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

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

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

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

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

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

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

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

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

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~~Forward-looking statements ~~are not historical facts, and are based upon current expectations, estimates and projections about our industry, management’s~~express only 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 usregarding future results 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~~events and are subject to inherent uncertainty, risks ~~assumptions~~ and ~~uncertainties that~~changes in circumstances, many of which are ~~difficult to predict~~outside of management's control. Uncertainty, risks, changes in circumstances 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 importantother factors ~~that~~ could cause ~~our~~the Company's actual results to differ materially from those ~~indicated~~projected in ~~these~~the forward-looking statements. Factors that could cause actual results to differ from those discussed in such forward-looking statements ~~including,~~include, but are not limited ~~to, the following:~~

The foregoing factors should not be construed as exhaustive and should be read in conjunction with the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (the ~~“2021~~“2022 Form 10-K”) and in future reports that we file with the Securities and Exchange Commission. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from our forward-looking statements.

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

NOTE 2 – SECURITIES

The amortized cost and fair value of securities available-for-sale and held-to-maturity at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are summarized as follows (in thousands):


	September 30, 2022									December 31, 2021									March 31, 2023									December 31, 2022
	Amortized Cost		Gross unrealized gains		Gross unrealized (losses)			Estimated fair value		Amortized Cost		Gross unrealized gains		Gross unrealized (losses)			Estimated fair value		Amortized Cost		Gross unrealized gains		Gross unrealized (losses)			Estimated fair value		Amortized Cost		Gross unrealized gains		Gross unrealized (losses)			Estimated fair value
Securities available-for-sale:
U. S. government agency securities	$	15,071	$	—	$	(1,753	)	$	13,318	$	11,550	$	47	$	(94	)	$	11,503	$	13,888	$	—	$	(1,226	)	$	12,662	$	14,537	$	—	$	(1,635	)	$	12,902
State and municipal securities		76,772		9		(11,034	)		65,747		81,158		2,107		(705	)		82,560		76,954		286		(7,564	)		69,676		77,562		129		(9,379	)		68,312
Mortgage-backed securities		307,828		—		(56,293	)		251,535		300,398		2,008		(8,799	)		293,607		293,323		—		(47,954	)		245,369		300,488		—		(55,660	)		244,828
Asset-backed securities		3,330		—		(70	)		3,260		3,326		13		—			3,339		3,184		—		(92	)		3,092		3,332		—		(62	)		3,270
Other debt securities		70,694		4		(3,213	)		67,485		67,104		1,514		(231	)		68,387		65,867		89		(5,208	)		60,748		70,542		3		(3,441	)		67,104
Total	$	473,695	$	13	$	(72,363	)	$	401,345	$	463,536	$	5,689	$	(9,829	)	$	459,396	$	453,216	$	375	$	(62,044	)	$	391,547	$	466,461	$	132	$	(70,177	)	$	396,416
Securities held-to-maturity:
State and municipal securities	$	1,762	$	—	$	(3	)	$	1,759	$	1,782	$	48	$	—		$	1,830	$	1,232	$	—	$	—		$	1,232	$	1,240	$	—	$	—		$	1,240
Total	$	1,762	$	—	$	(3	)	$	1,759	$	1,782	$	48	$	—		$	1,830	$	1,232	$	—	$	—		$	1,232	$	1,240	$	—	$	—		$	1,240

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

Less than 12 months

12 months or more

Total

September 30, 2022

Estimated
fair value

Gross
unrealized
losses

Estimated
fair value

Gross
unrealized
losses

Estimated
fair value

Gross
unrealized
losses

U. S. government agency securities

$
10,396

$
(1,299
)

$
2,922

$
(454
)

$
13,318

$
(1,753
)
State and municipal securities

42,671

(4,856
)

21,712

(6,178
)

64,383

(11,034
)
Mortgage-backed securities

90,279

(9,858
)

161,256

(46,435
)

251,535

(56,293
)
Asset-backed securities

3,260

(70
)

—

—

3,260

(70
)
Other debt securities

48,972

(2,220
)

15,508

(993
)

64,480

(3,213
)
Total temporarily impaired securities

$
195,578

$
(18,303
)

$
201,398

$
(54,060
)

$
396,976

$
(72,363
)

December 31, 2021

U. S. government agency securities

$
2,560

$
(20
)

$
2,737

$
(74
)

$
5,297

$
(94
)
State and municipal securities

15,309

(279
)

12,768

(426
)

28,077

(705
)
Mortgage-backed securities

155,805

(5,291
)

75,934

(3,508
)

231,739

(8,799
)
Asset-backed securities

—

—

—

—

—

—

Other debt securities

30,375

(231
)

—

—

30,375

(231
)
Total temporarily impaired securities

$
204,049

$
(5,821
)

$
91,439

$
(4,008
)

$
295,488

$
(9,829
)

~~As noted in the table above, as of September 30, 2022, the Company had gross unrealized losses of~~ACL totaling $~~72.4~~ million in its investment securities portfolio. The unrealized losses associated with these investment securities are driven by changes in interest rates and are recorded as a component of equity. These investment securities will continue to be monitored as a part of our ongoing impairment analysis. Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments. If an expected shortfall in future cash flows is identified, a credit loss will be deemed to have occurred and will be recognized as a charge to earnings and a new cost basis for the security will be established.

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

~~Securities with a market value of $214.4~~2.0 million at ~~September 30, 2022 were pledged to collateralize public deposits, derivative positions and Federal Home Loan Bank advances.~~March 31, 2023.

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


	Nine Months Ended		Nine Months Ended			Three Months Ended			Three Months Ended
	September 30, 2022		September 30, 2021			March 31, 2023			March 31, 2022
Proceeds	$	54,955	$	74,305		$	10,845		$	20,853
Gross gains		8		44			6			—
Gross losses		—		(24	)		(1	)		—

The amortized cost and fair value of securities at ~~September 30, 2022,~~March 31, 2023, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


	Available-for-sale				Held-to-maturity				Available-for-sale				Held-to-maturity
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value		Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
Due in less than one year	$	3,895	$	3,897	$	1,762	$	1,759	$	5,818	$	5,823	$	1,232	$	1,232
Due one to five years		28,551		27,379		—		—		31,222		30,357		—		—
Due five to ten years		107,384		97,731		—		—		101,167		91,703		—		—
Due beyond ten years		22,707		17,543		—		—		18,502		15,203		—		—
Mortgage-backed securities		307,828		251,535		—		—		293,323		245,369		—		—
Asset-backed securities		3,330		3,260		—		—		3,184		3,092		—		—
Total	$	473,695	$	401,345	$	1,762	$	1,759	$	453,216	$	391,547	$	1,232	$	1,232

Securities with a market value of $219.3 million at March 31, 2023 were pledged to collateralize public deposits, derivative positions and Federal Home Loan Bank advances.

Securities in an unrealized loss position for which an ACL has not been recorded as of March 31, 2023 and December 31, 2022, and the length of time they were in continuous loss positions as of such dates are as follows (in thousands):


	Less than 12 months					12 months or more					Total
March 31, 2023	Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses
U. S. government agency securities	$	—	$	—		$	12,662	$	(1,226	)	$	12,662	$	(1,226	)
State and municipal securities		2,974		(55	)		48,082		(7,509	)		51,056		(7,564	)
Mortgage-backed securities		15,696		(376	)		229,673		(47,578	)		245,369		(47,954	)
Asset-backed securities		3,092		(92	)		—		—			3,092		(92	)
Other debt securities		25,898		(1,840	)		33,762		(3,368	)		59,660		(5,208	)
Total temporarily impaired securities	$	47,660	$	(2,363	)	$	324,179	$	(59,681	)	$	371,839	$	(62,044	)

December 31, 2022
U. S. government agency securities	$	6,243	$	(836	)	$	6,659	$	(799	)	$	12,902	$	(1,635	)
State and municipal securities		12,952		(422	)		41,779		(8,957	)		54,731		(9,379	)
Mortgage-backed securities		81,751		(7,647	)		161,708		(48,013	)		243,459		(55,660	)
Asset-backed securities		3,270		(62	)		—		—			3,270		(62	)
Other debt securities		41,018		(2,028	)		24,084		(1,413	)		65,102		(3,441	)
Total temporarily impaired securities	$	145,234	$	(10,995	)	$	234,230	$	(59,182	)	$	379,464	$	(70,177	)

At adoption of ASC 326 on January 1, 2023 and at March 31, 2023, calculated credit losses and, thus, the related ACL on held-to-maturity debt securities were not material due to the high credit quality of the portfolio. As a result, no ACL was recorded on the held-to-maturity portfolio at March 31, 2023.

At December 31, 2023, the Company owned certain securities related to Signature Bank ("Signature") which, following the first quarter failure of Signature, were deemed to have significant credit losses and no probable recovery. As such, a $2.0 million provision for credit loss was recorded with a corresponding ACL. The Company has performed an assessment of its portfolio in an unrealized loss position and has determined no other credit losses present as of March 31, 2023. See Note 1 for additional details on the adoption of ASC 326 as it relates to the securities portfolio.

At March 31, 2023, there were 327 debt securities available-for-sale that were in an unrealized loss position. The Company does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at March 31, 2023 were primarily attributable to the rising interest rate environment. The majority of the investment portfolio was either government guaranteed or an issuance of a government sponsored entity or highly rated by major credit rating agencies.

As of March 31, 2023, the Signature securities for which an ACL has been recorded are on non-accrual. No other securities are past due or on non-accrual.

The following table shows a rollforward of the ACL on available for sale securities for the three months ended March 31, 2023:


	Other debt securities
Balance at December 31, 2022	$	—
Adoption of CECL		—
Additions for securities for which no previous expected credit losses were recognized		2,000
Total	$	2,000

NOTE 3 – LOANS AND ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES

A summary of the loans held for investment portfolio as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 follows (in thousands):


	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Commercial real estate	$	1,067,675		$	825,284
Commercial real estate - owner occupied							$	276,515		$	246,109
Commercial real estate - non-owner occupied								840,755			803,611
Consumer real estate		386,628			326,412			425,649			402,615
Construction and land development		198,869			214,310			209,556			229,972
Commercial and industrial		499,048			497,615			534,521			496,347
Consumer		52,715			46,811			55,125			53,382
Other		85,334			55,337			65,207			80,762
Total		2,290,269			1,965,769			2,407,328			2,312,798
Allowance for loan losses		(22,431	)		(21,698	)
Allowance for credit losses on loans								(25,189	)		(23,806	)
Total loans, net	$	2,267,838		$	1,944,071		$	2,382,139		$	2,288,992

~~Payroll Protection Program~~

Non-accrual and Past Due Loans

The following table presents the recorded investment in loans by aging category and accrual status of March 31, 2023 and December 31, 2022 by class of loans (in thousands):

~~In 2020,~~


	Accruing
	30 - 59		60 - 89		Greater Than
	Days		Days		89 Days		Total		Loans Not		Non-Accrual
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Total
March 31, 2023
Commercial real estate - owner occupied	$	—	$	—	$	—	$	—	$	271,511	$	5,004	$	276,515
Commercial real estate - non-owner occupied		—		—		—		—		840,755		—		840,755
Consumer real estate		2,856		2		311		3,169		421,357		1,123		425,649
Construction and land development		—		—		—		—		209,556		—		209,556
Commercial and industrial		4,005		2		635		4,642		525,902		3,977		534,521
Consumer		120		73		62		255		54,853		17		55,125
Other		—		—		—		—		65,205		2		65,207
Total	$	6,981	$	77	$	1,008	$	8,066	$	2,389,139	$	10,123	$	2,407,328


	Accruing
	30 - 59		60 - 89		Greater Than
	Days		Days		89 Days		Total		Loans Not		Non-Accrual
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans		Total
December 31, 2022
Commercial real estate - owner occupied	$	—	$	—	$	—	$	—	$	239,351	$	4,982	$	244,333
Commercial real estate - non-owner occupied		—		—		—		—		802,107		—		802,107
Consumer real estate		456		231		87		774		393,893		456		395,123
Construction and land development		—		—		—		—		229,896		8		229,904
Commercial and industrial		76		53		744		873		489,842		4,065		494,780
Consumer		178		39		14		231		52,731		54		53,016
Other		—		—		37		37		80,535		—		80,572
Purchased credit impaired		175		149		143		467		11,347		1,149		12,963
Total	$	885	$	472	$	1,025	$	2,382	$	2,299,702	$	10,714	$	2,312,798

The following table presents the ~~CARES Act created a new guaranteed, unsecured loan program under the SBA called the Payroll Protection Program (“PPP”), which the~~recorded investment in nonaccrual loans as of March 31, 2023 by class of loans (in thousands):


	Non-Accrual loans with no allowance		Non-Accrual loans with allowance		Total Non-Accrual Loans
Commercial real estate - owner occupied	$	5,004	$	—	$	5,004
Commercial real estate - non-owner occupied		—		—		—
Consumer real estate		1,123		—		1,123
Construction and land development		—		—		—
Commercial and industrial		3,109		868		3,977
Consumer		17		—		17
Other		2		—		2
Total	$	9,255	$	868	$	10,123

The Company ~~participated in, to fund operational costs of eligible businesses, organizations and self-employed persons~~recognized no interest income on nonaccrual loans during the pandemic period. The SBA has guaranteed 100% of the amounts loaned under the PPP by lenders to eligible small businesses. One of the notable features of the PPP is that borrowers are eligible for loan forgiveness if certain conditions are met related to retaining staff and if loan amounts are used to cover eligible expenses, such as payroll, mortgage interest, rents and utilities payments. These loans have a ~~two~~ to ~~five year~~ ~~term and will earn interest at a rate of~~ 1~~%. As of September 30, 2022, the outstanding balance of loans originated under the PPP totaled $0.9~~ ~~million compared with $26.5~~ ~~million as of December~~three months ended March 31, ~~2021 and was included in commercial and industrial loans.~~2023.

Additionally, PPP borrowers are not required to pay any fees to the government or the lender and the loans may be repaid by the borrower at any time. The SBA, however, will pay lenders a processing fee based on the size of the PPP loan, ranging from 1~~% to~~ 5~~% of the loan. These fees are deferred and amortized over the life of the loan. PPP fees recognized as income totaled $0.1~~ ~~million and $0.7~~ ~~million for the three and nine months ended September 30, 2022, compared to $1.9~~ ~~million and $6.8~~ ~~million for the same periods in 2021.~~16

~~Loans Held for Sale~~

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

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

~~Allowance for Loan Losses~~

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

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 individually and assigns each loan a risk rating. This analysis is performed at origination by the relationship manager and credit department personnel. On at least an annual basis, an independent party performs a formal credit risk review of a sample of the loan portfolio. Among other things, this review assesses the appropriateness of the loan’s risk rating. The Company uses the following definitions for risk ratings:

•

Pass – Loans in this category are considered to have a low probability of default and do not meet the criteria of the risk categories below.

•

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.~~

1417

The following tables provides the risk category of loans by applicable class of loans and vintage year as of March 31, 2023 (in thousands):


	Term Loans by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolvers		Revolvers converted to term loans		Total
Commercial real estate - owner occupied
Pass	$	5,741	$	85,800	$	89,177	$	28,210	$	14,854	$	31,490	$	10,475	$	275	$	266,022
Special Mention		—		—		—		—		4,704		—		623		—		5,327
Substandard		—		—		2,666		—		157		2,343		—		—		5,166
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	5,741	$	85,800	$	91,843	$	28,210	$	19,715	$	33,833	$	11,098	$	275	$	276,515
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Commercial real estate - non-owner occupied
Pass	$	25,232	$	308,523	$	243,403	$	106,801	$	45,415	$	102,482	$	7,638	$	810	$	840,304
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		236		—		—		—		—		215		—		451
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	25,232	$	308,759	$	243,403	$	106,801	$	45,415	$	102,482	$	7,853	$	810	$	840,755
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Consumer real estate
Pass	$	15,034	$	95,585	$	39,481	$	17,294	$	15,437	$	47,800	$	189,491	$	2,142	$	422,264
Special Mention		—		—		—		—		265		272		—		12		549
Substandard		91		916		30		42		197		1,347		170		2		2,795
Doubtful		—		—		—		—		—		—		41		—		41
Total	$	15,125	$	96,501	$	39,511	$	17,336	$	15,899	$	49,419	$	189,702	$	2,156	$	425,649
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Construction and land development
Pass	$	13,073	$	102,383	$	69,917	$	11,883	$	6,324	$	2,710	$	1,511	$	178	$	207,979
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		1,577		—		—		—		—		—		—		1,577
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	13,073	$	103,960	$	69,917	$	11,883	$	6,324	$	2,710	$	1,511	$	178	$	209,556
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Commercial and industrial
Pass	$	22,688	$	161,992	$	86,695	$	50,569	$	21,209	$	12,963	$	149,159	$	3,036	$	508,311
Special Mention		—		27		2,841		3,343		—		—		2,315		—		8,526
Substandard		—		—		—		5,323		—		—		12,178		—		17,501
Doubtful		—		—		—		130		23				30		—		183
Total	$	22,688	$	162,019	$	89,536	$	59,365	$	21,232	$	12,963	$	163,682	$	3,036	$	534,521
Current period gross charge-offs		—		80		9		59		—		—		—		—		148

Consumer
Pass	$	6,049	$	17,723	$	8,364	$	2,969	$	1,005	$	510	$	17,310	$	1,124	$	55,054
Special Mention		—		—		—		—		—		—		—		—		—
Substandard		—		8		39		—		20		2		—		—		69
Doubtful		—		—		2		—		—		—		—		—		2
Total	$	6,049	$	17,731	$	8,405	$	2,969	$	1,025	$	512	$	17,310	$	1,124	$	55,125
Current period gross charge-offs		—		11		21		20		12		37		—		—		101

Other
Pass	$	16,705	$	10,611	$	22,469	$	5,119	$	944	$	3,107	$	5,956	$	39	$	64,950
Special Mention		36		164		—		—		—		—		—		—		200
Substandard		—		—		2		53		—		2		—		—		57
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	16,741	$	10,775	$	22,471	$	5,172	$	944	$	3,109	$	5,956	$	39	$	65,207
Current period gross charge-offs		—		—		—		—		—		26		—		—		26

Total Portfolio
Pass	$	104,522	$	782,617	$	559,506	$	222,845	$	105,188	$	201,062	$	381,540	$	7,604	$	2,364,884
Special Mention		36		191		2,841		3,343		4,969		272		2,938		12		14,602
Substandard		91		2,737		2,737		5,418		374		3,694		12,563		2		27,616
Doubtful		—		—		2		130		23		—		71		—		226
Total	$	104,649	$	785,545	$	565,086	$	231,736	$	110,554	$	205,028	$	397,112	$	7,618	$	2,407,328
Current period gross charge-offs	$	-	$	91	$	30	$	79	$	12	$	63	$	-	$	-	$	275

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


September 30, 2022	Pass		Special Mention		Substandard		Doubtful		Total Impaired Loans		Total
Commercial real estate	$	1,047,993	$	11,316	$	8	$	—	$	4,966	$	1,064,283
													Non-impaired Loans
December 31, 2022													Pass		Special Mention		Substandard		Doubtful		Total Impaired Loans		Total
Commercial real estate - owner occupied													$	234,619	$	4,731	$	440	$	—	$	4,543	$	244,333
Commercial real estate - non-owner occupied														802,107		—		—		—		—		802,107
Consumer real estate		375,763		614		471		—		1,204		378,052		393,734		555		467		—		367		395,123
Construction and land development		198,793		—		—		—		8		198,801		229,897		—		—		—		7		229,904
Commercial and industrial		477,986		500		18,655		157		129		497,427		477,081		516		12,751		127		4,305		494,780
Consumer		52,097		—		88		2		10		52,197		52,911		—		84		2		19		53,016
Other		84,673		—		466		—		—		85,139		80,504		—		68		—		—		80,572
Purchased credit impaired		11,913		1,053		1,354		50		—		14,370		11,595		68		1,259		41		—		12,963
Total	$	2,249,218	$	13,483	$	21,042	$	209	$	6,317	$	2,290,269	$	2,282,448	$	5,870	$	15,069	$	170	$	9,241	$	2,312,798

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

Modifications

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, an other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL.

In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted.

The following table represents the loans at March 31, 2023 that were both experiencing financial difficulty and modified during the three months ended March 31, 2023, by class and by type of modification. The percentage of loans that were modified to borrowers in financial distress as compared to the total loans of each class is also presented below.


	Payment Delay		Term Extension		Total Class of Loans
Commercial and industrial		3,829		320		0.78	%
Total	$	3,829	$	320		0.17	%

The Company has not committed to lend additional amounts to the borrowers included in the previous table.

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. Such loans that had been modified in the last 12 months are all current with no loans past due.

The following table presents the financial effect of the loan modifications represented above to borrowers experiencing financial difficulty for the three months ended March 31, 2023:


	Weighted-Average	Weighted-Average
	Payment	Term
	Delay	Extension
Commercial and industrial	7 mos.	6 mos.
Total	7 mos.	6 mos.

No loans modified during the three months ended March 31, 2023 are in payment default.

Upon the Company's determination that a modified loan has subsequently been deemed uncollectible, the loan is written off. Therefore, the recorded investment of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

The following table presents collateral dependent loans, which are individually evaluated to determine expected credit losses, as of March 31, 2023 by class of loan and type of collateral.


	Real Estate	Total
Commercial real estate - owner occupied	$4,876	$4,876
Commercial and industrial	3,252	3,252
Total	$8,128	$8,128

Allowance for Credit Loss

The following table details the changes in the ~~ALL~~ACL for the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (in thousands):

Commercial
real estate

Consumer
real estate

Construction
and land
development

Commercial
and
industrial

Consumer

Other

Total

Three Months Ended September 30, 2022

Balance, beginning of period

$
7,149

$
2,555

$
3,271

$
7,464

$
498

$
747

$
21,684

Charged-off loans

—

—

—

(46
)

(64
)

(37
)

(147
)
Recoveries

—

1

—

7

14

5

27

Provision for loan losses

692

392

40

(419
)

3

159

867

Balance, end of period

$
7,841

$
2,948

$
3,311

$
7,006

$
451

$
874

$
22,431

Three Months Ended September 30, 2021

Balance, beginning of period

$
7,915

$
1,730

$
3,871

$
8,401

$
356

$
481

$
22,754

Charged-off loans

—

—

—

(125
)

(62
)

(80
)

(267
)
Recoveries

—

17

—

1

17

11

46

Provision for loan losses

(521
)

596

239

(664
)

124

226

—

Balance, end of period

$
7,394

$
2,343

$
4,110

$
7,613

$
435

$
638

$
22,533


	CECL																	Incurred Loss
Three Months Ended March 31,	2023																	2022
	Beginning Balance		Adoption of CECL			Jan. 1, 2023		Charge-Offs			Recoveries		Provision			Ending Balance		Beginning Balance		Charge-Offs			Recoveries		Provision			Ending Balance
Commercial real estate - owner occupied	$	1,967	$	209		$	2,176	$	—		$	—	$	143		$	2,319	$	5,439	$	—		$	—	$	(296	)	$	5,143
Commercial real estate - non-owner occupied		5,967		(632	)		5,335		—			—		275			5,610		1,685		—			—		159			1,844
Consumer real estate		3,153		650			3,803		—			—		5			3,808		2,412		—			—		(198	)		2,214
Construction and land development		3,830		(266	)		3,564		—			—		127			3,691		3,769		—			—		(461	)		3,308
Commercial and industrial		7,654		(995	)		6,659		(148	)		2		260			6,773		7,441		—			—		(235	)		7,206
Consumer		430		1,127			1,557		(101	)		103		8			1,567		397		(81	)		57		8			381
Other		805		1,404			2,209		(26	)		5		(767	)		1,421		555		(38	)		5		239			761
Total allowance for credit losses - loans	$	23,806	$	1,497		$	25,303	$	(275	)	$	110	$	51		$	25,189	$	21,698	$	(119	)	$	62	$	(784	)	$	20,857

Allowance for credit losses - unfunded commitments	$	319		3,350			3,669		—			—		391		$	4,060	$	319		—			—		—		$	319

As of March 31, 2023, the Company used a one-year reasonable and supportable forecast period. The changes in loss rates used as the basis for the estimate of credit losses during this period were modeled using both the Company's own historical data and historical data from peer banks and macroeconomic forecast data obtained from a third party vendor, which were then applied to the Company’s recent default experience as a starting point. At March 31, 2023, the forecast indicated that the markets in which the Company operates will experience a decline in economic conditions and an increase in the unemployment rate over the next year, primarily as a result of the interest rate environment. The increase in the ACL compared to January 1, 2023 was primarily attributable to an increase in the loan portfolio, changes in various loan attributes at the instrument level, and qualitative factors. For periods beyond the reasonable and supportable forecast period of one year, the Company reverted to historical credit loss information on a straight line basis over two years.

The Company maintains an allowance for unfunded commitments exposures. The allowance for unfunded commitments credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans. The ACL for unfunded loan commitments of $4.1 million and $0.3 million at March 31, 2023 and December 31, 2022, respectively, is separately classified on the balance sheet within Other Liabilities.

Commercial
real estate

Consumer
real estate

Construction
and land
development

Commercial
and
industrial

Consumer

Other

Total

Nine Months Ended September 30, 2022

Balance, beginning of period

$
7,124

$
2,412

$
3,769

$
7,441

$
397

$
555

$
21,698

Charged-off loans

(12
)

—

—

(205
)

(211
)

(128
)

(556
)
Recoveries

225

2

—

30

95

11

363

Provision for loan losses

504

534

(458
)

(260
)

170

436

926

Balance, end of period

$
7,841

$
2,948

$
3,311

$
7,006

$
451

$
874

$
22,431

Nine Months Ended September 30, 2021

Balance, beginning of period

$
7,349

$
1,831

$
3,476

$
9,708

$
305

$
576

$
23,245

Charged-off loans

(10
)

(1
)

—

(132
)

(106
)

(158
)

(407
)
Recoveries

—

22

—

2

63

23

110

Provision for loan losses

55

491

634

(1,965
)

173

197

(415
)
Balance, end of period

$
7,394

$
2,343

$
4,110

$
7,613

$
435

$
638

$
22,533

Incurred Loss Impairment Methodology

A breakdown of the ALL and the loan portfolio by loan category as previously required by ASC Topic 310 at ~~September 30, 2022 and~~ December 31, ~~2021~~2022 follows (in thousands):


	Commercial real estate		Consumer real estate		Construction and land development		Commercial and industrial		Consumer		Other		Total		Commercial real estate - owner occupied		Commercial real estate - non-owner occupied		Consumer real estate		Construction and land development		Commercial and industrial		Consumer		Other		Total
September 30, 2022
December 31, 2022
Allowance for Loan Losses:
Collectively evaluated for impairment	$	7,841	$	2,948	$	3,311	$	6,977	$	399	$	874	$	22,350	$	1,967	$	5,967	$	3,153	$	3,830	$	6,909	$	378	$	805	$	23,009
Individually evaluated for impairment		—		—		—		—		—		—		—		—		—		—		—		716		—		—		716
Purchased credit impaired		—		—		—		29		52		—		81		—		—		—		—		29		52		—		81
Balances, end of period	$	7,841	$	2,948	$	3,311	$	7,006	$	451	$	874	$	22,431	$	1,967	$	5,967	$	3,153	$	3,830	$	7,654	$	430	$	805	$	23,806
Loans:
Collectively evaluated for impairment	$	1,059,317	$	376,848	$	198,793	$	497,298	$	52,187	$	85,139	$	2,269,582	$	239,790	$	802,107	$	394,756	$	229,897	$	490,475	$	52,997	$	80,572	$	2,290,594
Individually evaluated for impairment		4,966		1,204		8		129		10		—		6,317		4,543		—		367		7		4,305		19		—		9,241
Purchased credit impaired		3,392		8,576		68		1,621		518		195		14,370		1,776		1,504		7,492		68		1,567		366		190		12,963
Balances, end of period	$	1,067,675	$	386,628	$	198,869	$	499,048	$	52,715	$	85,334	$	2,290,269	$	246,109	$	803,611	$	402,615	$	229,972	$	496,347	$	53,382	$	80,762	$	2,312,798

December 31, 2021
Allowance for Loan Losses:
Collectively evaluated for impairment	$	7,075	$	2,211	$	3,769	$	7,376	$	321	$	555	$	21,307
Individually evaluated for impairment		—		200		—		—		—		—		200
Purchased credit impaired		49		1		—		65		76		—		191
Balances, end of period	$	7,124	$	2,412	$	3,769	$	7,441	$	397	$	555	$	21,698
Loans:
Collectively evaluated for impairment	$	820,204	$	313,849	$	214,209	$	495,114	$	45,754	$	55,035	$	1,944,165
Individually evaluated for impairment		1,151		909		10		250		23		—		2,343
Purchased credit impaired		3,929		11,654		91		2,251		1,034		302		19,261
Balances, end of period	$	825,284	$	326,412	$	214,310	$	497,615	$	46,811	$	55,337	$	1,965,769

The following table presents ~~the allocation of the ALL~~additional detail on loans individually evaluated for ~~each respective loan category with the corresponding percentage of the ALL in each category to total loans, net of deferred fees~~impairment as previously required by ASC Topic 310 as of ~~September 30, 2022 and~~ December 31, ~~2021 (in thousands). PPP loans included in commercial and industrial loans in the below table do not have a corresponding ALL as they are fully guaranteed by the SBA:~~

September 30, 2022

December 31, 2021

Amount

Percent of total
loans

Amount

Percent of total
loans

Commercial real estate

$
7,841

0.34
%

$
7,124

0.36
%
Consumer real estate

2,948

0.13

2,412

0.12

Construction and land development

3,311

0.14

3,769

0.19

Commercial and industrial

7,006

0.31

7,441

0.38

Consumer

451

0.02

397

0.02

Other

874

0.04

555

0.03

Total allowance for loan losses

$
22,431

0.98
%

$
21,698

1.10
%

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

September 30, 2022

December 31, 2021

Recorded
investment

Unpaid
principal
balance

Related
allowance

Recorded
investment

Unpaid
principal
balance

Related
allowance

With no related allowance recorded:

Commercial real estate

$
4,966

$
4,974

$
—

$
1,151

$
1,115

$
—

Consumer real estate

1,204

1,218

—

255

281

—

Construction and land development

8

8

—

10

11

—

Commercial and industrial

129

414

—

250

298

—

Consumer

10

10

—

23

23

—

Other

—

—

—

—

—

—

Subtotal

6,317

6,624

—

1,689

1,728

—

With an allowance recorded:

Commercial real estate

—

—

—

—

—

—

Consumer real estate

—

—

—

654

654

200

Construction and land development

—

—

—

—

—

—

Commercial and industrial

—

—

—

—

—

—

Consumer

—

—

—

—

—

—

Other

—

—

—

—

—

—

Subtotal

—

—

—

654

654

200

Total

$
6,317

$
6,624

$
—

$
2,343

$
2,382

$
200


	December 31, 2022
	Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded:
Commercial real estate - owner occupied	$	4,543	$	4,551	$	—
Commercial real estate - non-owner occupied		—		—		—
Consumer real estate		367		393		—
Construction and land development		7		8		—
Commercial and industrial		420		412		—
Consumer		19		19		—
Other		—		—		—
Subtotal		5,356		5,383		—
With an allowance recorded:
Commercial real estate - owner occupied		—		—		—
Commercial real estate - non-owner occupied		—
Consumer real estate		—		—		—
Construction and land development		—		—		—
Commercial and industrial		3,885		4,061		716
Consumer		—		—		—
Other		—		—		—
Subtotal		3,885		4,061		716
Total	$	9,241	$	9,444	$	716

The ~~following table presents information related to the~~ average ~~recorded investment~~balances of impaired loans and ~~interest~~ income recognized on impaired loans ~~excluding PCI loans,~~while they were considered impaired under Incurred Loss are presented below for the ~~three and nine month periods ended September 30, 2022 and 2021~~period indicated (in thousands):

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended

September 30, 2022

September 30, 2021

September 30, 2022

September 30, 2021

Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

Average
recorded
investment

Interest
income
recognized

With no related allowance recorded:

Commercial real estate

$
4,988

$
59

$
1,159

$
16

$
5,075

$
234

$
1,174

$
48

Consumer real estate

548

6

889

—

337

7

1,181

—

Construction and land development

8

—

—

—

9

—

—

—

Commercial and industrial

106

2

63

—

79

—

64

1

Consumer

11

—

2

—

12

3

49

—

Other

—

—

—

—

—

—

—

—

Subtotal

5,661

67

2,113

16

5,512

244

2,468

49

With an allowance recorded:

Commercial real estate

—

—

—

—

—

—

—

—

Consumer real estate

—

—

—

—

—

—

—

—

Construction and land development

—

—

—

—

—

—

—

—

Commercial and industrial

—

—

—

—

—

—

—

—

Consumer

—

—

—

—

—

—

—

—

Other

—

—

—

—

—

—

—

—

Subtotal

—

—

—

—

—

—

—

—

Total

$
5,661

$
67

$
2,113

$
16

$
5,512

$
244

$
2,468

$
49

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

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

30 - 59

60 - 89

Greater Than

Days

Days

89 Days

Total

Loans Not

Past Due

Past Due

Past Due

Past Due

Past Due

Total

September 30, 2022

Commercial real estate

$
22

$
—

$
4,973

$
4,995

$
1,059,288

$
1,064,283

Consumer real estate

1,157

633

209

1,999

376,053

378,052

Construction and land development

—

—

73

73

198,728

198,801

Commercial and industrial

1,771

3,496

437

5,704

491,723

497,427

Consumer

269

117

43

429

51,768

52,197

Other

—

—

37

37

85,102

85,139

Purchased credit impaired

506

301

324

1,131

13,239

14,370

Total

$
3,725

$
4,547

$
6,096

$
14,368

$
2,275,901

$
2,290,269

December 31, 2021

Commercial real estate

$
—

$
—

$
1,115

$
1,115

$
820,240

$
821,355

Consumer real estate

1,806

—

241

2,047

312,711

314,758

Construction and land development

—

—

11

11

214,208

214,219

Commercial and industrial

57

48

268

373

494,991

495,364

Consumer

164

170

26

360

45,417

45,777

Other

—

—

—

—

55,035

55,035

Purchased credit impaired

302

153

459

914

18,347

19,261

Total

$
2,329

$
371

$
2,120

$
4,820

$
1,960,949

$
1,965,769

The following table presents the recorded investment in non-accrual loans, past due loans over 90 days and accruing and troubled debt restructurings (“TDR”) by class of loans as of September 30, 2022 and December 31, 2021 (in thousands):

Non-Accrual

Past Due Over 90 Days and Accruing

Troubled Debt Restructurings

September 30, 2022

Commercial real estate

$
4,974

$
—

$
—

Consumer real estate

307

175

—

Construction and land development

8

65

—

Commercial and industrial

186

436

344

Consumer

41

22

—

Other

—

37

—

Purchased credit impaired

1,218

256

—

Total

$
6,734

$
991

$
344

December 31, 2021

Commercial real estate

$
—

$
1,115

$
1,115

Consumer real estate

1,086

54

654

Construction and land development

11

—

—

Commercial and industrial

324

112

63

Consumer

31

10

—

Other

—

—

—

Purchased credit impaired

1,806

89

—

Total

$
3,258

$
1,380

$
1,832

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

~~As of September 30, 2022 and December 31, 2021, the Company had a recorded investment in TDR of $0.3~~ ~~million and~~ ~~1.8~~ ~~million, respectively. The Company had~~ no ~~specific allowance for those loans at September 30, 2022 or December 31, 2021 and there were~~ no commitments to lend additional amounts. Loans accounted for as TDR include modifications from original terms such as those due to bankruptcy proceedings, certain modifications of amortization periods or extended suspension of principal payments due to customer financial difficulties. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Bank’s loan policy. Loans accounted for as TDR are individually evaluated for impairment.In accordance with interagency guidance, short term deferrals granted due to the COVID-19 pandemic are not considered TDR unless the borrower was experiencing financial difficulty prior to the pandemic.

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

Number of contracts

Pre modification outstanding recorded investment

Post modification outstanding recorded investment, net of related allowance

Number of contracts

Pre modification outstanding recorded investment

Post modification outstanding recorded investment, net of related allowance
2022

Commercial and industrial

—

$—

$—

1

$86

$86

~~There were~~ no ~~TDR for which there was a payment default within twelve months following the modification during the nine months ended September 30, 2022 or 2021.~~


	Three Months Ended
	March 31, 2022
	Average recorded investment		Interest income recognized
With no related allowance recorded:
Commercial real estate - owner occupied	$	1,148	$	16
Commercial real estate - non-owner occupied		—		—
Consumer real estate		861		—
Construction and land development		10		—
Commercial and industrial		249		—
Consumer		11		—
Other		—		—
Subtotal		2,279		16
With an allowance recorded:
Commercial real estate - owner occupied		—		—
Commercial real estate - non-owner occupied		—		—
Consumer real estate		—		—
Construction and land development		—		—
Commercial and industrial		—		—
Consumer		—		—
Other		—		—
Subtotal		—		—
Total	$	2,279	$	16

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

~~There were~~ no ~~sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three or nine months ended September 30, 2022 or 2021.~~

NOTE 54 – SHORT TERM BORROWINGS AND LONG-TERM DEBT

Short-Term Borrowings

The Company had outstanding ~~borrowings totaling~~advances of $~~120.0~~55.5 million and $15.0 million as of ~~September 30, 2022 via various FHLB advances. These advances are non-callable; interest payments are due monthly, with principal due at maturity. The Company had~~ no ~~outstanding advances as of~~March 31, 2023 and December 31, ~~2021.~~

~~The following is a summary of the contractual maturities and average effective rates of outstanding advances (dollars in thousands):~~2022, respectively.


	September 30, 2022		March 31, 2023					December 31, 2022
Year	Amount	Interest Rates	Amount		Interest Rates			Amount		Interest Rates
2022	120,000	3.02%
2023			$	55,500		4.86	%	$	15,000		4.33	%

Advances from the FHLB are collateralized by investment securities with a market value of $~~20.4~~20.3 million and certain commercial and residential real estate mortgage loans totaling $~~721.0~~715.4 million under a blanket mortgage collateral agreement. At ~~September 30, 2022,~~March 31, 2023, the amount of available credit from the FHLB totaled $~~439.7~~462.4 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 $~~29.6~~29.7 million ~~at September 30, 2022~~as of March 31, 2023 and $~~29.5~~ ~~million at~~ December 31, ~~2021.~~2022.

NOTE ~~6 –~~5– ACCUMULATED OTHER COMPREHENSIVE ~~INCOME (LOSS)~~LOSS

The following were changes in accumulated other comprehensive ~~income (loss)~~loss by component, net of tax, for the periods ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (in thousands):

Unrealized Gains

and Losses

on Available

for Sale

Securities

Nine Months Ended September 30, 2022

Beginning balance

$
(1,270
)
Other comprehensive loss before
   reclassification, net of tax

(50,504
)
Amounts reclassified from accumulated other
   comprehensive loss, net of tax

(6
)
Net current period other comprehensive loss

(50,510
)
Ending Balance

$
(51,780
)

Nine Months Ended September 30, 2021

Beginning balance

$
7,728

Other comprehensive loss before
    reclassification, net of tax

(7,214
)
Amounts reclassified from accumulated other
   comprehensive loss, net of tax

(15
)
Net current period other comprehensive loss

(7,229
)
Ending Balance

$
499


	Unrealized Gains
	and Losses
	on Available
	for Sale
	Securities
Three Months Ended March 31, 2023
Beginning balance	$	(50,052	)
Other comprehensive income before reclassification, net of tax		6,205
Amounts reclassified from accumulated other comprehensive income, net of tax		(4	)
Net current period other comprehensive income		6,201
Ending Balance	$	(43,851	)

Three Months Ended March 31, 2022
Beginning balance	$	(1,270	)
Other comprehensive loss before reclassification, net of tax		(20,064	)
Amounts reclassified from accumulated other comprehensive loss, net of tax		—
Net current period other comprehensive loss		(20,064	)
Ending Balance	$	(21,334	)

The following amounts were reclassified out of each component of accumulated other comprehensive income (loss) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (in thousands):


													Affected Line Item						Affected Line Item
Details about Accumulated Other	Three Months Ended September 30,						Nine Months Ended September 30,						in the Statement Where	Three Months Ended March 31,					in the Statement Where
Comprehensive Income (Loss) Components	2022			2021			2022			2021			Net Income is Presented	2023			2022		Net Income is Presented
Realized gains on available- for-sale securities	$	8		$	7		$	8		$	20		Net gain (loss) on sale of securities	$	5		$	—	Net gain on sale of securities
		(2	)		(2	)		(2	)		(5	)	Income tax (expense) benefit		(1	)		—	Income tax expense
	$	6		$	5		$	6		$	15		Net of tax	$	4		$	—	Net of tax

~~NOTE 7– INCOME TAXES~~

~~The Company’s effective tax rate for the three and nine month periods ended September 30, 2022 was~~ ~~19.8% and~~ ~~19.7%, respectively, compared to~~ ~~19.4% and~~ ~~20.0% for the three and nine months ended September 30, 2021.~~

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

NOTE 86 – COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Company’s exposure to credit

loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet.

The following table sets forth outstanding financial instruments whose contract amounts represent credit risk as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 (in thousands):


	Contract or notional amount				Contract or notional amount
	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Financial instruments whose contract amounts represent credit risk:
Unused commitments to extend credit	$	1,008,167	$	831,075	$	1,165,573	$	1,112,950
Standby letters of credit		8,288		10,623		10,605		7,288
Total	$	1,016,455	$	841,698	$	1,176,178	$	1,120,238

The Company is party to litigation and claims arising in the normal course of business. Management believes that the liabilities, if any, arising from such litigation and claims as of ~~September 30, 2022,~~March 31, 2023, will not have a material impact on the financial statements of the Company.

NOTE 97 – DERIVATIVES

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

Interest Rate Swaps

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


	September 30, 2022					December 31, 2021					March 31, 2023					December 31, 2022
	Notional		Estimated			Notional		Estimated			Notional		Estimated			Notional		Estimated
	amount		fair value			amount		fair value			amount		fair value			amount		fair value
Interest rate swap agreements:
Pay fixed/receive variable swaps	$	36,402	$	2,435		$	54,055	$	(1,594	)	$	39,612	$	2,011		$	35,641	$	(2,343	)
Pay variable/receive fixed swaps		36,402		(2,435	)		54,055		1,594			39,612		(2,011	)		35,641		2,343
Total	$	72,804	$	—		$	108,110	$	—		$	79,224	$	—		$	71,282	$	—

Mortgage Banking Derivatives

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

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


	Three Months Ended			Nine Months Ended			Three Months Ended			Three Months Ended
	September 30, 2022			September 30, 2022			March 31, 2023			March 31, 2022
Mortgage loan interest rate lock commitments	$	(870	)	$	(940	)	$	576		$	(471	)
Mortgage-backed securities forward sales commitments		350			356			(296	)		415
Total	$	(520	)	$	(584	)	$	280		$	(56	)

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


	September 30, 2022					December 31, 2021					March 31, 2023					December 31, 2022
	Notional		Estimated			Notional		Estimated			Notional		Estimated			Notional		Estimated
	amount		fair value			amount		fair value			amount		fair value			amount		fair value
Included in other assets:
Mortgage loan interest rate lock commitments	$	—	$	—		$	50,281	$	696		$	23,930	$	582		$	19,413	$	6
Mortgage-backed securities forward sales commitments		24,500		196			—		—			—		—			12,500		27

Included in other liabilities:
Mortgage loan interest rate lock commitments	$	28,851	$	(244	)	$	—	$	—
Mortgage-backed securities forward sales commitments		—		—			43,000		(160	)	$	22,500	$	(269	)	$	—	$	—

NOTE 108 – STOCK OPTIONS AND RESTRICTED SHARES

On April 23, 2021, the shareholders of CapStar Financial Holdings, Inc. approved the 2021 Stock Incentive Plan (the "Plan"). The Plan provides for the grant of stock-based incentives, including stock options, restricted stock units, performance awards and restricted stock, to employees, directors and service providers that are subject to forfeiture until vesting conditions have been satisfied by the award recipient under the terms of the award. The Plan is intended to help align the interests of employees and our shareholders and reward our employees for improved Company performance. A total of 1,168,543 shares of stock were reserved for issuance under the Plan. Stock incentives include both restricted share and stock option grants. Total shares issuable under the plan were ~~1,105,148~~1,005,157 as of ~~September 30, 2022.~~March 31, 2023.

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


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2022			2021			2022			2021			2023			2022
Stock-based compensation expense before income taxes	$	258		$	373		$	971		$	1,169		$	399		$	388
Less: deferred tax benefit		(67	)		(98	)		(254	)		(306	)		(104	)		(101	)
Reduction of net income	$	191		$	275		$	717		$	863		$	295		$	287

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 was estimated using a Monte Carlo simulation. For awards based upon the achievement of the performance goals, the awards are earned ratably from 0% to 188%. If the performance goals are met at the end of the performance period, the award is adjusted to reflect the Company’s three-year total shareholder return (TSR) performance relative to a capital market peer group. This TSR modifier cannot cause the award to exceed the maximum of 188%.

The recipients have the right to vote and receive dividends but cannot sell, transfer, assign, pledge, hypothecate, or otherwise encumber the restricted stock until the shares have vested. A summary of the changes in the Company’s nonvested restricted shares for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 follows:


				Weighted					Weighted
				Average					Average
	Restricted			Grant Date		Restricted			Grant Date
Nonvested Shares	Shares			Fair Value		Shares			Fair Value
Nonvested at beginning of period		177,020		$	14.00		170,426		$	16.76
Granted		92,212			21.22		113,068			17.75
Vested		(31,521	)		18.90		(13,383	)		16.53
Forfeited		(33,131	)		14.93		—			—
Nonvested at end of period		204,580		$	16.89		270,111		$	17.20

As of ~~September 30, 2022,~~March 31, 2023, there was $~~2.0~~2.5 million of unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of ~~1.9~~2.1 years. The total fair value of shares vested during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was $~~0.7~~0.2 million.

Stock Options

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

The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model. There were no options granted in ~~2022~~2023 or ~~2021.~~2022.

A summary of the activity in stock options for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 follows:


						Weighted						Weighted
				Weighted		Average				Weighted		Average
				Average		Remaining				Average		Remaining
				Exercise		Contractual				Exercise		Contractual
	Shares			Price		Term (years)		Shares		Price		Term (years)
Outstanding at beginning of period		130,245		$	11.96				124,445	$	12.11
Granted		—			—				—		—
Exercised		(5,800	)		8.79				—		—
Forfeited or expired		—			—				—		—
Outstanding at end of period		124,445		$	12.11		4.5		124,445	$	12.11		3.7
Fully vested and expected to vest		124,445		$	12.11		4.5		124,445	$	12.11		3.7
Exercisable at end of period		124,445		$	12.11		4.5		124,445	$	12.11		3.7

~~Information related to stock options during each year follows:~~

2022

2021

Intrinsic value of options exercised

$
71,340

$
821,174

Cash received from option exercises

50,982

1,077,489

Tax benefit realized from option exercises

18,648

148,312

Weighted average fair value of options granted

—

—

~~As of September 30, 2022, all compensation cost related to stock~~No options ~~granted under~~were exercised during the ~~Plan has been recognized.~~three months ended March 31, 2023 or 2022.

NOTE 1311 – FAIR VALUE

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

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

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

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

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

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

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

2628

~~Impaired~~Individually Evaluated Loans: The fair value of impaired loans with specific allocations of the ~~allowance for loan losses~~ACL 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~~Individually evaluated loans are evaluated on at least a quarterly basis for additional impairment and adjusted in accordance with the loan policy.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Appraisals may be adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and/or management’s expertise and knowledge of the collateral. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The Company had no other real estate owned carried at fair value at ~~September 30, 2022~~March 31, 2023 or December 31, ~~2021.~~2022.

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):


	Fair value measurements at September 30, 2022											Fair value measurements at March 31, 2023
				Quoted prices											Quoted prices
				in active		Significant									in active		Significant
				markets for		other			Significant						markets for		other			Significant
				identical		observable			unobservable						identical		observable			unobservable
	Carrying			assets		inputs			inputs			Carrying			assets		inputs			inputs
	Value			(Level 1)		(Level 2)			(Level 3)			Value			(Level 1)		(Level 2)			(Level 3)
Assets:
Securities available-for-sale:
U. S. government agency securities	$	13,318		$	—	$	13,318		$	—		$	12,662		$	—	$	12,662		$	—
State and municipal securities		65,747			—		65,747			—			69,676			—		69,676			—
Mortgage-backed securities		251,535			—		251,535			—			245,369			—		245,369			—
Asset-backed securities		3,260			—		3,260			—			3,092			—		3,092			—
Other debt securities		67,485			—		67,485			—			60,748			—		60,748			—
Loans held for sale		35,574			—		35,574			—			17,026			—		17,026			—
Derivative assets:
Non-hedging derivatives:
Interest rate swaps - customer related		2,435			—		2,435			—			2,011			—		2,011			—
Mortgage-backed securities forward sales commitments		196			—		196			—
Mortgage loan interest rate lock commitments													582			—		—			582
Liabilities:
Derivative liabilities:
Non-hedging derivatives:
Interest rate swaps - customer related		(2,435	)		—		(2,435	)		—
Mortgage loan interest rate lock commitments		(244	)		—		—			(244	)
Derivative Liabilities - customer related													(2,011	)		—		(2,011	)		—
Mortgage-backed securities forward sales commitments													(269	)		—		(269	)		—

Fair value measurements at December 31, 2021

Quoted prices

in active

Significant

markets for

other

Significant

identical

observable

unobservable

Carrying

assets

inputs

inputs

Value

(Level 1)

(Level 2)

(Level 3)

Assets:

Securities available-for-sale:

U. S. government agency securities

$
11,503

$
—

$
11,503

$
—

State and municipal securities

82,560

—

82,560

—

Mortgage-backed securities

293,607

—

293,607

—

Asset-backed securities

3,339

—

3,339

—

Other debt securities

68,387

—

68,387

—

Loans held for sale

37,306

—

37,306

—

Derivative assets:

Non-hedging derivatives:

Interest rate swaps - customer related

1,594

—

1,594

—

Mortgage loan interest rate lock commitments

696

—

—

696

Liabilities:

Derivative liabilities:

Non-hedging derivatives:

Interest rate swaps - customer related

(1,594
)

—

(1,594
)

—

Mortgage-backed securities forward sales commitments

(160
)

—

(160
)

—


	Fair value measurements at December 31, 2022
				Quoted prices
				in active		Significant
				markets for		other			Significant
				identical		observable			unobservable
	Carrying			assets		inputs			inputs
	Value			(Level 1)		(Level 2)			(Level 3)
Assets:
Securities available-for-sale:
U. S. government agency securities	$	12,902		$	—	$	12,902		$	—
State and municipal securities		68,312			—		68,312			—
Mortgage-backed securities		244,828			—		244,828			—
Asset-backed securities		3,270			—		3,270			—
Other debt securities		67,104			—		67,104			—
Loans held for sale		12,636			—		12,636			—
Derivative assets:
Interest rate swaps - customer related		2,343			—		2,343			—
Mortgage loan interest rate lock commitments		6			—		—			6
Mortgage-backed securities forward sales commitments		27			—		27			—
Liabilities:
Derivative liabilities:
Interest rate swaps - customer related		(2,343	)		—		(2,343	)		—

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ (in thousands):


	Mortgage Loan Interest Rate						Mortgage Loan Interest Rate
	Lock Commitments						Lock Commitments
	2022			2021			2023		2022

Balance of recurring Level 3 assets at January 1st	$	696		$	2,607		$	6	$	696
Total gains or losses for the period:
Included in mortgage banking income		(940	)		(1,528	)		576		(471	)
Balance of recurring Level 3 assets (liabilites) at September 30th	$	(244	)	$	1,079
Balance of recurring Level 3 assets at March 31st							$	582	$	225

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


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


					Range
	Fair		Valuation		(Weighted-
March 31, 2023	Value		Technique(s)	Unobservable Input(s)	Average)
Assets:
Non-hedging derivatives:
Mortgage loan interest rate lock commitments	$	582	Consensus pricing	Origination pull-through rate	69% - 98% (86%)

Range

Fair

Valuation

(Weighted-

Fair

Valuation

(Weighted-

December 31, 2021

Value

Technique(s)

Unobservable Input(s)

Average)

December 31, 2022

Value

Technique(s)

Unobservable Input(s)

Average)

Assets:

Non-hedging derivatives:

Mortgage loan interest rate lock commitments

696

Consensus pricing

Origination pull-through rate

60% - 98% (80%)

Consensus pricing

Origination pull-through rate

80% - 100% (94%)

~~There were no assets measured at fair value on a nonrecurring basis as of September 30, 2022.~~ Assets measured at fair value on a nonrecurring basis as of March 31, 2023 and December 31, ~~2021~~2022 are summarized below (in thousands).


		Quoted prices
		in active	Significant
		markets for	other	Significant
		identical	observable	unobservable
	Carrying	assets	inputs	inputs
	Value	(level 1)	(level 2)	(level 3)
Fair value measurements at March 31, 2023
Assets:
Individually evaluated loans:
Commercial and industrial	$3,132	—	—	3,132
Fair value measurements at December 31, 2022
Assets:
Impaired loans:
Commercial and industrial	$3,169	—	—	$3,169

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.

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

Loans held for sale include residential mortgage loans, the guaranteed portion of SBA loans, and Tri-Net loans. The fair value of residential mortgage and SBA loans held for sale is measured using an exit price notion. The fair value of Tri-Net loans held for sale is measured using an exit price notion in as much as observable market data is available. Where there is no observable market data, the fair value of Tri-Net loans held for sale is estimated using discounted cash flow models. There were no Tri-Net loans held for sale as of March 31, 2023 or December 31, 2022.

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

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.

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

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

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.

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.

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

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

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

The following is a discussion of our financial condition at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 and our results of operations for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere in this Report and our ~~2021~~2022 10-K. Annualized results for interim periods may not be indicative of results for the full year or future periods.

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

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

The ~~third~~first quarter of ~~2022~~2023 resulted in ~~$0.37~~$0.30 diluted net income per share of common stock, a decrease of ~~37.3%~~37.5% compared to the ~~third~~first quarter of ~~2021.~~2022. Annualized return on average assets was ~~1.01%~~0.83% for the ~~third~~first quarter of ~~2022~~2023 compared to ~~1.64%~~1.37% for the same period in ~~2021.~~

For the nine months ended September 30, 2022, diluted net income per share of common stock was $1.30, a decrease of 20.2% compared to the same period in 2021. Annualized return on average assets was 1.22% for the nine months ended September 30, 2022 compared to 1.56% for the same period in 2021.2022.

At ~~September 30, 2022,~~March 31, 2023, loans held for investment increased to ~~$2.29~~$2.41 billion, as compared to ~~$1.97~~$2.31 billion at December 31, ~~2021. Included within the increase for the third quarter was $25.6 million of Tri-Net loans transferred from loans held for sale to loans held for investment.~~2022. Total deposits ~~decreased~~increased to ~~$2.63~~$2.75 billion at ~~September 30, 2022~~March 31, 2023 from $2.68 billion at December 31, ~~2021.~~2022.

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

As the global COVID pandemic and its variants continue, we will continue to assess the impact on our market. While it is uncertain losses will materialize in the future, we continue to proactively work with our clients and evaluate the potential impact of the pandemic on them and us. Furthermore, we currently do not anticipate a significant adverse liquidity impact related to the COVID-19 pandemic. See further discussion regarding the Company’s management of liquidity risk in the subsequent section titled ‘Liquidity’. Despite the uncertainty the Company is well positioned to continue delivering on its strategic initiatives in a responsible manner by prioritizing things such as business continuity, liquidity management and maintaining an adequate allowance for loan losses.

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

Net interest income increased ~~$2.6~~$2.1 million, or ~~11.3%~~9.8%, for the three months ended ~~September 30, 2022,~~March 31, 2023, compared to the same period in ~~2021 and increased $3.0 million, or 4.3% for the nine months ended September 30, 2022 compared to the same period in 2021.~~2022. Net interest margin increased to ~~3.50%~~3.24% for the three months ended ~~September 30, 2022,~~March 31, 2023, compared with ~~3.12%~~2.97% for the same period of ~~2021~~2022. The increase was attributable to the rising rate environment over the last 12 months and ~~increased~~ to ~~3.29%~~deploying excess liquidity into loans held for the nine months ended September 30, 2022 compared to 3.17% for the comparable period of 2021. The increases primarily resulted from continued increases in interest rates and the positive mix shift in average earning assets.investment.

The three months ended ~~September 30, 2022~~March 31, 2023 yielded a ~~$0.9~~$2.4 million provision expense compared to noa $0.8 million recovery of provision being recorded for the comparable period of ~~2021.~~2022. The ~~increase~~current year provision largely related to the $2.0 million provision expense related to the Signature Bank subordinated debt held in ~~provision was primarily attributable to strong loan growth and an increase in qualitative factors.~~available-for-sale debt securities.

Total noninterest income for the ~~third~~first quarter of ~~2022~~2023 decreased ~~$8.4~~$2.8 million, or ~~71.9%~~31.0%, compared with the same period in ~~2021,~~2022, and comprised ~~11%~~21% of total revenues, defined as net interest income plus noninterest income. For the nine months ended September 30, 2022, total noninterest income decreased $13.3 million, or 42.2%, compared to the same period in 2021, and comprised 20% of total revenues for the nine months ended September 30, 2022. Decreases across comparable periods wererevenues. The decrease is primarily attributable to ~~declines~~the lack of Tri-Net revenue in ~~mortgage and Tri-Net division revenues~~the current quarter as ~~the recent rapid rise~~well as a $0.9 million death benefit from bank-owned life insurance policies recorded in ~~interest rates has decreased demand.~~2022, with no corresponding amount in 2023.

Total noninterest expense for the three months ended ~~September 30, 2022 decreased $0.4~~March 31, 2023 increased $1.3 million, or ~~2.4%~~7.4%, compared to the same period in ~~2021, and decreased $2.1 million, or 3.9%, for the nine months ended September 30, 2022 when compared to 2021.~~2022. The ~~decreases were~~increase was primarily driven by ~~lower incentive expense included within salaries~~higher data processing and ~~employee benefits offset by $2.2 million~~software expenses as well as higher regulatory fees with increases in ~~operational losses.~~the FDIC assessment rates. Our efficiency ratio for the three months ended ~~September 30, 2022~~March 31, 2023 was ~~62.21%~~64.60% compared to ~~53.06%~~58.67% for the same period in ~~2021. For the nine months ended September 30, 2022 our efficiency ratio was 59.01% compared to 55.01% for the same period in 2021.~~2022.

Common equity tier 1 capital to risk weighted assets, summarized in Note 1110 of the consolidated financial statements, is a useful measure in evaluating the quality and adequacy of capital. Our consolidated ratio of common equity tier 1 capital to risk weighted assets was ~~12.70%~~12.07% as of ~~September 30, 2022,~~March 31, 2023, compared with ~~14.11%~~12.61% at December 31, ~~2021.~~2022.

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

Annualized return on average assets and annualized return on average shareholders’ equity were ~~1.01%~~0.83% and ~~8.76%~~7.41%, respectively, for the ~~third~~first quarter of ~~2022,~~2023, compared with ~~1.64%~~1.37% and ~~14.13%~~11.39%, respectively, for the same period in ~~2021.~~2022.

Annualized return on average assets and annualized return on average shareholders’ equity were 1.22% and 10.41%, respectively, for the nine months ended September 30, 2022, compared with 1.56% and 13.51%, respectively, for the same period in 2021.

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

The following tables set forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three ~~and nine~~ month periods ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:

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

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

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

The 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.

The net interest margin was ~~3.50%~~3.24% and ~~3.12%~~2.97% for the ~~third~~first quarters of 2023 and 2022, ~~and 2021,~~ respectively. ~~For the nine months ended September 30, 2022 the~~The increase in net interest margin was 3.29% compared to 3.17% for the comparable period of 2021. Both quarter and year to date periods in 2022 benefitted from a mix shift in interest earning assets as excess liquidity was deployed to fund loan growth. These improvements were partially offset by a $1.9 million and $6.1 million decline in PPP fees for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 compared to the same period in 2022 ~~respectively.~~was primarily due to the rising rate environment over the past 12 months and to deploying excess liquidity into loans held for investment. Average loans held for investment for the quarter ended March 31, 2023 increased $346.4 million versus the same period in 2022, partially as a result of the Company's expansion into Asheville, Chattanooga, and Knoxville markets and continued focus on attracting new clients.

The increase in market interest rates over the past year, with the federal funds rate rising to 5% as of March 31, 2023 versus 0.25% as of March 31, 2022, contributed to a decline in average non-interest bearing deposits and interest bearing transaction accounts, as shown in the tables above, offset by an increase in time deposits.

Average non-interest bearing deposits represented 19.1% of total deposits for the quarter ended March 31, 2023 compared to 26.9% for the quarter ending March 31, 2022, offset by an increase in higher cost time deposits. Deposit costs increased across all interest-bearing account types.

Prior to January 1, 2023, the provision for credit losses was based on the then-applicable incurred loss model and represented an estimate of probable incurred losses in the loan portfolio and unfunded commitments at the end of each reporting period. Since the adoption of CECL on January 1, 2023, the provision for credit losses represents management’s estimate of life of loan credit losses in the loan portfolio and unfunded loan commitments and debt securities. The allowance for unfunded commitments, which is included in other liabilities in the consolidated balance sheets, represents expected losses on unfunded loan commitments that are expected to result in outstanding loan balances. Management’s estimate of credit losses under CECL is determined using a model that relies on reasonable and supportable forecasts and historical loss information to determine the balance of the ACL and resulting provision for credit losses.

For the three months ended ~~September 30, 2022,~~March 31, 2023, there was a provision expense of $2.4 million, which included a $2.0 million provision expense on Signature Bank subordinated debt in available-for-sale debt securities, compared to a $0.8 million recovery of provision expense for the ~~average security yields~~comparable period in 2022.

Current period provision includes $0.1 million provision related to loans compared to a $0.8 million recovery of provision for the comparable period which largely related to the increasing portfolio and other qualitative factors. Net charge-offs for the first quarter of 2023 were $165 thousand compared to $57 thousand for the comparable period of 2022. Our ACL on loans at March 31, 2023 was 1.05% of total loans held for investment compared to 1.03% as of December 31, 2022.

A provision of $0.4 million related to unfunded commitments was recorded in the first quarter of 2023 related to the increase in unfunded balances, changes in their composition, and other qualitative factors. The related ACL as a percentage of unfunded commitments increased ~~54 basis points~~ to ~~2.29 percent~~0.47% as of March 31, 2023 compared to 0.44% as of CECL adoption on January 1, 2023.

The $2.0 million provision on available-for-sale securities related to expected credit losses on Signature Bank subordinated debt following their first quarter 2023 bank failure. A corresponding ACL is recorded on the balance sheet in available-for-sale debt securities. Should such expected credit losses have been experienced under the incurred loss model prior to our adoption of CECL on January 1, 2023, they would have been recorded in other noninterest expense as other than temporary impairment with no corresponding allowance on the balance sheet.

See “Notes to Consolidated Financial Statements (Unaudited) — Note 3 — Loans and Allowance for Credit Losses on Loans” and Note 2 — "Securities" for additional information on our allowance for credit losses.

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.

Deposit service charges increased for the three months ended March 31, 2023 compared to the same period in 2022. These amounts originate from our commercial and consumer deposit accounts.

Interchange and debit card transaction fees fluctuate based upon transaction volumes, which were slightly lower for the three months ended March 31, 2023 compared to the same period in 2022.

Mortgage banking income consists of fees and gains from the origination of loans in our markets that are subsequently sold to third-party investors. Generally, mortgage banking income increases in lower interest rate environments and more robust housing markets and declines in rising interest rate environments and more challenging housing markets. Mortgage banking income will fluctuate from period to period as the rate environment changes. The decline above is indicative of the mortgage market responding to the higher rate environment.

Tri-Net represents a line of business which originates and sells commercial real estate loans to third-party investors with the exception of certain loans originated to borrowers within our target market, which are retained at the discretion of management. All of these loan sales transfer servicing rights to the buyer. Tri-Net activity remained halted during the first quarter of 2023 as the Company assessed market pricing, however, the business is expected to resume modest activity for the remainder of 2023 as pricing has shown signs of stabilizing.

Noninterest income for SBA lending, which represents gains on sales of guaranteed portions of SBA loans, increased for the three month period ended March 31, 2023 when compared to ~~2021, while~~the same period in 2022 as the Company expanded this line of business with the addition of a specialized team in the fourth quarter of 2022.

Other noninterest income primarily consists of loan related fees, bank-owned life insurance, and other service-related fees. The largest driver of the decline relates to $0.9 million in death benefit income from bank-owned life insurance policies for the ~~nine~~three months ended March 31, 2022, with no such activity in 2023.

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

Salaries and employee benefits expense remained relatively flat for the three months ended March 31, 2023 compared to the same period in 2022. At March 31, 2023, our associate base increased to 401 compared to 397 at March 31, 2022.

Regulatory fees expenses increased for the three months ended March 31, 2023 compared to the same period in 2022 as the FDIC increased assessment rates in the current year.

Our efficiency ratio was 64.60% and 58.67% for the three months ended March 31, 2023 and March 31, 2022, respectively, with the increase being driven by the aforementioned noninterest expense factors combined with a 2.4% decline in total revenue for the three months ended March 31, 2023 when compared to the same period of 2022. 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 Company’s effective tax rate for the three month period ended ~~September 30, 2022, average security yields increased 33 basis points~~March 31, 2023 was relatively stable at 19.4% compared to ~~2.10%. Both increases were due to be benefits of increasing market interest rates.~~

~~Average noninterest bearing deposits represented 25.1% and 26.4% of total average deposits~~19.6% for the three ~~and nine~~ month ~~periods ending September 30,~~period ended March 31, 2022 ~~, respectively, a decline from 27.5% and 26.7%~~as the Company continues to execute its tax strategy.

The effective tax rate for the three months ended March 31, 2023 compared favorably versus the statutory tax rate due to our investments in qualified municipal securities, tax benefits from our real estate investment trust, company owned life insurance, state tax credits, net of the effect of certain non-deductible expenses and ~~nine month periods ending September 30, 2021. Deposit costs~~the recognition of excess tax benefits related to stock compensation. The Company anticipates its effective tax rate for 2023 to be approximately 20.0%.

Total assets increased ~~across~~$115.6 million, or 3.7%, from $3.12 billion on December 31, 2022 to $3.23 billion on March 31, 2023. Loans held for investment grew $94.5 million, or 16.6% annualized, in the first three months of 2023. Loans held for sale decreased $13.2 million, or 119.8% annualized, during the first three months of 2023.

Total liabilities increased $115.9 million, or 17.0% annualized, from $2.76 billion on December 31, 2022 to $2.88 billion on March 31, 2023. Deposits increased $70.3 million, or 10.6% annualized.

The composition of loans at March 31, 2023 and December 31, 2022 and the percentage of each classification to total loans are summarized as follows:

Our principal market for lending is the State of Tennessee and adjacent states that can be effectively accessed from our banking offices. Our target borrower profile includes consumers, small to medium sized businesses, professional firms, real estate investors and developers, and their owners and managers. Our growth since 2018 has been concentrated in borrowers meeting that profile. Our primary competition is community, regional, and national banks operating in our primary markets. In seeking customer banking relationships, we rely on a model of delivering services through a qualified banker meeting all ~~periods for all interest-bearing deposit categories. Average funding sources for~~ the ~~three~~banking service needs of the business and ~~nine month periods ended September 30, 2022~~its primary stakeholders.

At March 31, 2023, our loan portfolio composition remained ~~flat~~relatively consistent with the composition at ~~$2.7 billion~~December 31, 2022. Our primary focus has been on commercial and industrial and commercial real estate lending, which constituted 69% of our loan portfolio as of March 31, 2023. Although we expect continued growth with respect to our loan portfolio, we do not expect any significant changes over the foreseeable future in the composition of our loan portfolio or in our emphasis on commercial lending. Our loan growth since inception has been reflective of the target market that we serve. The commercial real estate category includes owner-occupied 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 operation, refinance, or sale of the underlying real estate.

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

Non-performing loans to total loans decreased to 0.42% at March 31, 2023 compared to ~~the similar periods~~0.46% at December 31, 2022. The balance in ~~2021. A key longer-term strategic initiative~~non-accrual loans is principally related to ~~create~~two relationships that total $8.2 million. These loans are made up of one loan totaling $3.3 million which has a ~~stronger deposit-led culture~~90% SBA guaranty of $3.0 million and a specific reserve of $0.2 million as well as a relationship of $4.9 million with ~~an emphasis on lower cost relationship-based deposits.~~a specific reserve of $0.4 million.

The ~~average rate paid on interest-bearing liabilities was 0.93% for the third quarter~~composition of securities at March 31, 2023 and December 31, 2022 are summarized as follows:

Our investment securities had a fair value of $392.8 million at March 31, 2023 compared to ~~0.34%~~$397.7 million at December 31, 2023. The Company recorded a provision for ~~September 30, 2021. For~~credit loss on available-for-sale securities and a corresponding ACL of $2.0 million during the ~~nine months ended September 30,~~first quarter of 2023 related to ownership in subordinated debt securities in Signature Bank ("Signature") which, following the first quarter failure of Signature, were deemed to have significant credit losses and no probable recovery. The Company has performed an assessment of its corporate debt securities which is largely made up of other financial institution subordinated debt based on various factors including liquidity and soundness of the underlying financial institution and credit rating and no other such credit losses are expected to be present in the Company's portfolio as of March 31, 2023.

The composition of deposits at March 31, 2023 and December 31, 2022 and ~~2021,~~ the percentage of each classification to total deposits are summarized as follows:

Deposits have increased $70.3 million or, 10.6% when annualized, to $2.75 billion as of March 31, 2023 compared to December 31, 2022. This increase is driven by our interest-bearing transaction accounts and time deposit accounts and partially offset by decreases in our non-interest bearing and savings and money market accounts. The average ~~rate paid~~balance per customer account remains low at $47 thousand. We opened 583 new accounts during the first quarter of 2023 and we continue to focus on ~~interest-bearing liabilities was 0.57%~~operating relationships and ~~0.38%, respectively.~~deposit growth opportunities.

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

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

At ~~September 30, 2022,~~March 31, 2023, our EAR static simulation results indicated that our ~~balance sheet~~net interest income over the next year is ~~asset sensitive~~estimated to ~~parallel shifts in~~be fairly neutral to modest rate increases while being adversely impacted by falling interest ~~rates.~~rates and benefiting from larger rate increases. This indicates that our assets generally reprice faster than our liabilities, which results in a favorable impact to net interest income when market interest rates increase and an unfavorable impact to net interest income when market interest rates decline. Many assumptions are used to calculate the impact of interest rate fluctuations on our net interest income, such as asset prepayments, non-maturity deposit price sensitivity, and key rate drivers. Because of the inherent use of these estimates and assumptions in the model, our actual results may, and most likely will, differ from our static EAR results. In addition, static EAR results do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates or client behavior. For example, as part of our

asset/liability management strategy, management has the ability to increase asset duration and/or decrease liability duration in order to reduce asset sensitivity, or to decrease asset duration and/or increase liability duration in order to increase asset sensitivity.

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

Our policy is to maintain an allowance for loan losses at a level sufficient to absorb probable incurred losses in the loan portfolio. The allowance is increased by a provision for loan losses, which is a charge to earnings, is decreased by charge offs and increased by loan recoveries. 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.

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

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

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

Deposit service charges were up slightly for the three and nine months ended September 30, 2022 compared to the same period in 2021. These amounts originate from our commercial and consumer deposit accounts.

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

Mortgage banking income consists of mortgage fee income from the origination and sale of mortgage loans. These mortgage fees are for loans originated in our markets that are subsequently sold to third-party investors. Generally, mortgage origination fees increase in 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, though the Company benefits from our strong markets and focus on purchase transactions. The Company’s mortgage division experienced a reduction in demand due to higher market rates and reduced demand and anticipates a difficult environment at least until the 2023 buying season returns.

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

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

Noninterest income for SBA lending, which represents gains on sales of guaranteed portions of SBA loans, declined 38.5% and 40.8% for the three and nine month periods ended September 30, 2022, respectively, when compared to the same period in 2021.

Other noninterest income primarily consists of loan related fees, bank-owned life insurance, and other service-related fees. While flat for the three month comparable periods, the increase in the nine months ended September 30, 2022 compared to 2021 relates to $0.9 million in death benefit income from bank-owned life insurance policies.

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

The decreases in salaries and employee benefits were driven primarily by lower incentive expense included within salaries and employee benefits related to lower profitability driven primarily by lower Tri-Net and Mortgage operating results. Additionally, following two operational loss incidents in the current quarter, the Company recorded $0.8 million of voluntary executive incentive reversals. At September 30, 2022, our associate base decreased to 387 compared to 392 at September 30, 2021.

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

Our efficiency ratio was 62.21% and 59.01% for the three and nine months ended September 30, 2022, respectively, versus 53.06% and 55.01%, respectively, for the comparable periods ended September 30, 2021. The efficiency ratio is the ratio of noninterest expense to the sum of net interest income and noninterest income and measures the amount of expense that is incurred to generate a dollar of revenue. Overall, noninterest expense has declined due to the lower incentive expense as well as the Company's continued focus on expense discipline and operational improvements.

The Company’s effective tax rate for the three and nine month periods ended September 30, 2022 was 19.8% and 19.7%, respectively, compared to 19.4% and 20.0% for the three and nine month periods ended September 30, 2021.

The effective tax rate for the three months ended September 30, 2022 compared favorably from the statutory tax rate due to our investments in qualified municipal securities, tax benefits from our real estate investment trust, company owned life insurance, state tax credits, net of the effect of certain non-deductible expenses, and the recognition of excess tax benefits related to stock compensation. The Company anticipates its effective tax rate for 2022 to be approximately 20.0 percent.

Total assets increased $32.7 million, or 1.1%, from $3.13 billion on December 31, 2021 to $3.17 billion on September 30, 2022. Loans held for investment grew $327.0 million in the first nine months of 2022.

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

Our growth in cash, loans and deposits continues to be significantly influenced by inflation, volatility in the interest rate environment, and funding through the Company's correspondent banking customers.

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

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

At September 30, 2022, our loan portfolio composition remained relatively consistent with the composition at December 31, 2021. Our primary focus has been on commercial and industrial and commercial real estate lending, which constituted 68% of our loan portfolio as of September 30, 2022. Although we expect continued growth with respect to our loan portfolio, we do not expect any significant changes over the foreseeable future in the composition of our loan portfolio or in our emphasis on commercial lending. Our loan growth since inception has been reflective of the target market that we serve. The commercial real estate category includes owner-occupied 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 operation, refinance, or sale of the underlying real estate.

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

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

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

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

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

Overall liquidity sources total $1.6 billion as of March 31, 2023. Our most liquid assets are comprised of cash and due from banks, interest-bearing deposits in financial institutions, available-for-sale marketable investment securities and federal funds sold. Interest-bearing deposits in financial institutions totaled ~~$164.4~~$149.4 million at ~~September 30, 2022,~~March 31, 2023, representing ~~a decrease~~an increase of ~~$182.6~~$43.9 million from ~~$347.0 million at~~ December 31, ~~2021 as the Company deployed excess liquidity to fund loan growth.~~2022. The fair value of the available-for-sale investment portfolio was ~~$401.3~~$391.5 million at ~~September 30, 2022,~~March 31, 2023, a ~~$58.1~~decrease of $4.87 million ~~decrease~~ from December 31, ~~2021.~~2022. We pledge portions of our investment securities portfolio to secure public fund deposits, derivative positions and Federal Home Loan Bank advances. At ~~September 30, 2022,~~March 31, 2023, total investment securities pledged for these purposes comprised ~~53%~~56% of the estimated fair value of the investment portfolio, leaving ~~$188.7~~$173.5 million of unpledged securities.

Other sources of funds available to meet daily needs include ~~$439.7~~$462.4 million of borrowing capacity from the FHLB of Cincinnati, ~~$303.2~~$315.7 million of borrowing capacity from the Federal Reserve Bank of Atlanta’s discount window and federal funds lines with correspondent banks totaling ~~$165.0~~$145.0 million at ~~September 30, 2022.~~March 31, 2023. We also have the ability to issue an additional $188.2 million of brokered CDs based on internal limits.

The Company has a diversified deposit portfolio comprised 86% of customer deposits and 14% of brokered deposits. Among customer deposits, the largest concentration by industry is $45.0 million, or 1.9%, and the largest banking market accounts for $568.7 million or 23.9%. Correspondent Banking customers account for 10.1% of customer deposits. As of March 31, 2023 66.1% of deposits were insured or collateralized.

We have a large base of non-maturity customer deposits, defined as demand, savings, and money market deposit accounts. At March 31, 2023, such deposits totaled $2.0 billion and represented approximately 72% of our total deposits.

The principal source of cash for CapStar Financial Holdings, Inc. (the “Parent Company”) is dividends paid to it as the sole shareholder of the Bank. At ~~September 30, 2022,~~March 31, 2023, the Bank was able to pay up to ~~$85.3~~$94.1 million in dividends to the Parent Company without regulatory approval subject to the ongoing capital requirements of the Bank.

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

At ~~September 30, 2022,~~March 31, 2023, shareholders’ equity ~~totaled $347.4 million, a decrease of $32.7 million from December 31, 2021.~~remained relatively stable at $353.9 million. The ~~decrease was driven by a decline in the fair value of available for sale securities included within~~increases due to net income and other comprehensive income ~~which more than~~were offset ~~a $23.0 million increase in retained earnings.~~by the impact of CECL adoption on January 1, 2023 as well as dividend payments and share repurchases during the first quarter of 2023. As of ~~September 30, 2022,~~March 31, 2023, the Company and the Bank were well-capitalized under the regulatory framework for prompt corrective action.

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

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

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

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

Our off-balance sheet arrangements are summarized in Note 86 of the consolidated financial statements.

This Report ~~may include~~includes the following financial measures that have been prepared other than in accordance with U.S. GAAP (“non-GAAP financial measures”): tangible ~~common equity, tangible~~ book value per ~~share of common stock,~~share; tangible book value per share of common stock less after-tax unrealized available for sale investment ~~(gains) losses,~~losses; tangible common equity to tangible assets and tangible common ~~equity~~equity; to tangible assets less after-tax unrealized available for sale investment ~~(gains)~~ losses. The Company believes that these non-GAAP financial measures (i) provide useful information to management and investors that is supplementary to its financial condition, results of operations and cash flows computed in accordance with U.S. GAAP, (ii) enable a more complete understanding of factors and trends affecting the Company’s business, and (iii) allow investors to evaluate the Company’s performance in a manner similar to management, the financial services industry, bank stock analysts and bank regulators; however, the Company acknowledges that its non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with U.S. GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use.

The following table presents a reconciliation of ~~these~~the non-GAAP measures referenced above to the most directly comparable U.S. GAAP financial measures.

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 2022-02 ― Financial Instruments- Credit Losses- Troubled Debt Restructurings and Vintage Disclosures:~~

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

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 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 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.

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.

There have been no material changes in our market risk as of ~~September 30, 2022~~March 31, 2023 from that presented in our ~~2021~~2022 10-K. Information about our interest rate sensitivity is included in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Simulation Sensitivity Analysis” of this Report and incorporated herein by this reference.

AsThe Company, with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this ~~report, under~~Report. Based upon that evaluation, the ~~supervision and with the participation of our management, including our~~Company’s Chief Executive Officer and Chief Financial Officer we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Management applied its judgment in assessing the effectiveness of those controls and procedures, which by their nature, can provide only reasonable assurance about management’s control objectives. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based upon this evaluation, our Chief Executive Officer and the Chief Financial Officer concluded that ~~our~~the Company’s disclosure controls and procedures were ~~not~~ effective as of ~~September 30, 2022 because~~the end of the material weakness in internal control over financial reporting described below. In light of the material weakness, management performed additional procedures to validate the accuracy and completeness of the financial results impactedperiod covered by ~~the control deficiencies. Such procedures included the validation of underlying data and detailed testing.~~

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

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

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

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

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

We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weakness are remediated as soon as possible. We have made progress towards remediation and continue to implement our remediation plan for the material weakness in internal control over financial reporting described above, which includes assigning each general ledger account an owner and second reviewer, implementing procedures for the Accounting Division to review and attest to each general ledger account, and ensuring our internal and external audit plans test the effectiveness of our general ledger account oversight. We will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.Report.

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

In the ordinary course of business, the Holding Company and the Bank are parties to various legal proceedings. Additionally, in the ordinary course of business, the Holding Company and the Bank are subject to regulatory examinations and investigations. Based on our current knowledge and advice of counsel, in the opinion of management there is no such pending or threatened legal matter which would result in a material adverse effect upon our consolidated financial condition or results of operations.

There have been no material changes to the risk factors set forth in the "Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2022.

The following table shows information relating to the repurchase of shares of common stock by the Company during the three months ended March 31, 2023.

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


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

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


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


Item		Page

PART I – FINANCIAL INFORMATION			64

Item 1.	Financial Statements	64

	Consolidated Balance Sheets	64

	Consolidated Statements of Income	75

	Consolidated Statements of Comprehensive Income (Loss)	86

	Consolidated Statements of Changes in Shareholders’ Equity	97

	Consolidated Statements of Cash Flows	108

	Notes to Consolidated Financial Statements	119

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3234

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	4345

Item 4.	Controls and Procedures	4345

PART II – OTHER INFORMATION			4546

Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 6.	Exhibits	4547

SIGNATURES			4648


	September 30, 2022						March 31, 2023			December 31, 2022
	(unaudited)			December 31, 2021			(unaudited)
Assets
Cash and due from banks	$	34,009		$	48,202		$	23,701		$	25,280
Interest-bearing deposits in financial institutions		164,379			347,023			149,440			105,558
Federal funds sold		1,525			19,900			2,416			4,467
Total cash and cash equivalents		199,913			415,125			175,557			135,305
Securities available-for-sale, at fair value		401,345			459,396
Securities held-to-maturity, fair value of $1,759 and $1,830 at September 30, 2022 and December 31, 2021, respectively		1,762			1,782
Loans held for sale, includes $35,574 and $37,306 measured at fair value at September 30, 2022 and December 31, 2021, respectively		43,122			83,715
Securities available-for-sale, at fair value net of allowance for credit losses of $2,000 and $0 at March 31, 2023 and December 31, 2022, respectively								391,547			396,416
Securities held-to-maturity, fair value of $1,232 and $1,240 at March 31, 2023 and December 31, 2022, respectively								1,232			1,240
Loans held for sale, includes $17,026 and $12,636 measured at fair value at March 31, 2023 and December 31, 2022, respectively								31,501			44,708
Loans held for investment		2,290,269			1,965,769			2,407,328			2,312,798
Less allowance for loan losses		(22,431	)		(21,698	)
Less allowance for credit losses on loans								(25,189	)		(23,806	)
Loans, net		2,267,838			1,944,071			2,382,139			2,288,992
Premises and equipment, net		24,691			25,727			24,384			24,855
Restricted equity securities		16,625			14,453			15,518			16,632
Accrued interest receivable		9,459			7,376			11,202			10,511
Goodwill		41,068			41,068
Core deposit intangible, net		5,400			6,691
Other real estate owned, net		165			266
Goodwill and other intangibles								45,685			46,069
Other assets		154,318			133,376			153,986			152,441
Total assets	$	3,165,706		$	3,133,046		$	3,232,751		$	3,117,169
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing	$	628,846		$	725,171		$	463,243		$	512,076
Interest-bearing		734,526			944,605			882,678			749,857
Savings and money market accounts		721,116			641,456			635,226			709,190
Time		549,185			373,049			768,940			708,696
Total deposits		2,633,673			2,684,281			2,750,087			2,679,819
Federal Home Loan Bank advances		120,000			—			55,500			15,000
Subordinated notes		29,633			29,532			29,699			29,666
Other liabilities		35,035			39,139			43,554			38,502
Total liabilities		2,818,341			2,752,952			2,878,840			2,762,987
Shareholders’ equity:
Common stock, voting, $1 par value; 25,000,000 shares authorized; 21,931,624 and 22,166,129 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		21,932			22,166
Common stock, voting, $1 par value; 25,000,000 shares authorized; 21,361,614 and 21,714,380 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively								21,362			21,714
Additional paid-in capital		243,716			248,709			233,877			240,863
Retained earnings		133,497			110,489			142,523			141,657
Accumulated other comprehensive loss, net of tax		(51,780	)		(1,270	)		(43,851	)		(50,052	)
Total shareholders’ equity		347,365			380,094			353,911			354,182
Total liabilities and shareholders’ equity	$	3,165,706		$	3,133,046		$	3,232,751		$	3,117,169


	Three Months Ended					Nine Months Ended					Three Months Ended
	September 30,					September 30,					March 31,
	2022			2021		2022		2021			2023		2022
Interest income:
Loans, including fees	$	27,335		$	22,350	$	71,476	$	66,936		$	31,959	$	20,367
Securities:
Taxable		1,966			1,655		5,643		4,900			1,951		1,754
Tax-exempt		314			344		958		1,065			314		325
Federal funds sold		7			9		31		12			55		10
Restricted equity securities		215			161		544		482			240		156
Interest-bearing deposits in financial institutions		617			171		1,076		405			1,264		172
Total interest income		30,454			24,690		79,728		73,800			35,783		22,784
Interest expense:
Interest-bearing deposits		1,205			390		2,279		1,216			2,946		436
Savings and money market accounts		1,603			288		2,401		896			3,259		331
Time deposits		1,332			654		2,271		2,317			5,573		484
Federal funds purchased		2			—		2		—
Securities sold under agreements to repurchase		—			—		—		—
Federal Home Loan Bank advances		365			—		461		12			392		—
Subordinated notes		394			394		1,181		1,181			394		393
Total interest expense		4,901			1,726		8,595		5,622			12,564		1,644
Net interest income		25,553			22,964		71,133		68,178			23,219		21,140
Provision for loan losses		867			—		926		(415	)
Net interest income after provision for loan losses		24,686			22,964		70,207		68,593
Provision for credit losses:
Provision for (recovery of) credit losses on loans												51		(784	)
Provision for credit losses on available-for-sale securities												2,000		—
Provision for credit losses on unfunded commitments												391		—
Total provision for (recovery of) credit losses												2,442		(784	)
Net interest income after provision for credit losses												20,777		21,924
Noninterest income:
Deposit service charges		1,251			1,187		3,575		3,398			1,368		1,142
Interchange and debit card transaction fees		1,245			1,236		3,803		3,555			1,038		1,222
Mortgage banking		765			4,693		4,436		13,318			1,293		1,966
Tri-Net		(2,059	)		1,939		39		4,618			—		2,171
Wealth management		385			481		1,284		1,412			374		440
SBA lending		560			911		1,054		1,781			1,091		222
Net gain (loss) on sale of securities		7			7		8		20
Net gain on sale of securities												5		—
Other noninterest income		1,118			1,197		4,038		3,446			1,106		1,926
Total noninterest income		3,272			11,651		18,237		31,548			6,275		9,089
Noninterest expense:
Salaries and employee benefits		8,712			10,980		28,191		31,210			10,341		10,269
Data processing and software		2,861			2,632		8,355		8,530			3,211		2,647
Occupancy		1,092			1,028		3,266		3,193			1,193		1,099
Equipment		743			760		2,235		2,640			822		709
Professional services		468			469		1,653		1,634			788		679
Regulatory fees		269			279		814		746			413		280
Acquisition related expenses		—			—		—		323
Amortization of intangibles		415			477		1,291		1,478			384		446
Other noninterest expense		3,371			1,741		6,935		5,105			1,902		1,607
Total noninterest expense		17,931			18,366		52,740		54,859			19,054		17,736
Income before income taxes		10,027			16,249		35,704		45,282			7,998		13,277
Income tax expense		1,988			3,147		7,018		9,075			1,552		2,604
Net income	$	8,039		$	13,102	$	28,686	$	36,207		$	6,446	$	10,673
Per share information:
Basic net income per share of common stock	$	0.37		$	0.59	$	1.30	$	1.64		$	0.30	$	0.48
Diluted net income per share of common stock	$	0.37		$	0.59	$	1.30	$	1.63		$	0.30	$	0.48
Weighted average shares outstanding:
Basic		21,938,259			22,164,278		22,051,950		22,114,948			21,561,007		22,198,339
Diluted		21,988,085			22,218,402		22,104,687		22,165,130			21,595,182		22,254,644


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


		Shares outstanding as of ~~November 9, 2022~~May 8, 2023
Common Stock, par value $1.00 per share		~~21,914,768~~21,042,291


	Common Stock, voting						Additional paid-in			Retained			Accumulated other comprehensive			Total shareholders’			Common Stock, voting						Additional paid-in			Retained			Accumulated other comprehensive			Total shareholders’
	Shares			Amount			capital			earnings			income (loss)			equity			Shares			Amount			capital			earnings			loss			equity
Balance December 31, 2020		21,988,803		$	21,989		$	246,890		$	66,879		$	7,728		$	343,486
Net restricted common stock activity		117,962			118			(216	)		—			—			(98	)
Stock-based compensation expense		—			—			349			—			—			349
Net exercise of common stock options		1,039			1			(1	)		—			—			—
Repurchase of common stock		(27,260	)		(27	)		(435	)		—			—			(462	)
Common stock dividends declared ($0.05 per share)		—			—			—			(1,093	)		—			(1,093	)
Net income		—			—			—			11,030			—			11,030
Other comprehensive loss		—			—			—			—			(9,425	)		(9,425	)
Balance March 31, 2021		22,080,544			22,081			246,587			76,816			(1,697	)		343,787
Net restricted common stock activity		(2,926	)		(3	)		(27	)		—			—			(30	)
Stock-based compensation expense		—			—			447			—			—			447
Net exercise of common stock options		87,929			88			938			—			—			1,026
Common stock dividends declared ($0.06 per share)		—			—			—			(1,332	)		—			(1,332	)
Net income		—			—			—			12,076			—			12,076
Other comprehensive income		—			—			—			—			3,778			3,778
Balance June 30, 2021		22,165,547			22,166			247,945			87,560			2,081			359,752
Net restricted common stock activity		(5,702	)		(6	)		(42	)		—			—			(48	)
Stock-based compensation expense		—			—			373			—			—			373
Net exercise of common stock options		5,915			6			46			—			—			52
Common stock dividends declared ($0.06 per share)		—			—			—			(1,321	)		—			(1,321	)
Net income		—			—			—			13,102			—			13,102
Other comprehensive loss		—			—			—			—			(1,582	)		(1,582	)
Balance September 30, 2021		22,165,760		$	22,166		$	248,322		$	99,341		$	499		$	370,328

Balance December 31, 2021		22,166,129		$	22,166		$	248,709		$	110,489		$	(1,270	)	$	380,094			22,166,129		$	22,166		$	248,709		$	110,489		$	(1,270	)	$	380,094
Net restricted common stock activity		65,550			66			(153	)		—			—			(87	)		65,550			66			(153	)		—			—			(87	)
Stock-based compensation expense		—			—			388			—			—			388			—			—			388			—			—			388
Repurchase of common stock		(36,608	)		(37	)		(730	)		—			—			(767	)		(36,608	)		(37	)		(730	)		—			—			(767	)
Common stock dividends declared ($0.06 per share)		—			—			—			(1,320	)		—			(1,320	)		—			—			—			(1,320	)		—			(1,320	)
Net income		—			—			—			10,673			—			10,673			—			—			—			10,673			—			10,673
Other comprehensive loss		—			—			—			—			(20,064	)		(20,064	)		—			—			—			—			(20,064	)		(20,064	)
Balance March 31, 2022		22,195,071			22,195			248,214			119,842			(21,334	)		368,917			22,195,071			22,195			248,214			119,842			(21,334	)		368,917

Balance December 31, 2022																				21,714,380		$	21,714		$	240,863		$	141,657		$	(50,052	)	$	354,182
Net restricted common stock activity		(3,719	)		(4	)		4			—			—			—			113,068			113			(211	)		—			—			(98	)
Stock-based compensation expense		—			—			325			—			—			325			—			—			399			—			—			399
Net exercise of common stock options		5,800			6			45			—			—			51
Repurchase of common stock		(262,598	)		(263	)		(5,091	)		—			—			(5,354	)		(465,834	)		(465	)		(7,174	)		—			—			(7,639	)
Common stock dividends declared ($0.10 per share)		—			—			—			(2,184	)		—			(2,184	)		—			—			—			(2,136	)		—			(2,136	)
Net income		—			—			—			9,972			—			9,972			—			—			—			6,446			—			6,446
Other comprehensive loss		—			—			—			—			(13,992	)		(13,992	)
Balance June 30, 2022		21,934,554			21,934			243,497			127,630			(35,326	)		357,735
Net restricted common stock activity		(2,930	)		(2	)		(39	)		—			—			(41	)
Stock-based compensation expense		—			—			258			—			—			258
Common stock dividends declared ($0.10 per share)		—			—			—			(2,172	)		—			(2,172	)
Net income		—			—			—			8,039			—			8,039
Other comprehensive loss		—			—			—			—			(16,454	)		(16,454	)
Balance September 30, 2022		21,931,624		$	21,932		$	243,716		$	133,497		$	(51,780	)	$	347,365
Other comprehensive income																				—			—			—			—			6,201			6,201
Adoption of new accounting standard, net of tax																				—			—			—			(3,444	)		—			(3,444	)
Balance at March 31, 2023																				21,361,614		$	21,362		$	233,877		$	142,523		$	(43,851	)	$	353,911


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

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


	March 31, 2023		December 31, 2022
Residential mortgage	$	17,026	$	12,636
Guaranteed portion of SBA loans		14,475		32,072
Tri-Net commercial real estate		—		—
Total	$	31,501	$	44,708


	September 30, 2022
Lease payments due:
2022	$	470
2023		1,834
2024		1,543
2025		1,549
2026		1,537
2027 and thereafter		6,252
Total undiscounted cash flows		13,185
Discount on cash flows		(1,827	)
Total lease liability	$	11,358


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


	Actual					Minimum capital requirement (1)					Minimum to be well-capitalized (2)					Actual					Minimum capital requirement (1)					Minimum to be well-capitalized (2)
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
At September 30, 2022:
At March 31, 2023:
Total capital to risk-weighted assets:
CapStar Financial Holdings, Inc.	$	403,888		14.59	%	$	221,410		8.0	%	N/A		N/A			$	408,693		13.98	%	$	233,847		8.0	%	N/A		N/A
CapStar Bank		391,827		14.16			221,306		8.0		$	276,633		10	%		396,469		13.57			233,770		8.0		$	292,212		10	%
Tier I capital to risk-weighted assets:
CapStar Financial Holdings, Inc.		351,505		12.70			166,058		6.0		N/A		N/A				353,380		12.09			175,385		6.0		N/A		N/A
CapStar Bank		369,077		13.34			165,980		6.0			221,306		8.00			370,855		12.69			175,327		6.0			233,770		8.00
Common equity Tier 1 capital to risk weighted assets:
CapStar Financial Holdings, Inc.		351,505		12.70			124,543		4.5		N/A		N/A				353,380		12.09			131,539		4.5		N/A		N/A
CapStar Bank		352,577		12.75			124,485		4.5			179,811		6.50			354,355		12.13			131,496		4.5			189,938		6.50
Tier I capital to average assets:
CapStar Financial Holdings, Inc.		351,505		11.22			125,360		4.0		N/A		N/A				353,380		11.20			126,183		4.0		N/A		N/A
CapStar Bank		369,077		11.79			125,257		4.0			156,572		5.00			370,855		11.76			126,122		4.0			157,653		5.00

At December 31, 2021:
At December 31, 2022:
Total capital to risk-weighted assets:
CapStar Financial Holdings, Inc.	$	384,116		16.29	%	$	188,610		8.0	%	N/A		N/A			$	410,704		14.51	%	$	226,491		8.0	%	N/A		N/A
CapStar Bank		370,919		15.74			188,471		8.0		$	235,589		10.0			402,453		14.22			226,407		8.0		$	283,009		10	%
Tier I capital to risk-weighted assets:
CapStar Financial Holdings, Inc.		332,567		14.11			141,458		6.0		N/A		N/A				356,913		12.61			169,868		6.0		N/A		N/A
CapStar Bank		348,902		14.81			141,354		6.0			188,471		8.0			378,328		13.37			169,805		6.0			226,407		8.00
Common equity Tier 1 capital to risk weighted assets:
CapStar Financial Holdings, Inc.		332,567		14.11			106,093		4.5		N/A		N/A				356,913		12.61			127,401		4.5		N/A		N/A
CapStar Bank		332,402		14.11			106,015		4.5			153,133		6.5			361,828		12.79			127,354		4.5			183,956		6.50
Tier I capital to average assets:
CapStar Financial Holdings, Inc.		332,567		10.69			124,437		4.0		N/A		N/A				356,913		11.40			125,202		4.0		N/A		N/A
CapStar Bank		348,902		11.23			124,246		4.0			155,308		5.0			378,328		12.10			125,089		4.0			156,361		5.00


					2022 - 2021								2022 - 2021								2023 - 2022
	Three Months Ended				Percent			Nine Months Ended					Percent			Three Months Ended					Percent
	September 30,				Increase			September 30,					Increase			March 31,					Increase
	2022		2021		(Decrease)			2022		2021			(Decrease)			2023		2022			(Decrease)
Interest income	$	30,454	$	24,690		23.3	%	$	79,728	$	73,800			8.0	%	$	35,783	$	22,784			57.1	%
Interest expense		4,901		1,726		184.0	%		8,595		5,622			52.9	%		12,564		1,644			664.2	%
Net interest income		25,553		22,964		11.3	%		71,133		68,178			4.3	%		23,219		21,140			9.8	%
Provision for loan losses		867		—		100.0	%		926		(415	)		-323.1	%
Provision for (recovery of) credit losses																	2,442		(784	)		100.0	%
Net interest income after provision for loan losses		24,686		22,964		7.5	%		70,207		68,593			2.4	%		20,777		21,924			(5.2	)%
Noninterest income		3,272		11,651		-71.9	%		18,237		31,548			-42.2	%		6,275		9,089			(31.0	)%
Noninterest expense		17,931		18,366		-2.4	%		52,740		54,859			-3.9	%		19,054		17,736			7.4	%
Net income before income taxes		10,027		16,249		-38.3	%		35,704		45,282			-21.2	%		7,998		13,277			(39.8	)%
Income tax expense		1,988		3,147		-36.8	%		7,018		9,075			-22.7	%		1,552		2,604			(40.4	)%
Net income	$	8,039	$	13,102		-38.6	%	$	28,686	$	36,207			-20.8	%	$	6,446	$	10,673			(39.6	)%

Basic net income per share of common stock	$	0.37	$	0.59		-37.3	%	$	1.30	$	1.64			-20.7	%	$	0.30	$	0.48			(37.5	)%
Diluted net income per share of common stock	$	0.37	$	0.59		-37.3	%	$	1.30	$	1.63			-20.2	%	$	0.30	$	0.48			(37.5	)%


	For the Three Months Ended September 30,														For the Three Months Ended March 31,
	2022							2021							2023							2022
	Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate			Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate			Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate			Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate
Interest-Earning Assets
Loans (1)	$	2,241,355	$	26,128		4.62	%	$	1,884,935	$	20,942		4.41	%	$	2,348,100	$	31,801		5.49	%	$	2,001,740	$	19,599		3.97	%
Loans held for sale		94,811		1,207		5.05	%		173,402		1,408		3.22	%		29,578		158		2.17	%		90,163		768		3.46	%
Securities:
Taxable investment securities (2)		396,358		2,181		2.20	%		455,583		1,816		1.59	%		356,137		2,191		2.46	%		426,144		1,909		1.79	%
Investment securities exempt from federal income tax (3)		54,575		314		2.92	%		60,294		344		2.90	%		54,234		314		2.93	%		57,195		326		2.89	%
Total securities		450,933		2,495		2.29	%		515,877		2,160		1.75	%		410,371		2,505		2.52	%		483,339		2,235		1.92	%
Cash balances in other banks		120,624		617		2.03	%		337,011		171		0.20	%		124,984		1,264		4.10	%		305,922		172		0.23	%
Funds sold		755		7		3.65	%		19,909		9		0.18	%		3,490		55		6.39	%		20,149		10		0.19	%
Total interest-earning assets		2,908,478		30,454		4.17	%		2,931,134		24,690		3.35	%		2,916,523		35,783		4.99	%		2,901,313		22,784		3.20	%
Noninterest-earning assets		238,363							240,048							233,913							252,007
Total assets	$	3,146,841						$	3,171,182						$	3,150,436						$	3,153,320
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts	$	821,545		1,205		0.58	%	$	984,874		390		0.16	%	$	757,480		2,946		1.58	%	$	949,313		436		0.19	%
Savings and money market deposits		709,591		1,603		0.90	%		589,101		288		0.19	%		678,288		3,259		1.95	%		660,721		331		0.20	%
Time deposits		462,036		1,332		1.14	%		406,329		654		0.64	%		740,774		5,573		3.05	%		366,769		484		0.54	%
Total interest-bearing deposits		1,993,172		4,140		0.82	%		1,980,304		1,332		0.27	%		2,176,542		11,778		2.19	%		1,976,803		1,251		0.26	%
Borrowings and repurchase agreements		88,584		761		3.41	%		29,495		394		5.30	%		62,585		786		5.09	%		29,547		393		5.40	%
Total interest-bearing liabilities		2,081,756		4,901		0.93	%		2,009,799		1,726		0.34	%		2,239,127		12,564		2.28	%		2,006,350		1,644		0.33	%
Noninterest-bearing deposits		666,096							751,862							514,566							728,134
Total funding sources		2,747,852							2,761,661							2,753,693							2,734,484
Noninterest-bearing liabilities		34,851							41,714							43,749							38,797
Shareholders’ equity		364,138							367,807							352,994							380,039
Total liabilities and shareholders’ equity	$	3,146,841						$	3,171,182						$	3,150,436						$	3,153,320
Net interest spread (4)						3.23	%						3.01	%						2.71	%						2.86	%
Net interest income/margin (5)			$	25,553		3.50	%			$	22,964		3.12	%			$	23,219		3.24	%			$	21,140		2.97	%


	For the Nine Months Ended September 30,
	2022			2021
	Average Outstanding Balance	Interest Income/ Expense	Average Yield/ Rate	Average Outstanding Balance	Interest Income/ Expense	Average Yield/ Rate
Interest-Earning Assets
Loans (1)	$2,131,159	$68,481	4.30%	$1,917,536	$63,077	4.40%
Loans held for sale	99,749	2,995	4.01%	162,092	3,859	3.18%
Securities:
Taxable investment securities (2)	413,229	6,187	2.00%	444,643	5,373	1.61%
Investment securities exempt from federal income tax (3)	55,798	958	2.90%	62,265	1,074	2.91%
Total securities	469,027	7,145	2.10%	506,908	6,447	1.77%
Cash balances in other banks	189,681	1,076	0.76%	290,454	405	0.19%
Funds sold	9,547	31	0.43%	12,866	12	0.12%
Total interest-earning assets	2,899,163	79,728	3.69%	2,889,856	73,800	3.43%
Noninterest-earning assets	243,822			220,041
Total assets	$3,142,985			$3,109,897
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts	$895,097	2,279	0.34%	$952,393	1,216	0.17%
Savings and money market deposits	680,331	2,401	0.47%	587,252	896	0.20%
Time deposits	393,594	2,271	0.77%	429,454	2,317	0.72%
Total interest-bearing deposits	1,969,022	6,951	0.47%	1,969,099	4,429	0.30%
Borrowings and repurchase agreements	63,099	1,644	3.49%	30,931	1,193	5.16%
Total interest-bearing liabilities	2,032,121	8,595	0.57%	2,000,030	5,622	0.38%
Noninterest-bearing deposits	707,084			717,122
Total funding sources	2,739,205			2,717,152
Noninterest-bearing liabilities	35,396			33,569
Shareholders’ equity	368,384			359,176
Total liabilities and shareholders’ equity	$3,142,985			$3,109,897
Net interest spread (4)			3.12%			3.05%
Net interest income/margin (5)		$71,133	3.29%		$68,178	3.17%


	Three Months Ended March 31, 2023
	Compared to 2022 Increase (Decrease) Due to Changes In
	Volume	Rate	Net
Interest-Earning Assets
Loans	$3,798	$8,404	$12,202
Loans held for sale	(392)	(218)	(610)
Securities:
Taxable investment securities	(221)	503	282
Investment securities exempt from federal income tax	(16)	4	(12)
Total securities	(237)	507	270
Cash balances in other banks	(40)	1,132	1,092
Funds Sold	(1)	46	45
Total interest-earning assets	3,128	9,871	12,999

Interest-Bearing Liabilities
Interest-bearing transaction accounts	(71)	2,581	2,510
Savings and money market deposits	9	2,919	2,928
Time deposits	916	4,173	5,089
Borrowings and repurchase agreements	414	(21)	393
Total interest-bearing liabilities	1,268	9,652	10,920
Net Interest Income	$1,860	$219	$2,079


	March 31, 2023			December 31, 2022
Non-accrual loans:
Commercial real estate - owner occupied	$	5,004		$	4,982
Commercial real estate - non-owner occupied		—			—
Consumer real estate		1,123			456
Construction and land development		—			8
Commercial and industrial		3,977			4,065
Consumer		17			54
Other		2			—
PCI (Under incurred loss methodology)		—			1,149
Total non-accrual loans	$	10,123		$	10,714

Non-performing loans		10,123			10,714
Other real estate owned		—			—
Non-performing assets	$	10,123		$	10,714

Non-performing loans to loans held for investment		0.42	%		0.46	%
Non-performing assets to total assets		0.31	%		0.34	%


	March 31, 2023		December 31, 2022
	Amortized Cost	Fair Value	Amortized Cost	Fair Value
Securities available-for-sale:
U. S. government agency securities	$13,888	$12,662	$14,537	$12,902
State and municipal securities	76,954	69,676	77,562	68,312
Mortgage-backed securities	293,323	245,369	300,488	244,828
Asset-backed securities	3,184	3,092	3,332	3,270
Other debt securities	65,867	60,748	70,542	67,104
Total	$453,216	$391,547	$466,461	$396,416
Securities held-to-maturity:
State and municipal securities	$1,232	$1,232	$1,240	$1,240
Total	$454,448	$392,779	$467,701	$397,656


		Net interest income change
Increase 300bp		7.3%
Increase 200bp		~~(0.9)%~~4.1%
Increase 100bp		~~0.3~~1.9
Decrease 100bp		(2.3)
Decrease 200bp	~~(3.2)~~	(4.5)
Decrease 300bp		(6.6)


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

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


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

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

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

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

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

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

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


	For the three months ended
	3/31/2023	12/31/2022
Tangible book value per share of common stock
Book value per share of common stock (GAAP)	$16.57	$16.31
Effect of goodwill and other intangibles	(2.14)	(2.12)
Tangible book value per share of common stock	$14.43	$14.19

Tangible book value per share of common stock less after-tax unrealized available for sale investment losses
Tangible book value per share of common stock	$14.43	$14.19
Effect of after-tax unrealized losses	2.13	2.38
Tangible book value per share of common stock less after-tax unrealized available for sale investment losses	$16.56	$16.57

Tangible common equity to tangible assets
Equity to Assets (GAAP)	10.95%	11.36%
Effect of goodwill and other intangibles	(1.28)%	(1.33)%
Tangible common equity to tangible assets	9.67%	10.03%

Tangible common equity to tangible assets less after-tax unrealized available for sale investment losses
Tangible common equity to tangible assets	9.67%	10.03%
Effect of after-tax unrealized losses	1.27%	1.49%
Tangible common equity to tangible assets less after-tax unrealized available for sale investment losses	10.94%	11.52%


	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plan (1)		Maximum remaining dollar value of shares that may be purchased under the plan
January 1 - January 31		236,262	$	17.50		230,727	$8.77 million
February 1 - February 28		672		17.00		672	$8.75 million
March 1 - March 31		234,457		15.02		234,435	$5.16 million
Total		471,391	$	16.27		465,834	$5.16 million


Exhibit Number		Description

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

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

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

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

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

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

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

101		Interactive data files for Capstar Financial Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~June 30, 2022,~~March 31, 2023, formatted in Inline XBRL: (i) the Consolidated Balance Sheets (unaudited); (ii) the Consolidated Statements of Income (unaudited); (iii) the Consolidated Statements of Comprehensive Income (unaudited); (iv) the Consolidated Statements in Shareholders’ Equity (unaudited); (v) the Consolidated Statements of Cash Flows (unaudited); and (vi) the Notes to Consolidated Financial Statements (unaudited).

104		The cover page from Capstar Financial Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2022~~March 31, 2023 (formatted in Inline XBRL and included in Exhibit 101)


CAPSTAR FINANCIAL HOLDINGS, INC.


By:		/s/ Michael J Fowler
		Michael J. Fowler
		Chief Financial Officer (Principal Financial Officer)

Date:		~~November 14, 2022~~May 10, 2023


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

Date:		~~November 14, 2022~~May 10, 2023