CAPSTAR FINANCIAL HOLDINGS, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

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

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

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

Insight

The first quarter of 2022 resulted in $0.48 Diluted net earnings per common share, down 4.0% compared to the first quarter of 2021. The annualized return on average assets was 1.37% for the first quarter of 2022 compared to 1.45% for the same period in 2021.

To March 31, 2022loans held for investment purposes have been reduced to $2.05 billioncompared to $1.97 billion to December 31, 2021. Total deposits increased to
$2.76 billion to March 31, 2022 from $2.68 billion to December 31, 2021.

From March 31, 2022the outstanding balance of loans made under the SBA’s Paycheck Protection Program (“PPP”) was approximately $6.5 million and was included in commercial and industrial loans.

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

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

Net interest income decreased $1.0 million, or 4.7%, for the three months ended
March 31, 2022, compared to the same period in 2021. Net interest margin
decreased to 2.97% for the three months ended March 31, 2022, compared with
3.13% for the same period of 2021. The decrease was attributable to a deferred
loan origination expense adjustment related to prior periods of $0.5 million and
a $1.8 million decline in PPP fees.

The three months ended March 31, 2022 yielded a $0.8 million provision release
compared to a $0.7 million provision being recorded for the comparable period of
2021. The release of reserves was primarily attributable to improved asset
quality trends and other qualitative factors.

Total noninterest income for the first quarter of 2022 decreased $0.9 million,
or 9.2%, compared with the same period in 2021, and comprised 29% of total
revenues. The decrease is primarily attributable to mortgage banking returning
to more normalized levels, partially offset by a $0.9 million death benefit from
bank-owned life insurance policies.

Total noninterest expense for the three months ended March 31, 2022 increased
$0.3 million, or 1.9%, compared to the same period in 2021. The increase was
primarily driven by higher salaries and employee benefits. Our efficiency ratio
for the three months ended March 31, 2022 was 58.67% compared to 54.08% for the
same period in 2021.

Common equity tier 1 capital to risk weighted assets, summarized in Note 11 of
the consolidated financial statements, is a useful measure in evaluating the
quality and adequacy of capital. Our consolidated ratio of common equity tier 1
capital to risk weighted assets was 13.58% as of March 31, 2022, compared with
14.11% at December 31, 2021.


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The following sections provide more detail on the topics presented in this overview.

(a)
Results of Operations

Here is a summary of our operating results:

                                                                             2022 - 2021
                                          Three Months Ended                   Percent
                                              March 31,                       Increase
                                       2022                2021              (Decrease)
Interest income                   $        22,784     $       24,278                    -6.2 %
Interest expense                            1,644              2,096                   -21.6 %
Net interest income                        21,140             22,182                    -4.7 %
Provision for loan losses                    (784 )              650                  -220.6 %
Net interest income after
provision for loan losses                  21,924             21,532                     1.8 %
Noninterest income                          9,089             10,014                    -9.2 %
Noninterest expense                        17,736             17,413                     1.9 %
Net income before income taxes             13,277             14,133                    -6.1 %
Income tax expense                          2,604              3,103                   -16.1 %
Net income                        $        10,673     $       11,030                    -3.2 %

Basic net income per share of
common stock                      $          0.48     $         0.50                    -4.0 %
Diluted net income per share of
common stock                      $          0.48     $         0.50                    -4.0 %



Annualized return on average assets and annualized return on average
shareholders' equity were 1.37% and 11.39%, respectively, for the first quarter
of 2022, compared with 1.45% and 12.76%, respectively, for the same period in
2021.


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.

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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 month periods ended March 31, 2022 and 2021:

                                                    For the Three Months Ended March 31,
                                             2022                                          2021
                             Average         Interest       Average        Average         Interest       Average
                           Outstanding       Income/        Yield/       Outstanding       Income/        Yield/
                             Balance         Expense         Rate          Balance         Expense         Rate
Interest-Earning Assets
Loans (1)                  $  2,001,740     $   19,599          3.97 %   $  1,929,342     $   20,723          4.47 %
Loans held for sale              90,163            768          3.46 %        164,867          1,291          3.56 %
Securities:
Taxable investment
securities (2)                  426,144          1,909          1.79 %        431,406          1,757          1.63 %
Investment securities
exempt from
  federal income tax (3)         57,195            326          2.89 %         64,629            373          2.92 %
Total securities                483,339          2,235          1.92 %        496,035          2,130          1.80 %
Cash balances in other
banks                           305,922            172          0.23 %        298,722            134          0.18 %
Funds sold                       20,149             10          0.19 %            153              -          1.27 %
Total interest-earning
assets                        2,901,313         22,784          3.20 %      2,889,119         24,278          3.42 %
Noninterest-earning
assets                          252,007                                       189,626
Total assets               $  3,153,320                                  $  3,078,745
Interest-Bearing
Liabilities
Interest-bearing
deposits:
Interest-bearing
transaction accounts       $    949,313            436          0.19 %   $    944,651            446          0.19 %
Savings and money market
deposits                        660,721            331          0.20 %        583,590            313          0.22 %
Time deposits                   366,769            484          0.54 %        458,380            931          0.82 %
Total interest-bearing
deposits                      1,976,803          1,251          0.26 %      1,986,621          1,690          0.35 %
Borrowings and
repurchase agreements            29,547            393          5.40 %         33,879            406          4.85 %
Total interest-bearing
liabilities                   2,006,350          1,644          0.33 %      2,020,500          2,096          0.42 %
Noninterest-bearing
deposits                        728,134                                       676,929
Total funding sources         2,734,484                                     2,697,429
Noninterest-bearing
liabilities                      38,797                                        30,635
Shareholders' equity            380,039                                       350,681
Total liabilities and
shareholders' equity       $  3,153,320                                  $  3,078,745
Net interest spread (4)                                         2.86 %                                        3.00 %
Net interest
income/margin (5)                           $   21,140          2.97 %                    $   22,182          3.13 %



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

(2) Taxable marketable securities include subordinate equity securities.

(3) Returns on tax-exempt securities are presented in tax equivalent.

(4) The net interest spread is the average return on total interest-bearing assets minus the average rate on total interest-bearing liabilities.

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



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The net interest margin was 2.97% and 3.13% for the first quarters of 2022 and
2021, respectively. The decrease in net interest margin for the three months
ended March 31, 2022 compared to March 31, 2021 was primarily due to a $0.5
million one time deferred origination expense adjustment related to prior
periods as well as a $1.8 million decline in PPP fees. Average loans at March
31, 2022 increased $72.4 million primarily as a result of the Company's recent
Chattanooga expansion and continued focus on attracting new clients.

The Company continues to experience favorable deposit trends. The Company
experienced a favorable mix shift as average non-interest bearing deposits
represented 26.9% at March 31, 2022 compared to 25.4% for the three month
periods ending March 31, 2021. Deposit costs declined across all
interest-bearing account types. Average funding sources slightly increased for
the three months ended March 31, 2022 compared to March 31, 2021. As shown in
the tables above, the primary driver of our increased funding sources was the
aforementioned growth in non-interest bearing deposits.

The average rate paid on interest-bearing liabilities was 0.33% for the first
quarter of 2022 compared to 0.42% for March 31, 2021. The majority of this
decrease was due to the impact of the Federal Reserve sharply lowering the
federal funds rate in response to the COVID-19 pandemic and its continued impact
on deposit rates.

Asset/liability management and interest rate risk

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

Interest rate simulation sensitivity analysis

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

At March 31, 2022, our EAR static simulation results indicated that our balance
sheet is asset sensitive to parallel shifts in interest rates. This indicates
that our assets generally reprice faster than our liabilities, which results in
a favorable impact to net interest income when market interest rates increase
and an unfavorable impact to net interest income when market interest rates
decline. Many assumptions are used to calculate the impact of interest rate
fluctuations on our net interest income, such as asset prepayments, non-maturity
deposit price sensitivity, and key rate drivers. Because of the inherent use of
these estimates and assumptions in the model, our actual results may, and most
likely will, differ from our static EAR results. In addition, static EAR results
do not include actions that our management may undertake to manage the risks in
response to anticipated changes in interest rates or client behavior. For
example, as part of our asset/liability management strategy, management has the
ability to increase asset duration and/or decrease liability duration in order
to reduce asset sensitivity, or to decrease asset duration and/or increase
liability duration in order to increase asset sensitivity.

The following table illustrates the results of our EAR analysis to determine the
extent to which our net interest income over the next 12 months would change if
prevailing interest rates increased or decreased immediately by the specified
amounts.
                   Net
                 interest
                  income
                  change
Increase 200bp     7.2%
Increase 100bp      4.1
Decrease 100bp     (4.5)



The Federal Reserve Bank is expected to aggressively raise short-term rates.
However, following significant yield curve steepening in recent months, yield
curve flattening could be a likely scenario. In a scenario where the federal
funds rate rises 200 basis points over 12 months and 5 year rates rise by 45
basis points, net interest income is projected to increase by 1.7%.

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Allowance 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. While our policies
and procedures used to estimate the allowance for loan losses, as well as the
resultant provision for loan losses charged to operations, are considered
adequate by management, they are necessarily approximate and imprecise. There
are factors beyond our control, such as conditions in the local and national
economy, local real estate markets, or particular industry or borrower-specific
conditions, which may materially and negatively impact our asset quality and the
adequacy of our allowance for loan losses and, thus, the resulting provision for
loan losses. Provision expense is impacted by macroeconomic factors, the
absolute level of loans, loan growth, the credit quality of the loan portfolio
and the amount of net charge-offs. We continue to assess the impact of and
developments in the COVID-19 pandemic to our loan portfolio.

For the three months ended March 31, 2022, there was a provision release of $0.8
million compared to a $0.7 million provision for the comparable period in 2021.
The release was primarily attributable to improved asset quality trends and
other qualitative factors. Net charge-offs for the first quarter of 2022 were
$57 thousand compared to $18 thousand for the comparable period of 2021. Our
allowance for loan losses at March 31, 2022 was 1.02% of total loans held for
investment compared to 1.10% as of December 31, 2021.

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

Noninterest Income

In addition to net interest income, we generate recurring noninterest income.
Our banking operations generate revenue from service charges on deposit
accounts, interchange and debit card transaction fees, originating and selling
mortgage, commercial real estate and SBA loans, wealth management and gains
(losses) on sales of securities. In addition to these types of recurring
noninterest income, we own insurance on several key employees and record income
within "Other noninterest income" based upon the increase in the cash surrender
value of these policies.

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

                                                                           2022 - 2021
                                                Three Months Ended           Percent
                                                     March 31,              Increase
                                                2022           2021        (Decrease)
Noninterest income:
Deposit service charges                       $   1,142      $  1,102               3.6 %
Interchange and debit card transaction fees       1,222         1,092              11.9 %
Mortgage banking                                  1,966         4,716             (58.3 )%
Tri-Net                                           2,171         1,143              89.9 %
Wealth management                                   440           459              (4.1 )%
SBA lending                                         222           492             (54.9 )%
Net gain on sale of securities                        -            26            (100.0 )%
Other noninterest income                          1,926           984              95.7 %
Total noninterest income                      $   9,089      $ 10,014              (9.2 )%



Deposit service fees remained stable for the three months ended March 31, 2022
compared to the same period in 2021. These amounts come from our commercial and consumer deposit accounts.

Interchange and debit card transaction fees fluctuate based upon transaction
volumes, which were slightly higher for the three months ended March 31, 2022
compared to the same period in 2021. This increase is attributable to an
emphasis on electronic banking and continued growth in deposits and volume of
our commercial and consumer deposit accounts.

Mortgage banking income consists of mortgage fee income from the origination and
sale of mortgage loans. These mortgage fees are for loans originated in our
markets that are subsequently sold to third-party investors. Generally, mortgage
origination fees increase in lower interest rate environments and more robust
housing markets and decrease in rising interest rate environments and more
challenging housing markets. Mortgage origination fees will fluctuate from
period to period as the rate environment changes. The decrease above is
indicative of the mortgage market returning to more normalized levels.

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Tri-Net represents a line of business which originates and sells commercial real
estate loans to third-party investors with the exception of certain loans
originated to borrowers within our target market, which are retained at the
discretion of management. All of these loan sales transfer servicing rights to
the buyer. Tri-Net revenue for the three month period ended March 31, 2022
increased 89.9% when compared to the same period of 2021, though future revenue
is expected to return to more normalized levels.

Wealth management income is derived from advisory services offered to specific
customers. The decrease in wealth management fees for the three month period
ended March 31, 2022 compared to the same period in 2021 was mostly driven by
transaction volume, which can fluctuate from period to period.

Non-interest income from SBA loans, which represents gains on sales of secured portions of SBA loans, decreased 54.9% for the three-month period ended March 31, 2022 compared to the same period in 2021.

Other non-interest income mainly includes loan fees, bank-owned life insurance and other service fees. The main driver of the increase in the two comparative periods is related to $0.9 million in death benefit income from bank-owned life insurance policies for the three months ended March 31, 2022.

Non-interest expenses

The following table presents the primary components of noninterest expense for
the periods indicated.
                                                        2022 - 2021
                                  Three Months Ended      Percent
                                      March 31,          Increase
                                   2022        2021     (Decrease)
Noninterest expense:
Salaries and employee benefits     $10,269     $9,427          8.9%
Data processing and software         2,647      2,827        (6.4)%
Occupancy                            1,099      1,108        (0.8)%
Equipment                              709        899       (21.1)%
Professional services                  679        704        (3.6)%
Regulatory fees                        280        257          8.9%
Acquisition related expenses             -         67      (100.0)%
Amortization of intangibles            446        508       (12.2)%
Other operating                      1,607      1,616        (0.6)%
Total noninterest expense          $17,736    $17,413          1.9%


The change in salaries and employee benefits was driven primarily by an overall
increase in salaries and a one time severance/retirement related expense of $0.4
million. At March 31, 2022, our associate base increased to 397 compared to 379
at March 31, 2021.

Our efficiency ratio was 58.67% and 54.08% for the three months ended March 31,
2022 and March 31, 2021, respectively, with the increase being driven by the
aforementioned noninterest expense factors combined with a 6.1% decline in total
revenue for the three months ended March 31, 2022 when compared to the same
period of 2021. The efficiency ratio is the ratio of noninterest expense to the
sum of net interest income and noninterest income and measures the amount of
expense that is incurred to generate a dollar of revenue. Overall, noninterest
expense remained relatively flat as the Company continues to focus on expense
discipline and operational improvements.


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Provision for income tax

The Company's effective tax rate for the three month period ended March 31, 2022
was 19.6% compared to 22.0% for the three month period ended March 31, 2021. The
three month period decrease is attributable to increased benefits related to the
Company's tax strategy.

The effective tax rate for the three months ended March 31, 2022 compared
favorably from the statutory tax rate due to our investments in qualified
municipal securities, tax benefits from our real estate investment trust,
company owned life insurance, state tax credits, net of the effect of certain
non-deductible expenses and the recognition of excess tax benefits related to
stock compensation. The Company anticipates its effective tax rate for 2021 to
be approximately 20.0 percent.

(b) Financial position

Balance sheet

Total assets increased $57.7 million, or 1.8%, from $3.13 billion on December
31, 2021 to $3.19 billion on March 31, 2022. Loans held for investment grew
$81.8 million, or 16.9% annualized, in the first three months of 2022. Excluding
PPP loans, loans held for investment increased $101.8 million, or 21.3%
annualized, for the same period. Loans held for sale increased $23.2 million, or
112.3% annualized, during the first three months of 2022.

Total liabilities increased $68.9 millioni.e. 10.1% annualized, of $2.75 billion on December 31, 2021 for $2.82 billion on March 31, 2022. Deposits increased $71.7 millioni.e. 10.8%.

Our growth in cash, loans and deposits continues to be significantly influenced
by the U.S. government's various stimulus programs and their impact on our
customers and economic uncertainty associated with the COVID-19 pandemic, as
well as inflation and changes in the interest rate environment.

Loans

The composition of loans to March 31, 2022 and December 31, 2021 and the percentage of each classification in relation to total loans are summarized as follows:

                                              March 31, 2022               

December 31, 2021

                                          Amount         Percent         Amount         Percent
Commercial real estate - owner
occupied                                $   231,933           11.3 %   $   209,261           10.6 %
Commercial real estate - non-owner
occupied                                    652,936           31.9 %       616,023           31.3 %
Consumer real estate                        327,416           16.0 %       326,412           16.6 %
Construction and land development           208,513           10.2 %       214,310           10.9 %
Commercial and industrial                   499,719           24.4 %       497,615           25.3 %
Consumer                                     48,790            2.4 %        46,811            2.4 %
Other                                        78,248            3.8 %        55,337            2.8 %
Total loans                             $ 2,047,555          100.0 %   $ 1,965,769          100.0 %




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



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

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Non-performing loans and assets

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

                                                March 31, 2022        December 31, 2021
Non-accrual loans                             $            3,502     $             3,258
Troubled debt restructurings                               1,847                   1,832
Loans past due over 90 days and still
accruing                                                     236                   1,380

Non-performing loans                                       3,502                   3,258
Other real estate owned                                      178                     266
Non-performing assets                                      3,680                   3,524
Non-performing loans to loans held for
investment                                                  0.17 %                  0.17 %
Non-performing assets to total assets                       0.12 %                  0.11 %






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

                                     March 31, 2022       December 31, 2021
Commercial real estate              $              -     $                 -
Consumer real estate                           1,033                   1,086
Construction and land development                 10                      11
Commercial and industrial                        463                     324
Consumer                                          39                      31
Other                                              -                       -
Purchased credit impaired                      1,957                   1,806
Total loans                         $          3,502     $             3,258




(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
maximizing profitability. This is accomplished by balancing changes in demand
for funds with changes in the supply of those funds. Liquidity is provided by
short-term liquid assets that can be converted to cash, investment securities
available-for-sale, various lines of credit available to us, and the ability to
attract funds from external sources, principally deposits.

Our most liquid assets are comprised of cash and due from banks,
interest-bearing deposits in financial institutions, available-for-sale
marketable investment securities and federal funds sold. Interest-bearing
deposits in financial institutions totaled $282.8 million at March 31, 2022,
representing a decrease of $64.2 million from December 31, 2021 as the Company
continues to deploy excess liquidity. The fair value of the available-for-sale
investment portfolio was $460.6 million at March 31, 2022, a slight increase
from December 31, 2021. We pledge portions of our investment securities
portfolio to secure public fund deposits, derivative positions and Federal Home
Loan Bank advances. At March 31, 2022, total investment securities pledged for
these purposes comprised 43% of the estimated fair value of the investment
portfolio, leaving $264.7 million of unpledged securities.

We have a large base of non-maturity customer deposits, defined as demand deposit, savings and money market accounts. To March 31, 2022these deposits totaled $2.4 billion and represented approximately 87% of our total deposits.

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Other sources of funds available to meet daily needs include $154.4 million of
borrowing capacity from the FHLB of Cincinnati, $325.1 million of borrowing
capacity from the Federal Reserve Bank of Atlanta's discount window and federal
funds lines with correspondent banks totaling $145.0 million at March 31, 2022.

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 March
31, 2022, the Bank was able to pay up to $87.9 million in dividends to the
Parent Company without regulatory approval subject to the ongoing capital
requirements of the Bank.

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

(d) Capital Resources

At March 31, 2022, shareholders' equity totaled $368.9 million, a decrease of
$11.2 million from December 31, 2021. The decrease was primarily a result of a
decline in the fair value of available for sale securities included within other
comprehensive income. As of March 31, 2022, the Company and the Bank were
well-capitalized under the regulatory framework for prompt corrective action.

Off-balance sheet arrangements

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

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

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

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

Our off-balance sheet arrangements are summarized in Note 8 to 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 U.S. GAAP ("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 U.S. GAAP, (ii) enable a more complete
understanding of factors and trends affecting the Company's business, and (iii)
allow investors to evaluate the Company's performance in a manner similar to
management, the financial services industry, bank stock analysts and bank
regulators; however, the Company acknowledges that its non-GAAP financial
measures have a number of limitations. As such, you should not view these
disclosures as a substitute for results determined in accordance with U.S. GAAP,
and they are not necessarily comparable to non-GAAP financial measures that
other companies use.

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The following table provides a reconciliation between common tangible equity, common tangible equity and total tangible assets and common tangible equity per share and most directly comparable equity. WE GAAP Financial Measures.

                                                                               December 31,
(dollars in thousands, except share and per share data)    March 31, 2022   

2021

Total equity                                              $        368,917     $     380,094
Less core deposit intangible                                        (6,245 )          (6,691 )
Less goodwill                                                      (41,068 )         (41,068 )
Tangible common equity                                    $        321,604     $     332,335

Total assets                                              $      3,190,749     $   3,133,046
Less core deposit intangible                                        (6,245 )          (6,691 )
Less goodwill                                                      (41,068 )         (41,068 )
Total tangible assets                                     $      3,143,436     $   3,085,287

Total shareholders' equity to total assets                           11.56 %           12.13 %
Total shares of common stock outstanding                        22,195,071  

22 166 129

Book value per share of common stock                      $          16.62     $       17.15
Tangible book value per share of common stock                        14.49             14.99



(f) Recently issued accounting pronouncements

ASU 2016-13, Financial Instruments – Credit Losses

In June 2016, the FASB issued guidance to change the accounting for credit
losses and modify the impairment model for certain debt securities. The
amendments were originally supposed to be effective for the Company for
reporting periods beginning after December 15, 2019 with early adoption
permitted for all organizations for periods beginning after December 15, 2018.
However, in November 2019, the FASB issued ASU 2019-10, Financial Instruments -
Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases
(Topic 842): Effective Dates, which finalizes effective date delays for private
companies, not-for-profit organizations, and certain smaller reporting companies
applying the credit losses standard. The Company is not required to adopt this
standard until January 1, 2023. The Company has established a Current Expected
Credit Loss (CECL) Steering Committee which includes the appropriate members of
management to evaluate the impact this ASU will have on the Company's financial
position, results of operations and financial statement disclosures.
Additionally, the Company selected a third-party vendor to provide allowance for
loan loss software as well as advisory services in developing a new methodology
and a parallel model.

ASU 2019-05 – Applicable to entities that hold financial instruments:

In May 2019, the FASB issued guidance to provide entities with an option to
irrevocably elect the fair value option, applied on an instrument-by-instrument
basis for eligible instruments, upon adoption of ASU 2016-13, Measurement of
Credit Losses on Financial Instruments. The amendments will be effective for the
Company upon adoption of ASU 2016-13 in fiscal year 2023. The Company does not
expect these amendments to have a material effect on its financial statements.

ASU 2020-04 – Applicable to entities under Topic 848, Reference Rate Reform:

In March 2020, the FASB issued guidance which provides temporary optional
guidance to ease the potential burden in accounting for reference rate reform.
The ASU provides optional expedients and exceptions for applying generally
accepted accounting principles to contract modifications and hedging
relationships, subject to meeting certain criteria, that reference LIBOR or
another reference rate expected to be discontinued. It is intended to help
stakeholders during the global market-wide reference rate transition period. In
January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional
expedients and exceptions in Topic 848 for contract modifications and hedge
accounting apply to derivatives that are affected by the discounting transition.
The guidance is effective for all entities as of March 12, 2020 through December
31, 2022. The Company continues to implement its transition plan towards
cessation of LIBOR and the modification of its outstanding financial instruments
with attributes that are either directly or indirectly influenced by LIBOR. The
Company expects to utilize the LIBOR transition relief allowed under ASU 2020-04
and ASU 2021-01, as applicable, and does not expect such adoption to have a
material impact on its accounting and disclosures. The Company will continue to
assess the impact as the reference rate transition approaches June 30, 2023.

(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.

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