements and related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” should be carefully considered before
investing in shares of our common stock.
Some statements in the following risk factors constitute forward-looking statements. Please refer to the section entitled
“Cautionary Note Regarding Forward-Looking Statements” at the beginning of this Report.
Risks Related To Our Business
Our business, financial condition, and results of operations may be adversely affected by global pandemics,
including the recent COVID-19 pandemic and future variants.
Our business, financial condition, and results of operations have been and may be adversely affected if the COVID-
19 pandemic continues to interfere with the ability of our employees, vendors, customers, financing sources, or others
to conduct business or continues to negatively affect consumer confidence or the economy.
In March 2020, the World Health Organization (WHO) characterized the outbreak of COVID-19 as a global pandemic
and recommended containment and mitigation measures. The United States declared a national emergency concerning
the pandemic, and multiple states and municipalities have declared public health emergencies. Along with these
declarations, there have been extraordinary and wide-ranging actions taken by international, federal, state and local
public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions
across the United States and the world, including quarantines and “stay-at-home” orders and similar mandates for
many individuals to restrict daily activities substantially and for many businesses to curtail or cease normal operations.
Although some restrictions have eased in some jurisdictions, there have been increasing rates of COVID-19 infection
in regions across the United States and the world in recent months, which have yet to show substantial signs of decline,
and some areas are re-imposing closures and other restrictions due to such increasing rates of COVID-19 cases. As a
result, the COVID-19 pandemic has significantly affected, and is likely to continue to affect, overall economic
conditions in the United States.
Although the Company maintains contingency plans for pandemic outbreaks, a significant increase in COVID-19
cases above current levels could also negatively impact the availability of key personnel necessary to conduct its
business activities. Such an increase or outbreak could also negatively impact the business and operations of third-
party service providers who perform critical services for the Company. If COVID-19 spreads or the response to
contain COVID-19 and its variants is unsuccessful, the Company could experience a material adverse effect to its
business, financial condition, and results of operations.
The pandemic is a widespread health crisis that has affected large segments of the global economy, resulting in a
rapidly changing market and economic activities. The pandemic and any preventative or protective actions that
governments, our customers or suppliers or we may take, in addition to those already in place, with respect to COVID-
19 may have a material adverse effect on our business, including business shutdowns or disruptions for an indefinite
period of time, or reduced consumer demand. Any additional financial impact cannot be estimated reasonably at this
time but may materially affect our business, financial condition, or results of operations. The extent to which COVID-
19 continues to affect our results will depend on future developments, including whether there are additional
outbreaks, mutations or related strains of the virus in locations where we operate, and the availability of, and
prevalence of access to, effective medical treatments and vaccines for COVID-19, which are highly uncertain and
cannot be predicted.
We are uncertain of the potential long-term impacts of the pandemic on our business, and the severity, duration, and
timing of the business and economic impacts from the continuing, unprecedented public health effort to contain and
combat the spread of COVID-19 and its variants, which has previously included, and may in the future include, among
other things, significant volatility in financial markets and a sharp decrease in the value of equity securities, including
our common stock.
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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 continued fallout of the global pandemic has resulted in wide reaching shutdown of certain businesses regions in
which we operate. Depending on future developments (including the extent of the virus’s spread, new variants 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, 2021, approximately 73% 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.
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
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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.
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.
Credit and Interest Rate Risks
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.
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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, 2021, approximately 58% of our loan
portfolio had been originated since December 31, 2018, 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. Highly
Levered Transaction (“HLT”) loan balances to customers amounted to $27.1 million, or 1.4% of our total loan
portfolio as of December 31, 2021.
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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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.
A prolonged downturn in the real estate market could result in losses and adversely affect our profitability.
As of December 31, 2021, approximately 31% of our loan portfolio was composed of non-owner occupied commercial
real estate loans, 11% of owner occupied commercial real estate loans, 17% consumer real estate loans, and 11%
construction and land development loans. The real estate collateral in each case provides an alternate source of
repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended.
A decline in real estate values could further impair the value of our collateral and our ability to sell the collateral upon
any foreclosure, which would likely require us to increase our allowance for loan losses. In the event of a default with
respect to any of these loans, the amounts we receive upon sale of the collateral may be insufficient to recover the
outstanding principal and interest on the loan. If we are required to re-value the collateral securing a loan to satisfy
the debt during a period of reduced real estate values or to increase our allowance for loan losses, our profitability
could be adversely affected, which could have a material adverse effect on our assets, business, cash flow, condition
(financial or otherwise), liquidity, prospects and results of operations.
Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage
our capital and adversely affect our growth and profitability.
The federal 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 than regulatory minimums to maintain an appropriate cushion against loss that 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.
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;
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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.
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 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 $155.6 million home equity portfolio at December 31,
2021, approximately $151.4 million were home equity lines of credit and $4.2 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, 2021, approximately $84.5 million of our home equity lines and
loans were in a second lien position.
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, 2021, our ten largest non-brokered depositors accounted for approximately 15% 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 86% of our bank’s deposits as of December 31, 2021
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were checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while
by comparison, 63% of the assets of our bank were loans at December 31, 2021, 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.
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, 2021, meaning that our net interest income would increase from rising interest
rates and decline in response due to 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.
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, changes in market interest rates and instability in the capital markets. Any of these factors,
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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.
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.
Strategic Risks
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.
Our bank’s size presents multiple challenges that may restrict our growth and prevent us from effectively
implementing our business strategy, such as our regulatory and internal lending limits and our ability to effectively
leverage our infrastructure to implement our business strategy.
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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 $10 million and $25 million, depending upon
the underlying risk rating of the borrower. Loans in excess of our internal limit are noted as a policy exception and
require approval by the Bank's Executive Committee. Based upon our bank’s current capital levels, the amount it may
lend is significantly less than that of many of our larger competitors and may discourage potential borrowers who
have credit needs in excess of the bank’s lending limit from doing business with us. Our bank accommodates larger
loans by selling participations in those loans to other financial institutions, but this strategy may not always be
available. If we are unable to compete effectively for loans from our target clients, we may not be able to effectively
implement our business strategy, which could have a material adverse effect on our assets, business, cash flow,
condition (financial or otherwise), liquidity, prospects and results of operations.
Our growth strategy involves strategic acquisitions, and we may not be able to overcome risks associated with such
transactions.
We plan to continue to explore opportunities to acquire other financial institutions and businesses in or around our
existing 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
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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.
Operational Risks
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.
Our risk management framework is comprised of various processes, systems and strategies and is designed to manage
the types of risk to which we are subject, including, among others, credit, liquidity, capital, financial performance,
asset/liability, operational, compliance and regulatory, Community Reinvestment Act, or CRA, strategic and
reputational, information technology and legal. Our framework also includes financial or other modeling
methodologies that involve management assumptions and judgment. Our risk management framework may not be
effective under all circumstances, including if our management fails to follow our credit policies and procedures, and
thus, it may not adequately mitigate any risk or loss to us. If our framework is not effective, we could suffer unexpected
losses and our assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of
operations could be materially and adversely affected. We may also be subject to potentially adverse regulatory
consequences.
We depend on our information technology and telecommunications systems, and any systems failures or
interruptions could adversely affect our operations and financial condition.
We rely heavily on communications and information systems to conduct our business. Any failure or interruption in
the operation of these systems could impair or prevent the effective operation of our client relationship management,
general ledger, deposit, lending or other functions. While we have policies and procedures designed to prevent or limit
the effect of a failure or interruption in the operation of our information systems, there can be no assurance that any
such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed. The occurrence
of any failures or interruptions impacting our information systems could damage our reputation, result in a loss of
clients, and expose us to additional regulatory scrutiny, civil litigation, and possible financial liability, any of which
could have a material adverse effect on our financial condition and results of operations.
We are dependent upon outside third parties for the processing and handling of our records and data.
We rely on software developed by third-party vendors to process various transactions. In some cases, we have
contracted with third parties to run their proprietary software on our behalf. These systems include, but are not limited
to, general ledger, payroll, employee benefits, loan and deposit processing, and securities portfolio accounting. For
example, one vendor provides our core banking system through a service bureau arrangement. While we perform a
review of controls instituted by the applicable vendors over these programs in accordance with industry standards and
perform our own testing of user controls, we rely on the continued maintenance of controls by these third-party
vendors, including safeguards over the security of client data. We may incur a temporary disruption in our ability to
conduct business or process transactions, or incur damage to our reputation, if the third-party vendor fails to adequately
maintain internal controls or institute necessary changes to systems. 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.
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.
Climate change and societal responses to climate change could adversely affect our business and results of
operations, including indirectly through impact to our customers.
The current and anticipated effects of climate change are creating an increasing level of concern for the state of the
global environment. As a result, political and social attention to the issue of climate change has increased. In recent
years, governments across the world have entered into international agreements to attempt to reduce global
temperatures, in part by limiting greenhouse gas emissions. The United States Congress, state legislatures and federal
and state regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives
seeking to mitigate the effects of climate change. These agreements and measures may result in the imposition of
taxes and fees, the required purchase of emission credits and the implementation of significant operational changes,
each of which may require businesses to expend significant capital and incur compliance, operating, maintenance and
remediation costs. Consumers and businesses also may change their behavior on their own as a result of these
concerns. It is not possible to predict how climate change may impact our financial condition and operations; however,
we operate in areas where our business and the activities of our customers could be impacted by the effects of climate
change. The effects of climate change may include increased frequency or severity of weather-related events, such as
severe storms, hurricanes, flooding and droughts and rising sea levels. These effects can disrupt business operations,
damage property, devalue assets and change customer and business preferences, which may adversely affect
borrowers, increase credit risk and reduce demand for our products and services. The Company and our customers
28
will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate
change concerns. As a result, the Company and our customers may face cost increases, asset value reductions,
operating process changes and the like. The impact to our customers will likely vary depending on their specific
attributes, including reliance on or role in carbon intensive activities. In addition, we could face reductions in
creditworthiness on the part of some customers or in the value of assets securing loans.
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. 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
uncollateralized fair value gain in the derivative. Market risk exists to the extent that interest rate changes cause the
value of our derivatives to decline – though to the extent the derivatives are effective hedges, changes in the value of
derivative derivatives could be largely offset by changes in the fair value of the hedged item. 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.
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 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.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and
for evaluating and reporting on our system of internal control. Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP. As a public company, we are required to comply
with the Sarbanes-Oxley Act and other rules that govern public companies. In particular, we are required to certify
our compliance with Section 404 of the Sarbanes-Oxley Act, which requires us to furnish annually a report by
management on the effectiveness of our internal control over financial reporting. In addition, our independent
registered public accounting firm is required to report on the effectiveness of our internal control over financial
reporting.
If we identify material weaknesses in our internal control over financial reporting in the future, if we cannot comply
with the requirements of the Sarbanes-Oxley Act in a timely manner or attest that our internal control over financial
29
reporting is effective, or if our independent registered public accounting firm cannot express an opinion as to the
effectiveness of our internal control over financial reporting when required, we may not be able to report our financial
results accurately and timely. As a result, investors, counterparties and customers may lose confidence in the accuracy
and completeness of our financial reports; our liquidity, access to capital markets and perceptions of our
creditworthiness could be adversely affected; and the market price of our common stock could decline. In addition,
we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, the
Federal Reserve, the FDIC, or other regulatory authorities, which could require additional financial and management
resources. These events could have an adverse effect on our business, financial condition and results of operations. 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.
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 (“FCA”) 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 indicated that the continuation of LIBOR on the current basis cannot and will not be guaranteed after
2021.
On March 5, 2021, the FCA confirmed that the publication of most LIBOR term rates will end on June 30, 2023
(excluding one-week U.S. LIBOR and two-month U.S. LIBOR, the publication of which ended on December 31,
2021). The Alternative Reference Rates Committee (ARRC), a committee of U.S. financial market participants, has
identified the Secured Overnight Financing Rate (SOFR) as the reference rate that represents best practice as the
alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR.
However, there are conceptual and technical differences between LIBOR and SOFR. The federal banking agencies
have encouraged banking organizations to cease entering into new contracts that use U.S. LIBOR as a reference rate
by no later than December 31, 2021, and to ensure existing contracts have robust fallback language that includes a
clearly defined alternative reference rate. Market participants are currently working on industry-wide and company-
specific transition plans as it relates to outstanding derivatives and cash markets indexed to LIBOR. While the
benchmark provider for U.S. LIBOR (which was typically the benchmark that the Company used) intends to provide
the benchmark for some tenors of U.S. LIBOR through June 2023, as of January, 2022 we no longer originate or
renew instruments linked to LIBOR, instead offering indices such as prime or SOFR.
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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, though the majority are scheduled to mature prior to the
June 30, 2023 expected date for cessation of most LIBOR tenors. The transition from LIBOR has resulted in and could
continue to result in added costs and employee efforts and could present additional risk. Since alternative reference
rates are calculated differently than LIBOR, payments under contracts referencing new alternative reference rates will
differ from those referencing LIBOR. The transition has changed and will continue to change our market risk profiles,
requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. We cannot
predict what the ultimate impact of the transition from LIBOR will be; however, failure to adequately manage the
transition could have an adverse effect on our business, results of operations and reputation with our customers.
Changes in U.S. trade policies and other factors beyond our Company’s 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. 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.
Regulatory and Compliance Risks
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.
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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, tightened capital standards, created the Consumer Financial
Protection Bureau and resulted in new regulations that are likely to increase our costs of operations.
As final rules and regulations implementing the Dodd-Frank Act have been adopted, this law has significantly changed
the current bank regulatory framework and affected the lending, deposit, investment, trading and operating activities
of banks and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range
of new implementing rules and regulations and to prepare numerous studies and reports for Congress. The federal
agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many
of the details and much of the impact of the Dodd-Frank Act depends on the rules and regulations that implement it.
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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 deposit insurance assessments as determined according to the calculation described in “Supervision and
Regulation—Bank Regulation and Supervision—FDIC Insurance and Other Assessments.” High levels of bank
failures since the financial crisis and increases in the statutory deposit insurance limits have increased resolution costs
to the FDIC and put significant pressure on the Deposit Insurance Fund. In order to maintain a strong funding position
and restore the reserve ratios of the Deposit Insurance Fund following the financial crisis, the FDIC increased deposit
insurance assessment rates and charged special assessments to all FDIC-insured financial institutions. Further
increases in assessment rates or special assessments may occur in the future, especially if there are significant
additional financial institution failures. Any future special assessments, increases in assessment rates or required
prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business
opportunities, which could have a material adverse effect on our assets, business, cash flow, condition (financial or
otherwise), liquidity, prospects and results of operations.
Risks Related to Our Common Stock
Even though our common stock is currently traded on the Nasdaq Stock Market's Global Select Market, it has less
liquidity than many other stocks quoted on a national securities exchange.
The trading volume in our common stock on the Nasdaq Global Select Market has been relatively low when compared
with larger companies listed on the Nasdaq Global Select Market or other stock exchanges. Because of this, it may
be more difficult for shareholders to sell a substantial number of shares for the same price at which shareholders 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.
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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, 2021,
22,166,129 shares of our common stock were issued and outstanding, including 177,020 shares of restricted common
stock that have yet to vest. Those shares outstanding do not include the potential issuance, as of December 31, 2021,
of 113,578 shares of our common stock subject to issuance upon exercise of outstanding stock options under the Stock
Incentive Plan, and 1,168,174 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.
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General Risks
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. Additionally, our directors’ community involvement and diverse and extensive local business relationships
are important to our success.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters and main branch office are located at 1201 Demonbreun Street, Suites 700 and 103, respectively,
Nashville, Tennessee 37203. The Company owns and leases retail bank branches located throughout Tennessee.
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
We and our subsidiaries may be involved from time to time in various routine legal proceedings incidental to our
respective businesses. Neither we nor any of our subsidiaries are currently engaged in any legal proceedings that are
expected to have a material adverse effect on our results of operations or financial position.
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.
As of February 24, 2022, there were approximately 3,892 holders of record of shares of our common stock.
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 of the date of this
Report, only shares of our common stock are issued and outstanding. As a Tennessee corporation, we are not permitted
to pay dividends if, after giving effect to such payment, we would not be able to pay our debts as they become due in
the usual course of business or our total assets would be less than the sum of our total liabilities plus any amounts
needed to satisfy any preferential rights if we were dissolving.
Because we are a bank holding company and do not engage directly in business activities of a material nature, our
ability to pay any dividends on our common stock depends, in large part, upon our receipt of dividends from our bank,
which is also subject to numerous limitations on the payment of dividends under federal and state banking laws,
regulations and policies. Pursuant to Tennessee law, our bank may not, without the prior approval of the Commissioner
of the TDFI, pay any dividends to us in a calendar year in excess of the total of our bank’s net income for that year
plus the retained net income for the preceding two years. For additional information, see “Item 1. Business—
Supervision and Regulation—Bank Regulation and Supervision—Payment of Dividends.”
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.
Stock Performance Graph
The following stock performance graphs compare total shareholders' return on our common stock for the five and
three year periods beginning at the close of trading on December 31, 2016 until December 31, 2021, and December
31, 2018 until December 31, 2021, respectively, with the cumulative total return of the Nasdaq Composite Index and
the Nasdaq Bank Index for the same period. While historically we have compared shareholders’ return on our common
stock to the Nasdaq Composite Index and Nasdaq Bank Index as an implied benchmark, we do not believe these
indices to be an optimal frame of reference or benchmark indicative of the Company’s size or characteristics.
Specifically, the Nasdaq composite index contains a significant concentration of tech companies which are
fundamentally different than the community banking industry at large, and the Nasdaq Bank index includes financial
institutions much larger in size than the Company. Therefore, we believe the Russell 2000 Index and ABA Nasdaq
Community Bank Index are more appropriate comparative indices. The Russell 2000 Index is comprised of a more
diverse subset of companies across multiple industries with more similar characteristics to that of the Company.
Similarly, the ABA Nasdaq Community Bank Index is a more comparable index given it is comprised of a more
narrowly defined subset of community banks. As such, the following stock performance graphs include references to
both the newly selected indices (The Russell 2000 Index and ABA Nasdaq Community Bank Index) and the indices
used in previous years (The Nasdaq Composite Index and Nasdaq Bank Index). In future periods we will only
reference the newly selected indices for purposes of comparing total shareholders’ return on our common stock.
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 graphs assume $100 is invested on December 31, 2016 and December 31, 2018
in shares of our common stock, the Russell 2000 Index and the ABA Nasdaq Community 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 graphs 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.
36
CapStar Financial Holdings, Inc. (CSTR)
Nasdaq Composite (IXIC)
Russell 2000 (RUT)
Nasdaq Bank (BKX)
ABA Nasdaq Community Bank Index
(ABAQ)
12/31/2016
100
100
100
100
12/31/2018
95
130
115
106
12/31/2018
67
126
102
88
12/31/2019
77
172
128
110
12/31/2020
69
250
154
101
12/31/2021
100
305
176
145
100
102
86
106
94
126
37
CapStar Financial Holdings, Inc. (CSTR)
Nasdaq Composite (IXIC)
Russell 2000 (RUT)
Nasdaq Bank (BKX)
ABA Nasdaq Community Bank Index (ABAQ)
12/31/2018
12/31/2019
12/31/2020
12/31/2021
100
100
100
100
100
114
137
126
124
123
103
198
151
115
109
149
242
173
163
146
38
ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands, except per share data)
Balance Sheet Data (at period end):
2021
2020
2019
2018
2017
Total assets
Total loans held for investment
Allowance for loan losses
Investment securities
Goodwill and core deposit intangible
Total deposits
FHLB advances and subordinated debt
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
Dividend and Per Share Data:
Cash dividends declared per share of
common and preferred stock
Dividend payout ratio
Net income per share, basic
Weighted average shares - basic
Net income per share, diluted
Weighted average shares - diluted
Book value per share of common stock
Tangible book value per share of common
stock (1)
Total shares of common stock outstanding
Total shares of preferred stock outstanding
Performance Ratios:
Return on average assets
Return on average equity
Net interest margin
Non-interest income to average assets
Efficiency ratio
Asset Quality Data:
Allowance for loan losses to total loans held
for investment
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
$
$
3,133,046
1,965,769
(21,698)
461,178
47,759
2,684,281
29,532
380,094
98,459
7,289
91,170
(1,066)
92,236
42,681
73,541
61,376
12,699
48,677
$
$
2,987,006
1,883,690
(23,245)
488,622
49,698
2,568,001
39,423
343,486
91,852
15,529
76,323
11,479
64,844
43,248
77,361
30,731
6,035
24,696
$
$
2,037,201
1,417,645
(12,604)
216,442
44,393
1,729,451
10,000
273,046
91,547
23,799
67,748
761
66,987
24,274
61,995
29,266
6,844
22,422
$
$
1,963,883
1,428,003
(12,113)
247,542
46,048
1,570,008
126,509
254,379
67,781
16,089
51,692
2,842
48,850
15,459
53,487
10,822
1,167
9,655
0.23
10%
0.20
16%
0.20
16%
0.08
13%
$
$
$
2.20
22,127,919
2.19
22,179,461
17.15
$
$
$
1.22
20,162,038
1.22
20,185,589
15.62
$
$
$
1.25
17,886,164
1.20
18,613,224
14.87
$
$
$
0.73
13,277,614
0.67
14,480,347
13.84
14.99
22,166,129
-
13.36
21,988,803
-
12.45
18,361,922
-
11.25
17,724,721
878,049
$
$
$
$
$
1,344,429
947,537
(13,721)
196,380
6,242
1,119,866
70,000
146,946
51,515
9,652
41,863
12,870
28,993
10,908
33,765
6,136
4,635
1,501
-
-
0.13
11,280,580
0.12
12,803,511
11.91
11.37
11,582,026
878,049
1.56%
13.38%
3.16%
1.37%
54.94%
0.94%
8.08%
3.10%
1.65%
64.70%
1.12%
8.49%
3.64%
1.21%
67.37%
0.63%
5.50%
3.55%
1.01%
79.65%
0.11%
1.05%
3.25%
0.80%
63.98%
1.10%
1.23%
0.89%
0.85%
1.45%
665.97%
0.11%
0.05%
16.29%
14.11%
14.11%
10.69%
482.55%
0.18%
0.05%
16.03%
13.52%
13.52%
9.60%
861.23%
0.12%
0.02%
13.45%
12.73%
12.73%
11.37%
582.84%
0.16%
0.39%
12.84%
12.13%
11.61%
11.06%
509.08%
0.20%
1.09%
12.52%
11.41%
10.70%
10.77%
(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 July 1, 2020, we completed our acquisitions of FCB Corporation and the Bank of Waynesboro. For more
information, please see “Item 1.—Business—Overview—Acquisitions”. The operations of FCB and BOW are
included in our financial statements beginning July 1, 2020. The acquisitions and incorporations of these entities into
our financial statements may materially affect the comparability of the selected financial data provided for fiscal years
2020 and beyond 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, 2021, 2020 and 2019. 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 and Supplementary Data” 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 2019, 2020
and 2021 mean our fiscal years ended December 31, 2019, 2020, and 2021, respectively.
Overview
We completed 2021 with net income of $48.7 million, or $2.19 diluted net income per share, compared to net income
of $24.7 million and $22.4 million, or $1.22 and $1.20 diluted net income per share, for 2020 and 2019, respectively.
Average loans held for investment for 2021 were $1.91 billion, a 13.0% increase over 2020, and average deposits for
2021 were $2.70 billion, a 19.2% increase over 2020. We acquired FCB and BOW on July 1, 2020, which has impacted
the comparability of our financial performance. Specifically, the Company's net interest income and non-interest
income generally benefited from an additional six months of FCB and BOW income for the year ended December 31,
2021. Conversely, non-interest expense increased for the same period due to the acquisitions. The 2020 FCB and
BOW acquisitions, as well as the Company's 2021 organic entrance into the Chattanooga market continue to
demonstrate our growth opportunities.
The Company continues its proactive approach to protect our team members and their families. The Company's
Pandemic Committee continues to meet and discuss the health and safety of employees as well as to discuss updates
provided by the Centers for Disease Control ("CDC"), state and local authorities. At this time, all financial centers
and support operations centers are operating in a non-remote environment. Although the economic and public health
outlooks improved in the United States during 2021, the future impact of the pandemic on our business, results of
operations and financial condition remains uncertain. Should current economic conditions deteriorate or if the
pandemic continues to intensify through the spread of more contagious or severe strains of COVID-19, the pandemic
could have an adverse effect on our business and results of operations and financial condition.
Although infection rates in the communities we serve vary, the positive impact that vaccinations have had on curbing
the spread of the virus allowed us to begin bringing departments back together and to loosen travel restrictions for
colleagues who are fully vaccinated. Given the COVID-19 variants currently spreading, we are strongly advising our
colleagues who are fully vaccinated to get vaccination boosters. We will continue to make prudent decisions for the
safety of our colleagues and our clients following recommended CDC and local health department guidance. We are
hopeful that infection rates will decline in the communities we serve as the percentage of fully vaccinated and boosted
individuals continues to increase.
In an effort to serve as a source of liquidity in our community at the onset of the pandemic, CapStar Bank proactively
offered a 90-day full deferment of all loan payments to CapStar borrowers that were less than 30 days past due. As
of December 31, 2021 the remaining loans still under deferment has been reduced to four loans (representing
approximately $32.2 million in outstanding loan balances). As of December 31, 2021, the remaining outstanding
balance of loans originated under the PPP totaled approximately $26.5 million and was included in commercial and
industrial loans.
40
As the pandemic continues, we will continue to assess the impact on our market. While it is uncertain losses will
materialize in the future, we will continue to proactively work with our clients and evaluate the potential impact of
the pandemic on them and us. Furthermore, we currently do not anticipate a significant adverse liquidity impact related
to the COVID-19 pandemic. In fact, since the start of the pandemic, deposit inflows have increased sharply,
significantly strengthening liquidity. Nonetheless, the Company has a comprehensive contingency funding plan that
addresses potential adverse liquidity events and emergency cash flow requirements that may arise from the COVID-
19 pandemic. See further discussion regarding the Company’s management of liquidity risk in the subsequent section
titled ‘Liquidity’.
Despite the uncertainty the Company is well positioned to continue delivering on its strategic initiatives in a
responsible manner by prioritizing things such as business continuity, liquidity management and maintaining an
adequate allowance for loan losses.
Our primary revenue 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 $14.8 million, or 19.5%, to $91.2 million for 2021 compared to $76.3 million for 2020.
The increase was primarily attributable to the acquisitions of FCB and BOW, increased PPP income and lower interest
rates across deposit categories when compared to 2020. Net interest margin increased to 3.16% for 2021, compared
with 3.10% for 2020.
The year ended December 31, 2021 yielded a ($1.1) million release of loan loss reserves compared to a $11.5 million
provision in 2020. This decrease was primarily attributable to improved asset quality trends, significant improvement
in specific classified loans and other qualitative factors. 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, 2021
was 1.10% of total loans held for investment, compared with 1.23% at December 31, 2020.
While benefitting from the FCB and BOW acquisitions, total noninterest income for 2021 remained relatively
unchanged at $42.7 million compared to $43.2 million for 2020, and comprised 31.9% of total revenues.
Despite the impact of the FCB and BOW acquisitions, total noninterest expense for 2021 decreased $3.9 million, or
4.9%, to $73.5 million compared to $77.4 million for 2020. Improving productivity and operating efficiency is a key
focus of the Company. The efficiency ratio for 2021 was 54.94% compared to 64.70% for 2020. The improvement
in efficiency ratio for 2021 is primarily attributable to greater expense discipline in accordance with the Company's
core strategy and a decline in acquisition related expenses.
The Company’s effective tax rate increased to 20.7% for 2021 from 19.6% for 2020. The higher effective tax rate in
2021 compared to 2020 is mainly the result of net operating loss carryback provisions associated with the CARES Act
in 2020.
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 10.77% as of
December 31, 2021, compared with 10.00% at December 31, 2020. 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, 2021, 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
41
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, particularly the impact from the COVID-
19 pandemic and its variants. Under different conditions or using different assumptions, the actual credit losses
ultimately realized by us may be different from our estimates. 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, 2021, which is included elsewhere in this Report.
Investment Securities Impairment
We assess on a quarterly basis whether there have been any events or economic circumstances to indicate that a
security with respect to which there is an unrealized loss is impaired on an other-than-temporary basis. In any instance,
we would consider many factors, including the severity and duration of the impairment, our intent and ability to hold
the security for a period of time sufficient for a recovery in value, recent events specific to the issuer or industry, and,
for debt securities, external credit ratings and recent downgrades. Securities with respect to which there is an
unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded
in earnings.
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.
42
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,
2021
2020
$ 98,459 $ 91,852
15,529
76,323
11,479
7,289
91,170
(1,066)
92,236
42,681
73,541
61,376
12,699
64,844
43,248
77,361
30,731
6,035
$ 48,677 $ 24,696
2021-2020
Percent
Increase
(Decrease)
Year ended
December 31,
2019
2020-2019
Percent
Increase
(Decrease)
7.2% $
(53.1)%
19.5%
(109.3)%
42.2%
(1.3)%
(4.9)%
99.7%
110.4%
97.1% $
91,547
23,799
67,748
761
66,987
24,274
61,995
29,266
6,844
22,422
1.25
1.20
0.3%
(34.7)%
12.7%
1408.4%
(3.2)%
78.2%
24.8%
5.0%
(11.8)%
10.1%
(2.4)%
1.7%
Basic net income per share of common stock
Diluted net income per share of common
stock
$
$
2.20 $
1.22
80.3% $
2.19 $
1.22
79.5% $
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 basis 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
43
interest-bearing liabilities, net interest spread and net interest margin for the years ended December 31, 2021, 2020
and 2019:
Average
Outstanding
Balance
2021
Interest
Income/
Expense
Average
Yield/
Rate
Average
Outstanding
Balance
2020
Interest
Income/
Expense
Average
Yield/
Rate
Average
Outstanding
Balance
2019
Interest
Income/
Expense
Average
Yield/
Rate
For the Year Ended December 31,
$
1,910,115
152,482
$
84,368
4,851
4.42% $
3.18%
1,690,179
175,311
$
4.63% $
3.47%
1,450,400
101,885
$ 78,557
4,271
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-bearing 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)
441,495
7,213
61,438
502,933
317,406
14,640
2,897,576
224,776
3,122,352
955,553
594,652
417,770
1,967,975
30,574
1,998,549
725,075
2,723,624
34,969
363,759
3,122,352
1,408
8,621
598
21
98,459
1,626
1,203
2,873
5,702
1,587
7,289
$
91,170
250,042
49,474
299,516
307,852
18
2,472,876
149,760
2,622,636
744,144
549,533
407,224
1,700,901
27,809
1,728,710
558,416
2,287,126
29,762
305,748
2,622,636
1.63%
2.90%
1.79%
0.19%
0.14%
3.41%
$
0.17% $
0.20%
0.69%
0.29%
5.19%
0.36%
$
3.05%
3.16%
78,180
6,092
5,455
1,326
6,781
799
-
91,852
3,868
5,196
5,317
14,381
1,148
15,529
5.42%
4.19%
3.04%
3.47%
3.14%
2.15%
3.52%
4.92%
1.51%
1.47%
2.08%
1.65%
2.99%
1.69%
176,647
5,374
1,438
6,812
1,881
26
91,547
7,538
7,266
7,542
22,346
1,453
23,799
52,392
229,039
87,305
752
1,869,381
137,947
2,007,328
499,468
494,587
361,956
1,356,011
48,629
1,404,640
315,031
1,719,671
23,533
264,124
2,007,328
2.18%
3.39%
2.38%
0.26%
2.77%
3.73%
$
0.52% $
0.95%
1.31%
0.85%
4.13%
0.90%
$
2.83%
3.10%
$
76,323
$ 67,748
3.22%
3.64%
(1) Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan
fees, net of deferred loan costs.
(2) Taxable investment securities include restricted equity securities.
(3) Yields on tax exempt securities are shown on a tax equivalent basis.
(4) Net interest spread is the average yield on total interest-earning assets minus the average rate on total interest-
bearing liabilities.
(5) Net interest margin is net interest income calculated on a tax equivalent basis divided by total average interest-
earning assets.
44
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
2021 Compared to 2020
Increase (decrease) due to
Volume
Rate
Net
2020 Compared to 2019
Increase (decrease) due to
Rate
Net
Volume
$ 10,173 $ (3,985) $
(793)
(448)
6,188 $ 13,212 $ (13,589) $
(1,241)
(1,114)
2,935
(377)
1,821
4,148
(2,390)
1,758
2,233
(2,152)
81
379
4,527
25
405
14,337
(297)
(2,687)
(226)
(384)
(7,730)
82
1,840
(201)
21
6,607
(71)
2,162
4,749
(26)
23,032
(40)
(2,192)
(5,831)
—
(22,726)
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
1,099
427
138
114
1,778
$ 12,559 $
(3,341)
(4,420)
(2,582)
325
(10,018)
2,288 $
2021 compared to 2020
(2,242)
(3,993)
(2,444)
439
(8,240)
14,847 $ 18,211 $ (9,636) $
(7,362)
(2,877)
(3,168)
317
(13,090)
3,693
807
943
(622)
4,821
(111)
(30)
(1,082)
(26)
306
(3,669)
(2,070)
(2,225)
(305)
(8,269)
8,575
Our net interest income increased $14.8 million, or 19.5%, from 2020 to 2021 primarily due to a 13.0% increase in
average loans held for investment and a 54 basis point or 60.0% decline in the average yield on interest-bearing
liabilities as we have worked to lower our cost of deposits across all categories.
The loan increase is primarily attributable to a combination of the FCB and BOW acquisitions, expansions into new
markets and fee income associated with PPP loan forgiveness and paydowns. PPP fees recognized as income totaled
$7.2 million and $3.6 million for the years ended December 31, 2021 and 2020, respectively.
Net interest margin for the year ended December 31, 2021 also benefited from a 67.9% increase in average total
securities offset by a 59 basis point or 24.8% decrease in average security yield as yields on investments purchased
were depressed by a sharp decline in market interest rates as the Federal Reserve lowered short-term rates to
historically low levels in response to the pandemic.
2020 compared to 2019
Net interest income increased $8.6 million, or 12.7%, from 2019 to 2020 primarily due to a 32% increase in average
earning assets associated with the FCB and BOW acquisitions, which was offset by a 54 basis point decline in the net
interest margin.
Our net interest margin was 3.10% and 3.64% for 2020 and 2019, respectively, with the decline triggered by two
factors related to the pandemic – first, the Federal Reserve reducing the Federal Funds target rate by 1.50% in March
2020, one of numerous actions intended to offset the pandemic’s impact on the U.S. economy, and second, the sharp
increase in deposits near the start of the pandemic, with deposits increasing $332 million or 19% in the 2nd quarter.
Additionally, included in interest expense for savings and money market deposits in 2020 is a loss on previously
terminated interest rate swaps of $1.9 million.
For 2020 compared to 2019, loan volumes increased 16.8% while loan yields declined from 5.41% to 4.61% due to
the impact of lower market interest rates on yields of new loan originations and yields of existing variable rate loans.
45
Average loans for 2020 increased 16.8% compared to 2019 as a result of the FCB and BOW acquisitions, the
Company’s active participation in the SBA’s Paycheck Protection Program (“PPP”), additional bankers in the
Nashville and Knoxville MSA, and continued focus on attracting new clients.
Average security yields decreased from 3.14% to 2.38% for 2019 and 2020, respectively, primarily due to decreases
in the LIBOR rate on the variable rate portion of our securities portfolio, the impact of lower market interest rates on
the yields of securities purchased to replace security maturities and paydowns, and the Company’s purchase of
additional conservative lower yield securities to deploy a portion of pandemic-related deposit growth.
We funded our growth in loans through an increase in funding sources of 33.0% from 2019 to 2020. The primary
driver of our increased funding sources was growth in our deposits of 35.2% from 2019 to 2020, driven by the FCB
and BOW acquisitions and the sharp increase in deposits near the start of the pandemic. Average non-interest bearing
deposits increased 77.3% from 2019 to 2020.
The average rate paid on interest-bearing liabilities was 0.90% for 2020 compared to 1.69% for 2019. The majority
of this decrease was due to decreases in the Federal Funds rate in response to the COVID-19 pandemic.
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. 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. Provision expense is impacted by macroeconomic factors, the
absolute level of loans, loan growth, the credit quality of the loan portfolio and the amount of net charge-offs.
Our allowance for loan losses as a percentage of total loans held for investment was 1.10%, 1.23% and 0.89% at
December 31, 2021, 2020 and 2019, respectively. Our allowance for loan losses plus fair value purchase accounting
marks to non-PPP loans was 1.27%, 1.58%, and 1.13% at December 31, 2021, 2020 and 2019, respectively. See “Non-
GAAP Financial Measures” for a discussion of and reconciliation to the most directly comparable U.S. GAAP
measure.
2021 compared to 2020
The year ended December 31, 2021 yielded a ($1.1) million release of loan loss reserves compared to a $11.5 million
provision in 2020. This decrease was primarily attributable to improved asset quality trends, significant improvement
in specific classified loans and improvement in COVID-19 qualitative factors within our allowance for loan losses
methodology. While the pandemic and its variants are still considered within the Company's current allowance for
loan losses, the release in 2021 is a reflection of credit quality metrics returning to pre-pandemic levels.
Charge-offs for 2021 were $0.6 million compared to $1.2 million for 2020, while our allowance for loan losses as a
percentage of total loans held for investment decreased from 1.23% at December 31, 2020 to 1.10% at December 31,
2021. Similarly, these decreases were attributable to improvements in economic conditions through December 31,
2021, as compared to the economic deterioration that occurred or was anticipated during 2020 as a result of COVID-
19 and its variants.
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, 2021.
2020 compared to 2019
The provision for loan losses amounted to $11.5 million and $0.8 million for 2020 and 2019, respectively.
Provision expense increased for 2020 compared to 2019 due to significantly increased qualitative factors in our
allowance for loan losses methodology in anticipation of credit deterioration associated with the COVID-19 pandemic.
Although losses have not yet materialized as a direct result of the COVID-19 pandemic, our overall reserves are
deemed to be adequate in light of the economic uncertainty of the pandemic. Charge-offs for 2020 were $1.2 million
compared to $0.8 million for 2019.
46
Our allowance for loan losses as a percentage of total loans increased from 0.89% at December 31, 2019 to 1.23% at
December 31, 2020. This increase was largely due to our assessment of risk generally related to macro-economic,
geo-political conditions associated with the COVID-19 pandemic and the related impact on asset quality.
Noninterest Income
In addition to net interest income, we generate recurring noninterest income. Our banking operations generate revenue
from service charges on deposit accounts, interchange and debit card transaction fees, originating and selling
mortgage, commercial real estate and SBA loans, wealth management and gains (losses) on sales of securities. In
addition to these types of recurring noninterest income, we own insurance on several key employees and record income
within "Other noninterest income" based upon the increase in the cash surrender value of these policies.
The following table sets forth the principal components of noninterest income for the periods indicated.
Year Ended
December 31,
2021
2020
2021-2020
Percent
Increase
(Decrease)
Year Ended
December 31,
2019
2020-2019
Percent
Increase
(Decrease)
Noninterest income:
Deposit service charges
Interchange and debit card transaction fees
Mortgage banking
Tri-Net
Wealth management
SBA lending
Net gain (loss) on sale of securities
Other noninterest income
Total noninterest income
2021 compared to 2020
$
4,515 $
4,816
16,058
8,613
1,850
2,060
28
4,741
3,494
3,172
25,034
3,693
1,573
1,440
125
4,717
$ 42,681 $ 43,248
29.2% $
51.8%
(35.9)%
133.2%
17.6%
43.1%
(77.6)%
0.5%
(1.3)% $
3,135
3,251
9,467
2,785
1,425
803
(99)
3,507
24,274
11.5%
(2.4)%
164.4%
32.6%
10.4%
79.3%
(226.3)%
34.5%
78.2%
The increase in interchange and debit card transaction fees and other deposit service charges for 2021 were driven by
the incremental increase in transaction volume related to our acquisitions of FCB and BOW, an emphasis on electronic
banking and continued growth in deposits and volume of our commercial and consumer deposit account.
Mortgage banking income consists of mortgage fee income from the origination and sale of mortgage loans. These
mortgage fees are for loans originated in our markets that are subsequently sold to third-party investors. Generally,
mortgage origination fees increase in lower interest rate environments and more robust housing markets and decrease
in rising interest rate environments and more challenging housing markets. Mortgage origination fees will fluctuate
from period to period as the rate environment changes. Mortgage banking income decreased 35.9% from 2020 to
2021 primarily due to a decline from the peak of the 2020 residential market. Beginning in 2020, we experienced an
increase in mortgage lending transactions as a result of the low mortgage interest rate environment due to the COVID-
19 pandemic. However, this began to decline in 2021 and we expect mortgage lending volume to continue to decline
into 2022 given the current environment and forecasted rate increases by the Federal Reserve.
Revenue for Tri-Net, a business launched 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 growth and development as one the Company's key unique fee
businesses.
SBA loan sales revenue also increased when compared to the prior year comparable period due to increased volumes
and premiums as we continue to invest in and grow our government guaranteed lending division.
Other noninterest income primarily consists of loan related fees, bank-owned life insurance and other service-related
fees.
47
2020 compared to 2019
The increase in treasury management and other deposit service charges for 2020 was driven primarily by the
incremental increase in transaction volume related to our acquisitions of FCB and BOW, as well as growth in the
volume of our commercial and consumer deposit accounts.
Mortgage banking income increased 164.4% from 2019 to 2020 primarily due to a significantly higher volume of
originations from home buyers capitalizing on lower interest rates.
The increase in other noninterest income of $1.2 million from 2019 to 2020 was primarily due to organic growth and
our acquisition of FCB and BOW.
Noninterest Expense
Our total noninterest expense increase reflects expenses that we have incurred as we build the foundation to support
and execute our growth strategy. The following table presents the primary components of noninterest expense for the
periods indicated.
Year Ended
December 31,
2021
2020
2021-2020
Percent
Increase
(Decrease)
Year Ended
December 31,
2019
2020-2019
Percent
Increase
(Decrease)
$
$
41,758 $ 45,252
8,865
11,248
3,590
4,205
3,195
3,507
2,224
2,155
1,261
1,031
5,390
323
1,824
1,939
5,760
7,375
73,541 $ 77,361
(7.7)% $
26.9%
17.1%
9.8%
(3.1)%
(18.2)%
(94.0)%
6.3%
28.0%
(4.9)% $
35,542
6,961
3,345
3,723
2,102
591
2,654
1,655
5,422
61,995
27.3%
27.4%
7.3%
(14.2)%
5.8%
113.4%
103.1%
10.2%
6.2%
24.8%
Noninterest expense:
Salaries and employee benefits
Data processing and software
Occupancy
Equipment
Professional services
Regulatory fees
Acquisition related expenses
Amortization of intangibles
Other noninterest expense
Total noninterest expense
2021 compared to 2020
Despite the impact of the FCB and BOW acquisitions, salaries and employee benefits expense decreased primarily
due to lower incentive compensation as mortgage banking results declined compared to 2020, as well as a decrease in
severance expense. At December 31, 2021, our associate base increased to 397 employees compared to 380 at
December 31, 2020.
Data processing and software expense increased from 2020 to 2021 primarily due to an increase in the volume of
transactions from organic growth, a full year of our FCB and BOW operations and services related to the processing
of PPP loans.
Our acquisition-related expenses decreased $5.1 million from 2020 to 2021 due to the absence of the FCB and BOW
acquisitions recorded during 2020, and thereby, lower integration-related expenses.
Our efficiency ratio was 54.94% and 67.40% for 2021 and 2020, 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. The improvement in efficiency ratio for 2021 is primarily attributable
to greater expense discipline in accordance with the Company's core strategy.
48
2020 compared to 2019
The increase in salaries and employee benefits was driven primarily by the incremental increase in compensation costs
related to our acquisitions of FCB and BOW, as well as increased compensation associated with strong revenue growth
in mortgage banking. At December 31, 2020, our associate base increased to 380 compared to 289 at December 31,
2019.
Data processing and software expense increased from 2019 to 2020 primarily due to an increase in the volume of
transactions from organic growth, costs associated with running dual systems related to our acquisitions of FCB and
BOW and insourcing certain IT related functions. The acquisition related systems conversion was successfully
completed during the third quarter of 2020.
The increase in occupancy expense from 2019 to 2020 was largely attributable to increased depreciation and other
facilities related expenses associated with our acquisitions of FCB and BOW as well as the increasing cost of managing
our IT network.
Amortization of intangibles increased from 2019 to 2020 due to the new core deposit intangible recorded in connection
with the FCB and BOW acquisitions.
Our efficiency ratio was 64.70% and 67.41% for 2020 and 2019, respectively. The efficiency ratio decreased in 2020
due to operational improvements and synergies achieved through the FCB and BOW acquisitions.
Income Taxes
2021 compared to 2020
We recorded income tax expense of $12.7 million and $6.0 million in 2021 and 2020, respectively. Our effective
income tax rate for 2021 and 2020 was 20.7% and 19.6%, respectively. Our effective tax rate differs from the statutory
tax rate by our investments in qualified municipal securities, tax benefits from our real estate investment trust,
company owned life insurance, state tax credits, net of the effect of certain non-deductible expenses and the
recognition of excess tax benefits related to stock compensation. The higher effective tax rate in 2021 compared to
2020 is mainly the result of net operating loss carryback provisions associated with the CARES Act in 2020.
2020 compared to 2019
We recorded income tax expense of $6.0 million and $6.8 million in 2020 and 2019, respectively. Our effective income
tax rate for 2020 and 2019 was 19.6% and 23.4%, respectively. The lower effective tax rate in 2020 compared to 2019
is mainly the result of net operating loss carryback provisions associated with the CARES Act in 2020.
Financial Condition
2021 compared to 2020
Total assets increased $146.0 million or 4.9%, from December 31, 2020 to December 31, 2021. Loans held for
investment grew from $1.884 billion at December 31, 2020 to $1.966 billion at December 31, 2021, a 4.4% increase.
The increase was supported by organic loan growth partially offset by approximately $159.5 million in net paydowns
of forgiven PPP loans by the SBA. Loans held for sale decreased $103.3 million or 55.2%, during 2021 which is
primarily related to the timing of selling residential and commercial real estate loans. Cash and cash equivalents
increased $137.7 million or 49.6% as the Company continued to experience excess liquidity and grow deposits.
Total liabilities increased $109.4 million or 4.1% from December 31, 2020 to December 31, 2021. Deposits increased
$116.3 million to $2.684 billion at December 31, 2021, a 4.5% increase. While in the short-term the Company is
experiencing a period of excess liquidity, a key longer-term strategic initiative is to create a stronger deposit-led culture
with an emphasis on lower cost relationship-based deposits. As of December 31, 2021, the Company’s lowest cost
deposit category, noninterest bearing, increased $62.2 million December 31, 2020 to December 31, 2021, while higher
cost time deposits decreased $96.5 million or 20.5%. Other changes in deposits from 2020 to 2021 included a $100.5
million increase or 11.9% in interest-bearing deposits and a $50.0 million or 8.5% increase in savings and money
market accounts.
49
2020 compared to 2019
Total assets increased $946.9 million or 46.5% from December 31, 2019 to December 31, 2020. Loans held for
investment grew from $1.418 billion at December 31, 2019 to $1.884 billion at December 31, 2020, a 32.9% increase.
Loans held for sale increased $16.3 million or 9.6% during 2020 which is primarily related to the timing of selling
residential and commercial real estate loans. Available for sale securities increased $278.1 million, or 128%, as the
Company deployed excess capital into such investments. Also, included in these changes is growth from our
acquisitions of FCB and BOW which included $514.7 million in total assets, primarily made up of $294.7 million in
loans and $98.7 million in securities.
Total liabilities increased $876.5 million, or 49.7%, from December 31, 2019 to December 31, 2020. Deposits
increased from $1.729 billion at December 31, 2019 to $2.568 billion at December 31, 2020, a 48.5% increase.
Included in liabilities is the third quarter issuance of $29.4 million in subordinated debt during the onset of the COVID-
19 pandemic. In addition, total liabilities and deposits acquired in our FCB and BOW acquisitions were $447.4 million
and $442.7 million, respectively.
Investment Securities
The investment portfolio plays a key role in the management of liquidity and interest rate risk, and provides another
source of interest income. 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 funds, 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, agency
mortgage-backed securities, obligations of states and political subdivisions, 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.
50
Our investment portfolio totaled $461.2 million, $488.6 million, and $216.4 million at December 31, 2021, 2020 and
2019, respectively. Our investment portfolio increased significantly in 2020 as part of our efforts to improve balance
sheet management through investing in high quality securities and deploying excess liquidity resulting from increased
deposits. 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, 2021 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
Weighted
Average
Yield
Fair Value
Due in one year to five
years
Due in five years to ten
years
Weighted
Average
Yield
Fair Value
Weighted
Average
Yield
Fair Value
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:
$
2,024
2.4% $
3,300
2.3% $
6,179
1.8% $
—
7,518
2,574
—
6,813
3.1%
16,929
3.6%
252,544
—
—
2.8%
60,128
3.1%
1.2%
—
3.6%
50,517
35,336
3,339
1,446
2.4%
1.3%
1.0%
5.5%
7,596
3,153
—
—
—
1.7%
2.9%
—
—
$
18,929
3.0% $ 332,901
1.7% $
96,817
2.0% $ 10,749
2.1%
State and municipal
securities
Total securities held
to maturity
$
$
521
521
Loans and Leases
3.1% $
1,309
3.1% $
1,309
3.1% $
3.1% $
—
—
— $
— $
—
—
—
—
Loans and leases are our largest category of earning assets and typically provide higher yields than other types of
earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks that we attempt to
control and counterbalance.
The composition of gross loans and leases at December 31 for each of the past five years and the percentage of each
classification to total loans are summarized as follows:
December 31, 2021
Percent
Amount
December 31, 2020
Percent
Amount
December 31, 2019
Percent
Amount
December 31, 2018
Amount
Percent
December 31, 2017
Amount Percent
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
held for investment
$
209,261
10.6% $
162,603
8.6% $
172,456
12.2% $
141,864
9.9% $ 101,132
10.7%
616,023
31.3%
481,229
25.5%
387,443
27.3%
408,582
28.6%
249,490
26.3%
326,412
16.6%
343,791
18.3%
256,097
18.1%
253,562
17.8%
102,581
10.8%
214,310
10.9%
174,859
9.3%
143,111
10.1%
174,670
12.2%
82,586
8.7%
497,615
46,811
55,337
25.3%
2.4%
2.8%
623,446
44,279
53,483
33.1%
2.4%
2.8%
391,951
28,426
38,161
27.6%
2.0%
2.7%
402,809
25,615
20,901
28.2%
1.8%
1.5%
373,248
6,862
31,638
39.4%
0.8%
3.3%
$ 1,965,769
100.0% $ 1,883,690
100.0% $ 1,417,645
100.0% $
1,428,003
100.0% $ 947,537
100.0%
Over the past five years, we have experienced significant growth in our loan portfolio. During 2017 and continuing
through 2021, we recognized growth in the commercial real estate loan classifications reflecting the development of
the Target Market in which we operate. The acquisitions of Athens, FCB and BOW have increased various loan
51
balance classifications and provided further diversity in our loan portfolio through more consumer-oriented loan
products.
Our primary focus has been on commercial and industrial and commercial real estate lending, which constituted 67%
of our loan portfolio as of December 31, 2021. 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, 2021.
Commercial real estate
Consumer real estate
Construction and land
development
Commercial and industrial
Consumer
Other
Gross loans
Interest rate sensitivity
Fixed interest rates
Floating or adjustable interest
rates
Total gross loans
$
$
$
Due in 1 year or
less
Due in 1-5 years
December 31, 2021
Due after 5-15
years
Due after 15
years
50,351 $
15,674
432,346 $
47,357
307,238 $
185,319
35,349 $
78,062
52,776
144,981
12,568
5,983
282,333 $
98,993
233,337
31,964
19,735
863,732 $
25,243
115,806
2,252
29,619
665,477 $
37,298
3,491
27
—
154,227 $
Total
825,284
326,412
214,310
497,615
46,811
55,337
1,965,769
111,789
544,463
388,459
39,986
1,084,697
170,544
282,333 $
319,269
863,732 $
277,018
665,477 $
114,241
154,227 $
881,072
1,965,769
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 and
credit underwriters 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 Chief Credit Policy 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.
52
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:
•
•
•
•
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 an annual basis an independent party performs a formal credit risk review
of a sample of the loan portfolio. Among other things, this review assesses the appropriateness of the risk rating of
each loan in the sample. See “Note 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.
2021
2020
December 31,
2019
4,817
1,928
3,296
4,817
523
5,340
$
$
1,464
2,717
38
1,464
1,044
2,508
$
$
2018
2017
2,078
1,391
214
2,078
988
3,066
$
$
2,695
1,206
231
2,695
—
2,695
0.25%
0.10%
0.15%
0.28%
0.18%
0.12%
0.16%
0.20%
Non-accrual loans
Troubled debt restructurings
Loans past due greater than 90 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
$
$
3,258
1,832
1,380
3,258
266
3,524
$
$
0.17%
0.11%
53
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, 2021, 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.”
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, 2021
Amount Percent
$
December 31, 2020
Amount Percent
December 31, 2019
Percent
Amount
December 31, 2018
Amount Percent
December 31, 2017
Amount Percent
7,124
2,412
3,769
7,441
397
555
32.8% $
11.1%
17.4%
34.3%
1.8%
2.6%
7,349
1,831
3,476
9,708
305
576
31.6% $
7.9%
15.0%
41.8%
1.3%
2.5%
3,599
1,231
2,058
5,074
222
420
28.6% $
9.8%
16.3%
40.3%
1.8%
3.3%
3,309
1,005
2,431
5,036
105
227
27.3% $
8.3%
20.1%
41.6%
0.9%
1.9%
3,324
1,063
1,628
7,209
91
406
24.2%
7.7%
11.9%
52.5%
0.7%
3.0%
$ 21,698
100.0% $ 23,245
100.0% $
12,604
100.0% $ 12,113
100.0% $ 13,721
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.
54
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 transaction accounts
Money market accounts
Savings accounts
Time deposits
Total deposits
2021
Average
Balance
Average
Rate Paid
Year ended December 31,
2020
Average
Balance
Average
Rate Paid
2019
Average
Balance
Average
Rate Paid
$
$
725,075
955,553
451,947
142,705
417,770
2,693,050
0.00% $
0.17%
0.23%
0.11%
0.69%
0.21% $
558,416
744,144
463,183
86,350
407,224
2,259,317
0.00% $
0.52%
1.10%
0.11%
1.31%
0.64% $
315,031
499,468
444,685
49,902
361,956
1,671,042
0.00%
1.51%
1.62%
0.08%
2.08%
1.34%
Total average deposits increased 19.2% in 2021 compared to 2020 and increased 35.2% in 2020 compared to 2019.
Much of the growth in deposits in 2020 is related to our acquisitions of FCB and BOW. However, we have been able
to increase average noninterest-bearing demand deposits each year as we focus on building and expanding client
relationships and delivering on our core deposit-led strategy. The Target Market is an already competitive market,
which has been further impacted by the COVID-19 pandemic and its variants.
The maturities of time deposits that exceed the FDIC insurance limit of $250 thousand at December 31, 2021 are as
follows ($ in thousands):
Time deposits in excess of FDIC insurance limit
$
Capital Adequacy
December 31, 2021
Over six
through
twelve
months
Three
months or
less
18,005 $
Over three
through six
months
Over twelve
months
Total
14,908 $
14,209 $
8,249 $
55,371
As of December 31, 2021, 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
10.00%
8.00%
6.50%
5.00%
December 31, 2021
16.29%
14.11%
14.11%
10.69%
See Note 16 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,
55
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 gradual and non-parallel changes such as changing slopes
and twists of the yield curve. Static simulation models are based on current exposures and assume a constant balance
sheet with no growth. By estimating the effects of interest rate increases and decreases, the model can reveal
approximate interest rate risk exposure. The simulation model is used by management to gauge approximate results
given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings
trends in given interest rate scenarios and does not indicate actual expected results.
At December 31, 2021, our EAR static simulation results indicated that our balance sheet is asset sensitive to parallel
shifts in interest rates. This indicates that our assets generally reprice faster than our liabilities, which results in a
favorable impact to net interest income when market interest rates increase and an unfavorable impact to net interest
income when market interest rates decline. Many assumptions are used to calculate the impact of interest rate
fluctuations on our net interest income, such as asset prepayments, non-maturity deposit price sensitivity, and key rate
drivers. Because of the inherent use of these estimates and assumptions in the model, our actual results may, and most
likely will, differ from our static EAR results. In addition, static EAR results do not include actions that our
management may undertake to manage the risks in response to anticipated changes in interest rates or client behavior.
For example, as part of our asset/liability management strategy, management has the ability to increase asset duration
and/or decrease liability duration in order to reduce asset sensitivity, or to decrease asset duration and/or increase
liability duration in order to increase asset sensitivity.
The following table illustrates the results of our EAR analysis to determine the extent to which our net interest income
over the next 12 months would change if prevailing interest rates increased or decreased by the specified amounts.
Increase 200bp
Increase 100bp
Decrease 100bp
Liquidity Risk Management
Net interest income change
4.6%
1.9
(3.9)
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 $459.4 million at December
31, 2021. 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, 2021, total investment securities pledged for
these purposes comprised 41% of the estimated fair value of the entire investment portfolio, leaving $272.5 million
of unpledged securities.
56
We have a large base of non-maturity customer deposits, defined as demand, savings, and money market deposit
accounts. At December 31, 2021, such deposits totaled $2.3 billion and represented 86% 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. At December 31, 2021, available credit from the
FHLB totaled $154.4 million. Additionally, we had available credit from the Federal Reserve of $244.8 million and
available federal funds purchased lines with correspondent banks totaling $145.0 million at December 31, 2021.
The principal source of cash for CapStar Financial is dividends paid to it as the sole shareholder of the Bank. At
December 31, 2021, the Bank was able to pay up to $82.5 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.
Contractual Obligations
The following table presents additional information about contractual obligations as of December 31, 2021, which by
their terms have contractual maturity and termination dates subsequent to December 31, 2021.
Contractual Obligations:
Subordinated debt
Certificates of deposits
Lease liabilities
Total
Off-Balance Sheet Arrangements
Due in 1
year or less
$
— $
300,251
1,751
302,002 $
$
Due after 1
through 3
years
Due after 3
through 5
years
— $
58,984
3,143
62,127 $
— $
13,208
2,701
15,909 $
Due after 5
years
29,532 $
606
6,239
36,377 $
Total
29,532
373,049
13,834
416,415
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 as well as commitments to extend 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,
2021
Contract or notional amount
December 31,
2020
December 31,
2019
Financial instruments whose contract amounts represent
credit risk:
Unused commitments to extend credit
Standby letters of credit
Total
Non-GAAP Financial Measures
$
$
831,075 $
10,623
841,698 $
804,520 $
10,403
814,923 $
672,933
9,634
682,567
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, tangible common equity per share and allowance for loan losses plus
fair value purchase accounting marks to non-PPP loans. 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
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
December 31,
2021
December 31,
2020
December 31,
2019
$
$
$
$
380,094
(6,691)
(41,068)
—
332,335
3,133,046
(6,691)
(41,068)
3,085,287
$
$
$
$
343,486
(8,630)
(41,068)
—
293,788
2,987,006
(8,630)
(41,068)
2,937,308
$
$
$
$
$
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
$
273,046
(6,883)
(37,510)
—
228,653
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
12.13%
10.77%
11.50%
10.00%
13.40%
11.47%
12.95%
10.39%
10.93%
9.84%
22,166,129
21,988,803
18,361,922
17,724,721
11,582,026
$
21.03
$
15.62
$
14.87
$
13.84
$
11.91
14.99
13.36
12.45
11.25
11.37
58
The following table presents a reconciliation of allowance for loan losses plus fair value purchase accounting marks
to non-PPP loans for the most directly comparable GAAP financial measures.
Allowance for loan losses
Purchase accounting marks
$
Allowance for loan losses and
purchase accounting fair value marks
Loans held for investment
Less: PPP Loans net of deferred fees
Non-PPP Loans
Allowance for loan losses plus fair
value marks / Non-PPP Loans
December 31, 2021
December 31, 2020
December 31, 2019
$
21,698
3,003
24,701
1,965,769
26,539
1,939,230
$
23,245
3,663
26,908
1,883,690
181,601
1,702,089
12,604
3,473
16,077
1,417,645
—
1,417,645
1.27%
1.58%
1.13%
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 AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm- Financial Statements [PCAOB ID 149]
Report of Independent Registered Public Accounting Firm - Internal Control over Financial
Reporting [PCAOB ID 149]
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
63
64
65
66
67
68
69
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, 2021 and 2020 and the related consolidated statements of income,
comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended
December 31, 2021, and the related notes to the consolidated financial statements (collectively, the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in
the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission in 2013, and our report dated March 4, 2022 expressed an unqualified opinion on the
effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with
the 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 audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the 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 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 financial statements. We believe that our
audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial
statements that were communicated or required to be communicated to the audit committee and that: (1) relate to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion
on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses
As described in Note 4 to the Company’s financial statements, the Company has a gross loan portfolio of
approximately $1.97 billion and related allowance for loan losses of approximately $21.7 million as of December 31,
2021. As described by the Company in Note 1, the evaluation of the allowance for loan losses is inherently subjective
as it requires estimates that are susceptible to significant revision as more information becomes available. The
allowance for loan losses is evaluated on a regular basis and is based upon the Company’s review of the collectability
of the loans in light of peer group historical loss experience, the nature and volume of the loan portfolio, information
about specific borrower situations and estimated collateral values, economic conditions, and other factors.
61
We identified the Company’s estimate of the allowance for loan losses as a critical audit matter. The principal
considerations for our determination of the allowance for loan losses as a critical audit matter related to the high degree
of subjectivity in the Company’s judgments in determining the qualitative factors. Auditing these complex judgments
and assumptions by the Company involves especially challenging auditor judgment due to the nature and extent of
audit evidence and effort required to address these matters, including the extent of specialized skill or knowledge
needed.
The primary procedures we performed to address this critical audit matter included the following:
•
•
•
•
•
•
We tested the design and operating effectiveness of controls relating to the Company’s determination of
the allowance for loan losses, including controls over the qualitative factors.
We evaluated the relevance and the reasonableness of assumptions related to evaluation of the loan
portfolio, current economic conditions, and other risk factors used in development of the qualitative
factors for collectively evaluated loans.
We validated the completeness and accuracy of the underlying data used to develop the factors.
We validated the mathematical accuracy of the calculation.
We evaluated the reasonableness of assumptions and data used by the Company in developing the
qualitative factors by comparing these data points to internally developed and third-party sources, as well
as other audit evidence gathered.
Analytical procedures were performed to evaluate the directional consistency of changes that occurred in
the allowance for loan losses for loans collectively evaluated for impairment.
We have served as the Company's auditor since 2017.
/s/ Elliott Davis, LLC
Franklin, Tennessee
March 4, 2022
62
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of CapStar Financial Holdings, Inc.:
Opinion on the Internal Control Over Financial Reporting
We have audited CapStar Financial Holdings, Inc. and Subsidiary's (the “Company”) internal control over financial
reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020 and the related
consolidated statements of income, comprehensive income, change in shareholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2021 of the Company and our report dated March 4, 2022
expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ Elliott Davis, LLC
Franklin, Tennessee
March 4, 2022
63
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
December 31, 2021
December 31, 2020
Cash and due from banks
Interest-bearing deposits in financial institutions
Federal funds sold
Assets
Total cash and cash equivalents
Securities available-for-sale, at fair value
Securities held-to-maturity, fair value of $1,830 and $2,504
at December 31, 2021 and 2020, respectively
Loans held for sale (includes $37,306 and $97,303 measured
at fair value at December 31, 2021 and 2020, respectively)
Loans held for investment
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:
Noninterest-bearing
Interest-bearing
Savings and money market accounts
Time
Total deposits
Federal Home Loan Bank advances
Subordinated debt
Other liabilities
Total liabilities
Shareholders’ equity:
Common stock, voting, $1 par value; 25,000,000 shares authorized;
22,166,129 and 21,988,803 shares issued and outstanding
at December 31, 2021 and 2020, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income, net of income tax
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
$
$
$
$
$
$
$
48,202
347,023
19,900
415,125
459,396
1,782
83,715
1,965,769
(21,698)
1,944,071
25,727
14,453
7,376
41,068
6,691
266
133,376
3,133,046
725,171
944,605
641,456
373,049
2,684,281
—
29,532
39,139
2,752,952
22,166
248,709
110,489
(1,270)
380,094
3,133,046
$
40,191
237,248
—
277,439
486,215
2,407
186,998
1,883,690
(23,245)
1,860,445
26,689
15,562
8,771
41,068
8,630
523
72,259
2,987,006
662,934
844,101
591,438
469,528
2,568,001
10,000
29,423
36,096
2,643,520
21,989
246,890
66,879
7,728
343,486
2,987,006
64
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Consolidated Statements of Income
(Dollars in thousands, except share and per 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
Subordinated notes
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Deposit service charges
Interchange and debit card transaction fees
Mortgage banking
Tri-Net
Wealth management
SBA lending
Net gain (loss) on sale of securities
Other noninterest income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Data processing and software
Occupancy
Equipment
Professional services
Regulatory fees
Acquisition related expenses
Amortization of intangibles
Other noninterest expense
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,
2020
2019
2021
$
89,219
$
84,272 $
82,828
6,573
1,408
21
640
598
98,459
1,626
1,203
2,873
—
—
12
1,575
7,289
91,170
(1,066)
92,236
4,515
4,816
16,058
8,613
1,850
2,060
28
4,741
42,681
41,758
11,248
4,205
3,507
2,155
1,031
323
1,939
7,375
73,541
61,376
12,699
48,677
2.20
2.19
$
$
$
4,863
1,342
—
576
799
91,852
3,868
5,196
5,317
—
—
356
792
15,529
76,323
11,479
64,844
3,494
3,172
25,034
3,693
1,573
1,440
125
4,717
43,248
45,252
8,865
3,590
3,195
2,224
1,261
5,390
1,824
5,760
77,361
30,731
6,035
24,696 $
1.22 $
1.22 $
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
3,251
9,467
2,785
1,425
803
(99)
3,507
24,274
35,542
6,961
3,345
3,723
2,102
591
2,654
1,655
5,422
61,995
29,266
6,844
22,422
1.25
1.20
22,127,919
22,179,461
20,162,038
20,185,589
17,886,164
18,613,224
$
$
$
65
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 (gains) losses included in
net income
Tax effect
Net of tax
Unrealized losses on cash flow hedges:
Unrealized holding losses arising during the period
Reclassification adjustment for losses included in
net income
Tax effect
Net of tax
Other comprehensive income (loss)
Comprehensive income
See accompanying notes to consolidated financial statements.
2021
Year Ended December 31,
2020
2019
48,677
$
24,696
$
22,422
(12,141)
(28)
3,171
(8,998)
—
—
—
—
(8,998)
39,679
$
4,968
(125)
(1,177)
3,666
—
2,679
—
2,679
6,345
31,041
$
6,321
99
(1,678)
4,742
(702)
878
(219)
(43)
4,699
27,121
$
$
$
$
$
$
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S
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
2021
Year Ended December 31,
2020
2019
$
48,677
$
24,696
$
22,422
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 (gain) loss on sale of securities
Mortgage banking income
Tri-Net fees
Net gain on sale of SBA loans
Net gain on disposal of premises and equipment
Net gain on sale of other real estate owned
Stock-based compensation
Deferred income tax (benefit) expense
Origination of loans held for sale
Proceeds from loans held for sale
Cash payments arising from operating leases
Amortization of debt issuance expense
Net (increase) decrease in accrued interest receivable and other assets
Net increase 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
Redemption (purchase) of restricted equity securities
Net (increase) decrease in loans
Purchase of premises and equipment
Proceeds from sale of premises and equipment
Purchases of bank owned life insurance
Proceeds from sale of other real estate
Cash paid for acquisitions
Cash received from acquisitions
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net increase in deposits
Proceeds from Federal Home Loan Bank advances
Payments on Federal Home Loan Bank advances
Proceeds from issuance of subordinated notes, net of debt issuance expense
Repurchase of common stock
Exercise of common stock options and warrants, net of repurchase of restricted
shares
Common stock dividends paid
Termination of interest rate swap agreement and related reclassification adjustment
for unrealized losses included in income
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 losses
Lease liabilities arising from obtaining right-of-use assets
Unrealized (losses) gains on securities available for sale
Loans transferred from held-for-sale to held-for-investment
Assets acquired, net of cash
Liabilities assumed
Goodwill
Conversion of preferred stock and non-voting common stock
See accompanying notes to consolidated financial statements.
$
$
68
(1,066)
(7,016)
3,452
2,435
(28)
(16,058)
(8,613)
(2,060)
(21)
(49)
1,600
(207)
(1,288,434)
1,397,992
(2,074)
109
(15,318)
3,043
116,364
(92,465)
—
104,733
600
1,109
(57,110)
(503)
21
(39,000)
2,328
—
—
(80,287)
116,280
—
(10,000)
—
(462)
858
(5,067)
—
101,609
137,686
277,439
415,125
8,075
16,045
2,022
647
—
(8,998)
18,396
—
—
—
—
$
$
11,479
(5,290)
3,201
1,563
(125)
(25,034)
(3,693)
(1,440)
(303)
(273)
1,223
(4,339)
(1,355,961)
1,365,568
(1,814)
36
2,894
6,790
19,178
(340,962)
78,385
91,616
881
(783)
(162,843)
(417)
3,286
—
1,817
(27,278)
90,760
(265,538)
395,873
680,000
(680,000)
29,387
(1,437)
63
(4,035)
2,679
422,530
176,170
101,269
277,439
15,551
10,353
452
1,226
668
3,666
2,800
423,983
447,412
3,558
—
$
$
761
(3,737)
2,883
807
99
(9,467)
(2,785)
(803)
—
(3)
1,262
2,585
(824,021)
725,003
(1,786)
—
(10,461)
11,887
(85,354)
(59,473)
68,068
27,624
395
(1,651)
14,448
(1,582)
—
—
127
—
—
47,956
159,443
75,000
(190,000)
—
(7,836)
1,627
(3,507)
(1,503)
33,224
(4,174)
105,443
101,269
24,216
716
180
798
13,512
4,742
—
—
—
—
1,011
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, 2021and 2020 and for each of the three years in the period
ended December 31, 2021 include CapStar Financial Holdings, Inc. and it’s wholly owned subsidiary, CapStar Bank
(the “Bank”, together referred to as the “Company”). Significant intercompany transactions and accounts are
eliminated in consolidation.
The 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.
Reclassifications
Certain amounts, previously reported, have been reclassified to state all periods on a comparable basis and had no
effect on shareholders' equity or net income.
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.
69
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.
70
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, such as SBA loans or Tri-Net loans, 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.
No SBA loans or Tri-Net loans were measured at fair value as of December 31, 2021. For further information, see
Note 23 - 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.
The changes in fair value are recorded as a component of mortgage banking income and included gains (losses) of
($2.5) million, $2.5 million, and $0.6 million for the years ended December 31, 2021, 2020, and 2019, respectively .
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, 2021 and 2020 (dollars in thousands):
December 31, 2021
Residential mortgage loans held for sale
December 31, 2020
Residential mortgage loans held for sale
Tri-Net Fees
Aggregate
Unpaid
Principal
Balance
Fair Value
$
37,306 $
36,755 $
97,303
94,248
Difference
550
3,055
Tri-Net fees are derived from the origination of commercial real estate loans with the intent to sell 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 seven classes of loans for financial reporting purposes: commercial real estate, consumer real estate,
construction and land development, commercial and industrial, consumer, PPP, and other. The appropriate
classification is determined based on the underlying collateral utilized to secure each loan.
Commercial real estate includes both owner-occupied and non-owner occupied properties. The repayment
of owner-occupied properties is largely dependent on the operations of the tenant, while non-owner occupied
properties is dependent upon the refinance or sale of the underlying 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.
71
Consumer loans include all loans issued to individuals not included in the consumer real estate class.
PPP loans originated through the CARES act and include partially, or fully forgivable loans used to cover
payroll costs, rent, interest, utilities, and other qualifiable expenses.
Other loans include all loans not included in the classes of loans above and leases.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are
reported at the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs,
and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees,
net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method
without anticipating prepayments.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well secured
and in process of collection. Consumer loans and any accrued interest is typically charged off no later than 180 days
past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or
charged off at an earlier date if collection of principal or interest is considered doubtful and collection is highly
questionable. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest
received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual
status. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero.
Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to
accrual status when all the principal and interest amounts contractually due are brought current and future payments
are reasonably assured. Loans can also be returned to accrual status when they become well secured and in the process
of collection.
Acquired Loans
Acquired loans are accounted for under the acquisition method of accounting. The acquired loans are recorded at their
estimated fair values as of the acquisition date. Fair value of acquired loans is determined using a discounted cash
flow model based on assumptions regarding the amount and timing of principal and interest payments, estimated
prepayments, estimated default rates, estimated loss severity in the event of defaults, and current market rates.
Estimated credit losses are included in the determination of fair value; therefore, an allowance for loan losses is not
recorded on the acquisition date.
An acquired loan is considered 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
72
limited loss history. Allocations of the allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance
when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries are credited to
the allowance for loan losses.
The Company also considers the results of the external independent loan review when assessing the adequacy of the
allowance and incorporates relevant loan review results in the loan impairment and overall adequacy of allowance
determinations. Furthermore, regulatory agencies periodically review the Company’s allowance for loan losses and
may require the Company to record adjustments to the allowance based on their judgment of information available to
them at the time of their examinations.
Additional considerations are included in the determination of the adequacy of the allowance based on the continuous
review conducted by relationship managers and credit department personnel. The Company’s loan policy requires that
each customer relationship wherein total exposure exceeds $1.5 million be subject to a formal credit review at least
annually. Should these reviews identify potential collection concerns, appropriate adjustments to the allowance may
be made.
The allowance consists of specific and general components as discussed below. While the allowance consists of
separate components, these terms are primarily used to describe a process. Both portions of the allowance are available
to provide for inherent losses in the entire portfolio.
Specific Component
The specific component relates to loans that are individually determined to be impaired when, based on current
information and events, it is probable that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and
for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”)
and classified as impaired.
Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
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 41 quarter look-back period as of December 31, 2019. Subsequently, the Company increased
its look-back period to a total of 45 quarters and 49 quarters as of December 31, 2020 and 2021, 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
73
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.
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 $555,000, $689,000, and $377,000 for the years ended
December 31, 2021, 2020, and 2019 respectively. Valuation adjustments associated with these servicing rights
amounted to $77,000, ($238,000) and ($211,000) for the years ended December 31, 2021, 2020 and 2019, respectively.
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.
74
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.
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. Qualitative factors are assessed to first determine if it is more likely than not
(more than 50%) that the carrying value of goodwill is less than fair value.
During the year ended December 31, 2021, qualitative factors indicated it was more likely than not that the carrying
value of goodwill was less than fair value, thus there were no indicators of impairment and no quantitative testing was
performed. For the year ended December 31, 2020, as a result of market volatility caused by the COVID-19 pandemic,
the company determined it did not satisfy the more likely than not qualitative assessment that the fair value of the
reporting unit exceeded its carrying value, including goodwill. As a result, the Company elected to perform a
quantitative assessment, which included a combination of quoted market prices of the Company’s stock, prices of
comparable businesses, discounted cash flows and other techniques. Based upon the results of the quantitative
assessment, the Company determined the fair value of the reporting unit exceeded the carrying value, resulting in no
impairment.
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 upon 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.
75
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, 2018 through 2021. It is the Company’s
policy to recognize interest and/or penalties related to income tax matters in income tax expense.
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 $758,000, $400,000 and $370,000
for the years ended December 31, 2021, 2020 and 2019, 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 market risk to the Bank. These swaps are derivatives, but are not
designated as hedging instruments.
The Bank may also utilize 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.
76
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.
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. On March 15, 2020, the Board of the Federal
Reserve reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve
requirements for all depository institutions.
Subsequent Events
The Company has evaluated subsequent events for recognition and disclosure through March 4, 2022, 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, 2021, 2020 or 2019.
77
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 2016-13, Financial Instruments – Credit Losses
Year Ended December 31,
2020
2021
2019
$
$
$
$
48,677 $
24,696 $
22,127,919
20,162,038
2.20 $
1.22 $
22,422
17,886,164
1.25
48,677 $
24,696 $
22,127,919
51,542
22,179,461
20,162,038
23,551
20,185,589
2.19 $
1.22 $
22,422
17,886,164
727,060
18,613,224
1.20
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 is not required to adopt this standard until January 1,
2023. The Company has established a Current Expected Credit Loss (CECL) Steering Committee which includes the
appropriate members of management to evaluate the impact this ASU will have on the Company’s financial position,
results of operations and financial statement disclosures. Additionally, the Company selected a third-party vendor to
provide allowance for loan loss software as well as advisory services in developing a new methodology and a parallel
model.
ASU 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. These amendments did not have a material effect on the
Company’s financial statements.
ASU 2020-04 ― Applicable to entities within the scope of Topic 848, Reference Rate Reform:
In March 2020, the FASB issued guidance which provides temporary optional guidance to ease the potential burden
in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally
accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria,
that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during
the global market-wide reference rate transition period. In January 2021, the FASB issued ASU 2021-01 which
clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting
apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March
12, 2020 through December 31, 2022. The Company continues to implement its transition plan towards cessation of
LIBOR and the modification of its outstanding financial instruments with attributes that are either directly or indirectly
78
influenced by LIBOR. The Company expects to utilize the LIBOR transition relief allowed under ASU 2020-04 and
ASU 2021-01, as applicable, and does not expect such adoption to have a material impact on its accounting and
disclosures. The Company will continue to assess the impact as the reference rate transition approaches June 30, 2023.
ASU 2021-06 ― Applicable to entities within the scope of Topic 245, Presentation of Financial Statements, Topic
942, Financial Services- Depository and Lending, and Topic 946, Financial Services- Investment Companies:
This guidance updated the FASB Codification pursuant to SEC Release No. 33-10786, Amendments to Financial
Disclosures about Acquired and Disposed Businesses, which was effective January 1, 2021, and SEC Release No. 33-
10835, Update to Statistical Disclosures for Bank and Savings and Loan Registrants which applied to fiscal years
ending on or after December 15, 2021. The adoption of ASU 2021-06 did not have a material impact on its disclosures.
79
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 2 – ACQUISITIONS
FCB Merger
Effective July 1, 2020, pursuant to the Agreement and Plan of Acquisition dated as of January 23, 2020 (the “FCB
Acquisition Agreement”), by and between the Company and FCB Corporation, a Tennessee corporation (“FCB”),
FCB was acquired by CapStar, with CapStar continuing as the surviving entity (the “FCB Acquisition”). Immediately
following the FCB Acquisition, The First National Bank of Manchester, a national banking association and a wholly
owned subsidiary of FCB, was acquired by CapStar Bank, a Tennessee chartered bank and a wholly owned subsidiary
of CapStar (the “FNBM Acquisition”), with CapStar Bank continuing as the surviving entity in the FNBM
Acquisition.
Subject to the terms and conditions set forth in the FCB Acquisition Agreement, at the effective time of the FCB
Acquisition, shares of common stock, par value $10.00 per share, of FCB (“FCB Common Stock”) issued and
outstanding immediately prior to the completion of the FCB Acquisition (other than shares of FCB Common Stock
owned or held by FCB, CapStar and their subsidiaries (in each case, other than shares of FCB Common Stock held in
a fiduciary or agency capacity or in satisfaction of debts previously contracted) were collectively converted into the
right to receive in the aggregate 2,966,918 shares of common stock, par value $1.00 per share, of CapStar (“CapStar
Common Stock”), with cash (without interest) in lieu of fractional shares, and $22.2 million in cash, without interest.
BOW Acquisition
Effective July 1, 2020, following the FCB Acquisition, pursuant to the Plan of Bank Acquisition, dated as of January
23, 2020 (the “BOW Acquisition Agreement,” and together with the FCB Acquisition Agreement, the “Acquisition
Agreements”), by and among CapStar, CapStar Bank and The Bank of Waynesboro, a Tennessee chartered bank
(“BOW”), BOW was acquired by CapStar Bank, with CapStar Bank continuing as the surviving entity (the “BOW
Acquisition,” and together with the FCB Acquisition, the “Acquisitions”).
On the terms and subject to the conditions set forth in the BOW Acquisition Agreement, at the effective time of the
BOW Acquisition, shares of common stock, par value $10.00 per share, of BOW (“BOW Common Stock”) issued
and outstanding immediately prior to the completion of the BOW Acquisition (other than shares of BOW Common
Stock owned or held by CapStar, CapStar Bank, BOW and their subsidiaries (in each case, other than shares of BOW
Common Stock held in a fiduciary or agency capacity or in satisfaction of debts previously contracted)) were
collectively converted into the right to receive in the aggregate 664,800 shares of CapStar Common Stock, with cash
(without interest) in lieu of fractional shares, and $5.1 million in cash, without interest.
Total acquisition consideration amounted to approximately $70.9 million.
With the acquisitions, the Company further expanded its franchise in the Middle Tennessee market. FCB’s and BOW’s
results of operations were included in the Company’s results beginning July 1, 2020. Acquisition related costs of $5.4
million are included in the Company’s consolidated statements of income for the year ended December 31, 2020. The
fair value of the common shares issued as part of the consideration paid for the Acquisitions was determined by the
closing price of the Company’s common shares immediately preceding the acquisition date.
80
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Goodwill of $3.6 million associated with the Acquisitions is not amortizable for book or tax purposes. The following
table summarizes the consideration paid for the Acquisitions and the amounts of the assets acquired and liabilities
assumed recognized at the acquisition date (in thousands).
As recorded by
FCB Corporation
and BOW
Initial fair value
adjustments
Measurement period
adjustments
As recorded by
CapStar Financial
Holdings
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
Cash consideration paid
Total cost of acquisition
Goodwill recorded related to acquisition
$
$
$
$
90,760
98,536
296,992
(4,544)
9,907
—
16,514
508,165
440,025
4,735
444,760
$
$
$
$
—
159 (a)
(2,318)(b)
4,544 (c)
1,540 (d)
3,570 (e)
(917)(f)
6,578
$
$
2,652 (g) $
—
2,652
$
— $
—
—
—
—
—
—
— $
— $
—
— $
$
$
$
$
90,760
98,695
294,674
—
11,447
3,570
15,597
514,743
442,677
4,735
447,412
67,331
43,611
27,278
70,889
3,558
(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 the acquired loans to their estimated fair value
based on interest rates and expected cash flows at the date of acquisition.
(c) The amount represents the removal of FCB and BOW’s existing allowance for loan losses.
(d) The amount represents the adjustment of the net book value of acquired premises and equipment to their estimated
fair value.
(e) The amount represents the adjustment of recording the fair value of the core deposit intangible representing the
intangible value of the deposit base acquired and the fair value of the customer relationship.
(f) The amount represents the net adjustment of the deferred tax asset recognized on the fair value adjustments on
acquired assets and assumed liabilities.
(g) The amount represents the adjustment necessary because the weighted average interest rate of acquired time
deposits exceeded the cost of similar funding at the time of acquisition. The fair value adjustment will be
amortized to reduce future interest expense over the life of the portfolio.
81
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following unaudited pro forma financial information presents the combined results of the Company, FCB and
BOW as if the acquisition had occurred as of January 1, 2019, 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, FCB and BOW 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, 2020
73,571
$
44,453
118,024
Pro forma combined
twelve months ended
December 31, 2019
87,523
$
27,375
114,898
25,927
28,989
$
$
1.29
1.28
$
$
1.35
1.30
Investment securities have been classified in the balance sheet according to management’s intent. The Company’s
classification of securities at December 31, 2021 and 2020 was as follows (in thousands):
December 31, 2021
Gross
Gross
unrealized
unrealized
(losses)
gains
Amortized
Cost
Estimated
fair value
Amortized
Cost
December 31, 2020
Gross
unrealized
gains
Gross
unrealized
(losses)
Estimated
fair value
Securities available-for-sale:
U. S. government agency
securities
State and municipal securities
Mortgage-backed securities
Asset-backed securities
Other debt securities
Total
Securities held-to-maturity:
State and municipal securities
Total
$
$
$
$
11,550 $
81,158
300,398
3,326
67,104
463,536 $
47 $
2,107
2,008
13
1,514
5,689 $
(94) $ 11,503
82,560
(705)
293,607
(8,799)
3,339
—
68,387
(231)
(9,829) $ 459,396
1,782 $
1,782 $
48 $
48 $
— $
— $
1,830
1,830
$
$
$
$
16,158 $
89,081
332,014
3,325
37,608
478,186 $
258 $
2,928
4,892
—
819
8,897 $
(25) $ 16,391
91,928
(81)
336,363
(543)
3,193
(132)
38,340
(87)
(868) $ 486,215
2,407 $
2,407 $
97 $
97 $
— $
— $
2,504
2,504
The amortized cost and fair value of debt and equity securities at December 31, 2021, 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
16,256 $
78,774
56,934
7,848
300,398
3,326
463,536 $
$
$
Estimated
fair value
Amortized
cost
Estimated
fair value
16,355 $
80,357
58,142
7,596
293,607
3,339
459,396 $
514 $
1,268
—
—
—
—
1,782 $
521
1,309
—
—
—
—
1,830
82
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Results from sales, maturities, prepayments and calls of securities available for sale were as follows (in thousands):
Proceeds
Gross gains
Gross losses
$
2021
Year ended December 31
2020
170,001 $
148
(23)
104,733 $
45
(17)
2019
95,692
116
(215)
Securities with a market value of $188.8 million and $163.5 million at December 31, 2021 and 2020, respectively,
were pledged to collateralize public deposits, derivative positions and Federal Home Loan Bank advances.
At December 31, 2021 and 2020 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, 2021
U. S. government agency securities
State and municipal securities
Mortgage-backed securities
Asset-backed securities
Other debt securities
Total temporarily impaired securities
December 31, 2020
U. S. government agency securities
State and municipal securities
Mortgage-backed securities
Asset-backed securities
Other debt securities
Less than 12 months
Gross
unrealized
losses
12 months or more
Gross
unrealized
losses
Estimated
fair value
Total
Estimated
fair value
Gross
unrealized
losses
Estimated
fair value
$
2,560 $
15,309
155,805
—
30,375
$ 204,049 $
$
1,989 $
10,463
100,291
—
6,103
(20) $
(279)
(5,291)
—
(231)
(5,821) $
2,737 $
12,768
75,934
—
—
91,439 $
(74) $
(426)
(3,508)
—
—
5,297 $
28,077
231,739
—
30,375
(4,008) $ 295,488 $
(25) $
(81)
(480)
—
(87)
(673) $
— $
—
1,449
3,193
—
4,642 $
— $
—
(63)
(132)
—
1,989 $
10,463
101,740
3,193
6,103
(195) $ 123,488 $
(94)
(705)
(8,799)
—
(231)
(9,829)
(25)
(81)
(543)
(132)
(87)
(868)
Total temporarily impaired securities
$ 118,846 $
83
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, 2021. There were no other-than-temporary impairments for the
years ended December 31, 2021, 2020 or 2019.
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31, 2021 and 2020 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, 2021
$
825,284 $
326,412
214,310
497,615
46,811
55,337
1,965,769
(21,698)
1,944,071 $
December 31, 2020
643,832
343,791
174,859
623,446
44,279
53,483
1,883,690
(23,245)
1,860,445
$
The CARES Act created a new guaranteed, unsecured loan program under the SBA called the Payroll Protection
Program (“PPP”), which the Company participates in, to fund operational costs of eligible businesses, organizations
and self-employed persons during the pandemic period. The SBA has guaranteed 100% of the amounts loaned under
the PPP by lenders to eligible small businesses. One of the notable features of the PPP is that borrowers are eligible
for loan forgiveness if certain conditions are met related to retaining staff and if loan amounts are used to cover eligible
expenses, such as payroll, mortgage interest, rents and utilities payments. These loans have a two-year term and will
earn interest at a rate of 1%. The outstanding balances of loans originated under the PPP as of December 31, 2021 and
2020 totaled $26.5 million and $185.5 million, respectively, and were included in commercial and industrial loans.
Additionally, PPP borrowers are not required to pay any fees to the government or the lender and the loans may be
repaid by the borrower at any time. The SBA, however, will pay lenders a processing fee based on the size of the PPP
loan, ranging from 1% to 5% of the loan. Unamortized fees associated with PPP loans included in total loans were
$0.6 million and $4.0 million as of December 31, 2021 and 2020, respectively. These fees are deferred and amortized
over the life of the loan. PPP fees recognized as income totaled $7.2 million and $3.6 million for the years ended
December 31, 2021 and 2020, respectively.
The adequacy of the allowance for loan losses (“ALL”) is assessed at the end of each quarter. The ALL includes a
specific component related to loans that are individually evaluated for impairment and a general component related to
loans that are segregated into homogenous pools and collectively evaluated for impairment. The ALL factors applied
to these pools are an estimate of probable incurred losses based on management’s evaluation of historical net losses
from loans with similar characteristics, which are adjusted by management to reflect current events, trends, and
conditions. The adjustments include consideration of the following: changes in lending policies and procedures,
economic conditions, nature and volume of the portfolio, experience of lending management, volume and severity of
past due loans, quality of the loan review system, value of underlying collateral for collateral dependent loans,
concentrations, and other external factors. The Company’s evaluation of other external factors included consideration
of the novel coronavirus (“COVID-19”) global pandemic and the resulting impact on the Company’s loan portfolio
as of December 31, 2021, which is uncertain due to evolving conditions and unforeseen new variants.
84
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
At December 31, 2021, variable-rate and fixed-rate loans totaled $881,072,000 and $1,084,697,000, respectively. At
December 31, 2020, variable-rate and fixed-rate loans totaled $1,199,105,000 and $691,914,000, respectively.
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to
service their debt such as: current financial information, historical payment experience, credit documentation, public
information, and current economic trends, among other factors. The Company analyzes all commercial loans, and
consumer relationships with an outstanding balance greater than $500,000, individually and assigns each loan a risk
rating. This analysis is performed on a continual basis by the relationship managers and credit department personnel.
On at least an annual basis an independent party performs a formal credit risk review of a sample of the loan portfolio.
Among other things, this review assesses the appropriateness of the loan’s risk rating. The Company uses the following
definitions for risk ratings:
Special Mention – A special mention asset possesses deficiencies or potential weaknesses deserving of
management’s attention. If uncorrected, such weaknesses or deficiencies may expose the Company to an
increased risk of loss in the future.
Substandard – A substandard asset is inadequately protected by the current sound net worth and paying capacity
of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the
Company will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate
amount of substandard assets, does not have to exist in individual assets classified substandard.
Doubtful – A doubtful asset has all weaknesses inherent in one classified substandard, with the added
characteristic that weaknesses make collection or liquidation in full, on the basis of existing facts, conditions, and
values, highly questionable and improbable. The probability of loss is extremely high, but certain important and
reasonable specific pending factors which may work to the advantage and strengthening of the asset exist,
therefore, its classification as an estimated loss is deferred until a more exact status may be determined. Pending
factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on
additional collateral, and refinancing plans.
Loans not falling into the criteria above are considered to be pass-rated loans. The Company utilizes six loan grades
within the pass risk rating.
The following table provides the risk category of loans by applicable class of loans as of December 31, 2021 and 2020
(in thousands):
December 31, 2021
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Purchased Credit Impaired
$
Pass
802,562 $
312,662
214,209
468,278
45,695
54,959
15,416
Total
$ 1,913,781 $
December 31, 2020
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Purchased Credit Impaired
$
601,133 $
323,072
169,315
568,767
41,640
52,949
23,899
Total
$ 1,780,775 $
Non-impaired Loans
Special
Mention
Substandard
Doubtful
Total Impaired
Loans
Total
4,721 $
712
—
16,952
56
76
3,585
26,102 $
2,933 $
1,122
19
25,666
18
66
4,412
34,236 $
— $
—
—
73
3
—
260
336
$
— $
—
—
—
2
—
81
83
$
1,151 $ 821,355
314,758
214,219
495,364
45,777
55,035
19,261
2,343 $ 1,965,769
909
10
250
23
—
—
1,179 $ 638,291
327,276
1,707
174,589
102
620,456
168
41,671
7
53,015
—
28,392
—
3,163 $ 1,883,690
12,921 $
475
—
9,811
—
—
—
23,207 $
33,046 $
1,375
5,153
25,855
4
—
—
65,433 $
85
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following tables detail the changes in the ALL for the years ending December 31, 2021, 2020 and 2019 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, 2021
Balance, beginning of period $
Charged-off loans
Recoveries
Provision for loan losses
Balance, end of period
$
Year ended December 31, 2020
Balance, beginning of period $
Charged-off loans
Recoveries
Provision for loan losses
Balance, end of period
$
Year ended December 31, 2019
Balance, beginning of period $
Charged-off loans
Recoveries
Provision for loan losses
Balance, end of period
$
7,349 $
(10)
10
(225)
7,124 $
1,831 $
(1)
18
564
2,412 $
3,476 $
—
—
293
3,769 $
9,708 $
(199)
10
(2,078)
7,441 $
305 $ 576 $ 23,245
(647)
(227)
(210)
166
41
87
215
(1,066)
165
397 $ 555 $ 21,698
3,599 $
—
10
3,740
7,349 $
1,231 $
(49)
14
635
1,831 $
3,309 $
—
23
267
3,599 $
1,005 $
(39)
20
245
1,231 $
2,058 $
—
—
1,418
3,476 $
2,431 $
—
—
(373)
2,058 $
5,074 $
(728)
235
5,127
9,708 $
5,036 $
(455)
380
113
5,074 $
222 $ 420 $ 12,604
(1,226)
(277)
(172)
53
76
388
11,479
380
179
305 $ 576 $ 23,245
105 $ 227 $ 12,113
(798)
(140)
(164)
528
23
82
199
761
310
222 $ 420 $ 12,604
86
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, 2021 and 2020 follows (in
thousands):
Commercial
real estate
Consumer
real estate
Construction
and land
development
Commercial
and
industrial
Consumer
Other
Total
December 31, 2021
Allowance for Loan Losses:
Collectively evaluated for
impairment
Individually evaluated for
impairment
Purchased credit impaired
Balances, end of period
Loans:
Collectively evaluated for
impairment
Individually evaluated for
impairment
Purchased credit impaired
Balances, end of period
December 31, 2020
Allowance for Loan Losses:
Collectively evaluated for
impairment
Individually evaluated for
impairment
Purchased credit impaired
Balances, end of period
Loans:
Collectively evaluated for
impairment
Individually evaluated for
impairment
Purchased credit impaired
Balances, end of period
$
$
$
$
$
$
$
$
7,075
$
2,211
$
3,769
$
7,376
$
321
$
555
$
21,307
—
49
7,124
$
200
1
2,412
$
—
—
3,769
$
—
65
7,441
$
—
76
397
$
—
—
555
$
200
191
21,698
820,204
$
313,849
$
214,209
$
495,114
$
45,754
$
55,035
$
1,944,165
1,151
3,929
825,284
$
909
11,654
326,412
$
10
91
214,310
$
250
2,251
497,615
$
23
1,034
46,811
$
—
302
55,337
2,343
19,261
1,965,769
$
7,349
$
1,831
$
3,410
$
9,708
$
305
$
576
$
23,179
—
—
7,349
$
—
—
1,831
$
66
—
3,476
$
—
—
9,708
$
—
—
305
$
—
—
576
$
66
—
23,245
637,112
$
325,569
$
174,487
$
620,288
$
41,664
$
53,015
$
1,852,135
1,179
5,541
643,832
$
1,707
16,515
343,791
$
102
270
174,859
$
168
2,990
623,446
$
7
2,608
44,279
$
—
468
53,483
3,163
28,392
1,883,690
$
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, 2021 and 2020. PPP loans
included in commercial and industrial loans in the below table do not have a corresponding ALL as they are fully
guaranteed by the SBA (dollars in thousands):
December 31, 2021
December 31, 2020
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
$
7,124
2,412
3,769
7,441
397
555
21,698
0.36% $
0.12%
0.19%
0.38%
0.02%
0.03%
1.10% $
7,349
1,831
3,476
9,708
305
576
23,245
0.39%
0.10%
0.18%
0.51%
0.02%
0.03%
1.23%
87
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following table presents information related to impaired loans, excluding purchased credit impaired (“PCI”) loans,
for the years ended December 31, 2021 and 2020 (in thousands):
December 31, 2021
Unpaid
principal
balance
Recorded
investment
Related
allowance
Recorded
investment
December 31, 2020
Unpaid
principal
balance
Related
allowance
With no related allowance recorded:
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Subtotal
With an allowance recorded:
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Subtotal
Total
$
$
1,151 $
255
10
250
23
—
1,689
—
654
—
—
—
—
654
2,343 $
1,115 $
281
11
298
23
—
1,728
—
654
—
—
—
—
654
2,382 $
— $
—
—
—
—
—
—
—
200
—
—
—
—
200
200 $
1,179 $
1,707
—
168
7
—
3,061
—
—
102
—
—
—
102
3,163 $
1,176 $
1,608
—
457
7
—
3,248
—
—
102
—
—
—
102
3,350 $
—
—
—
—
—
—
—
—
—
66
—
—
—
66
66
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, excluding PCI loans, for the years ended December 31, 2021, 2020 and 2019 (in thousands):
Year Ended
December 31, 2021
Year Ended
December 31, 2020
Year Ended
December 31, 2019
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
With no related allowance recorded:
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Subtotal
With an allowance recorded:
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Subtotal
Total
$
$
1,169 $
577
12
263
35
—
2,056
—
665
—
—
—
—
665
2,721 $
64 $
3
1
13
3
—
84
—
—
—
—
—
—
—
84 $
1,198 $
1,975
—
121
8
—
3,302
—
—
107
—
—
—
107
3,409 $
66 $
66
—
1
—
—
133
—
—
—
—
—
—
—
133 $
2,574 $
1,037
119
824
23
—
4,577
—
—
—
—
—
—
—
4,577 $
313
105
4
440
2
—
864
—
—
—
—
—
—
—
864
There was no interest income recognized on a cash basis for impaired loans for the years ended December 31, 2021,
2020 or 2019.
88
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, 2021 and 2020
by class of loans (in thousands):
December 31, 2021
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Purchased credit impaired
Total
December 31, 2020
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Purchased credit impaired
Total
30 - 59
Days
Past Due
60 - 90
Days
Past Due
Greater Than
90 Days
Past Due
$
— $
1,806
—
57
164
—
302
2,329
409
6,084
2,670
1,734
270
252
1,372
12,791
$
$
$
$
$
$
— $
—
—
48
170
—
153
371
$
— $
1,596
745
38
40
38
1,554
4,011
$
1,115 $
241
11
268
26
—
459
2,120 $
1,176 $
687
—
1,595
7
—
901
4,366 $
Total
Past Due
Loans Not
Past Due
1,115 $
2,047
11
373
360
—
914
Total
821,355
820,240 $
314,758
312,711
214,219
214,208
495,364
494,991
45,777
45,417
55,035
55,035
19,261
18,347
4,820 $ 1,960,949 $ 1,965,769
1,585 $
8,367
3,415
3,367
317
290
3,827
638,291
636,706 $
327,276
318,909
174,589
171,174
620,456
617,089
41,671
41,354
53,015
52,725
28,392
24,565
21,168 $ 1,862,522 $ 1,883,690
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, 2021 and 2020 (in thousands):
December 31, 2021
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Purchased credit impaired
Total
December 31, 2020
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Purchased credit impaired
Total
Non-Accrual
Past Due
Over 90 Days
and Accruing
Troubled Debt
Restructurings
$
$
$
$
— $
1,086
11
324
31
—
1,806
3,258 $
130 $
1,821
107
470
9
—
2,279
4,817 $
1,115 $
54
—
112
10
—
89
1,380 $
1,176 $
342
—
1,205
5
—
567
3,296 $
1,115
654
—
63
—
—
—
1,832
1,176
685
—
67
—
—
—
1,928
As of December 31, 2021 and 2020 all loans classified as nonperforming were deemed to be impaired.
89
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
As of December 31, 2021 and 2020 the Company had recorded investments in TDR of $1.8 million and $1.9 million,
respectively. The Company did not allocate a specific allowance for those loans at December 31, 2021 or 2020 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. In accordance with
interagency guidance, short term deferrals granted due to the COVID-19 pandemic are not considered TDRs unless
the borrower was experiencing financial difficulty prior to the pandemic.
There were no new TDR loans identified during the year ended December 31, 2021. The following table presents
loans by class modified as TDR that occurred during the year ended December 31, 2020 (in thousands).
2020
Commercial real estate
Consumer real estate
Construction and land development
Commercial and industrial
Consumer
Other
Total
Number of contracts
Pre modification
outstanding recorded
investment
Post modification
outstanding
recorded investment,
net of related
allowance
— $
2
—
—
—
—
2
— $
721
—
—
—
—
721
—
685
—
—
—
—
685
There were no TDR for which there was a payment default within the twelve months following the modification
during the years ended December 31, 2021, 2020 or 2019.
A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.
Acquired Loans
On July 1, 2020, the Company acquired FCB and BOW (see Note 2 for more information). As a result of the
acquisitions, the Company recorded loans with a fair value of $294.7 million. Of those loans, $33.6 million were
considered to be purchased credit impaired (“PCI”) loans, which are loans for which it is probable at the acquisition
date that all contractually required payments will not be collected. The remaining loans are considered to be purchased
non-impaired loans and their related fair value discount or premium is recognized as an adjustment to yield over the
remaining life of each loan.
The following table relates to acquired FCB and BOW PCI loans and summarizes the contractually required payments,
which includes principal and interest, expected cash flows to be collected, and the fair value of acquired PCI loans at
the acquisition date (in thousands):
Contractually required payments
Nonaccretable difference
Cash flows expected to be collected at acquisition
Accretable yield
Fair value of PCI loans at acquisition date
FCB and BOW
acquired on July 1,
2020
$
$
42,443
4,501
37,942
4,349
33,593
90
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following table relates to acquired FCB and BOW 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
FCB and BOW
acquired on July 1,
2020
$
296,527
260,701
3,718
The following table presents changes in the carrying value of PCI loans (in thousands):
Balance at beginning of period
Additions due to the acquisitions
Change due to payments received and accretion
Reclassification of discount to allowance for loan
losses
Balance at end of period
For the year ended
December 31, 2021
28,392
$
—
(8,940)
For the year ended
December 31, 2020
1,605
$
33,593
(6,806)
For the year ended
December 31, 2019
1,620
$
—
(15)
$
(191)
19,261
$
—
28,392
$
—
1,605
The following table presents changes in the accretable yield for PCI loans (in thousands):
Balance at beginning of period
Additions due to the acquisitions
Accretion
Reclassification from nonaccretable difference
Other changes, net
Balance at end of period
For the year ended
December 31, 2021
4,068
$
—
(1,987)
1,519
2,163
5,763
$
For the year ended
December 31, 2020
915
$
4,349
(1,196)
—
—
4,068
$
For the year ended
December 31, 2019
440
$
—
(570)
1,045
—
915
$
PCI loans had a $0.2 million impact on the ALL for the year ended December 31, 2021 and no impact on the ALL for
the years ended December 31, 2020 or 2019.
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, 2021 and 2020 was $154.0 million and $254.9 million,
respectively. Custodial escrow balances maintained in connection with serviced loans was $547,000 and $1,459,000
at December 31, 2021 and 2020, respectively.
Activity for loan servicing rights and the related valuation allowance are summarized as follows (in thousands):
91
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Loan servicing rights:
Balance at beginning of period
Additions
Amortized to offset other noninterest income
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, 2021
For the year ended
December 31, 2020
$
$
$
$
1,634 $
229
(438)
1,425 $
(449) $
—
77
—
(372) $
1,755
466
(587)
1,634
(211)
—
—
(238)
(449)
Premises and equipment at December 31, 2021 and 2020 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,
2021
December 31,
2020
$
$
6,630
18,900
990
5,561
20
32,101
(6,374)
25,727
$
$
6,885
19,461
939
6,910
1,995
36,190
(9,501)
26,689
Premises and equipment depreciation and amortization expense for the years ended December 31, 2021, 2020 and
2019 totaled $1.5 million, $1.4 million and $1.2 million, 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, 2021, the
Company had lease liabilities totaling $11.9 million and right-of-use assets totaling $11.1 million related to these
leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively. At
December 31, 2021, the weighted average remaining lease term for operating leases was 9.1 years and the weighted
average discount rate used in the measurement of operating lease liabilities was 3.5%.
Lease costs were as follows (in thousands):
Operating lease cost
Short-term lease cost
Variable least cost
Total lease cost
December 31, 2021
2,102
$
—
—
2,102
$
December 31, 2020
1,946
$
—
—
1,946
$
There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the
year ended December 31, 2021 or 2020.
The Company has entered into an agreement for a real estate lease associated with the Chattanooga expansion that is
not recorded as a right-of-use asset or lease liability as the Company has not yet taken possession as of December 31,
2021. The lease is expected to commence in 2022 with undiscounted future payments of $597,000.
92
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
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:
2022
2023
2024
2025
2026
2027 and thereafter
Total undiscounted cash flows (a)
Discount on cash flows
Total lease liability
December 31, 2021
$
$
1,751
1,717
1,426
1,393
1,308
6,239
13,834
(1,941)
11,893
(a) Operating lease payments exclude $0.6 million of legally binding minimum lease payments related to the
Chattanooga lease signed, but not yet commenced.
NOTE 8 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
The change in goodwill during the years ended December 31, 2021 and 2020 was as follows (in thousands):
Beginning of year
Acquired goodwill
Impairment
End of year
2021
2020
41,068
—
—
41,068
$
$
37,510
3,558
—
41,068
$
$
Goodwill represents the excess of the purchase price over the sum of the estimated fair values of the tangible and
identifiable intangible assets acquired less the estimated fair value of the liabilities assumed. Goodwill has an indefinite
useful life and is evaluated for impairment annually or more frequently if events and circumstances indicate that the
asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s
fair value. Qualitative factors are assessed to first determine if it is more likely than not (more than 50%) that the
carrying value of goodwill is less than fair value. During the year ended December 31, 2021, qualitative factors
indicated it was more likely than not that the carrying value of goodwill was less than fair value, thus there were no
indicators of impairment and no quantitative testing was performed.
For the year ended December 31, 2020, as a result of market volatility caused by the COVID-19 pandemic, the
company determined it did not satisfy the more likely than not qualitative assessment that the fair value of the reporting
unit exceeded its carrying value, including goodwill. As a result, the Company elected to perform a quantitative
assessment, which included a combination of quoted market prices of the Company’s stock, prices of comparable
businesses, discounted cash flows and other techniques. Based upon the results of the quantitative assessment, the
Company determined the fair value of the reporting unit exceeded the carrying value, resulting in no impairment.
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.
93
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Acquired Intangible Assets
Acquired intangible assets at December 31, 2021 and 2020 were as follows (in thousands):
Amortized intangible assets:
Core deposit intangibles
December 31, 2021
December 31, 2020
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
$
12,837 $
(6,146) $
12,837 $
(4,207)
For the years ended December 31, 2021, 2020 and 2019, amortization expense was $1.9 million, $1.8 million and
$1.7 million, respectively.
Estimated amortization expense for each of the next five years is as follows (in thousands):
Year ending December 31:
2022
2023
2024
2025
2026
Thereafter
Total
$
$
1,690
1,441
1,192
943
694
731
6,691
NOTE 9 – OTHER REAL ESTATE OWNED
Other real estate owned activity was as follows (in thousands):
Beginning balance
Additions due to acquisitions
Loans transferred to other real estate owned
Direct write-downs
Sales of other real estate owned
End of year
2021
2020
2019
$
$
523
—
2,022
—
(2,279)
266
$
$
1,044
571
452
—
(1,544)
523
$
$
988
—
180
—
(124)
1,044
There was no valuation allowance allocated to properties held for the years ended December 31, 2021, 2020 and 2019.
(Income) expenses related to other real estate owned during the years ended December 31, 2021, 2020 and 2019,
respectively include (in thousands):
Net gain on sales
Provision for unrealized losses
Operating expenses, net of rental income
Total
2021
2020
2019
$
$
(49) $
—
—
(49) $
(273) $
—
—
(273) $
(3)
—
—
(3)
94
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 10 – DEPOSITS
Time deposits that exceed the FDIC deposit insurance limit of $250,000 at December 31, 2021 and 2020 were
$55,372,000 and $64,110,000, respectively.
Scheduled maturities of time deposits for the next five years and thereafter are as follows (in thousands):
Maturity:
2022
2023
2024
2025
2026
Thereafter
$
$
300,251
39,785
19,199
6,568
6,640
606
373,049
At December 31, 2021 and 2020, the Company had $344,000 and $558,000, respectively of deposit accounts in
overdraft status that were reclassified to loans in the accompanying balance sheets.
NOTE 11 – SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-Term Borrowings
The Company did not have any short-term borrowings as of December 31, 2021. The Company had short-term
borrowings totaling $10,000,000 at December 31, 2020 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
2021
December 31, 2021
December 31, 2020
Amount
Interest Rates
Amount
Interest Rates
—
—
10,000
0.33%
Advances from the FHLB are collateralized by investment securities with a market value of $2.2 million, FHLB stock
and certain commercial and residential real estate mortgage loans totaling $214.9 million under a blanket mortgage
collateral agreement. At December 31, 2021, the amount of available credit from the FHLB totaled $154.4 million.
Subordinated Notes
The Company issued $30.0 million of fixed-to-floating rate subordinated notes during the third quarter of 2020, which
were recorded net of issuance costs of $0.6 million, that mature June 30, 2030. Beginning on or after June 30, 2025,
the Company may redeem the notes, in whole or in part, at their principal amount plus any accrued and unpaid interest.
The notes have a fixed interest rate of 5.25% per annum for the first five years. Thereafter, the interest rate will reset
quarterly to an interest rate per annum equal to a benchmark rate (which is expected to be Three-Month Term SOFR)
plus 513 basis points. The carrying value of subordinated notes was $29.5 million and $29.4 million at December 31,
2021 and 2020, respectively.
95
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
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, 2021 and 2020 (in thousands):
Year Ended December 31, 2021
Beginning balance
Other comprehensive loss before
reclassification, net of tax
Amounts reclassified from accumulated other
comprehensive loss, net of tax
Net current period other comprehensive loss
Ending balance
Year Ended December 31, 2020
Beginning balance
Other comprehensive income 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
Total
— $
—
—
—
— $
7,728 $
7,728
(8,977)
(8,977)
(21)
(8,998)
(1,270) $
(21)
(8,998)
(1,270)
(2,679) $
4,062 $
—
2,679
2,679
— $
3,758
(92)
3,666
7,728 $
1,383
3,758
2,587
6,345
7,728
$
$
$
$
The following were significant amounts reclassified out of each component of accumulated other comprehensive
income (loss) for the years ended December 31, 2021, 2020 and 2019 (in thousands):
Details about Accumulated Other
Comprehensive Income Components
Realized losses on cash flow hedges
Realized gains and (losses) on
available-for-sale securities
Year Ended
December 31,
2021
Year Ended
December 31,
2020
Year Ended
December 31,
2019
Affected Line Item
in the Statement Where
Net Income is Presented
$
$
$
$
— $
(2,466) $
—
—
— $
28 $
(7)
21 $
(213)
—
(2,679) $
125 $
(33)
92 $
Interest expense - savings and
money market accounts
Interest expense - Federal Home
Loan Bank advances
(635)
(243)
9 Income tax benefit
(869) Net of tax
Net gain (loss) on sale of
securities
(99)
26 Income tax (expense) benefit
(73) 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
2021
2020
2019
$
$
12,174
732
12,906
(158)
(49)
(207)
12,699
$
$
8,822
1,552
10,374
(3,523)
(816)
(4,339)
6,035
$
$
3,215
1,044
4,259
2,039
546
2,585
6,844
96
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
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, 2021, 2020 and 2019 is as follows (in thousands):
Computed tax expense at statutory rate
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 expense (benefit) related to stock compensation
Nondeductible acquisition related expenses
CARES act net operating loss carryback
Federal tax credits
Other
Total
$
2021
2020
2019
$
12,889
$
6,454
$
6,146
540
(294)
(384)
66
(163)
—
—
(57)
102
12,699
$
582
(278)
(186)
69
91
132
(772)
—
(57)
6,035
$
1,256
(302)
(173)
84
(57)
—
—
—
(110)
6,844
The effective tax rate compared favorably to the statutory federal rate of 21% and Tennessee excise tax rate of 6.5%
primarily due to investments in qualified municipal securities, tax benefits from our real estate investment trust,
company owned life insurance, state tax credits, net of the effect of certain non-deductible expenses and the
recognition of excess tax benefits related to stock compensation. For the year ended December 31, 2020, the Company
recorded an income tax benefit of $0.8 million related to the permanent tax rate benefit of Net Operating Loss
carrybacks as a result of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").
Significant items that gave rise to deferred taxes at December 31, 2021 and 2020 were as follows (in thousands):
December 31, 2021
December 31, 2020
Deferred tax assets:
Allowance for loan losses
Net operating loss carryforward
Organization and preopening costs
Stock-based compensation
Acquired loans
Accrued contributions
Acquired deposits
Accrued compensation
Deferred loan fees
Unrealized loss on securities available for sale
Other
Deferred tax assets
Deferred tax liabilities:
Depreciation
Goodwill
Unrealized gain on securities available-for-sale
Amortization of core deposit intangible
Other acquired assets
Other
Deferred tax liabilities
Net deferred tax asset
$
$
4,863
422
158
152
769
297
214
2,670
1,004
1,161
215
11,925
1,563
465
—
1,136
337
449
3,950
7,975
$
$
5,040
527
261
48
939
288
459
3,159
—
—
148
10,869
1,633
311
2,009
1,608
509
201
6,271
4,598
At December 31, 2021, the Company had federal net operating loss carryforwards of approximately $2.0 million,
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.
97
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
There were no significant unrecognized income tax benefits as of December 31, 2021 or December 31, 2020. As of
December 31, 2021 and 2020 the Company had no accrued interest or penalties related to uncertain tax penalties.
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, 2021 and 2020 (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, 2021
December 31, 2020
$
$
831,075 $
10,623
841,698 $
804,520
10,403
814,923
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, 2021, will not have a material impact on
the financial statements of the Company.
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, 2021 and 2020, the Company’s cash and due from banks, federal funds sold and interest-bearing
deposits in financial institutions aggregated $358.8 million and $243.2 million, 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 Banking 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, 2021, 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
98
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
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, 2021 and 2020, the Company and the Bank were well capitalized under the regulatory framework
for prompt corrective action. There have been no conditions or events subsequent to December 31, 2021 that
management believes have changed the Company’s or the Bank’s category.
The Company’s and the Bank’s capital amounts and ratios are presented in the following table (dollars in thousands):
At December 31, 2021:
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, 2020:
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
$ 384,116
370,919
16.29% $ 188,610
188,471
15.74
8.0%
8.0
N/A
235,589
332,567
348,902
14.11
14.81
141,458
141,354
332,567
332,402
332,567
348,902
14.11
14.11
10.69
11.23
106,093
106,015
124,437
124,246
6.0
6.0
4.5
4.5
4.0
4.0
N/A
188,471
N/A
153,133
N/A
155,308
$ 338,426
324,152
16.03% $ 168,910
168,808
15.36
8.0%
8.0
N/A
211,010
285,439
300,588
13.52
14.25
126,682
126,606
285,439
284,088
285,439
300,588
13.52
13.46
9.60
10.12
95,012
94,954
118,877
118,780
6.0
6.0
4.5
4.5
4.0
4.0
N/A
168,808
N/A
137,156
N/A
148,476
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 2021, 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 2.5% to avoid limits on capital
distributions and certain discretionary bonus payments to executive officers and similar employees.
(2) For the Company to be well-capitalized, the Bank must be well-capitalized and the Company must not be subject
to any written agreement, order, capital directive, or prompt corrective action directive issued by the Federal
Reserve to meet and maintain a specific capital level for any capital measure.
99
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Under Tennessee banking law, the Bank is subject to restrictions on the payment of dividends. Banking regulations
limit the amount of dividends that may be paid without prior approval of the Tennessee Department of Financial
Institutions. Under these regulations, the amount of dividends that may be paid in any calendar year without prior
approval of the Tennessee Department of Financial Institutions is limited to the current year’s net income, combined
with the retained net income of the preceding two years, subject to the capital requirements described above. The
Bank’s payment of dividends may also be affected or limited by other factors, such as the requirement to maintain
adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that
deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any
dividends if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the
federal agencies have issued policy statements that provide that Company holding companies and insured banks
should generally only pay dividends out of current operating earnings.
Based on these regulations, the Bank was eligible to pay $82.5 million and $49.6 million of dividends as of December
31, 2021 and 2020, respectively. The Bank paid the Company $5.2 million of dividends during 2021.
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. During 2019, 132,561 shares
of nonvoting common stock were converted to common stock. As a result, at December 31, 2021, 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, 2021, there was no Series A Preferred Stock outstanding.
NOTE 18 – STOCK OPTIONS AND RESTRICTED SHARES
On April 23, 2021, the shareholders of CapStar Financial Holdings, Inc. approved the 2021 Stock Incentive Plan (the
"Plan"), which replaced the 2016 Stock Incentive Plan. The Plan provides for the grant of stock-based incentives,
including stock options, restricted stock units, performance awards and restricted stock, to employees, directors and
service providers that are subject to forfeiture until vesting conditions have been satisfied by the award recipient under
the terms of the award. The Plan is intended to help align the interests of employees and our shareholders and reward
our employees for improved Company performance. The Plan reserved 1,168,543 shares of stock for issuance of stock
incentives. Stock incentives include both restricted stock and stock option grants. Total shares issuable under the plan
were 1,168,174 at December 31, 2021.
The Company has recognized stock-based compensation expense, within salaries and employee benefits for
employees, and within other non-interest expense for directors, in the consolidated statements of income as follows
(in thousands):
Stock-based compensation expense before income taxes
Less: deferred tax benefit
Reduction of net income
For the year ended December 31,
2020
2019
2021
$
$
1,600 $
(418)
1,182 $
1,223 $
(320)
903 $
1,262
(330)
932
100
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Restricted Shares, Restricted Stock Units, and Performance Stock Units
We grant time-vested restricted stock units and performance stock units to certain key employees and directors under
our stock award plan. Compensation expense is recognized over the vesting period of the awards based on the fair
value of the stock at the issue date. Awards vest ratably over a two or three-year vesting period depending on the
specific award.
Performance stock units vest based upon the attainment of certain performance metrics over a three-year cumulative
performance period. Certain of these awards are eligible to receive dividend equivalent shares. The grant date fair
value of these awards approximates the market value of the shares. For awards based upon the achievement of the
performance goals, the awards are earned ratably from 0% to 188%. If the performance goals are met at the end of the
performance period, the award is adjusted to reflect the Company’s three-year total shareholder return (TSR)
performance relative to a capital market peer group. This TSR modifier cannot cause the award to exceed the
maximum of 188%.
The recipients have the right to vote and receive dividends but cannot sell, transfer, assign, pledge, hypothecate, or
otherwise encumber the restricted stock until the shares have vested. A summary of the changes in the Company’s
nonvested stock awards for 2021 follows:
Year Ended December 31, 2021
Nonvested at beginning of period
Granted
Vested
Forfeited
Nonvested at end of period
Year Ended December 31, 2020
Nonvested at beginning of period
Granted
Vested
Forfeited
Nonvested at end of period
Year Ended December 31, 2019
Nonvested at beginning of period
Granted
Vested
Forfeited
Nonvested at end of period
Restricted
Shares
Weighted
Average
Grant Date
Fair Value
148,414
143,591
(91,763)
(23,222)
177,020
84,697
144,557
(76,715)
(4,125)
148,414
157,616
31,683
(83,062)
(21,540)
84,697
$
$
$
$
$
$
14.39
14.84
14.99
14.52
14.00
17.44
13.73
16.50
14.45
14.39
17.00
15.86
15.93
17.72
17.44
As of December 31, 2021, there was $1.4 million 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 1.8 years. The total
fair value of shares vested during the years ended December 31, 2021, 2020 and 2019 was $1.7 million, $1.0 million
and $1.4 million, 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
101
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
vanilla options as permitted under authoritative literature. The risk-free rate for periods within the contractual life of
the option is based on the U.S. Treasury yield curve in effect at the time of grant.
The fair value of options granted was determined using the following weighted average assumptions as of the grant
date. There were no options granted during 2021 or 2020. The Company granted 50,000 options during 2019.
A summary of the activity in stock options for 2021 follows:
Year Ended December 31, 2021
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
Year Ended December 31, 2020
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
Year Ended December 31, 2019
Outstanding at beginning of period
Granted
Exercised
Forfeited or expired
Outstanding at end of period
Fully vested and expected to vest
Exercisable at end of period
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (years)
11.73
—
11.41
—
11.96
11.96
11.54
11.22
—
6.75
10.92
11.73
11.73
11.19
8.66
14.84
7.33
—
11.22
11.22
10.32
4.9
4.9
4.5
3.9
3.9
3.1
4.9
4.9
3.8
Shares
226,589
—
(96,344)
—
130,245
130,245
113,578
271,202
—
(24,613)
(20,000)
226,589
226,589
193,255
507,903
50,000
(286,701)
—
271,202
271,086
214,952
$
$
$
$
$
$
$
$
$
$
$
$
Information related to stock options during 2021, 2020 and 2019 follows:
Intrinsic value of options exercised
Cash received from option exercises
Tax benefit realized from option exercises
Weighted average fair value of options granted
2021
821,174 $
$
1,077,489
148,312
—
2020
188,662 $
105,847
16,524
—
2019
2,478,086
1,930,737
103,847
5.35
As of December 31, 2021, there was $35,000 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 0.4 years.
102
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 19 – 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 20 – 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, 2021, 2020 and 2019, the Company contributed $1.0 million, $0.8 million and $0.9 million respectively,
to the 401(k) Plan.
The Company also has a Health Reimbursement Plan in place to offset the cost of healthcare deductibles for
employees. At the end of the year, up to one-half of the unused balance in the employee’s account will be available
for the following year up to a maximum of the deductible for that employee.
NOTE 21 – 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, 2021 or 2020. The company
previously terminated an interest rate swap during 2019, which resulted in a termination fee of $1.5 million which
continued to be amortized as the corresponding hedged items, consisting of LIBOR-based brokered deposits and
FHLB borrowings, were expected to remain outstanding until the initial maturities of the terminated swaps. However,
during the year ended December 31, 2020, it was determined that in light of the Company’s surplus liquidity position
this funding was expected to be terminated at the next renewal date and thus the previously terminated interest rate
swaps which had been designated as cash flow hedges were no longer deemed effective, therefore, remaining
unrealized losses of $1.9 million included in accumulated other comprehensive income were recognized in net income.
There are no unrealized gains or losses in accumulated other comprehensive income as of December 31, 2021.
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, 2021
December 31, 2020
Notional
amount
Estimated
fair value
Notional
amount
Estimated
fair value
$
$
54,055 $
54,055
108,110 $
(1,594) $
1,594
— $
59,946 $
59,946
119,892 $
(2,740)
2,740
—
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
103
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
are reflected in current period earnings under mortgage banking income. Interest rate lock commitments are valued
using a model with significant unobservable market parameters. Forward sale commitments are valued based on
quoted prices for similar assets in an active market with inputs that are observable.
The net 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,
2021
For the year
ended
December 31,
2020
For the year
ended
December 31,
2019
$
$
(1,911) $
466
(1,445) $
1,959
(478)
1,481
$
$
648
(148)
500
The amount and fair value of mortgage banking derivatives included in the consolidated balance sheets was as follows
(dollars in thousands):
Included in other assets:
Mortgage loan interest rate lock commitments
Included in other liabilities:
Mortgage-backed securities forward sales
commitments
$
$
NOTE 22 – RELATED PARTY
December 31, 2021
December 31, 2020
Notional
amount
Estimated
fair value
Notional
amount
Estimated
fair value
50,281 $
696 $
88,303 $
2,607
43,000 $
(160) $
87,000 $
(626)
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, 2021 or 2020. Activity within
these loans during the years ended December 31, 2021 and 2020 was as follows (in thousands):
Year ended December 31, 2021
Beginning of period
New commitments/draw downs
Repayments
End of period
Year ended December 31, 2020
Beginning of period
New commitments/draw downs
Repayments
End of period
Total
commitment
Total funded
commitment
$
$
$
$
18,024
1,314
(8,761)
10,577
21,815
200
(3,991)
18,024
$
$
$
$
9,782
2,896
(4,140)
8,538
10,673
2,798
(3,689)
9,782
Deposits from directors, executive officers, significant shareholders and their affiliates at December 31, 2021 and
2020 were $40.8 million and $38.5 million, respectively.
104
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 23 – 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, 2021 or 2020.
105
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).
Derivatives-Mortgage Loan Interest Rate Lock Commitments: Interest rate lock commitments that relate to the
origination of mortgage loans that will be held for sale are recorded at fair value, determined as the amount that would
be required to settle each derivative instrument at the balance sheet date. The fair value of the interest rate lock
commitment is derived from the fair value of related mortgage loans, which is based on observable market data and
includes the expected net future cash flows related to servicing of the loans. In estimating the fair value of an interest
rate lock commitment, the Company assigns a probability to the interest rate lock commitment based on an expectation
that it will be exercised and the loan will be funded (a “pull through” rate). The expected pull through rates are applied
to the fair value of the unclosed mortgage pipeline, resulting in a Level 3 fair value classification. The pull through
rate is a statistical analysis of our actual rate lock fallout history to determine the sensitivity of the residential mortgage
loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based
on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull through rate) are applied accordingly.
Significant increases (decreases) in the pull through rate in isolation result in a significantly higher (lower) fair value
measurement. Changes to the fair value of interest rate lock commitments are recognized based on interest rate
changes, changes in the probability that the commitment will be exercised, and the passage of time.
Derivatives-Mortgage-Backed Securities Forward Sales Commitments: The Company utilizes mortgage-backed
securities forward sales commitments to hedge mortgage loan interest rate lock commitments. Mortgage-backed
securities forward sales commitments are recorded at fair value based on quoted prices for similar assets in an active
market with inputs that are observable, resulting in a Level 2 fair value classification.
.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Assets:
Securities available-for-sale:
U.S. government agency agencies
State and municipal securities
Mortgage-backed securities
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:
Derivative Liabilities - customer related
Mortgage-backed securities forward sales
commitments
Fair value measurements at December 31, 2021
Quoted prices
in active
markets for
identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Carrying
Value
$
11,503 $
82,560
293,607
3,339
68,387
37,306
— $
—
—
—
—
—
11,503 $
82,560
293,607
3,339
68,387
37,306
1,594
696
(1,594)
(160)
—
—
—
—
1,594
—
(1,594)
(160)
—
—
—
—
—
—
—
696
—
—
106
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Fair value measurements at December 31, 2020
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 agency agencies
State and municipal securities
Mortgage-backed securities
Asset-backed securities
Other debt securities
Loans held for sale
Derivatives:
Derivative Liabilities - customer related
Mortgage loan interest rate lock commitments
Liabilities:
Derivatives:
Derivative Liabilities - customer related
Mortgage-backed securities forward sales
commitments
$
16,391 $
91,928
336,363
3,193
38,340
97,303
2,740
2,607
(2,740)
(626)
— $
—
—
—
—
16,391 $
91,928
336,363
3,193
38,340
97,303
—
—
—
—
2,740
—
(2,740)
(626)
—
—
—
—
—
—
2,607
—
—
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 years ended December 31, 2021 and 2020 (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
2021
2020
$
$
2,607
$
(1,911)
696
$
648
1,959
2,607
The following table presents quantitative information about recurring Level 3 fair value measurements at December
31, 2021 (dollars in thousands).
December 31, 2021
Assets:
Non-hedging derivatives:
Mortgage loan interest rate lock
commitments
December 31, 2020
Assets:
Non-hedging derivatives:
Mortgage loan interest rate lock
commitments
Fair
Value
Valuation
Technique(s)
Unobservable Input(s)
Range
(Weighted-
Average)
$
696 Consensus pricing
Origination pull-
through rate
60% - 98%
(80%)
Fair
Value
Valuation
Technique(s)
Unobservable Input(s)
Range
(Weighted-
Average)
$
2,607 Consensus pricing
Origination pull-
through rate
54% - 91%
(74%)
107
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
Assets measured at fair value on a nonrecurring basis are summarized below (in thousands):
Fair value measurements at December 31, 2021
Quoted prices
in active
markets for
identical
assets
(level 1)
Significant
other
observable
inputs
(level 2)
Significant
unobservable
inputs
(level 3)
Carrying
Value
$
454 $
— $
— $
454
Fair value measurements at December 31, 2020
Quoted prices
in active
markets for
identical
assets
(level 1)
Significant
other
observable
inputs
(level 2)
Significant
unobservable
inputs
(level 3)
Carrying
Value
Assets:
Impaired loans:
Consumer real estate
Assets:
Impaired loans:
Construction and land development
$
36 $
— $
— $
36
The following table presents quantitative information about Level 3 fair value measurements for assets measured at
fair value on a nonrecurring basis (dollars in thousands):
December 31, 2021
Impaired loans:
Consumer real estate
December 31, 2020
Impaired loans:
Fair
Value
Valuation
Technique(s)
Unobservable
Input(s)
$
454
Sales Comparison
approach
Appraisal
discounts
Fair
Value
Valuation
Technique(s)
Unobservable
Input(s)
Commercial and industrial
$
Sales comparison
approach
36
Appraisal
discounts
Range
(Weighted-
Average)
10%
Range
(Weighted-
Average)
10%
108
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, 2021 and 2020
were as follows (in thousands):
December 31, 2021
December 31, 2020
Carrying
amount
Fair value
Carrying
amount
Fair value
Fair value
level of input
Financial assets:
Cash and due from banks, interest-
bearing deposits in financial
institutions
Federal funds sold
Securities available-for-sale
Securities held-to-maturity
Loans held for sale
Restricted equity securities
Loans
Accrued interest receivable
Other assets
Financial liabilities:
Deposits
Federal Home Loan Bank advances
and other borrowings
Other liabilities
$
395,225 $
19,900
459,396
1,782
83,715
14,453
1,965,769
7,376
91,064
395,225 $
19,900
459,396
1,830
84,934
N/A
1,963,803
7,376
91,064
277,439 $
—
486,215
2,407
186,998
15,562
1,883,690
8,771
46,381
277,439
—
486,215
2,504
180,698
N/A
1,900,647
8,771
Level 1
Level 1
Level 2
Level 2
Level 2
N/A
Level 3
Level 2
46,381 Level 2 / Level 3
2,684,281
2,517,856
2,568,001
2,472,860
Level 3
29,532
1,842
30,477
1,842
39,423
3,334
41,400
3,334
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.
109
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 and Other Borrowings
The fair value of fixed rate Federal Home Loan Bank Advances and other borrowings 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 24 – PARENT COMPANY ONLY FINANCIAL INFORMATION
The following information presents the condensed balance sheets of CapStar Financial Holdings, Inc. as of the years
ended December 31, 2021 and 2020 (in thousands).
Condensed Balance Sheets
Assets
Cash and cash equivalents
Investment in consolidated subsidiary
Other assets
Total assets
Liabilities and Shareholders' Equity
Subordinated debt
Other liabilities
Total shareholders' equity
Total liabilities and shareholders' equity
December 31, 2021
December 31, 2020
$
$
$
$
12,050
396,429
1,208
409,687
29,532
60
380,095
409,687
$
$
$
$
13,176
358,635
1,163
372,974
29,423
65
343,486
372,974
110
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
The following information presents the statements of income, and statements of cash flows of CapStar Financial
Holdings, Inc. for the years ended December 31, 2021, 2020 and 2019 (in thousands).
Condensed Income Statements
Year Ended
December 31,
2021
Year Ended
December 31,
2020
Year Ended
December 31,
2019
Income - dividends from subsidiary
Interest expense subordinated debt
Other expenses
Income (loss) before income taxes and equity in undistributed net
income of subsidiary
Income tax benefit
Income (loss) before equity in undistributed net income of subsidiary
Equity in undistributed net income of subsidiary
Net income
$
$
5,150
1,575
954
2,621
(645)
3,266
45,411
48,677
$
$
4,075
792
1,373
1,910
(552)
2,462
22,234
24,696
$
$
3,530
—
1,083
2,447
(262)
2,709
19,713
22,422
Condensed Statements of Cash Flow
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash used in operating
activities:
Changes in other assets and liabilities
Equity in undistributed net income of subsidiary
Net cash used in operating activities
Cash flows from investing activities:
Cash paid for acquisitions
Dividends received from CapStar Bank
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Issuance of subordinated debt
Repurchase of common stock
Exercise of common stock options and warrants
Common stock dividends paid
Net cash (used in) provided by financing activities
Net (decrease) increase 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,
2021
Year Ended
December 31,
2020
Year Ended
December 31,
2019
$
48,677
$
24,696
$
22,422
(4,871)
(45,411)
(1,605)
—
5,150
5,150
—
(462)
858
(5,067)
(4,671)
(1,126)
13,176
12,050
$
(2,935)
(22,234)
(473)
(27,278)
4,075
(23,203)
29,387
(1,437)
63
(4,035)
23,978
302
12,874
13,176
$
(3,567)
(19,713)
(858)
—
3,530
3,530
—
(7,836)
1,627
(3,507)
(9,716)
(7,044)
19,918
12,874
$
111
CAPSTAR FINANCIAL HOLDINGS INC. & SUBSIDIARY
Notes to Consolidated Financial Statements
NOTE 25 – QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following is a summary of quarterly financial results (unaudited) for 2021, 2020 and 2019:
2021
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
2020
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 (benefit)
Net income
Net income per share, basic
Net income per share, diluted
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
First Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
24,278
2,096
22,182
650
21,532
10,014
17,413
14,133
3,103
11,030
0.50
0.50
21,738
5,077
16,661
7,553
9,108
5,874
14,211
771
(575)
1,346
0.07
0.07
22,967
5,965
17,002
886
16,116
4,735
14,725
6,126
1,346
4,780
0.27
0.25
$
$
$
$
$
$
$
$
$
$
$
$
24,832
1,800
23,032
(1,065)
24,097
9,883
19,080
14,900
2,824
12,076
0.55
0.54
20,741
3,066
17,675
1,624
16,051
10,823
18,934
7,940
1,759
6,181
0.34
0.34
23,158
6,150
17,008
—
17,008
7,032
16,470
7,570
1,814
5,756
0.33
0.31
$
$
$
$
$
$
$
$
$
$
$
$
24,690
1,726
22,964
—
22,964
11,651
18,366
16,249
3,147
13,102
0.59
0.59
24,642
4,986
19,656
2,119
17,537
14,804
22,739
9,602
2,115
7,487
0.34
0.34
23,216
6,060
17,156
(125)
17,281
6,788
15,531
8,538
2,072
6,466
0.36
0.35
$
$
$
$
$
$
$
$
$
$
$
$
24,659
1,667
22,992
(651)
23,643
11,133
18,682
16,094
3,625
12,469
0.56
0.56
24,731
2,400
22,331
184
22,147
11,748
21,478
12,417
2,736
9,681
0.44
0.44
22,205
5,624
16,581
—
16,581
5,719
15,266
7,034
1,613
5,421
0.30
0.29
112
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of its disclosure controls
and procedures (as such term is defined in Exchange Act Rule 13a-15(e)) as of December 31, 2021. Based on that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures, were effective as of the end of the period covered by this Report.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting (as such term is defined in Exchange
Act Rule 13a-15(f)) that occurred during the quarter ended December 31, 2021, that 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 over financial reporting was designed by, or under the supervision
of, the company’s principal executive and principal financial officers and effected by the company’s board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of the Company’s financial statements in accordance with U.S. GAAP. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2021, 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 Consolidated Financial
Statements. Based on such assessment, management determined that, as of December 31, 2021, the Company’s
internal control over financial reporting was effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, has been
audited by Elliott Davis LLC, an independent registered public accounting firm, as stated in their report included on
page 63 of this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
113
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item will be contained in, and is hereby incorporated herein by reference from, the
2022 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be contained in, and is hereby incorporated herein by reference from, the
2022 Proxy Statement.
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,
2021:
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)
130,245 (1) $
—
130,245 (1) $
11.96
—
11.96
1,168,174
—
1,168,174
(1) Represents 130,245 shares of common stock subject to issuance upon exercise of issued and outstanding stock
options.
The other information required by this Item will be contained in, and is hereby incorporated herein by reference from,
the 2022 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this Item will be contained in, and is hereby incorporated herein by reference from, the
2022 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item will be contained in, and is hereby incorporated herein by reference from, the
2022 Proxy Statement.
114
PART IV
ITEM 15. EXHIBIT AND FINANCIAL STATEMENTS
(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 61 through 112.
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Income for the years ended December 2021, 2020, and 2019
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31,
2021, 2020 and 2019
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020
and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, 2019
Notes to Consolidated Financial Statements
(2) See Item 15(b) of this Report and the Exhibit Index immediately preceding the signature pages to this
Annual Report on 10-K, which is incorporated herein by reference.
(b)
Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index immediately
preceding the signature pages to this Annual Report on 10-K and are either filed with or incorporated by
reference in this Annual Report on Form 10-K.
ITEM 16. FORM 10-K SUMMARY
None.
115
Exhibit
Number
3.1
3.2
4.1
4.2
10.1†
10.2†
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
EXHIBIT INDEX
Description
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)
Description of Registrant’s Securities, registered pursuant to Section 12 of the Securities
Exchange Act of 1934 (incorporated by reference herein to Exhibit 4.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2020 and filed on March 5, 2021*.
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)
Third Amended and Restated Executive Employment Agreement between CapStar Bank and
Christopher Tietz, dated as of September 14, 2021 (incorporated by reference herein to Exhibit
10.1 to the Company’s Current Report on Form 8-K filed on January 13, 2022)
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)
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)
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)
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)
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)
116
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
21.1
23.1
31.1
31.2
32.1
32.2
101
CapStar Financial Holdings, Inc. form of Restricted Stock Agreement to replace awards of
CapStar Bank Restricted Stock (incorporated by reference herein to Exhibit 10.8 to the
Company’s Registration Statement on Form S-1 (File Number 333-213367) filed on August 29,
2016)
CapStar Financial Holdings, Inc. form of Non-Qualified Stock Option Agreement (incorporated
by reference herein to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (File
Number 333-213367) filed on August 29, 2016)
CapStar Financial Holdings, Inc. form of 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)
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)
CapStar Financial Holdings, Inc. 2021 Stock Incentive Plan (incorporated by reference herein to
Appendix A to the Company’s Definitive Proxy Statement filed on March 26, 2021)
Separation Agreement between CapStar Bank and Denis J. Duncan, dated as of February 10,
2022 (incorporated by reference herein to Exhibit 99.2 to the Company’s Current Report on Form
8-K filed on February 11, 2022)
Subsidiaries of Capstar Financial Holdings, Inc. *
Consent of Elliot 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 mended.**
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 mended.**
The following financial information from the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2021, formatted in Inline XBRL (Extensible Business Reporting
Language) includes: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of
Operations, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of
Stockholders' Equity, and (v) the Notes to Consolidated Financial Statements. The instance
document does not appear in the interactive data file because its XBRL tags are embedded within
the Inline XBRL document.*
101 INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data
File because in XBRL tags are embedded within the Inline XBRL document.
101 SCH
Inline XBRL Taxonomy Extension Schema Document
101 CAL
Inline XBRL Taxonomy Calculation Linkbase Document.*
117
101 LAB
Inline XBRL Taxonomy Labels Linkbase Document.*
101 PRE
Inline XBRL Taxonomy Presentation Linkbase Document.*
101 DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document.*
104
The cover page of CapStar Financial Holdings, Inc.’s Annual Report on Form 10-K for the year
ended December 31, 2021, formatted in Inline XBRL
*
**
†
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.
118
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 4, 2022
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/ Michael J. Fowler
Michael J. Fowler
/s/ Jeffrey L. Moody
Jeffrey L. Moody
/s/ Dennis C. Bottorff
Dennis C. Bottorff
/s/ L. Earl Bentz
L. Earl Bentz
/s/ Sam B. DeVane
Sam B. DeVane
/s/ Thomas R. Flynn
Thomas R. Flynn
/s/ Louis A. Green III
Louis A. Green III
/s/ Valora S. Gurganious
Valora S. Gurganious
/s/ Myra NanDora Jenne
Myra NanDora Jenne
/s/ Joelle J. Phillips
Joelle J. Phillips
/s/ Stephen B. Smith
Stephen B. Smith
/s/ James S. Turner, Jr.
James S. Turner, Jr.
/s/ Toby S. Wilt
Toby S. Wilt
Date
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
March 4, 2022
Title
Director, President and Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Controller
(Principal Accounting Officer)
Chairman
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
119
(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:59)(cid:80)(cid:65)(cid:71)(cid:69)(cid:0)(cid:73)(cid:78)(cid:84)(cid:69)(cid:78)(cid:84)(cid:73)(cid:79)(cid:78)(cid:65)(cid:76)(cid:76)(cid:89)(cid:0)(cid:76)(cid:69)(cid:70)(cid:84)(cid:0)(cid:66)(cid:76)(cid:65)(cid:78)(cid:75)(cid:61)
(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)
(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:59)(cid:80)(cid:65)(cid:71)(cid:69)(cid:0)(cid:73)(cid:78)(cid:84)(cid:69)(cid:78)(cid:84)(cid:73)(cid:79)(cid:78)(cid:65)(cid:76)(cid:76)(cid:89)(cid:0)(cid:76)(cid:69)(cid:70)(cid:84)(cid:0)(cid:66)(cid:76)(cid:65)(cid:78)(cid:75)(cid:61)
(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)
(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:59)(cid:80)(cid:65)(cid:71)(cid:69)(cid:0)(cid:73)(cid:78)(cid:84)(cid:69)(cid:78)(cid:84)(cid:73)(cid:79)(cid:78)(cid:65)(cid:76)(cid:76)(cid:89)(cid:0)(cid:76)(cid:69)(cid:70)(cid:84)(cid:0)(cid:66)(cid:76)(cid:65)(cid:78)(cid:75)(cid:61)
(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)(cid:0)
We Are CapStar
To win long-term relationships and positively impact our customers’ lives by
setting the standard in Guidance, Responsiveness, Flexibility, and Service.
Our Mission
Our Vision
(cid:55)(cid:82)(cid:3)(cid:69)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:70)(cid:75)(cid:82)(cid:76)(cid:70)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:82)(cid:16)(cid:87)(cid:82)(cid:3)(cid:178)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)
provider in the markets we serve.
Our Values
We operate with an owner mindset.
At the root of everything we do, the underlying goal is to produce compound annual
returns to shareholders greater than industry and market averages.
We are one team.
(cid:58)(cid:72)(cid:3)(cid:86)(cid:72)(cid:72)(cid:78)(cid:3)(cid:90)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:80)(cid:82)(cid:86)(cid:87)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:178)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:38)(cid:68)(cid:83)(cid:54)(cid:87)(cid:68)(cid:85)(cid:15)(cid:3)(cid:85)(cid:68)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:90)(cid:75)(cid:68)(cid:87)(cid:3)(cid:76)(cid:86)(cid:3)(cid:69)(cid:72)(cid:86)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:82)(cid:88)(cid:85)(cid:86)(cid:72)(cid:79)(cid:89)(cid:72)(cid:86)(cid:3)
or a single group. Individuals alone cannot achieve our ultimate goals.
We follow the Golden Rule.
Treating others as we expect to be treated is the blueprint for every interaction with
each (cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:15)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:80)(cid:69)(cid:68)(cid:86)(cid:86)(cid:68)(cid:71)(cid:82)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:68)(cid:83)(cid:54)(cid:87)(cid:68)(cid:85)(cid:3)(cid:76)(cid:81)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:17)
Our team plays to win.
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We are driven, (cid:73)(cid:82)(cid:70)(cid:88)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:82)(cid:88)(cid:86)(cid:3)(cid:76)(cid:80)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:81)(cid:72)(cid:89)(cid:72)(cid:85)(cid:3)(cid:86)(cid:68)(cid:87)(cid:76)(cid:86)(cid:178)(cid:72)(cid:71)(cid:17)(cid:3)
Everyone makes an impact.
Diversity and inclusion of people, thoughts, and voices are priorities in every aspect
of our company. We strive to recruit and retain highly effective teammates who
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We are obsessed with Wowing! customers.
We work tirelessly to win each customer. Every day we have a chance to gain a new customer
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Fast is better than slow.
To win, we act fast. We operate with a sense of urgency established by our customer’s timeline
and need for responsiveness. Our decisions are thorough, but response is rapid.
We celebrate everything!
Large or small, we communicate and celebrate everything. We are passionate
about the success of our teammates and customers.
FINANCIAL HOLDINGS, INC.