CapStar Financial Holdings, Inc. - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2017

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

For the transition period from _______ to ________.

Commission File Number: 001-37886

CAPSTAR FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

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

(615) 732-6400

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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

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

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

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

As of October 16, 2017, there were 11,359,130 shares of common stock, $1.00 par value per share, issued and outstanding.

CAPSTAR FINANCIAL HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

Item		Page

PART I – FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	5

	Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016	5

	Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2017 and 2016	6

	Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2017 and 2016	7

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the nine months ended September 30, 2017 and 2016	8

	Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2017 and 2016	9

	Notes to Consolidated Financial Statements (Unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42

Item 4.	Controls and Procedures	42

PART II – OTHER INFORMATION		43

Item 1.	Legal Proceedings	43

Item 1A.	Risk Factors	43

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

Item 6.	Exhibits	44

SIGNATURES		45

TERMINOLOGY

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

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “aspire,” “roadmap,” “achieve,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “goal,” “target,” “would,” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates and projections will be achieved. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date of this Report, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but are not limited to, the following:

Economic conditions (including interest rate environment, government economic and monetary policies, the strength of global financial markets and inflation and deflation) that impact the financial services industry as a whole and/or our business; the concentration of our business in the Nashville metropolitan statistical area (“MSA”) and the effect of changes in the economic, political and environmental conditions on this market; increased competition in the financial services industry, locally, regionally or nationally, which may adversely affect pricing and the other terms offered to our clients; our dependence on our management team and board of directors and changes in our management and board composition; our reputation in the community; our ability to execute our strategy and to achieve loan and deposit growth through organic growth and strategic acquisitions; credit risks related to the size of our borrowers and our ability to adequately identify, assess and limit our credit risk; our concentration of large loans to a small number of borrowers; the significant portion of our loan portfolio that originated during the past two years and therefore may less reliably predict future collectability than older loans; the adequacy of reserves (including our allowance for loan losses) and the appropriateness of our methodology for calculating such reserves; non-performing loans and leases; non-performing assets; charge-offs, non-accruals, troubled-debt restructurings, impairments and other credit issues; adverse trends in the healthcare service industry, which is an integral component of our market’s economy; our management of risks inherent in our commercial real estate loan portfolio, and the risk of a prolonged downturn in the real estate market, which could impair the value of our collateral and our ability to sell collateral upon any foreclosure; governmental legislation and regulation, including changes in the nature and timing of the adoption and effectiveness of new requirements under the Dodd-Frank Act of 2010, as amended, Basel guidelines, capital requirements, accounting regulation or standards and other applicable laws and regulations; the loss of large depositor relationships, which could force us to fund our business through more expensive and less stable sources; operational and liquidity risks associated with our business, including liquidity risks inherent in correspondent banking; volatility in interest rates and our overall management of interest rate risk, including managing the sensitivity of our interest-earning assets and interest-bearing liabilities to interest rates, and the impact to our earnings from a change in interest rates; the potential for our Bank’s regulatory lending limits and other factors related to our size to restrict our growth and prevent us from effectively implementing our business strategy; strategic acquisitions we may undertake to achieve our goals; the sufficiency of our capital, including sources of capital and the extent to which we may be required to raise additional capital to meet our goals; fluctuations to the fair value of our investment securities that are beyond our control; deterioration in the fiscal position of the U.S. government and downgrades in Treasury and federal agency securities; potential exposure to fraud, negligence, computer theft and cyber-crime; the adequacy of our risk management framework; our dependence on our information technology and telecommunications systems and the potential for any systems failures or interruptions; our dependence upon outside third parties for the processing and handling of our records and data; our ability to adapt to technological change; the financial soundness of other financial institutions; our exposure to environmental liability risk associated with our lending activities; our engagement in derivative transactions; our involvement from time to time in legal proceedings and examinations and remedial actions by regulators; the susceptibility of our market to natural disasters and acts of God; and the effectiveness of our internal controls over financial reporting and our ability to remediate any future material weakness in our internal controls over financial reporting.

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

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Balance Sheets

(Dollars in thousands, except share data)

	September 30, 2017
	(unaudited)			December 31, 2016
Assets
Cash and due from banks	$	10,796		$	9,134
Interest-bearing deposits in financial institutions		58,993			54,323
Federal funds sold		—			16,654
Total cash and cash equivalents		69,789			80,111
Securities available-for-sale, at fair value		146,600			182,355
Securities held-to-maturity, fair value of $48,980, and $49,731 at September 30, 2017 and December 31, 2016, respectively		45,635			46,864
Loans held for sale		53,225			42,111
Loans		974,530			935,251
Less allowance for loan losses		(14,122	)		(11,634	)
Loans, net		960,408			923,617
Premises and equipment, net		5,978			5,350
Restricted equity securities		8,799			6,032
Accrued interest receivable		3,849			3,942
Goodwill		6,219			6,219
Core deposit intangible		33			71
Deferred tax assets		12,472			12,956
Bank owned life insurance		22,335			21,900
Other assets		3,217			2,147
Total assets	$	1,338,559		$	1,333,675
Liabilities and Shareholders’ Equity
Deposits:
Non-interest-bearing	$	250,007		$	197,788
Interest-bearing		303,756			299,621
Savings and money market accounts		338,391			447,686
Time		199,341			183,628
Total deposits		1,091,495			1,128,723
Federal Home Loan Bank advances		95,000			55,000
Accrued interest payable		305			212
Other liabilities		7,555			10,533
Total liabilities		1,194,355			1,194,468
Shareholders’ equity:
Series A convertible preferred stock, $1 par value; 5,000,000 shares authorized; 878,049 shares issued and outstanding at September 30, 2017 and December 31, 2016		878			878
Common stock, voting, $1 par value; 20,000,000 shares authorized; 11,346,498 and 11,204,515 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		11,347			11,205
Additional paid-in capital		117,617			116,143
Retained earnings		18,541			17,132
Accumulated other comprehensive loss, net of income tax		(4,179	)		(6,151	)
Total shareholders’ equity		144,204			139,207
Total liabilities and shareholders’ equity	$	1,338,559		$	1,333,675

See accompanying notes to consolidated financial statements (unaudited).

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Income (Unaudited)

(Dollars in thousands, except share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017		2016
Interest income:
Loans, including fees	$	12,095		$	10,659		$	33,935	$	29,532
Securities:
Taxable		838			787			2,827		2,596
Tax-exempt		304			291			944		841
Federal funds sold		7			4			26		12
Restricted equity securities		108			71			271		210
Interest-bearing deposits in financial institutions		169			63			387		197
Total interest income		13,521			11,875			38,390		33,388
Interest expense:
Interest-bearing deposits		635			404			1,839		1,096
Savings and money market accounts		772			689			2,360		2,141
Time deposits		706			546			1,750		1,566
Federal funds purchased		2			13			13		21
Securities sold under agreements to repurchase		—			—			—		1
Federal Home Loan Bank advances		563			97			1,083		280
Total interest expense		2,678			1,749			7,045		5,105
Net interest income		10,843			10,126			31,345		28,283
Provision for loan losses		(195	)		1,639			12,900		2,759
Net interest income after provision for loan losses		11,038			8,487			18,445		25,524
Noninterest income:
Treasury management and other deposit service charges		427			277			1,097		805
Loan commitment fees		223			329			646		901
Net gain (loss) on sale of securities		9			(4	)		42		121
Tri-Net fees		367			—			748		—
Mortgage banking income		2,030			2,339			4,617		5,342
Other noninterest income		316			250			1,021		961
Total noninterest income		3,372			3,191			8,171		8,130
Noninterest expense:
Salaries and employee benefits		5,119			5,119			14,989		15,275
Data processing and software		709			627			2,040		1,831
Professional fees		336			391			1,050		1,148
Occupancy		531			352			1,518		1,133
Equipment		564			458			1,604		1,301
Regulatory fees		270			250			877		742
Other operating		946			1,330			2,988		3,057
Total noninterest expense		8,475			8,527			25,066		24,487
Income before income taxes		5,935			3,151			1,550		9,167
Income tax expense		1,516			1,042			141		2,998
Net income	$	4,419		$	2,109		$	1,409	$	6,169
Per share information:
Basic net income per share of common stock	$	0.39		$	0.24		$	0.13	$	0.71
Diluted net income per share of common stock	$	0.35		$	0.20		$	0.11	$	0.58
Weighted average shares outstanding:
Basic		11,279,364			8,792,665			11,239,093		8,701,596
Diluted		12,750,423			10,799,536			12,758,091		10,682,976

See accompanying notes to consolidated financial statements (unaudited).

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Net income	$	4,419		$	2,109		$	1,409		$	6,169
Other comprehensive income (loss):
Unrealized gains (losses) on securities available-for-sale:
Unrealized holding gains (losses) arising during the period		526			(744	)		2,433			2,829
Reclassification adjustment for gains (losses) included in net income		(9	)		4			(42	)		(121	)
Tax effect		(198	)		283			(915	)		(1,037	)
Net of tax		319			(457	)		1,476			1,671
Unrealized losses on securities transferred to held-to-maturity:
Reclassification adjustment for losses included in net income		79			42			162			125
Tax effect		(30	)		(16	)		(62	)		(48	)
Net of tax		49			26			100			77
Unrealized gains (losses) on cash flow hedges:
Unrealized holding gains (losses) arising during the period		(29	)		87			(242	)		(1,760	)
Reclassification adjustment for losses included in net income		278			88			589			261
Tax effect		(34	)		(33	)		49			674
Net of tax		215			142			396			(825	)
Other comprehensive income (loss)		583			(289	)		1,972			923
Comprehensive income	$	5,002		$	1,820		$	3,381		$	7,092

See accompanying notes to consolidated financial statements (unaudited).

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(Dollars in thousands, except share data)

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

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

See accompanying notes to consolidated financial statements (unaudited).

CAPSTAR FINANCIAL HOLDINGS, INC. & SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

	Nine Months Ended
	September 30,
	2017			2016
Cash flows from operating activities:
Net income	$	1,409		$	6,169
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		12,900			2,759
Accretion of discounts on acquired loans and deferred fees		(537	)		(1,232	)
Depreciation and amortization		345			324
Net amortization of premiums on investment securities		984			1,106
Securities gains, net		(42	)		(121	)
Mortgage banking income		(4,617	)		(5,342	)
Tri-Net fees		(748	)		—
Net gain on sale of loans		(67	)		—
Net loss on disposal of premises and equipment		137			—
Net gain on sale of other real estate owned		—			(157	)
Stock-based compensation		771			643
Excess tax benefit from stock compensation		—			(29	)
Deferred income tax expense		(445	)		63
Origination of loans held for sale		(409,179	)		(393,378	)
Proceeds from loans held for sale		403,497			370,374
Net increase in accrued interest receivable and other assets		(1,320	)		(2,021	)
Net increase (decrease) in accrued interest payable and other liabilities		(2,630	)		1,077
Net cash provided by (used in) operating activities		458			(19,765	)
Cash flows from investing activities:
Activities in securities available for sale:
Purchases		(11,754	)		(55,862	)
Sales		34,299			46,700
Maturities, prepayments and calls		14,718			17,113
Activities in securities held to maturity:
Purchases		—			(4,300	)
Maturities, prepayments and calls		1,332			1,233
Purchase of restricted equity securities		(2,767	)		(112	)
Net increase in loans		(49,154	)		(112,961	)
Purchase of premises and equipment		(1,074	)		(103	)
Proceeds from the sale of premises and equipment		3			—
Proceeds from sale of other real estate		—			373
Net cash used in investing activities		(14,397	)		(107,919	)
Cash flows from financing activities:
Net increase (decrease) in deposits		(37,228	)		97,599
Proceeds from Federal Home Loan Bank advances		135,000			15,000
Payments on Federal Home Loan Bank advances		(95,000	)		(30,000	)
Issuance of common stock		—			21,928
Exercise of common stock options and warrants, net of repurchase of restricted shares		845			149
Excess tax benefit from stock compensation		—			29
Net decrease in repurchase agreements		—			(3,755	)
Net cash provided by financing activities		3,617			100,950
Net decrease in cash and cash equivalents		(10,322	)		(26,734	)
Cash and cash equivalents at beginning of period		80,111			100,185
Cash and cash equivalents at end of period	$	69,789		$	73,451
Supplemental disclosures of cash paid:
Interest paid	$	6,951		$	5,079
Income taxes		2,142			2,545
Supplemental disclosures of noncash transactions:
Loans charged off to the allowance for loan losses	$	12,369		$	1,452
Loans transferred from held for sale to held for investment		—			2,823

See accompanying notes to consolidated financial statements (unaudited).

CAPSTAR FINANCIAL HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements as of and for the period ended September 30, 2017 include CapStar Financial Holdings, Inc. and its wholly owned subsidiary, CapStar Bank (the “Bank”, together referred to as the “Company”). Significant intercompany transactions and accounts are eliminated in consolidation. On February 5, 2016, CapStar Financial Holdings, Inc. acquired all of the Bank’s issued and outstanding shares of common stock, preferred stock, common stock options and warrants, and the Bank became the wholly owned subsidiary of CapStar Financial Holdings, Inc.

The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and do not include all information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. These unaudited consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Initial Public Offering

On September 21, 2016, the Securities and Exchange Commission (“SEC”) declared effective our registration statement on Form S-1 registering the shares of our common stock. On September 27, 2016, we completed the initial public offering of 2,972,750 shares of our common stock. Of the 2,972,750 shares sold, 1,688,049 shares were sold by us and 1,284,701 shares were sold by certain selling shareholders. Of the 1,284,701 shares sold by certain selling shareholders, 731,707 were from preferred shares converted to common shares and 79,166 from the cashless exercise of 250,000 common share warrants. We received net proceeds of approximately $21.9 million from the offering, after deducting the underwriting discounts and commissions and estimated offering expenses. We did not receive any proceeds from the sale of shares by the selling shareholders.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, determination of impairment of intangible assets, including goodwill, the valuation of our investment portfolio, deferred tax assets and estimated liabilities. There have been no significant changes to the Company’s critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Tri-Net Fees

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

Subsequent Events

Accounting Standards Codification (“ASC”) 855, Subsequent Events, establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. The Company evaluated all events or transactions that occurred after September 30, 2017 through the date of the issued financial statements.

NOTE 2 – SECURITIES

The amortized cost and fair value of securities available-for-sale and held-to-maturity at September 30, 2017 and December 31, 2016 are summarized as follows (dollars in thousands):

	September 30, 2017									December 31, 2016
	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	$	11,434	$	18	$	(153	)	$	11,299	$	9,517	$	—	$	(143	)	$	9,374
State and municipal securities		19,031		172		(136	)		19,067		28,480		65		(632	)		27,913
Mortgage-backed securities		96,975		14		(1,166	)		95,823		126,637		17		(2,059	)		124,595
Asset-backed securities		20,668		—		(257	)		20,411		21,620		—		(1,147	)		20,473
Total	$	148,108	$	204	$	(1,712	)	$	146,600	$	186,254	$	82	$	(3,981	)	$	182,355
Securities held-to-maturity:
State and municipal securities	$	36,469	$	3,138	$	—		$	39,607	$	36,842	$	2,784	$	—		$	39,626
Mortgage-backed securities		3,837		77		—			3,914		4,687		79		—			4,766
Other debt securities		5,329		130		—			5,459		5,335		11		(7	)		5,339
Total	$	45,635	$	3,345	$	—		$	48,980	$	46,864	$	2,874	$	(7	)	$	49,731

Security fair values are established by an independent pricing service as 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 event of dispositions prior to maturity or other-than-temporary impairment. Securities with unrealized losses as of September 30, 2017 and December 31, 2016, 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, 2017	Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses			Estimated fair value		Gross unrealized losses
U. S. government agency securities	$	9,303	$	(153	)	$	—	$	—		$	9,303	$	(153	)
State and municipal securities		4,968		(19	)		6,103		(117	)		11,071		(136	)
Mortgage-backed securities		61,997		(591	)		30,360		(575	)		92,357		(1,166	)
Asset-backed securities		—		—			20,410		(257	)		20,410		(257	)
Total temporarily impaired securities	$	76,268	$	(763	)	$	56,873	$	(949	)	$	133,141	$	(1,712	)

December 31, 2016
U. S. government agency securities	$	9,374	$	(143	)	$	—	$	—		$	9,374	$	(143	)
State and municipal securities		20,279		(632	)		—		—			20,279		(632	)
Mortgage-backed securities		110,563		(1,955	)		4,150		(104	)		114,713		(2,059	)
Asset-backed securities		—		—			20,473		(1,147	)		20,473		(1,147	)
Other debt securities		2,029		(7	)		—		—			2,029		(7	)
Total temporarily impaired securities	$	142,245	$	(2,737	)	$	24,623	$	(1,251	)	$	166,868	$	(3,988	)

As noted in the table above, as of September 30, 2017, the Company had unrealized losses of $1.7 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 a 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.

Because the Company currently does not intend to sell any investment securities that have an unrealized loss at September 30, 2017, and it is not more-likely-than-not 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, 2017.

Securities with a carrying value of $127.1 million at September 30, 2017 were pledged to collateralize public deposits, derivative positions and Federal Home Loan Bank advances.

The proceeds from sales of securities and the associated gains and losses are listed below (dollars in thousands):

	Nine Months Ended			Nine Months Ended
	September 30, 2017			September 30, 2016
Proceeds	$	34,299		$	46,700
Gross gains		99			244
Gross losses		(57	)		(123	)

The amortized cost and fair value of securities at September 30, 2017, by contractual maturity, are shown below (dollars 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
	Amortized cost		Estimated fair value		Amortized cost		Estimated fair value
Due one to five years	$	11,388	$	11,511	$	27,299	$	29,448
Due five to ten years		17,970		17,788		14,069		15,129
Due beyond ten years		1,107		1,067		430		489
Mortgage-backed securities		96,975		95,823		3,837		3,914
Asset-backed securities		20,668		20,411		—		—
	$	148,108	$	146,600	$	45,635	$	48,980

NOTE 3 – LOANS AND ALLLOWANCE FOR LOAN LOSSES

A summary of the loan portfolio as of September 30, 2017 and December 31, 2016 follows (dollars in thousands):

	September 30, 2017			December 31, 2016
Commercial real estate	$	366,778		$	302,322
Consumer real estate		100,811			97,015
Construction and land development		79,951			94,491
Commercial and industrial		394,600			379,620
Consumer		6,289			5,974
Other		26,460			56,796
Total		974,889			936,218
Less net unearned income		(359	)		(967	)
		974,530			935,251
Allowance for loan losses		(14,122	)		(11,634	)
	$	960,408		$	923,617

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 categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes all commercial loans, and consumer relationships with an outstanding balance greater than $500,000, individually and assigns each loan a risk rating. This analysis is performed on a continual basis by the relationship managers and credit department personnel. On at least an annual basis an independent party performs a formal credit risk review of a sample of the loan portfolio. Among other things, this review assesses the appropriateness of the loan’s risk rating. The Company uses the following definitions for risk ratings:

Special Mention – A special mention asset possesses deficiencies or potential weaknesses deserving of management’s attention. If uncorrected, such weaknesses or deficiencies may expose the Company to an increased risk of loss in the future.

Substandard – A substandard asset is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard.

Doubtful – A doubtful asset has all weaknesses inherent in one classified substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but certain important and reasonable specific pending factors which may work to the advantage and strengthening of the asset exist, therefore, its classification as an estimated loss is deferred until a more exact status may be determined. Pending factors include proposed merger, acquisition or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.

Loans not falling into the criteria above are considered to be pass-rated loans. The Company utilizes six loan grades within the pass risk rating.

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

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

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

None of the Company’s loans had a risk rating of “Doubtful” as of September 30, 2017 or December 31, 2016.

The following tables detail the changes in the ALL for the three and nine months ended September 30, 2017 and 2016 (in thousands):

	Commercial real estate			Consumer real estate			Construction and land development		Commercial and industrial			Consumer			Other			Total
Three Months Ended September 30, 2017
Balance, beginning of period	$	3,533		$	1,081		$	911	$	6,395		$	57		$	477		$	12,454
Charged-off loans		—			—			—		—			—			—			—
Recoveries		3			—			—		1,860			—			—			1,863
Provision for loan losses		(242	)		(97	)		576		(306	)		22			(148	)		(195	)
Balance, end of period	$	3,294		$	984		$	1,487	$	7,949		$	79		$	329		$	14,122

Three Months Ended September 30, 2016
Balance, beginning of period	$	2,596		$	968		$	943	$	5,037		$	104		$	806		$	10,454
Charged-off loans		—			—			—		(645	)		—						(645	)
Recoveries		52			—			—		10			—			—			62
Provision for loan losses		(228	)		4			721		1,166			(18	)		(6	)		1,639
Balance, end of period	$	2,420		$	972		$	1,664	$	5,568		$	86		$	800		$	11,510

	Commercial real estate			Consumer real estate			Construction and land development			Commercial and industrial			Consumer			Other			Total
Nine Months Ended September 30, 2017
Balance, beginning of period	$	2,655		$	1,013		$	1,574		$	5,618		$	76		$	698		$	11,634
Charged-off loans		—			—			—			(12,369	)		—			—			(12,369	)
Recoveries		4			—			—			1,862			91			—			1,957
Provision for loan losses		635			(29	)		(87	)		12,838			(88	)		(369	)		12,900
Balance, end of period	$	3,294		$	984		$	1,487		$	7,949		$	79		$	329		$	14,122

Nine Months Ended September 30, 2016
Balance, beginning of period	$	2,879		$	968		$	914		$	4,693		$	103		$	575		$	10,132
Charged-off loans		(350	)		—			—			(956	)		(146	)		—			(1,452	)
Recoveries		52			—			—			18			1			—			71
Provision for loan losses		(161	)		4			750			1,813			128			225			2,759
Balance, end of period	$	2,420		$	972		$	1,664		$	5,568		$	86		$	800		$	11,510

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

	Commercial real estate		Consumer real estate		Construction and land development		Commercial and industrial		Consumer		Other		Total
September 30, 2017
Allowance for Loan Losses:
Collectively evaluated for impairment	$	3,294	$	984	$	1,487	$	7,449	$	79	$	329	$	13,622
Individually evaluated for impairment		—		—		—		500		—		—		500
Balances, end of period	$	3,294	$	984	$	1,487	$	7,949	$	79	$	329	$	14,122
Loans:
Collectively evaluated for impairment	$	365,545	$	100,811	$	79,951	$	392,668	$	6,289	$	26,460	$	971,724
Individually evaluated for impairment		1,233		—		—		1,932		—		—		3,165
Balances, end of period	$	366,778	$	100,811	$	79,951	$	394,600	$	6,289	$	26,460	$	974,889

December 31, 2016
Allowance for Loan Losses:
Collectively evaluated for impairment	$	2,655	$	1,013	$	1,574	$	5,118	$	76	$	698	$	11,134
Individually evaluated for impairment		—		—		—		500		—		—		500
Balances, end of period	$	2,655	$	1,013	$	1,574	$	5,618	$	76	$	698	$	11,634
Loans:
Collectively evaluated for impairment	$	301,012	$	97,015	$	94,491	$	377,311	$	5,974	$	56,796	$	932,599
Individually evaluated for impairment		1,310		—		—		2,309		—		—		3,619
Balances, end of period	$	302,322	$	97,015	$	94,491	$	379,620	$	5,974	$	56,796	$	936,218

The following table presents the allocation of the ALL for each respective loan category with the corresponding percentage of the ALL in each category to total loans, net of deferred fees as of September 30, 2017 and December 31, 2016 (dollars in thousands):

	September 30, 2017					December 31, 2016
	Amount		Percent of total loans, net of deferred fees			Amount		Percent of total loans, net of deferred fees
Commercial real estate	$	3,294		0.34	%	$	2,655		0.28	%
Consumer real estate		984		0.10			1,013		0.11
Construction and land development		1,487		0.15			1,574		0.17
Commercial and industrial		7,949		0.82			5,618		0.60
Consumer		79		0.01			76		0.01
Other		329		0.03			698		0.07
Total allowance for loan losses	$	14,122		1.45	%	$	11,634		1.24	%

The following table presents the Company’s impaired loans that were evaluated for specific loss allowance as of September 30, 2017 and December 31, 2016 (dollars in thousands):


	September 30, 2017						December 31, 2016
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded:
Commercial real estate	$	1,233	$	1,660	$	—	$	1,310	$	1,686	$	—
Consumer real estate		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Other		—		—		—		—		—		—
Subtotal		1,233		1,660		—		1,310		1,686		—
With an allowance recorded:
Commercial real estate		—		—		—		—		—		—
Consumer real estate		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—
Commercial and industrial		1,932		2,770		500		2,309		2,921		500
Consumer		—		—		—		—		—		—
Other		—		—		—		—		—		—
Subtotal		1,932		2,770		500		2,309		2,921		500
Total	$	3,165	$	4,430	$	500	$	3,619	$	4,607	$	500

The following table presents information related to the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):

	Three Months Ended				Three Months Ended				Nine Months Ended				Nine Months Ended
	September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
With no related allowance recorded:
Commercial real estate	$	1,245	$	—	$	—	$	—	$	1,272	$	—	$	—	$	—
Consumer real estate		—		—		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—		—		—
Consumer		—		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—		—
Subtotal		1,245		—		—		—		1,272		—		—		—
With an allowance recorded:
Commercial real estate		—		—		1,685		—		—		—		1,742		—
Consumer real estate		—		—		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—		—		—
Commercial and industrial		1,941		—		3,411		—		2,141		—		3,534		30
Consumer		—		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—		—
Subtotal		1,941		—		5,096		—		2,141		—		5,276		30
Total	$	3,186	$	—	$	5,096	$	—	$	3,413	$	—	$	5,276	$	30

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

The following table presents the aging of the recorded investment in past-due loans as of September 30, 2017 and December 31, 2016 by class of loans (dollars 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, 2017
Commercial real estate	$	—	$	—	$	—	$	—	$	366,778	$	366,778
Consumer real estate		506		279		—		785		100,026		100,811
Construction and land development		—		—		—		—		79,951		79,951
Commercial and industrial		1,154		218		27		1,398		393,202		394,600
Consumer		—		1		—		1		6,288		6,289
Other		—		—		—		—		26,460		26,460
Total	$	1,660	$	497	$	27	$	2,184	$	972,705	$	974,889

December 31, 2016
Commercial real estate	$	—	$	—	$	—	$	—	$	302,322	$	302,322
Consumer real estate		81		282		—		363		96,652		97,015
Construction and land development		—		—		—		—		94,491		94,491
Commercial and industrial		—		—		—		—		379,620		379,620
Consumer		—		—		—		—		5,974		5,974
Other		—		—		—		—		56,796		56,796
Total	$	81	$	282	$	—	$	363	$	935,855	$	936,218

The following table presents the recorded investment in non-accrual loans, past due loans over 90 days outstanding and accruing and troubled debt restructurings (“TDR”) by class of loans as of September 30, 2017 and December 31, 2016 (dollars in thousands):

	Non-Accrual		Past Due Over 90 Days and Accruing		Troubled Debt Restructurings
September 30, 2017
Commercial real estate	$	1,233	$	—	$	1,222
Consumer real estate		—		—		—
Construction and land development		—		—		—
Commercial and industrial		1,932		27		—
Consumer		—		—		—
Other		—		—		—
Total	$	3,165	$	27	$	1,222

December 31, 2016
Commercial real estate	$	1,310	$	—	$	1,272
Consumer real estate		—		—		—
Construction and land development		—		—		—
Commercial and industrial		2,309		—		—
Consumer		—		—		—
Other		—		—		—
Total	$	3,619	$	—	$	1,272

As of September 30, 2017 and December 31, 2016, all loans classified as nonperforming were deemed to be impaired.

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

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	Number of contracts		Pre modification outstanding recorded investment		Post modification outstanding recorded investment, net of related allowance		Number of contracts		Pre modification outstanding recorded investment		Post modification outstanding recorded investment, net of related allowance
2016
Commercial real estate		—	$	—	$	—		1	$	1,948	$	1,170
Consumer real estate		—		—		—		—		—		—
Construction and land development		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Other		—		—		—		—		—		—
Total		—	$	—	$	—		1	$	1,948	$	1,170

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	Number of contracts		Recorded investment		Number of contracts		Recorded investment
2016
Commercial real estate		—	$	—		—	$	—
Consumer real estate		—		—		—		—
Construction and land development		—		—		—		—
Commercial and industrial		—		—		—		—
Consumer		—		—		1		124
Other		—		—		—		—
Total		—	$	—		1	$	124

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

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

NOTE 4 – FEDERAL HOME LOAN BANK ADVANCES

The Company had outstanding borrowings totaling $95.0 million and $55.0 million at September 30, 2017 and December 31, 2016, respectively, via various advances. These advances are non-callable; interest payments are due monthly, with principal due at maturity.

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

	September 30, 2017					December 31, 2016
Year	Amount		Interest Rates			Amount		Interest Rates
2017	$	60,000		1.18	%	$	55,000		0.80	%
2018		35,000		1.50			—		—
2019		—		—			—		—
2020		—		—			—		—
2021		—		—			—		—
Thereafter		—		—			—		—
Total	$	95,000		1.30	%	$	55,000		0.80	%

Advances from the FHLB are collateralized by investment securities, FHLB stock and certain commercial and residential real estate mortgage loans totaling $367.0 million under a blanket mortgage collateral agreement. At September 30, 2017, the amount of available credit from the FHLB totaled $108.0 million.

NOTE 5 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

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

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

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

													Affected Line Item
Details about Accumulated Other	Three Months Ended September 30,						Nine Months Ended September 30,						in the Statement Where
Comprehensive Income Components	2017			2016			2017			2016			Net Income is Presented
Unrealized losses on cash flow hedges	$	109		$	38		$	322		$	113		Interest expense - money market
		168			50			267			148		Interest expense - Federal Home Loan Bank advances
	$	277		$	88		$	589		$	261		Net of tax
Unrealized (gains) and losses on available for sale securities	$	(9	)	$	4		$	(42	)	$	(121	)	Net (gain) loss on sale of securities
		3			(2	)		16			46		Income tax expense (benefit)
	$	(6	)	$	2		$	(26	)	$	(75	)	Net of tax
Unrealized losses on securities transferred to held to maturity	$	79		$	42		$	162		$	125		Interest income - securities
		(30	)		(16	)		(62	)		(48	)	Income tax benefit
	$	49		$	26		$	100		$	77		Net of tax

NOTE 6 – INCOME TAXES

The Company’s effective tax rate for the three and nine months ended September 30, 2017 was 25.5% and 9.1% compared to 33.1% and 32.7% for the three and nine months ended September 30, 2016. In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions, including income tax consequences. In addition to other changes, the guidance changes the accounting for excess tax benefits and tax deficiencies from generally being recognized in additional paid-in capital to recognition as income tax expense or benefit in the period they occur. The Company adopted the new guidance in the first quarter of 2017. As a result, the Company’s income tax expense was reduced by $144,000 and $310,000 for the three and nine months ended September 30, 2017.

The effective tax rate compared favorably to the statutory federal rate of 34% and Tennessee excise tax rate of 6.5% primarily due to investments in qualified municipal securities, company owned life insurance, state tax credits, net of the effect of certain non-deductible expenses and the recognition of excess tax benefits related to stock compensation.

NOTE 7 – COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet.

The following table sets forth outstanding financial instruments whose contract amounts represent credit risk as of September 30, 2017 and December 31, 2016 (dollars in thousands):

	Contract or notional amount
	September 30, 2017		December 31, 2016
Financial instruments whose contract amounts represent credit risk:
Unused commitments to extend credit	$	575,558	$	508,990
Standby letters of credit		11,535		10,886
Total	$	587,093	$	519,876

The Company is party to litigation and claims arising in the normal course of business. Management believes that the liabilities, if any, arising from such litigation and claims as of September 30, 2017, will not have a material impact on the financial statements of the Company.

NOTE 8 – DERIVATIVES

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

Interest Rate Swaps Designated as Cash Flow Hedges

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

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

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

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

Other Interest Rate Swaps

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

	September 30, 2017					December 31, 2016
	Notional		Estimated			Notional		Estimated
	amount		fair value			amount		fair value
Interest rate swap agreements:
Pay fixed/receive variable swaps	$	46,021	$	(250	)	$	41,254	$	(460	)
Pay variable/receive fixed swaps		46,021		250			41,254		460
Total	$	92,042	$	—		$	82,508	$	—

NOTE 9 – STOCK OPTIONS AND RESTRICTED SHARES

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

Following the formation of CapStar Financial Holdings, Inc. in 2016, and in connection with the Share Exchange, the outstanding awards of restricted stock and stock options under the CapStar Bank 2008 Stock Incentive Plan were exchanged for similar awards of restricted stock and stock options issued by CapStar Financial Holdings, Inc. under the CapStar Financial Holdings, Inc. Stock Incentive Plan, which the board of directors adopted in 2016. The Stock Incentive Plan provides for the grant of stock-based incentives, including stock options, restricted stock units, performance awards and restricted stock, to employees, directors and service providers that are subject to forfeiture until vesting conditions have been satisfied by the award recipient under the terms of the award. The Plan reserved 1,569,475 shares of stock for issuance of stock incentives. Stock incentives include both restricted share and stock option grants. Total shares issuable under the plan were 169,867 at September 30, 2017.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Stock-based compensation expense before income taxes	$	288		$	212		$	771		$	643
Less: deferred tax benefit		(110	)		(81	)		(295	)		(246	)
Reduction of net income	$	178		$	131		$	476		$	397

Restricted Shares

Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The fair value of each restricted stock grant is based on valuations performed by independent consultants. The recipients have the right to vote and receive dividends but cannot sell, transfer, assign, pledge, hypothecate, or otherwise encumber the restricted stock until the shares have vested. Restricted shares fully vest on the third anniversary of the grant date. A summary of the changes in the Company’s nonvested restricted shares for the nine months ended September 30, 2017 follows:

				Weighted
				Average
	Restricted			Grant Date
Nonvested Shares	Shares			Fair Value
Nonvested at beginning of period		199,641		$	12.34
Granted		37,233			18.05
Vested		(58,921	)		12.24
Forfeited		(3,600	)		13.57
Nonvested at end of period		174,353		$	13.56

As of September 30, 2017, there was $1.6 million of unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.9 years. The total fair value of shares vested during the nine months ended September 30, 2017 and 2016 was $1.1 million and $0.5 million, respectively.

Stock Options

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

The fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model that uses the assumptions noted in the table below. Expected volatility is based on calculations performed by management using industry data. The Company’s expected dividend yield is 0.00% because the Company has not paid dividends in the past. The expected term of options granted was calculated using the “simplified” method for plain vanilla options as permitted under authoritative literature. The risk free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no options granted in 2017.

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

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

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

						Weighted
				Weighted		Average
				Average		Remaining
				Exercise		Contractual
	Shares			Price		Term (years)
Outstanding at beginning of period		1,006,000		$	10.48
Granted		—			—
Exercised		(82,150	)		10.00
Forfeited or expired		—			—
Outstanding at end of period		923,850		$	10.52		2.5
Fully vested and expected to vest		918,437		$	10.51		2.5
Exercisable at end of period		875,100		$	10.43		2.2

Information related to stock options during each year follows:

	2017		2016
Intrinsic value of options exercised	$	684,275	$	—
Cash received from option exercises		821,500		—
Tax benefit realized from option exercises		263,446		—
Weighted average fair value of options granted		—		3.16

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

NOTE 10 – REGULATORY CAPITAL REQUIREMENTS

The Company and the Bank are subject to regulatory capital requirements administered by the Federal Reserve and the Bank is also subject to the regulatory capital requirements of the Tennessee Department of Financial Institutions. Failure to meet capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that could, in that event, have a material adverse effect on the institutions’ financial statements. The relevant regulations require the Company and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting principles. The capital classifications of the Company and the Bank are also subject to qualitative judgments by their regulators about components, risk weightings, and other factors. Those qualitative judgments could also affect the capital status of the Company and the Bank and the amount of dividends the Company and the Bank may distribute. The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of September 30, 2017, the Company and the Bank met all regulatory capital adequacy requirements to which they are subject.

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

	Actual					Minimum capital requirement (1)					Minimum to be well-capitalized (2)
	Amount		Ratio			Amount		Ratio			Amount		Ratio
At September 30, 2017:
Total capital to risk-weighted assets:
CapStar Financial Holdings, Inc.	$	155,426		12.42	%	$	100,130		8.00	%	N/A		N/A
CapStar Bank		141,843		11.33			100,118		8.00		$	125,147		10.00
Tier I capital to risk-weighted assets:
CapStar Financial Holdings, Inc.		141,125		11.28			75,098		6.00		N/A		N/A
CapStar Bank		127,542		10.19			75,088		6.00			100,118		8.00
Common equity Tier 1 capital to risk weighted assets:
CapStar Financial Holdings, Inc.		132,417		10.58			56,323		4.50		N/A		N/A
CapStar Bank		111,334		8.90			56,316		4.50			81,346		6.50
Tier I capital to average assets:
CapStar Financial Holdings, Inc.		141,125		10.36			54,464		4.00		N/A		N/A
CapStar Bank		127,542		9.37			54,463		4.00			68,079		5.00

At December 31, 2016:
Total capital to risk-weighted assets:
CapStar Financial Holdings, Inc.	$	149,616		12.60	%	$	95,028		8.00	%	N/A		N/A
CapStar Bank		126,718		10.67			95,028		8.00		$	118,785		10.00
Tier I capital to risk-weighted assets:
CapStar Financial Holdings, Inc.		137,909		11.61			71,271		6.00		N/A		N/A
CapStar Bank		115,011		9.68			71,271		6.00			95,028		8.00
Common equity Tier 1 capital to risk weighted assets:
CapStar Financial Holdings, Inc.		129,528		10.90			53,453		4.50		N/A		N/A
CapStar Bank		99,130		8.35			53,453		4.50			77,210		6.50
Tier I capital to average assets:
CapStar Financial Holdings, Inc.		137,909		10.46			52,727		4.00		N/A		N/A
CapStar Bank		115,011		8.72			52,727		4.00			65,909		5.00

(1)

For the calendar year 2017, the Company must maintain a capital conservation buffer of Tier 1 common equity capital in excess of minimum risk-based capital ratios by at least 1.25% to avoid limits on capital distributions and certain discretionary bonus payments to executive officers and similar employees.

(2)

For the Company to be well-capitalized, the Bank must be well-capitalized and the Company must not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Federal Reserve to meet and maintain a specific capital level for any capital measure.

NOTE 11 – EARNINGS PER SHARE

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Basic net income per share calculation:
Numerator – Net income	$	4,419	$	2,109	$	1,409	$	6,169
Denominator – Average common shares outstanding		11,279,364		8,792,665		11,239,093		8,701,596
Basic net income per share	$	0.39	$	0.24	$	0.13	$	0.71
Diluted net income per share calculation:
Numerator – Net income	$	4,419	$	2,109	$	1,409	$	6,169
Denominator – Average common shares outstanding		11,279,364		8,792,665		11,239,093		8,701,596
Dilutive shares contingently issuable		1,471,059		2,006,871		1,518,998		1,981,380
Average diluted common shares outstanding		12,750,423		10,799,536		12,758,091		10,682,976
Diluted net income per share	$	0.35	$	0.20	$	0.11	$	0.58

NOTE 12 – 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.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on at least a quarterly basis for additional impairment and adjusted in accordance with the loan policy.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach with data from comparable properties. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Appraisals may be adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and/or management’s expertise and knowledge of the collateral. Such adjustments result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly. The Company had no other real estate owned at September 30, 2017 or December 31, 2016.

Loans Held For Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated on a pool-level basis. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2). There were no loans held for sale carried at fair value at September 30, 2017 or December 31, 2016.

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

	Fair value measurements at September 30, 2017
				Quoted prices
				in active		Significant
				markets for		other			Significant
				identical		observable			unobservable
	Carrying			assets		inputs			inputs
	Value			(Level 1)		(Level 2)			(Level 3)
Assets:
Securities available for sale:
U.S. government-sponsored agencies	$	11,299		$	—	$	11,299		$	—
Obligations of states and political subdivisions		19,067			—		19,067			—
Mortgage-backed securities-residential		95,823			—		95,823			—
Asset-backed securities		20,411			—		20,411			—
Total securities available for sale	$	146,600		$	—	$	146,600		$	—
Derivatives:
Interest rate swaps - customer related	$	352		$	—	$	352		$	—
Liabilities:
Derivatives:
Interest rate swaps - customer related	$	(352	)	$	—	$	(352	)	$	—
Interest rate swaps - cash flow hedges		(1,658	)		—		(1,658	)		—
Total derivatives	$	(2,010	)	$	—	$	(2,010	)	$	—

	Fair value measurements at December 31, 2016
				Quoted prices
				in active		Significant
				markets for		other			Significant
				identical		observable			unobservable
	Carrying			assets		inputs			inputs
	Value			(Level 1)		(Level 2)			(Level 3)
Assets:
Securities available for sale:
U.S. government-sponsored agencies	$	9,374		$	—	$	9,374		$	—
Obligations of states and political subdivisions		27,913			—		27,913			—
Mortgage-backed securities-residential		124,595			—		124,595			—
Asset-backed securities		20,473			—		20,473			—
Total securities available for sale	$	182,355		$	—	$	182,355		$	—
Derivatives:
Interest rate swaps - customer related	$	460		$	—	$	460		$	—
Liabilities:
Derivatives:
Interest rate swaps - customer related	$	(460	)	$	—	$	(460	)	$	—
Interest rate swaps - cash flow hedges		(1,535	)		—		(1,535	)		—
Total derivatives	$	(1,995	)	$	—	$	(1,995	)	$	—

Assets measured at fair value on a nonrecurring basis are summarized below (dollars in thousands):

Fair value measurements at September 30, 2017

Quoted prices

in active

Significant

markets for

other

Significant

identical

observable

unobservable

Carrying

assets

inputs

Value

(level 1)

(level 2)

(level 3)

Assets:

Impaired loans:

Commercial and industrial

1,432

—

1,432

Fair value measurements at December 31, 2016

Quoted prices

in active

Significant

markets for

other

Significant

identical

observable

unobservable

Carrying

assets

inputs

Value

(level 1)

(level 2)

(level 3)

Assets:

Impaired loans:

Commercial and industrial

1,809

—

1,809

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

Range

Fair

Valuation

(Weighted-

September 30, 2017

Value

Technique(s)

Unobservable Input(s)

Average)

Impaired loans:

Commercial and industrial

1,432

Sales comparison approach

Appraisal discounts

Range

Fair

Valuation

(Weighted-

December 31, 2016

Value

Technique(s)

Unobservable Input(s)

Average)

Impaired loans:

Commercial and industrial

1,809

Sales comparison approach

Appraisal discounts

Fair Value of Financial Instruments

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

	September 30, 2017				December 31, 2016
	Carrying				Carrying				Fair value
	amount		Fair value		amount		Fair value		level of input
Financial assets:
Cash and due from banks, interest-bearing deposits in financial institutions	$	69,789	$	69,789	$	63,456	$	63,456	Level 1
Federal funds sold		—		—		16,654		16,654	Level 1
Securities available for sale		146,600		146,600		182,355		182,355	Level 2
Securities held to maturity		45,635		48,980		46,864		49,731	Level 2
Loans held for sale		53,225		54,407		42,111		42,302	Level 2
Restricted equity securities		8,799	N/A			6,032	N/A		N/A
Loans, net of unearned income		974,530		974,551		935,251		934,628	Level 3
Accrued interest receivable		3,849		3,849		3,942		3,942	Level 2
Bank owned life insurance		22,335		22,335		21,900		21,900	Level 2
Other assets		352		352		460		460	Level 2
Financial liabilities:
Deposits		1,091,495		1,050,801		1,128,723		1,088,758	Level 3
Federal Home Loan Bank advances		95,000		94,980		55,000		54,989	Level 2
Accrued interest payable		305		305		212		212	Level 2
Other liabilities		3,800		3,800		5,349		5,349	Level 3

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

(a)	Cash and Due from Banks, Interest-Bearing Deposits in Financial Institutions

For these short‑term instruments, the carrying amount is a reasonable estimate of fair value.

(b)	Federal Funds Sold

Federal funds sold clear on a daily basis. For this reason, the carrying amount is a reasonable estimate of fair value.

(c)	Restricted Equity Securities

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

(d)	Loans, net

The fair value of the Bank’s loan portfolio includes a credit risk assumption in the determination of the fair value of its loans. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Bank’s loan portfolio is initially fair valued using a segmented approach. The Bank divides its loan portfolio into the following categories: variable rate loans, impaired loans and all other loans. The results are then adjusted to account for credit risk. For variable‑rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values. Fair values for impaired loans are estimated using discounted cash flow models or based on the fair value of the underlying collateral. For other loans, fair values are estimated using discounted cash flow models, using current market interest rates offered for loans with similar terms to borrowers of similar credit quality. The values derived from the discounted cash flow approach for each of the above portfolios are then further discounted to incorporate credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(e)	Bank Owned Life Insurance

For bank owned life insurance, the carrying amount is based on the cash surrender value and is a reasonable estimate of fair value.

(f)	Other Assets

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

(g)

Deposits

The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounted cash flow models, using current market interest rates offered on certificates with similar remaining maturities.

(h)	Federal Home Loan Bank Advances

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

(i)	Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value.

(j)	Other Liabilities

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

(k)	Off-Balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

(l)	Limitations

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

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

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

The following is a discussion of our financial condition at September 30, 2017 and December 31, 2016 and our results of operations for the three and nine months ended September 30, 2017 and 2016. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere in this Report and our Annual Report on Form 10-K for the year ended December 31, 2016. Annualized results for interim periods may not be indicative of results for the full year or future periods. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our current expectations. Factors that could cause such differences are discussed in the section entitled “Cautionary Note Regarding Forward-Looking Statements” in this Report and the sections entitled “Item 1A. Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in our Annual Report on Form 10-K for the year ended December 31, 2016. We assume no obligation to update any of these forward-looking statements except to the extent required by applicable law.

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

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

Overview

We completed the first nine months of 2017 with net income of $1.4 million, a 77.2% decrease in net income from the comparable period of 2016. The decrease in our net income was primarily due to a higher provision for loan losses, resulting from $12.4 million of charged-off loans recognized during the first nine months of 2017. The decrease in our net income was partially offset by higher net interest income resulting from continued loan growth. Fully diluted net income per share of common stock for the first nine months of 2017 was $0.11, compared with $0.58 for the first nine months of 2016. Average loans for the first nine months of 2017 were $998.2 million, a 14.5% increase over the comparable period of 2016. Average deposits for the first nine months of 2017 were $1.12 billion, a 2.9% increase over the comparable period of 2016.

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

Net interest income increased $3.1 million, or 10.8%, for the first nine months of 2017, compared with the same period in 2016. The positive effects of increased volume and yields on earning assets were partially offset by the negative effect of increasing deposit costs. Net interest margin increased to 3.18% for the first nine months of 2017, compared with 3.17% for the same period of 2016.

In response to an assessment of risk in the loan portfolio, including net loan growth and charge-offs, we recorded a $12.9 million provision for loan losses in the first nine months of 2017, compared with a $2.8 million provision in the first nine months of 2016. The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management’s evaluation, is adequate to provide coverage for the inherent losses on outstanding loans.

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

Total non-interest expense in the first nine months of 2017 increased $0.6 million, or 2.4%, compared with the same period in 2016. Our efficiency ratio in the first nine months of 2017 was 63.4% compared to 67.2% in the same period in 2016.

Our effective tax rate decreased to 9.1% for the first nine months of 2017 from 32.7% for the same period in 2016. The decrease in the effective tax rate is largely the result of the effectiveness of Accounting Standards Update (ASU) 2016-09, Compensation – Stock Compensation, which, among other things, amended existing guidance for the accounting of excess tax benefits from stock compensation.

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

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

(a)	Results of Operations

The following is a summary of our results of operations:

						2017 - 2016							2017 - 2016
	Three Months Ended					Percent			Nine Months Ended				Percent
	September 30,					Increase			September 30,				Increase
	2017			2016		(Decrease)			2017		2016		(Decrease)
Interest income	$	13,521		$	11,875		13.9	%	$	38,390	$	33,388		15.0	%
Interest expense		2,678			1,749		53.1	%		7,045		5,105		38.0	%
Net interest income		10,843			10,126		7.1	%		31,345		28,283		10.8	%
Provision for loan losses		(195	)		1,639		(111.9	)%		12,900		2,759		367.6	%
Net interest income after provision for loan losses		11,038			8,487		30.1	%		18,445		25,524		(27.7	)%
Noninterest income		3,372			3,191		5.7	%		8,171		8,130		0.5	%
Noninterest expense		8,475			8,527		(0.6	)%		25,066		24,487		2.4	%
Net income before income taxes		5,935			3,151		88.3	%		1,550		9,167		(83.1	)%
Income tax expense		1,516			1,042		45.5	%		141		2,998		(95.3	)%
Net income	$	4,419		$	2,109		109.5	%	$	1,409	$	6,169		(77.2	)%

Basic net income per share of common stock	$	0.39		$	0.24		63.3	%	$	0.13	$	0.71		(82.3	)%
Fully diluted net income per share of common stock	$	0.35		$	0.20		77.4	%	$	0.11	$	0.58		(80.9	)%

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

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

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

Annualized return on average assets and annualized return on average stockholders’ equity were 0.14% and 1.33%, respectively, for the first nine months of 2017, compared with 0.66% and 7.25%, respectively, for the same period in 2016.

Net Interest Income

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

The following tables set forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three and nine months ended September 30, 2017 and 2016:

	For the Three Months Ended September 30,
	2017							2016
	Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate			Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate
Interest-Earning Assets
Loans (1)	$	991,238	$	11,375		4.55	%	$	918,302	$	10,072		4.36	%
Loans held for sale		67,886		720		4.21	%		63,640		587		3.67	%
Securities:
Taxable investment securities (2)		156,979		946		2.41	%		170,382		858		2.01	%
Investment securities exempt from federal income tax (3)		50,947		304		2.39	%		48,081		291		2.42	%
Total securities		207,926		1,250		2.40	%		218,463		1,149		2.10	%
Cash balances in other banks		49,151		169		1.36	%		45,122		63		0.56	%
Funds sold		1,711		7		1.67	%		1,510		4		0.95	%
Total interest-earning assets		1,317,912		13,521		4.07	%		1,247,037		11,875		3.79	%
Noninterest-earning assets		50,081							49,834
Total assets	$	1,367,993						$	1,296,871
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts	$	291,250		635		0.87	%	$	303,727		404		0.53	%
Savings and money market deposits		354,972		772		0.86	%		437,827		689		0.63	%
Time deposits		211,122		706		1.32	%		203,240		546		1.07	%
Total interest-bearing deposits		857,344		2,113		0.98	%		944,794		1,639		0.69	%
Borrowings and repurchase agreements		123,859		565		1.81	%		34,946		110		1.25	%
Total interest-bearing liabilities		981,203		2,678		1.08	%		979,740		1,749		0.71	%
Noninterest-bearing deposits		237,156							187,244
Total funding sources		1,218,359							1,166,984
Noninterest-bearing liabilities		8,078							12,497
Shareholders’ equity		141,556							117,390
Total liabilities and shareholders’ equity	$	1,367,993						$	1,296,871
Net interest spread (4)						2.99	%						3.08	%
Net interest income/margin (5)			$	10,843		3.26	%			$	10,126		3.23	%

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

(2)	Taxable investment securities include restricted equity securities.

(3)	Balances for investment securities exempt from federal income tax are not calculated on a tax equivalent basis.

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

(5)	Net interest margin is net interest income divided by total average interest-earning assets and is presented in the table above on an annualized basis.

	For the Nine Months Ended September 30,
	2017							2016
	Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate			Average Outstanding Balance		Interest Income/ Expense		Average Yield/ Rate
Interest-Earning Assets
Loans (1)	$	998,247	$	32,580		4.36	%	$	871,637	$	28,252		4.33	%
Loans held for sale		43,790		1,355		4.14	%		45,564		1,280		3.75	%
Securities:
Taxable investment securities (2)		170,810		3,098		2.42	%		178,388		2,806		2.10	%
Investment securities exempt from federal income tax (3)		53,230		944		2.36	%		45,370		841		2.47	%
Total securities		224,040		4,042		2.41	%		223,758		3,647		2.17	%
Cash balances in other banks		48,980		387		1.06	%		49,430		197		0.53	%
Funds sold		2,359		26		1.46	%		2,053		12		0.79	%
Total interest-earning assets		1,317,416		38,390		3.90	%		1,192,442		33,388		3.74	%
Noninterest-earning assets		49,873							49,550
Total assets	$	1,367,289						$	1,241,992
Interest-Bearing Liabilities
Interest-bearing deposits:
Interest-bearing transaction accounts	$	307,992		1,839		0.80	%	$	263,251		1,096		0.56	%
Savings and money market deposits		389,425		2,360		0.81	%		442,740		2,141		0.65	%
Time deposits		193,436		1,750		1.21	%		191,440		1,566		1.09	%
Total interest-bearing deposits		890,853		5,949		0.89	%		897,431		4,803		0.71	%
Borrowings and repurchase agreements		100,221		1,096		1.46	%		31,926		302		1.26	%
Total interest-bearing liabilities		991,074		7,045		0.95	%		929,357		5,105		0.73	%
Noninterest-bearing deposits		225,623							187,058
Total funding sources		1,216,697							1,116,415
Noninterest-bearing liabilities		8,627							11,970
Shareholders’ equity		141,965							113,607
Total liabilities and shareholders’ equity	$	1,367,289						$	1,241,992
Net interest spread (4)						2.95	%						3.01	%
Net interest income/margin (5)			$	31,345		3.18	%			$	28,283		3.17	%

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

(2)	Taxable investment securities include restricted equity securities.

(3)	Balances for investment securities exempt from federal income tax are not calculated on a tax equivalent basis.

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

(5)	Net interest margin is net interest income divided by total average interest-earning assets and is presented in the table above on an annualized basis.

Our net interest margin was 3.26% and 3.23% for the third quarter of 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, our net interest margin was 3.18% and 3.17%, respectively. The increase in net interest margin for both periods is primarily due to growth of our interest earning assets at a higher pace than our interest bearing liabilities.

For the third quarter of 2017 and 2016, average loan yields increased from 4.36% to 4.55% which was primarily driven by increases in short-term interest rate indexes affecting the variable rate portion of our loan portfolio, offset by competitive pricing pressures. From September 30, 2016 to September 30, 2017, the LIBOR – 1 month interest rate increased from 0.53% to 1.23%. Approximately 65% of our loan portfolio is variable in nature and indexed to 1 month LIBOR. For the nine months ended September 30, 2017 and 2016, average loan yields increased from 4.33% to 4.36%. Average loans for the first nine months of 2017 increased 14.5% compared to the same period in 2016 as a result of our continued focus on attracting new clients to our Company.

For the third quarter of 2017 and 2016, average security yields increased from 2.10% to 2.40% and from 2.17% to 2.41% for the nine months ended September 30, 2016 and 2017, respectively, primarily due to increases in the LIBOR rate on the variable rate portion of our securities portfolio. The resulting yield on average interest-earning assets increased 28 basis points for the third quarter of 2017 compared to the similar period in 2016 and 16 basis points for the nine months ended September 30, 2017 compared to the similar period of 2016.

We funded our growth in loans through an increase in our funding sources of 9.0% for the nine months ended September 30, 2017 compared to the similar period in 2016. For the first nine months of 2017, average interest-bearing liabilities increased $61.8 million, or 6.6%, from the same period in 2016. The average rate paid on interest-bearing liabilities was 0.95% for the first nine months of 2017, as compared to 0.73% for the same period in 2016. A portion of the increase was due to increases in the Fed Funds rate during the period. The Fed Funds rate increased from 0.50% at September 30, 2016 to 1.25% at September 30, 2017. We passed along a portion of these rate increases to our clients.

Asset/Liability Management and Interest Rate Risk

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

Interest Rate Simulation Sensitivity Analysis

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

At September 30, 2017, our EAR static simulation results indicated that our balance sheet is asset sensitive to parallel shifts in interest rates. This indicates that our assets generally reprice faster than our liabilities, which results in a favorable impact to net interest income when market interest rates increase. Many assumptions are used to calculate the impact of interest rate fluctuations on our net interest income, such as asset prepayments, non-maturity deposit price sensitivity and decay rates, and key rate drivers. Because of the inherent use of these estimates and assumptions in the model, our actual results may, and most likely will, differ from our static EAR results. In addition, static EAR results do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates or client behavior. For example, as part of our asset/liability management strategy, management has the ability to increase asset duration and/or decrease liability duration in order to reduce asset sensitivity, or to decrease asset duration and/or increase liability duration in order to increase asset sensitivity.

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

		Net interest income change
Increase 200bp		6.2%
Increase 100bp		2.7
Decrease 100bp		(8.8)
Decrease 200bp		(13.8)

Provision for Loan Losses

Our policy is to maintain an allowance for loan losses at a level sufficient to absorb probable incurred losses inherent in the loan portfolio. The allowance is increased by a provision for loan losses, which is a charge to earnings, is decreased by charge-offs and increased by loan recoveries. Our allowance for loan losses as a percentage of total loans was 1.45% and 1.24% at September 30, 2017 and December 31, 2016, respectively.

The provision for loan losses amounted to $(0.2) million and $12.9 million, respectively, for the three and nine months ended September 30, 2017 compared to $1.6 million and $2.8 million, respectively, for the three and nine months ended September 30, 2016. Provision expense is impacted by the absolute level of loans, loan growth, the credit quality of the loan portfolio and the amount of net charge-offs.

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

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

Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at September 30, 2017. While our policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by management, they are necessarily approximate and imprecise. There are factors beyond our control, such as conditions in the local and national economy, legislation and regulation, local real estate markets, or particular industry or borrower-specific conditions, which may materially negatively impact our asset quality and the adequacy of our allowance for loan losses and, thus, the resulting provision for loan losses. See our Annual Report on Form 10-K for the year ended December 31, 2016 “Notes to Consolidated Financial Statements — Note 1 — Summary of Significant Accounting Policies” and “Notes to Consolidated Financial Statements (Unaudited) — Note 3 — Loans and Allowance for Loan Losses” for additional information on our allowance for loan losses.

Noninterest Income

In addition to net interest income, we generate other types of recurring noninterest income from our lines of business. Our banking operations generate revenue from service charges and fees on deposit accounts. We have a mortgage banking line of business that generates revenue from originating and selling mortgages, a line of business that originates and sells commercial real estate loans, and we have a revenue-sharing relationship with a registered broker-dealer, which generates wealth management fees. In addition to these types of recurring noninterest income, we own insurance on several key employees and record income on the increase in the cash surrender value of these policies.

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

						2017-2016							2017-2016
	Three Months Ended					Percent			Nine Months Ended				Percent
	September 30,					Increase			September 30,				Increase
	2017		2016			(Decrease)			2017		2016		(Decrease)
Noninterest income:
Treasury management and other deposit service charges	$	427	$	277			54.2	%	$	1,097	$	805		36.2	%
Loan commitment fees		223		329			(32.0	)%		646		901		(28.3	)%
Net gain (loss) on sale of securities		9		(4	)		(319.8	)%		42		121		(65.0	)%
Tri-Net fees		367		—			100.0	%		748		—		100.0	%
Mortgage banking income		2,030		2,339			(13.2	)%		4,617		5,342		(13.6	)%
Other noninterest income		316		250			26.2	%		1,021		961		6.2	%
Total noninterest income	$	3,372	$	3,191			5.7	%	$	8,171	$	8,130		0.5	%

The increase in treasury management and other deposit service charges for the three and nine months ended September 30, 2017 compared to the same periods in 2016 are primarily related to increased analysis fees due to an increase in the volume of commercial accounts.

Loan commitment fees vary from period to period based on the timing of one-time, transaction related loan fees.

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

Mortgage banking income consists of mortgage fee income from the origination and sale of mortgage loans. These mortgage fees are for loans that we originated and that are subsequently sold to third-party investors. All of these loan sales transfer servicing rights to the buyer. Mortgage origination fees will fluctuate from quarter to quarter as the rate environment changes. Mortgage banking income decreased 13.2% and 13.6% for the three and nine months ended September 30, 2017, respectively, compared to the similar periods in 2016 due to declining volumes and margins on mortgage loans sold.

Noninterest Expense

Our total noninterest expense increase reflects expenses that we have incurred as we build the foundation to support our recent growth and enable us to execute our growth strategy. The following table presents the primary components of noninterest expense for the periods indicated.

					2017-2016							2017-2016
	Three Months Ended				Percent			Nine Months Ended				Percent
	September 30,				Increase			September 30,				Increase
	2017		2016		(Decrease)			2017		2016		(Decrease)
Noninterest expense:
Salaries and employee benefits	$	5,119	$	5,119		(0.0	)%	$	14,989	$	15,275		(1.9	)%
Data processing and software		709		627		13.0	%		2,040		1,831		11.4	%
Professional fees		336		391		(14.1	)%		1,050		1,148		(8.5	)%
Occupancy		531		352		51.0	%		1,518		1,133		34.0	%
Equipment		564		458		23.1	%		1,604		1,301		23.3	%
Regulatory fees		270		250		7.6	%		877		742		18.2	%
Other operating		946		1,330		(28.8	)%		2,988		3,057		(2.3	)%
Total noninterest expense	$	8,475	$	8,527		(0.6	)%	$	25,066	$	24,487		2.4	%

The largest increase between periods within noninterest expense was related to a new lease of our corporate headquarters which we moved into in the first quarter of 2017. This new lease resulted in an increase in occupancy expense of 51.0% and 34.0% for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016.

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

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

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

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

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

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

Our efficiency ratio (ratio of noninterest expense to the sum of net interest income and noninterest income) was 59.6% for the three months ended September 30, 2017 compared to 64.0% for the same period 2016. For the nine months ended September 30, 2017 and 2016, our efficiency ratio was 63.4% and 67.2%, respectively. The efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue. The efficiency ratio for both periods was positively impacted by growth in our net interest income that outpaced increases in our expenses. For the nine months ended September 30, 2017, our revenue (net interest income plus noninterest income) grew at rate of approximately 3.6 times our noninterest expense.

Income Tax Provision

During the three and nine months ended September 30, 2017, we recorded income tax expense of $1.5 million and $0.1 million, respectively, compared to $1.0 million and $3.0 million, respectively, for the three and nine months ended September 30, 2016. Our income tax expense for the nine months ended September 30, 2017 reflects an effective income tax rate of 9.1% compared to 32.7% for the same period in 2016. Our effective tax rate differs from the statutory tax rate by our investments in municipal securities, company owned life insurance, state tax credits, net of the effect of certain non-deductible expenses and the recognition of excess tax benefits related to stock compensation. In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions, including income tax consequences. In addition to other changes, the guidance changes the accounting for excess tax benefits and tax deficiencies from generally being recognized in additional paid-in capital to recognition as income tax expense or benefit in the period they occur. The Company adopted the new guidance in the first quarter of 2017. As a result, the Company’s income tax expense was reduced by $310,000 for the nine months ended September 30, 2017.

(b)	Financial Condition

Balance Sheet

Total assets increased $4.9 million, or 0.4%, from $1.33 billion on December 31, 2016 to $1.34 billion on September 30, 2017. Loans and leases grew $39.3 million, or 4.2%, in the first nine months of 2017, offset by a decrease in cash of $10.3 million, or 12.9% for the same period. Securities decreased $35.8 million, or 19.6% as we sold out of lower yielding securities to fund loan growth. Loans held for sale increased $11.1 million, or 26.4%, during the first nine months of 2017 as we implemented a new line of business related to originating and selling commercial real estate loans.

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

Loans and Leases

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

	September 30, 2017					December 31, 2016
	Amount		Percent			Amount		Percent
Commercial real estate	$	366,778		37.6	%	$	302,322		32.3	%
Consumer real estate		100,811		10.3	%		97,015		10.4	%
Construction and land development		79,951		8.2	%		94,491		10.1	%
Commercial and industrial		394,600		40.5	%		379,620		40.5	%
Consumer		6,289		0.6	%		5,974		0.6	%
Other		26,460		2.7	%		56,796		6.1	%
Total loans	$	974,889		100.0	%	$	936,218		100.0	%

At September 30, 2017, our loan portfolio composition remained relatively consistent with the composition at December 31, 2016. The commercial real estate category includes owner-occupied commercial real estate loans which is similar in many ways to our commercial and industrial lending in that these loans are generally made to businesses on the basis of the cash flows of the business rather than on the valuation of the real estate. At September 30, 2017, approximately 28.1% of the outstanding principal balance of our commercial real estate loans was secured by owner-occupied properties. Growth in the commercial real estate segment reflects the growth and development of the Nashville MSA in which we operate.

Non-Performing Loans and Assets

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

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

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

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

	September 30, 2017		December 31, 2016
Commercial real estate	$	1,233	$	1,310
Consumer real estate		—		—
Construction and land development		—		—
Commercial and industrial		1,932		2,309
Consumer		—		—
Other		—		—
Total loans	$	3,165	$	3,619

(c)

Liquidity

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

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

Our most liquid assets are comprised of cash and due from banks, available-for-sale marketable investment securities and federal funds sold. The fair value of the available-for-sale investment portfolio was $146.6 million at September 30, 2017. We pledge portions of our investment securities portfolio to secure public fund deposits, derivative positions and Federal Home Loan Bank advances. At September 30, 2017, total investment securities pledged for these purposes comprised 65% of the estimated fair value of the entire investment portfolio, leaving $68.5 million of unpledged securities.

We have a large base of non-maturity customer deposits, defined as demand, savings, and money market deposit accounts. At September 30, 2017, such deposits totaled $892.2 million and represented 82% of our total deposits. Because these deposits are less volatile and are often tied to other products through long lasting relationships they do not put heavy pressure on liquidity.

Other sources of funds available to meet daily needs include FHLB advances. As a member of the FHLB of Cincinnati, the Company has access to credit products offered by the FHLB. The Company views these borrowings as a low cost alternative to other time deposits. At September 30, 2017, available credit from the FHLB totaled $108.0 million. Additionally, we had available federal funds purchased lines with correspondent banks totaling $110.0 million at September 30, 2017.

The principal source of cash for CapStar Financial Holdings, Inc. (the “Parent Company”) is dividends paid to it as the sole shareholder of the Bank. At September 30, 2017, the Bank was able to pay up to $19.2 million in dividends to the Parent Company without regulatory approval subject to the ongoing capital requirements of the Bank.

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

(d)	Capital Resources

At September 30, 2017, shareholders’ equity totaled $144.2 million, an increase of $5.0 million since December 31, 2016. Accordingly, as of September 30, 2017, the Company and the Bank were well-capitalized under the regulatory framework for prompt corrective action. See the Consolidated Statement of Changes in Shareholders’ Equity and Note 10 of the consolidated financial statements for further detail of the changes in equity since the end of 2016.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions that, in accordance with 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 7 of the consolidated financial statements.

(e)	Non-GAAP Financial Measures

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

The following table presents a reconciliation of tangible common equity, tangible common equity to total tangible assets and tangible common equity per share to the most directly comparable GAAP financial measures.

(dollars in thousands, except per share data)	September 30, 2017			December 31, 2016
Total equity	$	144,204		$	139,207
Less core deposit intangible		(33	)		(71	)
Less goodwill		(6,219	)		(6,219	)
Less preferred equity		(9,000	)		(9,000	)
Tangible common equity	$	128,952		$	123,917
Total assets	$	1,338,559		$	1,333,675
Less core deposit intangible		(33	)		(71	)
Less goodwill		(6,219	)		(6,219	)
Total tangible assets	$	1,332,307		$	1,327,385
Total shareholders' equity to total assets		10.77	%		10.44	%
Tangible common equity ratio		9.68	%		9.34	%
Total shares of common stock outstanding		11,346,498			11,204,515
Book value per share of common stock	$	11.92		$	11.62
Tangible book value per share of common stock		11.36			11.06

(f)	Recently Issued Accounting Pronouncements

ASU 2014-09, Revenue from Contracts with Customers

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

ASU 2016-02, Leases

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

ASU 2016-13, Financial Instruments – Credit Losses

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

ASU 2017-04, Simplifying the Test of Goodwill Impairment

In January 2017, the FASB amended the Goodwill and Other Topic of the Accounting Standards Codification to simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2019.

ASU 2017-09, Scope of Modification Accounting

In May 2017, the FASB amended the requirements in the Compensation—Stock Compensation Topic of the Accounting Standards Codification related to changes to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments will be effective for the Company for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB amended the requirements of the Derivatives and Hedging Topic of the Accounting Standards Codification to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments will be effective for the Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its financial statements.

(g)	Impact of Inflation

The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with U.S. GAAP and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Information required by this item is included in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Interest Rate Simulation Sensitivity Analysis.”

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company, with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the Company’s filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

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

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

The following table shows information relating to the repurchase of shares of common stock by the Company during the three months ended September 30, 2017.

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

_____________________________________________

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

Use of Proceeds

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

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

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

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

Item 6.

Exhibits


Exhibit Number		Description

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

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

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

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

101.INS		XBRL Instance Document.*

101.SCH		XBRL Taxonomy Extension Schema Document.*

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.*

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.*

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.*

101.DEF		XBRL Taxonomy Extension Definition Document.*

*	Filed with this Quarterly Report on Form 10-Q.

**	Furnished with this Quarterly Report on Form 10-Q.

SIGNATURES

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

CAPSTAR FINANCIAL HOLDINGS, INC.


By:		/s/ Robert B. Anderson
		Robert B. Anderson
		Chief Financial Officer and Chief Administrative Officer

Date:		October 18, 2017