10-Q 1 tsc-03312019x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________

FORM 10-Q
___________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
¨
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: 001-35913
___________

TRISTATE CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
___________
Pennsylvania
 
20-4929029
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
One Oxford Centre
301 Grant Street, Suite 2700
Pittsburgh, Pennsylvania 15219
(Address of principal executive offices)
(Zip Code)
 
(412) 304-0304
(Registrant’s telephone number, including area code)
___________

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.    ý Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ý 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.
Large accelerated filer
¨
 
Accelerated filer
ý
Non-accelerated filer
¨
 
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 ý No
___________




Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, no par value
 
TSC
 
Nasdaq Global Select Market
Depositary Shares, Each Representing a 1/40th Interest in a Share of 6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock
 
TSCAP
 
Nasdaq Global Select Market
___________

As of April 30, 2019, there were 29,354,333 shares of the registrant’s common stock, no par value, outstanding.



TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31,
2019
December 31,
2018
 
 
 
ASSETS
 
 
 
 
 
Cash
$
364

$
367

Interest-earning deposits with other institutions
237,203

183,625

Federal funds sold
6,344

5,993

Cash and cash equivalents
243,911

189,985

Debt securities available-for-sale, at fair value
238,722

233,296

Debt securities held-to-maturity, at cost
216,915

196,131

Equity securities, at fair value
11,379

12,661

Federal Home Loan Bank stock
20,071

24,671

Total investment securities
487,087

466,759

Loans and leases held-for-investment
5,336,725

5,132,873

Allowance for loan and lease losses
(14,712
)
(13,208
)
Loans and leases held-for-investment, net
5,322,013

5,119,665

Accrued interest receivable
23,847

20,702

Investment management fees receivable, net
7,894

7,299

Goodwill
41,660

41,660

Intangible assets, net of accumulated amortization of $8,931 and $8,429, respectively
25,701

26,203

Office properties and equipment, net of accumulated depreciation of $12,789 and $12,385, respectively
5,379

5,126

Operating lease right-of-use asset
24,766

—

Bank owned life insurance
68,729

68,309

Prepaid expenses and other assets
93,023

89,947

Total assets
$
6,344,010

$
6,035,655

 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Liabilities:
 
 
Deposits
$
5,337,704

$
5,050,461

Borrowings, net
398,216

404,166

Accrued interest payable on deposits and borrowings
5,797

5,204

Deferred tax liability, net
4,315

3,513

Acquisition earn out liability
—

2,920

Operating lease liability
24,766

—

Other accrued expenses and other liabilities
76,655

90,037

Total liabilities
5,847,453

5,556,301

 
 
 
Shareholders’ Equity:
 
 
Preferred stock, no par value; Shares authorized - 150,000;
Series A shares issued and outstanding - 40,250 and 40,250, respectively
38,468

38,468

Common stock, no par value; Shares authorized - 45,000,000;
Shares issued - 31,386,743 and 30,893,584, respectively;
Shares outstanding - 29,351,833 and 28,878,674, respectively
293,697

293,355

Additional paid-in capital
16,940

15,364

Retained earnings
177,894

164,009

Accumulated other comprehensive income (loss), net
502

(1,331
)
Treasury stock (2,034,910 and 2,014,910 shares, respectively)
(30,944
)
(30,511
)
Total shareholders’ equity
496,557

479,354

Total liabilities and shareholders’ equity
$
6,344,010

$
6,035,655


See accompanying notes to unaudited condensed consolidated financial statements.

4

TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended March 31,
(Dollars in thousands, except per share data)
2019
2018
 
 
 
Interest income:
 
 
Loans and leases
$
57,262

$
39,027

Investments
4,353

1,784

Interest-earning deposits
1,287

605

Total interest income
62,902

41,416

 
 
 
Interest expense:
 
 
Deposits
29,333

13,401

Borrowings
3,197

1,753

Total interest expense
32,530

15,154

Net interest income
30,372

26,262

Provision (credit) for loan and lease losses
(377
)
195

Net interest income after provision for loan and lease losses
30,749

26,067

Non-interest income:
 
 
Investment management fees
9,424

8,908

Service charges on deposits
136

134

Net gain on the sale and call of debt securities
28

5

Swap fees
1,803

1,248

Commitment and other loan fees
531

332

Other income
1,147

462

Total non-interest income
13,069

11,089

Non-interest expense:
 
 
Compensation and employee benefits
16,775

15,468

Premises and occupancy costs
1,270

1,290

Professional fees
995

1,095

FDIC insurance expense
1,421

1,146

General insurance expense
294

247

State capital shares tax
380

427

Travel and entertainment expense
835

646

Intangible amortization expense
502

461

Other operating expenses
4,200

3,070

Total non-interest expense
26,672

23,850

Income before tax
17,146

13,306

Income tax expense
2,582

2,905

Net income
$
14,564

$
10,401

Preferred stock dividends on Series A
679

—

Net income available to common shareholders
$
13,885

$
10,401

 
 
 
Earnings per common share:
 
 
Basic
$
0.50

$
0.38

Diluted
$
0.48

$
0.36


See accompanying notes to unaudited condensed consolidated financial statements.


5

TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
 
 
 
Net income
$
14,564

$
10,401

 
 
 
Other comprehensive income (loss):
 
 
 
 
 
Unrealized holding gains (losses) on debt securities, net of tax expense (benefit) of $766 and $(222), respectively
2,430

(758
)
 
 
 
Reclassification adjustment for gains included in net income on debt securities, net of tax expense of $(4) and $(1), respectively
(13
)
(4
)
 
 
 
Unrealized holding gains (losses) on derivatives, net of tax expense (benefit) of $(44) and $220, respectively
(162
)
722

 
 
 
Reclassification adjustment for gains included in net income on derivatives, net of tax expense of $(139) and $(37), respectively
(422
)
(121
)
 
 
 
Other comprehensive income (loss)
1,833

(161
)
 
 
 
Total comprehensive income
$
16,397

$
10,240


See accompanying notes to unaudited condensed consolidated financial statements.


6

TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands)
Preferred Stock
(Series A)
Common
Stock
Additional
Paid-in-Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss), Net
Treasury Stock
Total Shareholders’ Equity
Balance, December 31, 2017
$
—

$
289,507

$
10,290

$
111,732

$
1,246

$
(23,704
)
$
389,071

Impact of adoption of ASU 2014-09
—

—

—

534

—

—

534

Reclassification for equity securities under ASU 2016-01
—

—

—

(286
)
286

—

—

Reclassification for certain income tax effects under ASU 2018-02
—

—

—

(274
)
274

—

—

Net income
—

—

—

10,401

—

—

10,401

Other comprehensive loss
—

—

—

—

(161
)
—

(161
)
Issuance of preferred stock (net of offering costs of $1,810)
38,440

—

—

—

—

—

38,440

Exercise of stock options
—

1,211

(690
)
—

—

—

521

Purchase of treasury stock
—

—

—

—

—

(575
)
(575
)
Stock-based compensation
—

—

1,998

—

—

—

1,998

Balance, March 31, 2018
$
38,440

$
290,718

$
11,598

$
122,107

$
1,645

$
(24,279
)
$
440,229

 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
38,468

$
293,355

$
15,364

$
164,009

$
(1,331
)
$
(30,511
)
$
479,354

Net income
—

—

—

14,564

—

—

14,564

Other comprehensive income
—

—

—

—

1,833

—

1,833

Preferred stock dividend
—

—

—

(679
)
—

—

(679
)
Exercise of stock options
—

342

(154
)
—

—

—

188

Purchase of treasury stock
—

—

—

—

—

(433
)
(433
)
Stock-based compensation
—

—

1,730

—

—

—

1,730

Balance, March 31, 2019
$
38,468

$
293,697

$
16,940

$
177,894

$
502

$
(30,944
)
$
496,557


See accompanying notes to unaudited condensed consolidated financial statements.


7

TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
Cash flows from operating activities:
 
 
Net income
$
14,564

$
10,401

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
Depreciation and intangible amortization expense
906

842

Amortization of deferred financing costs
51

50

Provision (credit) for loan losses
(377
)
195

Net gain on the sale of loans
—

(19
)
Stock-based compensation expense
1,730

1,998

Net gain on the sale or call of debt securities available-for-sale
(17
)
(2
)
Net gain on the call of debt securities held-to-maturity
(11
)
(3
)
Income from equity securities
(719
)
—

Net amortization (accretion) of premiums and discounts on debt securities
(5
)
234

Decrease (increase) in investment management fees receivable, net
(595
)
194

Increase in accrued interest receivable
(3,145
)
(1,493
)
Increase (decrease) in accrued interest payable
593

(65
)
Bank owned life insurance income
(420
)
(426
)
Decrease in income taxes payable
(488
)
—

Decrease in prepaid income taxes
7,066

12,164

Deferred tax provision
223

582

Decrease in accounts payable and other accrued expenses
(19,323
)
(10,405
)
Other, net
(4,173
)
634

Net cash provided by (used in) operating activities
(4,140
)
14,881

Cash flows from investing activities:
 
 
Purchase of debt securities available-for-sale
(12,425
)
(28,951
)
Purchase of debt securities held-to-maturity
(42,367
)
—

Purchase of equity securities
—

(66
)
Proceeds from the sale of debt securities available-for-sale
—

2,037

Proceeds from the sale of equity securities
2,000

—

Principal repayments and maturities of debt securities available-for-sale
10,202

3,074

Principal repayments and maturities of debt securities held-to-maturity
21,595

895

Investment in low income housing and historic tax credits
(311
)
—

Net redemption (purchase) of Federal Home Loan Bank stock
4,600

(3,000
)
Net increase in loans and leases
(201,971
)
(121,641
)
Proceeds from loan sales
—

3,342

Additions to office properties and equipment
(656
)
(221
)
Net cash used in investing activities
(219,333
)
(144,531
)
Cash flows from financing activities:
 
 
Net increase in deposit accounts
287,243

111,344

Net decrease in Federal Home Loan Bank advances
(5,000
)
(25,000
)
Net decrease in line of credit advances
(1,000
)
(6,200
)
Net proceeds from issuance of preferred stock
—

38,440

Net proceeds from exercise of stock options
188

521

Payment of contingent consideration
(2,920
)
—

Purchase of treasury stock
(433
)
(575
)
Dividends paid on preferred stock
(679
)
—

Net cash provided by financing activities
277,399

118,530

Net change in cash and cash equivalents during the period
53,926

(11,120
)
Cash and cash equivalents at beginning of the period
189,985

156,153

Cash and cash equivalents at end of the period
$
243,911

$
145,033

 
 
 

8

 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
Supplemental disclosure of cash flow information:
 
 
Cash paid (received) during the period for:
 
 
Interest expense
$
31,886

$
15,169

Income taxes
$
(4,219
)
$
(9,841
)
Other non-cash activity:
 
 
Operating lease right-of-use asset
$
24,766

$
—


See accompanying notes to unaudited condensed consolidated financial statements.

9

TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
[1] BASIS OF INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATION
TriState Capital Holdings, Inc. (“we,” “us,” “our,” the “holding company,” the “parent company,” or the “Company”) is a registered bank holding company pursuant to the Bank Holding Company Act of 1956, as amended. The Company has three wholly owned subsidiaries: TriState Capital Bank (the “Bank”), a Pennsylvania-chartered state bank; Chartwell Investment Partners, LLC (“Chartwell”), a registered investment adviser; and Chartwell TSC Securities Corp. (“CTSC Securities”), a registered broker/dealer.

The Bank was established to serve the commercial banking needs of middle-market businesses and private banking needs of high-net-worth individuals. Chartwell provides investment management services primarily to institutional investors, mutual funds and individual investors. CTSC Securities supports marketing efforts for the proprietary investment products provided by Chartwell, including shares of mutual funds advised and/or administered by Chartwell.

The Company and the Bank are subject to regulatory examination by the Federal Deposit Insurance Corporation (“FDIC”), the Pennsylvania Department of Banking and Securities and the Board of Governors of the Federal Reserve System and its Reserve Banks, which we refer to as the Federal Reserve. Chartwell is a registered investment adviser regulated by the Securities and Exchange Commission (“SEC”). CTSC Securities is regulated by the SEC and the Financial Industry Regulatory Authority, Inc. (“FINRA”).

The Bank conducts business through its main office located in Pittsburgh, Pennsylvania, as well as its four additional representative offices in Cleveland, Ohio; Philadelphia, Pennsylvania; Edison, New Jersey; and New York, New York. Chartwell conducts business through its office located in Berwyn, Pennsylvania, and CTSC Securities conducts business through its office located in Pittsburgh, Pennsylvania.

USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of related revenues and expenses during the reporting period. Although our current estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than those anticipated in the estimates, which could materially affect the financial results of our operations and financial condition.

Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan and lease losses, valuation of goodwill and other intangible assets and their evaluation for impairment, and deferred income taxes and their related recoverability, each of which is discussed later in this section.

CONSOLIDATION
Our consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, the Bank, Chartwell and CTSC Securities, after elimination of inter-company accounts and transactions. The accounts of the Bank, in turn, include its wholly owned subsidiary, Meadowood Asset Management, LLC (established in 2011 to hold and manage the foreclosed properties for the Bank), after elimination of inter-company accounts and transactions. The unaudited condensed consolidated financial statements of the Company presented herein have been prepared pursuant to SEC rules for Quarterly Reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP for a full year presentation. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) and disclosures, considered necessary for the fair presentation of the accompanying unaudited condensed consolidated financial statements, have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and the related notes for the fiscal year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the SEC on February 19, 2019.

CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company has defined cash and cash equivalents as cash, interest-earning deposits with other institutions, federal funds sold and short-term investments that have an original maturity of 90 days or less.

BUSINESS COMBINATIONS
The Company accounts for business combinations using the acquisition method of accounting. Under this method of accounting, the acquired company’s net assets are recorded at fair value as of the date of acquisition, and the results of operations of the acquired company are combined with our results from that date forward. Acquisition costs are expensed when incurred. The difference between the purchase price, which includes an initial measurement of any contingent earn out, and the fair value of the net assets

10

acquired (including identified intangibles) is recorded as goodwill in the consolidated statements of financial condition. A change in the initial estimate of any contingent earn out amounts is recorded to non-interest expense in the consolidated statements of income.

INVESTMENT SECURITIES
The Company’s investments are classified as either: (1) held-to-maturity, which are debt securities that the Company intends to hold until maturity and are reported at amortized cost; (2) trading, which are debt securities bought and held principally for the purpose of selling them in the near term and reported at fair value, with unrealized gains and losses included in non-interest income; (3) available-for-sale, which are debt securities not classified as either held-to-maturity or trading securities and reported at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss), on an after-tax basis; or (4) equity securities, which are reported at fair value, with unrealized gains and losses included in non-interest income.

The cost of securities sold is determined on a specific identification basis. Amortization of premiums and accretion of discounts are recorded to interest income on investments over the estimated life of the security utilizing the level yield method. We evaluate impaired investment securities quarterly to determine if impairments are temporary or other-than-temporary. For impaired debt and equity securities, management first determines whether it intends to sell or if it is more likely than not that it will be required to sell the impaired securities. This determination considers current and forecasted liquidity requirements, regulatory and capital requirements, and securities portfolio management. If the Company intends to sell a security with a fair value below amortized cost or if it is more likely than not that it will be required to sell such a security before recovery, an other-than-temporary impairment (“OTTI”) charge is recorded through current period earnings for the full decline in fair value below amortized cost. For debt securities that the Company does not intend to sell or it is more likely than not that it will not be required to sell before recovery, an OTTI charge is recorded through current period earnings for the amount of the valuation decline below amortized cost that is attributable to credit losses. The remaining difference between the security’s fair value and amortized cost (that is, the decline in fair value not attributable to credit losses) is recognized in other comprehensive income (loss), in the consolidated statements of comprehensive income and the shareholders’ equity section of the consolidated statements of financial condition, on an after-tax basis.

FEDERAL HOME LOAN BANK STOCK
The Company is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh. Member institutions are required to invest in FHLB stock. The stock is carried at cost, which approximates its liquidation value, and it is evaluated for impairment based on the ultimate recoverability of the par value. The following matters are considered by management when evaluating the FHLB stock for impairment: the ability of the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; the impact of legislative and regulatory changes on the institution and its customer base; and the Company’s intent and ability to hold its FHLB stock for the foreseeable future. Management believes the Company’s holdings in the FHLB stock were recoverable at par value as of March 31, 2019 and December 31, 2018. Cash and stock dividends are reported as interest income on investments in the consolidated statements of income.

LOANS AND LEASES
Loans and leases held-for-investment are stated at unpaid principal balances, net of deferred loan fees and costs. Loans held-for-sale are stated at the lower of cost or fair value. Interest income on loans is accrued at the contractual rate on the principal amount outstanding and includes the amortization of deferred loan fees and costs. Deferred loan fees and costs are amortized to interest income over the estimated life of the loan, taking into consideration scheduled payments and prepayments.

The Company considers a loan to be a troubled debt restructuring (“TDR”) when there is a concession made to a financially troubled borrower without adequate consideration provided to the Company. Once a loan is deemed to be a TDR, the Company considers whether the loan should be placed on non-accrual status. In assessing accrual status, the Company considers the likelihood that repayment and performance according to the original contractual terms will be achieved, as well as the borrower’s historical payment performance. A loan is designated and reported as a TDR until such loan is either paid off or sold, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is fully expected that the remaining principal and interest will be collected according to the restructured agreement.

The recognition of interest income on a loan is discontinued when, in management’s opinion, it is probable the borrower is unable to meet payments as they become due or when the loan becomes 90 days past due, whichever occurs first, at which time the loan is placed on non-accrual status. All accrued and unpaid interest on such loans is then reversed. The interest ultimately collected is applied to reduce principal if there is doubt about the collectability of principal. If a borrower brings a loan current for which accrued interest has been reversed, then the recognition of interest income on the loan is resumed once the loan has been current for a period of six consecutive months or greater.

The Company is a party to financial instruments with off-balance sheet risk, such as commitments to extend credit, in the normal course of business to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the lending agreement. Commitments generally have fixed expiration

11

dates or other termination clauses (i.e., loans due on demand) and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the unfunded commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis using the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary by the Company upon extension of a commitment, is based on management’s credit evaluation of the borrower.

OTHER REAL ESTATE OWNED
Real estate owned, other than bank premises, is recorded at fair value less estimated selling costs. Fair value is determined based on an independent appraisal. Expenses related to holding the property are charged against earnings when incurred. Depreciation is not recorded on other real estate owned (“OREO”) properties.

ALLOWANCE FOR LOAN AND LEASE LOSSES
The allowance for loan and lease losses is established through provisions for loan and lease losses that are recorded in the consolidated statements of income. Loans and leases are charged off against the allowance for loan and lease losses when management believes that the principal is uncollectible. If, at a later time, amounts are recovered with respect to loans and leases previously charged off, the recovered amount is credited to the allowance for loan and lease losses.

In management’s judgment, the allowance was appropriate to cover probable losses inherent in the loan and lease portfolio as of March 31, 2019 and December 31, 2018. Management’s judgment takes into consideration general economic conditions, diversification and seasoning of the loan portfolio, historic loss experience, identified credit problems, delinquency levels and adequacy of collateral. Although management believes it has used the best information available to it in making such determinations, and that the present allowance for loan and lease losses is adequate, future adjustments to the allowance may be necessary, and net income may be adversely affected if circumstances differ substantially from the assumptions used in determining the level of the allowance. In addition, as an integral part of their periodic examination, certain regulatory agencies review the adequacy of the Bank’s allowance for loan and lease losses and may direct the Bank to make additions to the allowance based on their judgments about information available to them at the time of their examination.

The two components of the allowance for loan and lease losses represent estimates of general reserves based upon Accounting Standards Codification (“ASC”) Topic 450, Contingencies; and specific reserves based upon ASC Topic 310, Receivables. ASC Topic 450 applies to homogeneous loan pools such as commercial loans, consumer lines of credit and residential mortgages that are not individually evaluated for impairment. ASC Topic 310 is applied to commercial and consumer loans that are individually evaluated for impairment.

In management’s opinion, a loan or lease is impaired, based upon current information and events, when it is probable that the loan or lease will not be repaid according to its original contractual terms, including both principal and interest, or if a loan is designated as a TDR. Management performs individual assessments of impaired loans and leases to determine the existence of loss exposure based upon a discounted cash flows method or where a loan is collateral dependent, based upon the fair value of the collateral less estimated selling costs.

In estimating probable loan and lease loss of general reserves, management considers numerous factors, including historical charge-offs and subsequent recoveries. Management also considers qualitative factors that influence our credit quality, such as delinquency and non-performing loan trends, changes in loan underwriting guidelines and credit policies, and the results of internal loan reviews. Finally, management considers the impact of changes in current local and regional economic conditions in the markets that we serve.

Management bases the computation of the allowance for loan and lease losses of general reserves on two factors: the primary factor and the secondary factor. The primary factor is based on the inherent risk identified by management within each of the Company’s three loan portfolios based on the historical loss experience of each loan portfolio in addition to the loss emergence period. Management has developed a methodology that is applied to each of the three primary loan portfolios: private banking loans, commercial and industrial (“C&I”) loans and leases, and commercial real estate (“CRE”) loans. As the loan loss history, mix and risk ratings of each loan portfolio change, the primary factor adjusts accordingly. The allowance for loan and lease losses related to the primary factor is based on our estimates as to probable losses for each loan portfolio. The secondary factor is intended to capture risks related to events and circumstances that management believes have an impact on the performance of the loan portfolio. Although this factor is more subjective in nature, the methodology focuses on internal and external trends in pre-specified categories, or risk factors, and applies a quantitative percentage that drives the secondary factor. There are nine risk factors and each risk factor is assigned a reserve level based on management’s judgment as to the probable impact of each risk factor on each loan portfolio and is monitored on a quarterly basis. As the trend in any risk factor changes, a corresponding change occurs in the reserve associated with each respective risk factor, such that the secondary factor remains current to changes in each loan portfolio.

The Company also maintains a reserve for losses on unfunded commitments. This reserve is reflected as a component of other liabilities and, in management’s judgment, is sufficient to cover probable losses inherent in the loan commitments. Management

12

tracks the level and trends in unused commitments and takes into consideration the same factors as those considered for purposes of the allowance for loan and lease losses on outstanding loans.

INVESTMENT MANAGEMENT FEES
The Company recognizes investment management fee revenue when advisory services are performed. Fees are based on assets under management and are calculated pursuant to individual client contracts. Investment management fees are generally received on a quarterly basis. Certain incremental costs incurred to acquire some of our investment management contracts are deferred and amortized to non-interest expense over the estimated life of the contract.

Investment management fees receivable represent amounts due for contractual investment management services provided to the Company’s clients, primarily institutional investors, mutual funds and individual investors. Management performs credit evaluations of its customers’ financial condition when it is deemed to be necessary, and does not require collateral. The Company provides an allowance for uncollectible accounts based on specifically identified receivables. Bad debt expense is recorded to other non-interest expense on the consolidated statements of income and the allowance for uncollectible accounts is recorded to investment management fees receivable, net on the consolidated statements of financial position. Investment management fees receivable are considered delinquent when payment is not received within contractual terms and are charged off against the allowance for uncollectible accounts when management determines that recovery is unlikely and the Company ceases its collection efforts. There was no bad debt expense recorded for the three months ended March 31, 2019, and no allowance for uncollectible accounts as of March 31, 2019. There was no bad debt expense recorded for the three months ended March 31, 2018, and there was no allowance for uncollectible accounts as of December 31, 2018.

GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized and is subject to at least annual assessments for impairment by applying a fair value based test. The Company reviews goodwill annually and again at any quarter-end if a material event occurs during the quarter that may affect goodwill. If goodwill testing is required, an assessment of qualitative factors can be completed before performing the two-step goodwill impairment test. If an assessment of qualitative factors determines it is more likely than not that the fair value of a reporting unit exceeds its carrying amount, then the two-step goodwill impairment test is not required. Goodwill is evaluated for potential impairment by determining if the fair value has fallen below carrying value.

Other intangible assets represent purchased assets that may lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. The Company has determined that certain of its acquired mutual fund client relationships meet the criteria to be considered indefinite-lived assets because the Company expects both the renewal of these contracts and the cash flows generated by these assets to continue indefinitely. Accordingly, the Company does not amortize these intangible assets, but instead reviews these assets annually or more frequently whenever events or circumstances occur indicating that the recorded indefinite-lived assets may be impaired. Each reporting period, the Company assesses whether events or circumstances have occurred which indicate that the indefinite life criteria are no longer met. If the indefinite life criteria are no longer met, the Company assesses whether the carrying value of these assets exceeds its fair value. If the carrying value exceeds the fair value of the asset, an impairment loss is recorded in an amount equal to any such excess and the assets are reclassified to finite-lived. Other intangible assets that the Company has determined to have finite lives, such as trade name, client lists and non-compete agreements are amortized over their estimated useful lives. These finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from four to 25 years. Finite-lived intangibles are evaluated for impairment on an annual basis or more frequently whenever events or circumstances occur indicating that the carrying amount may not be recoverable.

OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated depreciation. Office properties include furniture, fixtures and leasehold improvements. Equipment includes computer equipment and internal use software. Depreciation is computed utilizing the straight-line method over the estimated useful lives of the related assets, except for leasehold improvements, which are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Estimated useful lives are dependent upon the nature and condition of the asset and range from three to 10 years. Repairs and maintenance are charged to expense as incurred, while improvements that extend the useful life are capitalized and depreciated to non-interest expense over the estimated remaining life of the asset. When the Bank receives an allowance for improvements to be made to one of its leased offices, we record the allowance as a deferred liability and recognize it as a reduction to rent expense over the life of the related lease.

OPERATING LEASES
The Company is a lessee in noncancellable operating leases, primarily for its office spaces and other office equipment. The Company accounts for leases in accordance with ASC Topic 842, “Leases,” and records operating leases as a right-of-use asset and an offsetting lease liability in the consolidated statements of financial condition at the present value of the unpaid lease payments. The Company generally uses its incremental borrowing rate as the discount rate for operating leases. The right-of-use asset is initially measured

13

at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

BANK OWNED LIFE INSURANCE
Bank owned life insurance (“BOLI”) policies on certain officers and employees are recorded at net cash surrender value on the consolidated statements of financial condition. Upon termination of a BOLI policy, the Company receives the cash surrender value. BOLI benefits are payable to the Company upon the death of the insured. Changes in net cash surrender value are recognized as non-interest income in the consolidated statements of income.

DEPOSITS
Deposits are stated at principal outstanding. Interest on deposits is accrued and charged to interest expense daily and is paid or credited in accordance with the terms of the respective accounts.

BORROWINGS
The Company records FHLB advances, line of credit borrowings and subordinated notes payable at their principal amount net of debt issuance costs. Interest expense is recognized based on the coupon rate of the obligations. Costs associated with the acquisition of subordinated notes payable are amortized to interest expense over the expected term of the borrowing.

INCOME TAXES
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities with regard to a change in tax rates is recognized in income in the period that includes the enactment date. Management assesses all available evidence to determine the amount of deferred tax assets that are more likely than not to be realized. The available evidence used in connection with the assessments includes taxable income in prior periods, projected taxable income, potential tax planning strategies and projected reversals of deferred tax items. These assessments involve a degree of subjectivity and may undergo significant change. Changes to the evidence used in the assessments could have a material adverse effect on the Company’s results of operations in the period in which they occur. The Company considers uncertain tax positions that it has taken or expects to take on a tax return. Any interest and penalties related to unrecognized tax benefits would be recognized in income tax expense in the consolidated statements of income.

EARNINGS PER COMMON SHARE
Earnings per common share (“EPS”) is computed using the two-class method, where net income is reduced by dividends declared on our preferred stock to derive net income available to common shareholders. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period, excluding non-vested restricted stock. Diluted EPS reflects the potential dilution upon the exercise of stock options and the vesting of restricted stock awards granted utilizing the treasury stock method.

STOCK-BASED COMPENSATION
Compensation cost for all stock-based payments is based on the estimated grant-date fair value. The value of the portion of the award that is ultimately expected to vest is included in compensation and employee benefits expense in the consolidated statements of income and recorded as a component of additional paid-in capital. Compensation expense for all awards is recognized on a straight-line basis over the requisite service period for the entire grant.

DERIVATIVES AND HEDGING ACTIVITIES
All derivatives are evaluated at inception as to whether or not they are hedging or non-hedging activities. All derivatives are recognized as either assets or liabilities on the consolidated statements of financial condition and measured at fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item. For derivatives designated as cash flow hedges, changes in fair value of the effective portion of the cash flow hedges are reported in accumulated other comprehensive income (loss). When the cash flows associated with the hedged item are realized, the gain or loss included in accumulated other comprehensive income (loss) is recognized in the consolidated statements of income. The Company also has interest rate derivative positions that are not designated as hedging instruments. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.


14

FAIR VALUE MEASUREMENT
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in a principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date, using assumptions market participants would use when pricing such an asset or liability. An orderly transaction assumes exposure to the market for a customary period for marketing activities prior to the measurement date and not a forced liquidation or distressed sale. Fair value measurement and disclosure guidance provides a three-level hierarchy that prioritizes the inputs of valuation techniques used to measure fair value into three broad categories:

•
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
•
Level 2 – Observable inputs such as quoted prices for similar assets and liabilities in active markets, quoted prices for similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
•
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

Fair value must be recorded for certain assets and liabilities every reporting period on a recurring basis or, under certain circumstances, on a non-recurring basis.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains and the non-credit component of unrealized losses on the Company’s debt securities available-for-sale are included in accumulated other comprehensive income (loss), net of applicable income taxes. Also included in accumulated other comprehensive income (loss) is the remaining unamortized balance of the unrealized holding gains (non-credit losses) net of applicable income taxes, that existed on the transfer date for debt securities reclassified into the held-to-maturity category from the available-for-sale category.

Unrealized holding gains (losses) on the effective portion of the Company’s cash flow hedge derivatives are included in accumulated other comprehensive income (loss), net of applicable income taxes, which will be reclassified to interest expense as interest payments are made on the Company’s debt.

Income tax effects in accumulated other comprehensive income (loss) are released as investments are sold or matured and as liabilities are extinguished.

TREASURY STOCK
The repurchase of the Company’s common stock is recorded at cost. At the time of reissuance, the treasury stock account is reduced using the average cost method. Gains and losses on the reissuance of common stock are recorded in additional paid-in capital, to the extent additional paid-in capital from any previous net gains on treasury share transactions exists. Any net deficiency is charged to retained earnings.

RECENT ACCOUNTING DEVELOPMENTS
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820),” which aims to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing fair value measurement disclosures. This ASU is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2019. Retrospective adoption is required except for the following changes, which are required to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption: (1) changes in unrealized gains and losses included in other comprehensive income for Level 3 instruments; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements; and (3) the narrative description of measurement uncertainty. Early adoption is permitted. An entity may early adopt any eliminated or modified disclosure requirements and delay adoption of the additional disclosure requirements until their effective date. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.

In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The changes are effective for public business entities, for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.


15

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. The changes are effective for public business entities that are SEC filers for annual and interim periods in fiscal years beginning after December 15, 2019. Management created a formal working group, consisting of key stakeholders from finance, risk and credit, to govern the implementation of this standard. We are in the process of designing current expected credit loss estimation methodologies and collecting data to be able to comply with this standard. We have engaged a third party software provider to assist during our design and implementation phase. The Company is currently evaluating the impact this standard will have on our results of operations, financial position and related disclosure.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which, among other things, requires lessees to recognize most leases on the balance sheet and disclose key information about leasing arrangements. This will result in an increase to a company’s reported assets and liabilities. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 supersedes Topic 840, “Leases” and replaces it with Topic 842 “Leases.” This standard is effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for annual and interim periods in fiscal years beginning after December 15, 2018. This standard provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company’s operating leases primarily relate to our six office spaces and other office equipment. We have completed our assessment of this standard and have recognized a lease liability and related right-of-use asset on our balance sheet, with no impact on our income statement. The Company adopted this standard and all standards related to Topic 842 on January 1, 2019, and elected to apply it as of the beginning of the period of adoption. Of the optional practical expedients available under ASU 2016-02, all have been adopted except for the hindsight practical expedient.

RECLASSIFICATION
Certain items previously reported have been reclassified to conform with the current year’s reporting presentation and are considered immaterial.

[2] INVESTMENT SECURITIES

Debt securities available-for-sale and held-to-maturity were comprised of the following:
 
March 31, 2019
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Debt securities available-for-sale:
 
 
 
 
Corporate bonds
$
157,923

$
1,244

$
721

$
158,446

Trust preferred securities
17,996

—

518

17,478

Agency collateralized mortgage obligations
32,438

18

50

32,406

Agency mortgage-backed securities
20,194

123

183

20,134

Agency debentures
10,000

258

—

10,258

Total debt securities available-for-sale
238,551

1,643

1,472

238,722

Debt securities held-to-maturity:
 
 
 
 
Corporate bonds
27,182

236

41

27,377

Agency debentures
163,861

745

2

164,604

Municipal bonds
21,475

102

2

21,575

Agency mortgage-backed securities
4,397

183

—

4,580

Total debt securities held-to-maturity
216,915

1,266

45

218,136

Total debt securities
$
455,466

$
2,909

$
1,517

$
456,858



16

 
December 31, 2018
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Debt securities available-for-sale:
 
 
 
 
Corporate bonds
$
152,691

$
33

$
1,661

$
151,063

Trust preferred securities
17,964

—

1,115

16,849

Non-agency collateralized loan obligations
393

—

3

390

Agency collateralized mortgage obligations
33,680

42

4

33,718

Agency mortgage-backed securities
21,575

37

348

21,264

Agency debentures
9,994

67

49

10,012

Total debt securities available-for-sale
236,297

179

3,180

233,296

Debt securities held-to-maturity:
 
 
 
 
Corporate bonds
27,184

353

22

27,515

Agency debentures
141,575

472

34

142,013

Municipal bonds
22,963

11

61

22,913

Agency mortgage-backed securities
4,409

—

27

4,382

Total debt securities held-to-maturity
196,131

836

144

196,823

Total debt securities
$
432,428

$
1,015

$
3,324

$
430,119


Interest income on investment securities was as follows:
 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
Taxable interest income
$
3,872

$
1,414

Non-taxable interest income
104

110

Dividend income
377

260

Total interest income on investment securities
$
4,353

$
1,784


As of March 31, 2019, the contractual maturities of the debt securities were:
 
March 31, 2019
 
Available-for-Sale
 
Held-to-Maturity
(Dollars in thousands)
Amortized
Cost
Estimated
Fair Value
 
Amortized
Cost
Estimated
Fair Value
Due in one year or less
$
13,425

$
13,415

 
$
2,124

$
2,127

Due from one to five years
111,769

112,899

 
38,495

38,595

Due from five to ten years
42,663

42,016

 
140,515

141,032

Due after ten years
70,694

70,392

 
35,781

36,382

Total debt securities
$
238,551

$
238,722

 
$
216,915

$
218,136


The $70.4 million fair value of debt securities available-for-sale with a contractual maturity due after 10 years as of March 31, 2019, included $42.5 million, or 60.4%, that are floating-rate securities. The $140.5 million amortized cost of debt securities held-to-maturity with a contractual maturity due from five to 10 years as of March 31, 2019, included $20.8 million that have call provisions within the next four years that would either mature, if called, or become floating-rate securities after the call date.

Prepayments may shorten the contractual lives of the collateralized mortgage obligations, mortgage-backed securities and collateralized loan obligations.


17

Proceeds from the sale and call of debt securities available-for-sale and held-to-maturity and related gross realized gains and losses were:
 
Available-for-Sale
 
Held-to-Maturity
 
Three Months Ended March 31,
 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
 
2019
2018
Proceeds from sales
$
—

$
2,037

 
$
—

$
—

Proceeds from calls
1,224

—

 
21,460

895

Total proceeds
$
1,224

$
2,037


$
21,460

$
895

 
 
 
 
 
 
Gross realized gains
$
17

$
2

 
$
11

$
3

Gross realized losses
—

—

 
—

—

Net realized gains
$
17

$
2

 
$
11

$
3


Debt securities available-for-sale of $3.2 million as of March 31, 2019, were held in safekeeping at the FHLB and were included in the calculation of borrowing capacity.

The following tables show the fair value and gross unrealized losses on temporarily impaired debt securities available-for-sale and held-to-maturity, by investment category and length of time that the individual securities have been in a continuous unrealized loss position as of March 31, 2019 and December 31, 2018, respectively:
 
March 31, 2019
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair value
Unrealized losses
 
Fair value
Unrealized losses
 
Fair value
Unrealized losses
Debt securities available-for-sale:
 
 
 
 
 
 
 
 
Corporate bonds
$
14,862

$
19

 
$
38,191

$
702

 
$
53,053

$
721

Trust preferred securities
17,478

518

 
—

—

 
17,478

518

Agency collateralized mortgage obligations
24,099

40

 
2,944

10

 
27,043

50

Agency mortgage-backed securities
2,832

31

 
8,361

152

 
11,193

183

Total debt securities available-for-sale
59,271

608

 
49,496

864

 
108,767

1,472

Debt securities held-to-maturity:
 
 
 
 
 
 
 
 
Corporate bonds
2,978

22

 
980

19

 
3,958

41

Agency debentures
—

—

 
1,984

2

 
1,984

2

Municipal bonds
—

—

 
891

2

 
891

2

Total debt securities held-to-maturity
2,978

22

 
3,855

23

 
6,833

45

Total temporarily impaired debt securities (1)
$
62,249

$
630

 
$
53,351

$
887

 
$
115,600

$
1,517

(1) 
The number of investment positions with unrealized losses totaled 37 for available-for-sale securities and 6 for held-to-maturity securities.


18

 
December 31, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair value
Unrealized losses
 
Fair value
Unrealized losses
 
Fair value
Unrealized losses
Debt securities available-for-sale:
 
 
 
 
 
 
 
 
Corporate bonds
$
110,200

$
789

 
$
22,954

$
872

 
$
133,154

$
1,661

Trust preferred securities
16,849

1,115

 
—

—

 
16,849

1,115

Non-agency collateralized loan obligations
—

—

 
390

3

 
390

3

Agency collateralized mortgage obligations
—

—

 
3,015

4

 
3,015

4

Agency mortgage-backed securities
5,851

51

 
8,690

297

 
14,541

348

Agency debentures
3,487

49

 
—

—

 
3,487

49

Total debt securities available-for-sale
136,387

2,004

 
35,049

1,176

 
171,436

3,180

Debt securities held-to-maturity:
 
 
 
 
 
 
 
 
Corporate bonds
3,978

22

 
—

—

 
3,978

22

Agency debentures
1,952

34

 
—

—

 
1,952

34

Municipal bonds
16,105

51

 
2,110

10

 
18,215

61

Agency mortgage-backed securities
4,382

27

 
—

—

 
4,382

27

Total debt securities held-to-maturity
26,417

134

 
2,110

10

 
28,527

144

Total temporarily impaired debt securities (1)
$
162,804

$
2,138

 
$
37,159

$
1,186

 
$
199,963

$
3,324

(1) 
The number of investment positions with unrealized losses totaled 78 for available-for-sale securities and 29 for held-to-maturity securities.

The changes in the fair values of our municipal bonds, agency debentures, agency collateralized mortgage obligations and agency mortgage-backed securities are primarily the result of interest rate fluctuations. To assess for credit impairment, management evaluates the underlying issuer’s financial performance and the related credit rating information through a review of publicly available financial statements and other publicly available information. This most recent review did not identify any issues related to the ultimate repayment of principal and interest on these debt securities. In addition, the Company has the ability and intent to hold debt securities in an unrealized loss position until recovery of their amortized cost. Based on this, the Company considers all of the unrealized losses to be temporary.

There were no outstanding debt securities classified as trading as of March 31, 2019 and December 31, 2018.

Equity securities consist of mutual funds investing in short-duration, corporate bonds and mid-cap value equities. There were $11.4 million and $12.7 million in equity securities outstanding as of March 31, 2019 and December 31, 2018, respectively.

There was $20.1 million and $24.7 million in FHLB stock outstanding as of March 31, 2019 and December 31, 2018, respectively.

[3] LOANS AND LEASES

The Company generates loans through the private banking and middle-market banking channels. The private banking channel primarily includes loans made to high-net-worth individuals, trusts and businesses that are typically secured by cash, marketable securities or cash value life insurance. The middle-market banking channel consists of our C&I loan and lease portfolio and CRE loan portfolio, which serve middle-market businesses and real estate developers in our primary markets.

Loans and leases held-for-investment were comprised of the following:
 
March 31, 2019
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Loans and leases held-for-investment, before deferred fees and costs
$
2,976,451

$
859,480

$
1,496,493

$
5,332,424

Deferred loan costs (fees)
5,522

2,925

(4,146
)
4,301

Loans and leases held-for-investment, net of deferred fees and costs
2,981,973

862,405

1,492,347

5,336,725

Allowance for loan and lease losses
(2,001
)
(7,041
)
(5,670
)
(14,712
)
Loans and leases held-for-investment, net
$
2,979,972

$
855,364

$
1,486,677

$
5,322,013



19

 
December 31, 2018
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Loans and leases held-for-investment, before deferred fees and costs
$
2,864,094

$
781,836

$
1,482,148

$
5,128,078

Deferred loan costs (fees)
5,449

3,484

(4,138
)
4,795

Loans and leases held-for-investment, net of deferred fees and costs
2,869,543

785,320

1,478,010

5,132,873

Allowance for loan and lease losses
(1,942
)
(5,764
)
(5,502
)
(13,208
)
Loans and leases held-for-investment, net
$
2,867,601

$
779,556

$
1,472,508

$
5,119,665


The Company’s customers have unused loan commitments based on the availability of eligible collateral or other terms and conditions under their loan agreements. Often these commitments are not fully utilized and therefore the total amount does not necessarily represent future cash requirements. The amount of unfunded commitments, including standby letters of credit, as of March 31, 2019 and December 31, 2018, was $3.88 billion and $3.54 billion, respectively. The interest rate for each commitment is based on the prevailing market conditions at the time of funding. The reserve for losses on unfunded commitments was $550,000 and $542,000 as of March 31, 2019 and December 31, 2018, respectively, which includes reserves for probable losses on unfunded loan commitments, including standby letters of credit and also risk participations.

The total unfunded commitments above included loans in the process of origination totaling approximately $58.0 million and $64.4 million as of March 31, 2019 and December 31, 2018, respectively, which extend over varying periods of time.

The Company issues standby letters of credit in the normal course of business. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. The Company would be required to perform under a standby letter of credit when drawn upon by the guaranteed party in the case of non-performance by the Company’s customer. Collateral may be obtained based on management’s credit assessment of the customer. The amount of unfunded commitments related to standby letters of credit as of March 31, 2019 and December 31, 2018, included in the total unfunded commitments above, was $71.3 million and $60.0 million, respectively. Should the Company be obligated to perform under any standby letters of credit, the Company will seek repayment from the customer for amounts paid. During the three months ended March 31, 2019 and 2018, there were draws on standby letters of credit totaling $48,000 and $2.1 million, respectively, which were repaid by the borrowers. Most of these commitments are expected to expire without being drawn upon and the total amount does not necessarily represent future cash requirements. The potential liability for losses on standby letters of credit was included in the reserve for losses on unfunded commitments.

The Company has entered into risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which we are a participant. The risk participation agreements provide credit protection to the financial institution counterparties should the customers fail to perform on their interest rate derivative contracts. The potential liability for outstanding obligations was included in the reserve for losses on unfunded commitments.

[4] ALLOWANCE FOR LOAN AND LEASE LOSSES

Our allowance for loan and lease losses represents our estimate of probable loan losses inherent in the loan portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan portfolio. Additions are made to the allowance through both periodic provisions recorded in the consolidated statements of income and recoveries of losses previously incurred. Reductions to the allowance occur as loans are charged off or when the credit history of any of the Company’s three loan portfolios (private banking loans, C&I loans and leases, and CRE loans) improves. Management evaluates the adequacy of the allowance quarterly, and in doing so relies on various factors including, but not limited to, assessment of historical loss experience, delinquency and non-accrual trends, portfolio growth, underlying collateral coverage and current economic conditions. This evaluation is subjective and requires material estimates that may change over time. In addition, management evaluates the overall methodology for the allowance for loan and lease losses on an annual basis. The calculation of the allowance for loan and lease losses takes into consideration the inherent risk identified within each of the Company’s three loan portfolios. In addition, management takes into account the historical loss experience of each loan portfolio to ensure that the allowance for loan and lease losses is sufficient to cover probable losses inherent in such loan portfolios. Refer to Note 1, Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements for more details on the Company’s allowance for loan and lease losses policy.

The following discusses key characteristics and risks within each primary loan portfolio:

Private Banking Loans
Our private banking lending activities are conducted on a national basis. This loan portfolio primarily includes loans made to high-net-worth individuals, trusts and businesses that are typically secured by cash, marketable securities or cash value life insurance.

20

This portfolio also has some loans that are secured by residential real estate or other financial assets, lines of credit and unsecured loans. The primary sources of repayment for these loans are the income and/or assets of the borrower.

The underlying collateral is the most important indicator of risk for this loan portfolio. The overall lower risk profile of this portfolio is driven by loans secured by cash, marketable securities or cash value life insurance, which were 96.9% and 96.7% of total private banking loans as of March 31, 2019 and December 31, 2018, respectively.

Middle-Market Banking: Commercial and Industrial Loans and Leases
This loan portfolio primarily includes loans and leases made to financial and other service companies or manufacturers generally for the purposes of financing production, operating capacity, accounts receivable, inventory, equipment, acquisitions and recapitalizations. Cash flow from the borrower’s operations is the primary source of repayment for these loans and leases, except for certain commercial loans that are secured by marketable securities.

The borrower’s industry and local and regional economic conditions are important indicators of risk for this loan portfolio. Collateral for these types of loans at times does not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. C&I loans collateralized by marketable securities are treated the same as private banking loans for purposes of the allowance for loan and lease loss calculation.

Middle-Market Banking: Commercial Real Estate Loans
This loan portfolio includes loans secured by commercial purpose real estate, including both owner-occupied properties and investment properties for various purposes including office, industrial, multifamily, retail, hospitality, healthcare and self-storage. The primary source of repayment for CRE loans secured by owner-occupied properties is cash flow from the borrower’s operations. Individual project cash flows, global cash flows and liquidity from the developer, or the sale of the property are the primary sources of repayment for CRE loans secured by investment properties. Also included are commercial construction loans to finance the construction or renovation of structures as well as to finance the acquisition and development of raw land for various purposes. The increased level of risk for these loans is generally confined to the construction period. If there are problems the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal.

The underlying purpose and collateral of the loans are important indicators of risk for this loan portfolio. Additional risks exist and are dependent on several factors such as the condition of the local and regional economies, whether or not the project is owner-occupied, the type of project, and the experience and resources of the developer.

On a monthly basis, management monitors various credit quality indicators for the loan portfolio, including delinquency, non-performing status, changes in risk ratings, changes in the underlying performance of the borrowers and other relevant factors. On a daily basis, the Company monitors the collateral of loans secured by cash, marketable securities or cash value life insurance within the private banking portfolio, which further reduces the risk profile of that portfolio. Refer to Note 1, Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements for the Company’s policy for determining past due status of loans.

Loan risk ratings are assigned based upon the creditworthiness of the borrower and the quality of the collateral for loans secured by marketable securities. Loan risk ratings are reviewed on an ongoing basis according to internal policies. Loans within the pass rating are believed to have a lower risk of loss than loans that are risk rated as special mention, substandard or doubtful, which are believed to have an increasing risk of loss. Our internal risk ratings are consistent with regulatory guidance. Management also monitors the loan portfolio through a formal periodic review process. All non-pass rated loans are reviewed monthly and higher risk-rated loans within the pass category are reviewed three times a year.

The Company’s risk ratings are consistent with regulatory guidance and are as follows:

Pass – The loan is currently performing in accordance with its contractual terms.

Special Mention – A special mention loan has potential weaknesses that warrant management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects or in our credit position at some future date. Economic and market conditions beyond the customer’s control may in the future necessitate this classification.

Substandard – A substandard loan is not adequately protected by the net worth and/or paying capacity of the obligor or by the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.


21

Doubtful – A doubtful loan has all the weaknesses inherent in a loan categorized as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

The following tables present the recorded investment in loans by credit quality indicator:
 
March 31, 2019
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Pass
$
2,979,766

$
837,922

$
1,489,947

$
5,307,635

Special mention
—

19,361

2,400

21,761

Substandard
2,207

5,122

—

7,329

Loans and leases held-for-investment
$
2,981,973

$
862,405

$
1,492,347

$
5,336,725


 
December 31, 2018
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Pass
$
2,864,774

$
767,540

$
1,475,793

$
5,108,107

Special mention
2,532

12,636

2,217

17,385

Substandard
2,237

5,144

—

7,381

Loans and leases held-for-investment
$
2,869,543

$
785,320

$
1,478,010

$
5,132,873


Changes in the allowance for loan and lease losses were as follows for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31, 2019
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Balance, beginning of period
$
1,942

$
5,764

$
5,502

$
13,208

Provision (credit) for loan losses
59

(604
)
168

(377
)
Charge-offs
—

—

—

—

Recoveries
—

1,881

—

1,881

Balance, end of period
$
2,001

$
7,041

$
5,670

$
14,712


 
Three Months Ended March 31, 2018
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Balance, beginning of period
$
1,577

$
8,043

$
4,797

$
14,417

Provision (credit) for loan losses
(21
)
217

(1
)
195

Charge-offs
—

—

—

—

Recoveries
—

206

—

206

Balance, end of period
$
1,556

$
8,466

$
4,796

$
14,818


The following tables present the age analysis of past due loans and leases segregated by class:
 
March 31, 2019
(Dollars in thousands)
30-59 Days Past Due
60-89 Days Past Due
90 Days or More Past Due
Total Past Due
Current
Total
Private banking
$
13

$
—

$
2,173

$
2,186

$
2,979,787

$
2,981,973

Commercial and industrial
—

—

—

—

862,405

862,405

Commercial real estate
—

—

—

—

1,492,347

1,492,347

Loans and leases held-for-investment
$
13

$
—

$
2,173

$
2,186

$
5,334,539

$
5,336,725



22

 
December 31, 2018
(Dollars in thousands)
30-59 Days Past Due
60-89 Days Past Due
90 Days or More Past Due
Total Past Due
Current
Total
Private banking
$
1,040

$
173

$
2,000

$
3,213

$
2,866,330

$
2,869,543

Commercial and industrial
—

—

—

—

785,320

785,320

Commercial real estate
—

—

—

—

1,478,010

1,478,010

Loans and leases held-for-investment
$
1,040

$
173

$
2,000

$
3,213

$
5,129,660

$
5,132,873


Non-Performing and Impaired Loans

Management monitors the delinquency status of the Company’s loan portfolio on a monthly basis. Loans are considered non-performing when interest and principal are 90 days or more past due or management has determined that it is probable the borrower is unable to meet payments as they become due. The risk of loss is generally highest for non-performing loans.

Management determines loans to be impaired when, based upon current information and events, it is probable that the loan will not be repaid according to the original contractual terms of the loan agreement, including both principal and interest, or if a loan is designated as a TDR. Refer to Note 1, Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements for the Company’s policy on evaluating loans for impairment and interest income.

The following tables present the Company’s investment in loans considered to be impaired and related information on those impaired loans:
 
As of and for the Three Months Ended March 31, 2019
(Dollars in thousands)
Recorded Investment
Unpaid Principal Balance
Related Allowance
Average Recorded Investment
Interest Income Recognized
With a related allowance recorded:
 
 
 
 
 
Private banking
$
2,207

$
2,393

$
557

$
2,216

$
—

Commercial and industrial
5,122

5,191

1,200

5,122

—

Commercial real estate
—

—

—

—

—

Total with a related allowance recorded
7,329

7,584

1,757

7,338

—

Without a related allowance recorded:
 
 
 
 
 
Private banking
—

—

—

—

—

Commercial and industrial
—

—

—

—

—

Commercial real estate
—

—

—

—

—

Total without a related allowance recorded
—

—

—

—

—

Total:
 
 
 
 
 
Private banking
2,207

2,393

557

2,216

—

Commercial and industrial
5,122

5,191

1,200

5,122

—

Commercial real estate
—

—

—

—

—

Total
$
7,329

$
7,584

$
1,757

$
7,338

$
—



23

 
As of and for the Twelve Months Ended December 31, 2018
(Dollars in thousands)
Recorded Investment
Unpaid Principal Balance
Related Allowance
Average Recorded Investment
Interest Income Recognized
With a related allowance recorded:
 
 
 
 
 
Private banking
$
2,237

$
2,421

$
437

$
2,293

$
—

Commercial and industrial
—

—

—

—

—

Commercial real estate
—

—

—

—

—

Total with a related allowance recorded
2,237

2,421

437

2,293

—

Without a related allowance recorded:
 
 
 
 
 
Private banking
—

—

—

—

—

Commercial and industrial
—

—

—

—

—

Commercial real estate
—

—

—

—

—

Total without a related allowance recorded
—

—

—

—

—

Total:
 
 
 
 
 
Private banking
2,237

2,421

437

2,293

—

Commercial and industrial
—

—

—

—

—

Commercial real estate
—

—

—

—

—

Total
$
2,237

$
2,421

$
437

$
2,293

$
—


Impaired loans as of March 31, 2019 and December 31, 2018, were $7.3 million and $2.2 million, respectively. There was no interest income recognized on impaired loans that were also on non-accrual status for the three months ended March 31, 2019, and the twelve months ended December 31, 2018. As of March 31, 2019 and December 31, 2018, there were no loans 90 days or more past due and still accruing interest income.

Impaired loans were evaluated using a discounted cash flow method or based on the fair value of the collateral less estimated selling costs. Based on those evaluations there were specific reserves totaling $1.8 million and $437,000 as of March 31, 2019 and December 31, 2018, respectively.

The following tables present the allowance for loan and lease losses and recorded investment in loans by class:
 
March 31, 2019
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Allowance for loan and lease losses:
 
 
 
 
Individually evaluated for impairment
$
557

$
1,200

$
—

$
1,757

Collectively evaluated for impairment
1,444

5,841

5,670

12,955

Total allowance for loan and lease losses
$
2,001

$
7,041

$
5,670

$
14,712

Loans and leases held-for-investment:
 
 
 
 
Individually evaluated for impairment
$
2,207

$
5,122

$
—

$
7,329

Collectively evaluated for impairment
2,979,766

857,283

1,492,347

5,329,396

Loans and leases held-for-investment
$
2,981,973

$
862,405

$
1,492,347

$
5,336,725



24

 
December 31, 2018
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Allowance for loan and lease losses:
 
 
 
 
Individually evaluated for impairment
$
437

$
—

$
—

$
437

Collectively evaluated for impairment
1,505

5,764

5,502

12,771

Total allowance for loan and lease losses
$
1,942

$
5,764

$
5,502

$
13,208

Loans and leases held-for-investment:
 
 
 
 
Individually evaluated for impairment
$
2,237

$
—

$
—

$
2,237

Collectively evaluated for impairment
2,867,306

785,320

1,478,010

5,130,636

Loans and leases held-for-investment
$
2,869,543

$
785,320

$
1,478,010

$
5,132,873


Troubled Debt Restructuring

The following table provides additional information on the Company’s loans designated as troubled debt restructurings:
(Dollars in thousands)
March 31,
2019
December 31,
2018
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
 
 
Performing loans accruing interest
$
—

$
—

Non-accrual loans
207

237

Total troubled debt restructurings
$
207

$
237


There were no unused commitments on loans designated as troubled debt restructurings as of March 31, 2019 and December 31, 2018.

The modifications made to restructured loans typically consist of an extension of the payment terms or the deferral of principal payments. There were no loans modified as TDRs within 12 months of the corresponding balance sheet date with a payment default during the three months ended March 31, 2019, and a loan totaling $196,000 modified as a TDR within 12 months of the corresponding balance sheet date with a payment default during the three months ended March 31, 2018.

There were no loans newly designated as TDRs during the three months ended March 31, 2019 and 2018.

Other Real Estate Owned

As of March 31, 2019 and December 31, 2018, the balance of the other real estate owned portfolio was $3.1 million and $3.4 million, respectively. There were no residential mortgage loans in the process of foreclosure as of March 31, 2019.

[5] OPERATING LEASES

The Company has noncancellable operating leases primarily for its six office spaces and other office equipment that expire between 2019 and 2036. These leases generally contain renewal options for periods ranging from one to five years. Because the Company is not reasonably certain that it will exercise these renewal options, the options are not considered in determining the lease terms, and associated potential option payments are excluded from lease payments. The Company’s leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. Payments due under the lease contracts include fixed payments and, for many of the Company’s leases, variable payments. Variable payments for office space leases include the Company’s proportionate share of the building’s property taxes, insurance and common area maintenance. For office equipment leases for which the Company has elected not to separate lease and nonlease components, maintenance services are provided by the lessor at a fixed cost and are included in the fixed lease payments for the single, combined lease component.

Operating lease cost for the three months ended March 31, 2019, was $368,000. As of March 31, 2019, the weighted average remaining lease term was 14.3 years and the weighted average discount rate as 4.25%.


25

Maturities of lease liabilities under noncancellable leases as of March 31, 2019, are as follows:
(Dollars in thousands)
Amount
March 31,
 
2020
$
2,510

2021
2,539

2022
2,793

2023
2,292

2024
2,174

Thereafter
21,664

Total undiscounted lease payments
$
33,972

Imputed interest
(9,206
)
Operating lease liability
$
24,766


[6] DEPOSITS

As of March 31, 2019 and December 31, 2018, deposits were comprised of the following:
 
Interest Rate
Range
 
Weighted Average
Interest Rate
 
Balance
(Dollars in thousands)
March 31,
2019
 
March 31,
2019
December 31,
2018
 
March 31,
2019
December 31,
2018
Demand and savings accounts:
 
 
 
 
 
 
 
Noninterest-bearing checking accounts
—
 
—
—
 
$
292,188

$
258,268

Interest-bearing checking accounts
0.05 to 3.04%
 
2.31%
2.29%
 
895,948

778,131

Money market deposit accounts
0.10 to 3.25%
 
2.53%
2.45%
 
2,760,147

2,781,870

Total demand and savings accounts
 
 
 
 
 
3,948,283

3,818,269

Certificates of deposit
1.29 to 3.25%
 
2.63%
2.39%
 
1,389,421

1,232,192

Total deposits
 
 
 
 
 
$
5,337,704

$
5,050,461

Weighted average rate on interest-bearing accounts
 
 
2.52%
2.41%
 
 
 

As of March 31, 2019 and December 31, 2018, the Bank had total brokered deposits of $618.1 million and $641.4 million, respectively. Reciprocal deposits through Certificate of Deposit Account Registry Service® (“CDARS®”) and Insured Cash Sweep® (“ICS®”) totaled $799.5 million and $565.3 million as of March 31, 2019 and December 31, 2018, respectively, and were considered non-brokered.

As of March 31, 2019 and December 31, 2018, certificates of deposit with balances of $100,000 or more, excluding brokered and reciprocal deposits, totaled $631.0 million and $569.8 million, respectively. As of March 31, 2019 and December 31, 2018, certificates of deposit with balances of $250,000 or more, excluding brokered and reciprocal deposits, totaled $282.1 million and $230.0 million.

The contractual maturity of certificates of deposit was as follows:
(Dollars in thousands)
March 31,
2019
December 31,
2018
12 months or less
$
1,096,823

$
992,468

12 months to 24 months
237,847

181,456

24 months to 36 months
54,751

58,268

Total
$
1,389,421

$
1,232,192



26

Interest expense on deposits was as follows:
 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
Interest-bearing checking accounts
$
4,542

$
1,621

Money market deposit accounts
16,540

8,113

Certificates of deposit
8,251

3,667

Total interest expense on deposits
$
29,333

$
13,401


[7] BORROWINGS

As of March 31, 2019 and December 31, 2018, borrowings were comprised of the following:
 
March 31, 2019
 
December 31, 2018
(Dollars in thousands)
Interest Rate
Ending Balance
Maturity Date
 
Interest Rate
Ending Balance
Maturity Date
FHLB borrowings:
 
 
 
 
 
 
 
FHLB line of credit
2.70%
$
140,000

5/1/2019
 
2.62%
$
250,000

5/1/2019
Issued 3/29/2019
2.73%
100,000

7/1/2019
 

—


Issued 3/29/2019
2.70%
70,000

4/1/2019
 

—


Issued 1/8/2019
2.73%
50,000

4/8/2019
 

—


Issued 12/31/2018

—


 
2.65%
65,000

1/2/2019
Issued 10/10/2018

—


 
2.54%
50,000

1/8/2019
Line of credit borrowings
5.48%
3,250

10/17/2019
 
5.47%
4,250

9/28/2019
Subordinated notes payable (net of debt issuance costs of $34 and $84)
5.75%
34,966

7/1/2019
 
5.75%
34,916

7/1/2019
Total borrowings, net
 
$
398,216

 
 
 
$
404,166

 

The Bank’s FHLB borrowing capacity is based on the collateral value of certain securities held in safekeeping at the FHLB and loans pledged to the FHLB. The Bank submits a quarterly Qualified Collateral Report (“QCR”) to the FHLB to update the value of the loans pledged. As of March 31, 2019, the Bank’s borrowing capacity is based on the information provided in the December 31, 2018, QCR filing. As of March 31, 2019, the Bank had securities held in safekeeping at the FHLB with a fair value of $3.2 million, combined with pledged loans of $1.18 billion, for a gross borrowing capacity of $841.3 million, of which $360.0 million was outstanding in advances. As of December 31, 2018, there was $365.0 million outstanding in advances from the FHLB. When the Bank borrows from the FHLB, interest is charged at the FHLB’s posted rates at the time of the borrowing.

The Bank maintains an unsecured line of credit of $10.0 million with M&T Bank and an unsecured line of credit of $20.0 million with Texas Capital Bank. As of March 31, 2019 and December 31, 2018, there were no outstanding borrowings under these lines of credit and they are available to the Bank at the lenders’ discretion. In addition, the Bank maintains an $8.0 million unsecured line of credit with PNC Bank for private label credit card facilities for certain commercial clients of the Bank.

The holding company maintains an unsecured line of credit of $50.0 million with Texas Capital Bank. As of March 31, 2019 and December 31, 2018, there was $3.3 million and $4.3 million outstanding under this line of credit, respectively.

Interest expense on borrowings was as follows:
 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
FHLB borrowings
$
2,585

$
1,147

Line of credit borrowings
58

52

Subordinated notes payable
554

554

Total interest expense on borrowings
$
3,197

$
1,753



27

[8] STOCK TRANSACTIONS

In March 2018, the Company completed the issuance and sale of a registered, underwritten public offering of 1,610,000 depositary shares, each representing a 1/40th interest in a share of its 6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, no par value (the “Series A Preferred Stock”), with a liquidation preference of $1,000 per share (equivalent to $25 per depository share). The Company received net proceeds of $38.5 million from the sale of 40,250 shares of its Series A Preferred Stock (equivalent to 1,610,000 depositary shares), after deducting underwriting discounts, commissions and direct offering expenses. The preferred stock provides Tier 1 capital for the holding company under federal regulatory capital rules.

When, as, and if declared by the board of directors (the “Board”) of the Company, dividends will be payable on the Series A Preferred Stock from the date of issuance to, but excluding April 1, 2023, at a rate of 6.75% per annum, payable quarterly, in arrears, and from and including April 1, 2023, dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 398.5 basis points per annum, payable quarterly, in arrears. The Company may redeem the Series A Preferred Stock at its option, subject to regulatory approval, on or after April 1, 2023, as described in the prospectus supplement relating to the offering filed with the SEC on March 19, 2018.

During the three months ended March 31, 2019, the Company paid dividends of $679,000, or $0.42 per depositary share, on its Series A Preferred Stock.

Under authorization by the Board, the Company was permitted to repurchase its common stock up to prescribed amounts, of which $1.8 million remained available as of March 31, 2019. The Board also authorized the Company to utilize some of the share repurchase program authorizations to cancel certain options to purchase shares of its common stock granted by the Company. During the three months ended March 31, 2019, the Company repurchased a total of 20,000 shares for approximately $433,000, at an average cost of $21.65 per share, which are held as treasury stock. During the three months ended March 31, 2018, the Company repurchased a total of 24,200 shares for approximately $575,000, at an average cost of $23.76 per share, which are held as treasury stock.

The tables below show the changes in the Company’s preferred and common shares outstanding during the periods indicated:
 
Number of
Preferred Shares
(Series A) Outstanding
Number of
Common Shares
Outstanding
Balance, December 31, 2017
—

28,591,101

Issuance of preferred stock
40,250

—

Issuance of restricted common stock
—

359,613

Forfeitures of restricted common stock
—

(2,000
)
Exercise of stock options
—

51,700

Purchase of treasury stock
—

(24,200
)
Balance, March 31, 2018
40,250

28,976,214

 
 
 
Balance, December 31, 2018
40,250

28,878,674

Issuance of restricted common stock
—

538,703

Forfeitures of restricted common stock
—

(61,474
)
Exercise of stock options
—

15,930

Purchase of treasury stock
—

(20,000
)
Balance, March 31, 2019
40,250

29,351,833


[9] REGULATORY CAPITAL

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.


28

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the tables below) of Common Equity Tier 1 (“CET 1”), Tier 1 and Total risk-based capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). As of March 31, 2019 and December 31, 2018, TriState Capital Holdings, Inc. and TriState Capital Bank exceeded all capital adequacy requirements to which they were subjected.

Financial depository institutions are categorized as well capitalized if they meet minimum capital ratios as set forth in the tables below. The Bank exceeded the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since the filing of the most recent Call Report that management believes have changed the Bank’s capital, as presented in the tables below.

The Basel III regulatory capital framework (the “Basel III”), which began phasing in on January 1, 2015, has replaced the regulatory capital rules for the Company and the Bank. The Basel III final rules required new minimum capital ratio standards, established a new CET 1 to total risk-weighted assets ratio, subjected banking organizations to certain limitations on capital distributions and discretionary bonus payments, and established a new standardized approach for risk weightings.

The final rules subject a banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of risk-based capital ratios in an amount greater than 2.5% of its total risk-weighted assets. The implementation of the capital conservation buffer began on January 1, 2016, at 0.625%, and was phased in ratably over a four-year period until it reached 2.5% on January 1, 2019. As of March 31, 2019 and December 31, 2018, the capital conservation buffer was 2.5% and 1.875%, respectively, in addition to the minimum capital adequacy levels shown in the tables below. Thus, both the Company and the Bank were above the levels required to avoid limitations on capital distributions and discretionary bonus payments.

The following tables set forth certain information concerning the Company’s and the Bank’s regulatory capital as of March 31, 2019 and December 31, 2018:
 
March 31, 2019
 
Actual
 
For Capital Adequacy Purposes
 
To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)
Amount
Ratio
 
Amount
Ratio
 
Amount
Ratio
Total risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
444,937

11.26
%
 
$
316,146

8.00
%
 
 N/A

N/A

Bank
$
454,670

11.57
%
 
$
314,293

8.00
%
 
$
392,866

10.00
%
Tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
431,428

10.92
%
 
$
237,110

6.00
%
 
 N/A

N/A

Bank
$
439,408

11.18
%
 
$
235,720

6.00
%
 
$
314,293

8.00
%
Common equity tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
394,213

9.98
%
 
$
177,832

4.50
%
 
 N/A

N/A

Bank
$
439,408

11.18
%
 
$
176,790

4.50
%
 
$
255,363

6.50
%
Tier 1 leverage ratio
 
 
 
 
 
 
 
 
Company
$
431,428

7.13
%
 
$
242,001

4.00
%
 
 N/A

N/A

Bank
$
439,408

7.29
%
 
$
241,042

4.00
%
 
$
301,303

5.00
%


29

 
December 31, 2018
 
Actual
 
For Capital Adequacy Purposes
 
To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)
Amount
Ratio
 
Amount
Ratio
 
Amount
Ratio
Total risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
426,066

10.86
%
 
$
313,789

8.00
%
 
 N/A

N/A

Bank
$
437,849

11.25
%
 
$
311,497

8.00
%
 
$
389,371

10.00
%
Tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
414,808

10.58
%
 
$
235,342

6.00
%
 
 N/A

N/A

Bank
$
424,418

10.90
%
 
$
233,622

6.00
%
 
$
311,497

8.00
%
Common equity tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
378,117

9.64
%
 
$
176,506

4.50
%
 
 N/A

N/A

Bank
$
424,418

10.90
%
 
$
175,217

4.50
%
 
$
253,091

6.50
%
Tier 1 leverage ratio
 
 
 
 
 
 
 
 
Company
$
414,808

7.28
%
 
$
227,851

4.00
%
 
 N/A

N/A

Bank
$
424,418

7.49
%
 
$
226,762

4.00
%
 
$
283,453

5.00
%

[10] EARNINGS PER COMMON SHARE

The computation of basic and diluted earnings per common share for the periods presented was as follows:
 
Three Months Ended March 31,
(Dollars in thousands, except per share data)
2019
2018
 
 
 
Net income available to common shareholders
$
13,885

$
10,401

Weighted average common shares outstanding:
 
 
Basic
27,832,839

27,594,691

Restricted stock - dilutive
538,711

642,789

Stock options - dilutive
332,086

473,626

Diluted
28,703,636

28,711,106

 
 
 
Earnings per common share:
 
 
Basic
$
0.50

$
0.38

Diluted
$
0.48

$
0.36

 
Three Months Ended March 31,
 
2019
2018
Anti-dilutive shares (1)
146,579

34,188

(1) 
Includes stock options and/or restricted stock not considered for the calculation of diluted EPS as their inclusion would have been anti-dilutive.

[11] DERIVATIVES AND HEDGING ACTIVITY

RISK MANAGEMENT OBJECTIVE OF USING DERIVATIVES

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments related to certain of the Company’s FHLB borrowings. The Company also has derivatives that are a result of a service the Company provides to certain qualifying customers while at the same time the Company enters into an offsetting derivative transaction in order to eliminate its interest rate risk exposure resulting from such transactions.


30

FAIR VALUES OF DERIVATIVE INSTRUMENTS ON THE STATEMENTS OF FINANCIAL CONDITION

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the unaudited condensed consolidated statements of financial condition as of March 31, 2019 and December 31, 2018:
 
Asset Derivatives
 
Liability Derivatives
 
as of March 31, 2019
 
as of March 31, 2019
(Dollars in thousands)
Balance Sheet Location
Fair Value
 
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate products
Other assets
$
668

 
Other liabilities
$
—

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate products
Other assets
32,342

 
Other liabilities
32,351

 
 
 
 
 
 
Total
Other assets
$
33,010

 
Other liabilities
$
32,351


 
Asset Derivatives
 
Liability Derivatives
 
as of December 31, 2018
 
as of December 31, 2018
(Dollars in thousands)
Balance Sheet Location
Fair Value
 
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate products
Other assets
$
1,384

 
Other liabilities
$
—

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate products
Other assets
25,523

 
Other liabilities
25,518

 
 
 
 
 
 
Total
Other assets
$
26,907

 
Other liabilities
$
25,518


The following tables show the impact legally enforceable master netting agreements had on the Company’s derivative financial instruments as of March 31, 2019 and December 31, 2018:
 
Offsetting of Derivative Assets
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Assets
presented in the Statement of Financial Position
 
Gross Amounts Not Offset in the Statement of Financial Position
 
Net Amount
 
 
 
 
 
(Dollars in thousands)
 
 
 
Financial Instruments
 
Cash Collateral Received
 
March 31, 2019
$
33,010

 
$
—

 
$
33,010

 
$
(5,659
)
 
$
—

 
$
27,351

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
$
26,907

 
$
—

 
$
26,907

 
$
(9,587
)
 
$
—

 
$
17,320


 
Offsetting of Derivative Liabilities
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Statement of Financial Position
 
Net Amounts of Liabilities
presented in the Statement of Financial Position
 
Gross Amounts Not Offset in the Statement of Financial Position
 
Net Amount
 
 
 
 
 
(Dollars in thousands)
 
 
 
Financial Instruments
 
Cash Collateral Posted
 
March 31, 2019
$
32,351

 
$
—

 
$
32,351

 
$
(5,659
)
 
$
(21,565
)
 
$
5,127

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
$
25,518

 
$
—

 
$
25,518

 
$
(9,587
)
 
$
(3,941
)
 
$
11,990


CASH FLOW HEDGES OF INTEREST RATE RISK

The Company’s objectives in using certain interest rate derivatives are to add stability to net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. The Company has entered into derivative contracts to hedge the variable cash flows associated with certain FHLB borrowings. These interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in

31

exchange for the Company effectively making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company’s cash flow hedge derivatives did not have any hedge ineffectiveness recognized in earnings during the three months ended March 31, 2019.

Characteristics of the Company’s interest rate derivative transactions designated as cash flow hedges of interest rate risk as of March 31, 2019, were as follows:
(Dollars in thousands)
Notional
Amount
Estimated Increase/(Decrease) to Interest Expense in the Next Twelve Months
Maturity Date
Remaining Term
(in Months)
Interest rate products:
 
 
 
 
Issued 6/29/2016
$
100,000

$
(445
)
7/1/2019
3
Issued 1/8/2018
50,000

(145
)
1/8/2021
21
Total
$
150,000

$
(590
)
 
 

The tables below present the effective portion of the Company’s cash flow hedge instruments in the unaudited condensed consolidated statements of income and accumulated other comprehensive income (loss):
 
 
 
Three Months Ended March 31,
 
Three Months Ended March 31,
(Dollars in thousands)
 
 
2019
2018
 
2019
2018
Derivatives designated as hedging instruments:
Location of Gain (Loss) Recognized in Income on Derivatives
 
Realized Gain (Loss) Recognized in Income on Derivatives
 
Unrealized Gain (Loss) Recognized in Accumulated Other Comprehensive Income on Derivatives
Interest rate products
Interest expense
 
$
561

$
158

 
$
(206
)
$
942


NON-DESIGNATED HEDGES

The Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate derivatives with its commercial banking customers to facilitate their respective risk management strategies. Those derivatives are simultaneously and economically hedged by offsetting derivatives that the Company executes with a third party, such that the Company eliminates its interest rate exposure resulting from such transactions. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of March 31, 2019, the Company had derivative transactions with an aggregate notional amount of $2.21 billion related to this program.

The table below presents the effect of the Company’s non-designated hedge instruments in the unaudited condensed consolidated statements of income:
 
 
 
Three Months Ended March 31,
(Dollars in thousands)
 
 
2019
2018
Derivatives not designated as hedging instruments:
Location of Gain (Loss) Recognized in Income on Derivatives
 
Amount of Gain (Loss) Recognized in Income on Derivatives
Interest rate products
Non-interest income
 
$
(20
)
$
25


CREDIT-RISK-RELATED CONTINGENT FEATURES

The Company has agreements with each of its derivative counterparties that contain a provision where, if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

The Company has agreements with certain of its derivative counterparties that contain a provision where, if either the Company or the counterparty fails to maintain its status as a well/adequately capitalized institution, then the Company or the counterparty could be required to terminate any outstanding derivative positions and settle its obligations under the agreement.

32


As of March 31, 2019, the termination value of derivatives for which we had master netting arrangements with the counterparty and in a net liability position was $21.6 million, including accrued interest. As of March 31, 2019, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $24.4 million. If the Company had breached any of these provisions as of March 31, 2019, it could have been required to settle its obligations under the agreements at their termination value.

[12] DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates of financial instruments are based on the present value of expected future cash flows, quoted market prices of similar financial instruments, if available, and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions and risk assumptions used. Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realized in an immediate settlement of instruments. Accordingly, the aggregate fair value amounts presented below do not represent the underlying value of the Company.

FAIR VALUE MEASUREMENTS

In accordance with U.S. GAAP, the Company must account for certain financial assets and liabilities at fair value on a recurring and non-recurring basis. The Company utilizes a three-level fair value hierarchy of valuation techniques to estimate the fair value of its financial assets and liabilities based on whether the inputs to those valuation techniques are observable or unobservable. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within multiple levels of the fair value hierarchy, the lowest level input that has a significant impact on fair value measurement is used.

Financial assets and liabilities are categorized based upon the following characteristics or inputs to the valuation techniques:

•
Level 1 – Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in actively traded markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.
•
Level 2 – Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets or liabilities that are actively traded. Level 2 also includes pricing models in which the inputs are corroborated by market data, for example, matrix pricing.
•
Level 3 – Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include assumptions of a source independent of the reporting entity or the reporting entity’s own assumptions that are supported by little or no market activity or observable inputs.

The Company is responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value. The Company performs due diligence to understand the inputs used or how the data was calculated or derived and corroborates the reasonableness of external inputs in the valuation process.


33

RECURRING FAIR VALUE MEASUREMENTS

The following tables represent assets and liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018:
 
March 31, 2019
(Dollars in thousands)
Level 1
Level 2
Level 3
Total Assets /
Liabilities
at Fair Value
Financial assets:
 
 
 
 
Debt securities available-for-sale:
 
 
 
 
Corporate bonds
$
—

$
158,446

$
—

$
158,446

Trust preferred securities
—

17,478

—

17,478

Agency collateralized mortgage obligations
—

32,406

—

32,406

Agency mortgage-backed securities
—

20,134

—

20,134

Agency debentures
—

10,258

—

10,258

Equity securities
11,379

—

—

11,379

Interest rate swaps
—

33,010

—

33,010

Total financial assets
11,379

271,732

—

283,111

 
 
 
 
 
Financial liabilities:
 
 
 
 
Interest rate swaps
—

32,351

—

32,351

Acquisition earn out liability
—

—

—

—

Total financial liabilities
$
—

$
32,351

$
—

$
32,351


 
December 31, 2018
(Dollars in thousands)
Level 1
Level 2
Level 3
Total Assets /
Liabilities
at Fair Value
Financial assets:
 
 
 
 
Debt securities available-for-sale:
 
 
 
 
Corporate bonds
$
—

$
151,063

$
—

$
151,063

Trust preferred securities
—

16,849

—

16,849

Non-agency collateralized loan obligations
—

390

—

390

Agency collateralized mortgage obligations
—

33,718

—

33,718

Agency mortgage-backed securities
—

21,264

—

21,264

Agency debentures
—

10,012

—

10,012

Equity securities
12,661

—

—

12,661

Interest rate swaps
—

26,907

—

26,907

Total financial assets
12,661

260,203

—

272,864

 
 
 
 
 
Financial liabilities:
 
 
 
 
Interest rate swaps
—

25,518

—

25,518

Acquisition earn out liability
—

—

2,920

2,920

Total financial liabilities
$
—

$
25,518

$
2,920

$
28,438


INVESTMENT SECURITIES
Generally, debt securities are valued using pricing for similar securities, recently executed transactions, and other pricing models utilizing observable inputs and therefore are classified as Level 2. Equity securities (including mutual funds) are classified as Level 1 because these securities are in actively traded markets.

INTEREST RATE SWAPS
The fair value of interest rate swaps is estimated using inputs that are observable or that can be corroborated by observable market data and therefore are classified as Level 2. These fair value estimations include primarily market observable inputs such as the forward LIBOR swap curve.


34

ACQUISITION EARN OUT LIABILITY
The fair value of the Columbia Partners, L.L.C. Investment Management (“Columbia”) acquisition earn out liability was estimated based on management’s estimate of the projected annualized run-rate revenue of Columbia at December 31, 2018, and therefore are classified as Level 3. The earn out liability was fully paid in the three months ended March 31, 2019, and there is no remaining earn out liability.

NON-RECURRING FAIR VALUE MEASUREMENTS

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

The following tables represent the balances of assets measured at fair value on a non-recurring basis as of March 31, 2019 and December 31, 2018:
 
March 31, 2019
(Dollars in thousands)
Level 1
Level 2
Level 3
Total Assets
at Fair Value
Loans measured for impairment, net
$
—

$
—

$
5,572

$
5,572

Other real estate owned
—

—

3,124

3,124

Total assets
$
—

$
—

$
8,696

$
8,696


 
December 31, 2018
(Dollars in thousands)
Level 1
Level 2
Level 3
Total Assets
at Fair Value
Loans measured for impairment, net
$
—

$
—

$
1,800

$
1,800

Other real estate owned
—

—

3,424

3,424

Total assets
$
—

$
—

$
5,224

$
5,224


As of March 31, 2019 and December 31, 2018, the Company recorded $1.8 million and $437,000, respectively, of specific reserves to allowance for loan and lease losses as a result of adjusting the fair value of impaired loans.

IMPAIRED LOANS
A loan is considered impaired when management determines it is probable that all of the principal and interest due under the original terms of the loan may not be collected or if a loan is designated as a TDR. Impairment is measured based on a discounted cash flow of ongoing operations, discounted at the loan’s original effective interest rate, or a calculation of the fair value of the underlying collateral less estimated selling costs. Our policy is to obtain appraisals on collateral supporting impaired loans on an annual basis, unless circumstances dictate a shorter time frame. Appraisals are reduced by estimated costs to sell the collateral, and, under certain circumstances, additional factors that may arise and cause us to believe our recoverable value may be less than the independent appraised value. Accordingly, impaired loans are classified as Level 3. The Company measures impairment on all loans as part of the allowance for loan and lease losses.

OTHER REAL ESTATE OWNED
OREO is comprised of property acquired through foreclosure or voluntarily conveyed by borrowers. These assets are recorded on the date acquired at fair value, less estimated disposition costs, with the fair value being determined by appraisal. Our policy is to obtain appraisals on collateral supporting OREO on an annual basis, unless circumstances dictate a shorter time frame. Appraisals are reduced by estimated costs to sell the collateral and, under certain circumstances, additional factors that may arise and cause us to believe our recoverable value may be less than the independent appraised value. Accordingly, OREO is classified as Level 3.


35

LEVEL 3 VALUATION

The following tables present additional quantitative information about assets measured at fair value on a recurring and non-recurring basis and for which we have utilized Level 3 inputs to determine fair value as of March 31, 2019 and December 31, 2018:
 
March 31, 2019
(Dollars in thousands)
Fair Value
 
Valuation Techniques (1)
 
Significant Unobservable Inputs
 
Weighted Average Discount Rate
Loans measured for impairment, net
$
5,572

 
Collateral
 
Appraisal value or liquidation analysis and discount due to salability conditions
 
63%
 
 
 
 
 
 
 
 
Other real estate owned
$
3,124

 
Collateral
 
Appraisal value and discount due to salability conditions
 
18%
(1) 
Fair value is generally determined through independent appraisals or liquidation analysis of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow of ongoing operations if the loan is not collateral dependent.
 
December 31, 2018
(Dollars in thousands)
Fair Value
 
Valuation Techniques (1)
 
Significant Unobservable Inputs
 
Weighted Average Multiple/
Discount Rate
Acquisition earn out liability
$
2,920

 
Income approach
 
Run-rate revenue multiple; client retention
 
1.6 times
 
 
 
 
 
 
 
 
Loans measured for impairment, net
$
1,800

 
Collateral
 
Appraisal value and discount due to salability conditions
 
16%
 
 
 
 
 
 
 
 
Other real estate owned
$
3,424

 
Collateral
 
Appraisal value and discount due to salability conditions
 
10%
(1) 
Fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow of ongoing operations if the loan is not collateral dependent.


36

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table summarizes of the carrying amounts and estimated fair values of financial instruments:
 
 
 
March 31, 2019
 
December 31, 2018
(Dollars in thousands)
Fair Value
Level
 
Carrying
Amount
Estimated
Fair Value
 
Carrying
Amount
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
1
 
$
243,911

$
243,911

 
$
189,985

$
189,985

Debt securities available-for-sale
2
 
238,722

238,722

 
233,296

233,296

Debt securities held-to-maturity
2
 
216,915

218,136

 
196,131

196,823

Equity securities
1
 
11,379

11,379

 
12,661

12,661

Federal Home Loan Bank stock
2
 
20,071

20,071

 
24,671

24,671

Loans and leases held-for-investment, net
3
 
5,322,013

5,323,241

 
5,119,665

5,119,562

Accrued interest receivable
2
 
23,847

23,847

 
20,702

20,702

Investment management fees receivable, net
2
 
7,894

7,894

 
7,299

7,299

Bank owned life insurance
2
 
68,729

68,729

 
68,309

68,309

Other real estate owned
3
 
3,124

3,124

 
3,424

3,424

Interest rate swaps
2
 
33,010

33,010

 
26,907

26,907

 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
Deposits
2
 
$
5,337,704

$
5,342,816

 
$
5,050,461

$
5,048,079

Borrowings, net
2
 
398,216

398,174

 
404,166

404,084

Acquisition earn out liability
3
 
—

—

 
2,920

2,920

Interest rate swaps
2
 
32,351

32,351

 
25,518

25,518


During the three months ended March 31, 2019 and 2018, there were no transfers between fair value Levels 1, 2 or 3.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of March 31, 2019 and December 31, 2018:

CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value.

INVESTMENT SECURITIES
The fair values of debt securities available-for-sale, debt securities held-to-maturity, debt securities trading and equity securities are based on quoted market prices for the same or similar securities, recently executed transactions and pricing models.

FEDERAL HOME LOAN BANK STOCK
The carrying value of our FHLB stock, which is carried at cost, approximates fair value.

LOANS AND LEASES HELD-FOR-INVESTMENT
The fair value of loans and leases held-for-investment is estimated by discounting the future cash flows using market rates (utilizing both unobservable and certain observable inputs when applicable) at which similar loans would be made to borrowers with similar credit ratings over the estimated remaining maturities. Impaired loans are generally valued at the fair value of the associated collateral.

ACCRUED INTEREST RECEIVABLE
The carrying amount approximates fair value.

INVESTMENT MANAGEMENT FEES RECEIVABLE
The carrying amount approximates fair value.

BANK OWNED LIFE INSURANCE
The fair value of the general account BOLI is based on the insurance contract net cash surrender value.

OTHER REAL ESTATE OWNED
OREO is recorded at fair value, less estimated disposition costs, with the fair value being determined by appraisal.


37

DEPOSITS
The fair value of demand deposits is the amount payable on demand as of the reporting date, i.e., their carrying amounts. The fair value of fixed maturity deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

BORROWINGS
The fair value of borrowings is calculated by discounting scheduled cash flows through the estimated maturity using period end market rates for borrowings of similar remaining maturities.

ACQUISITION EARN OUT LIABILITY
The carrying amount of the Columbia acquisition earn out liability approximates fair value.

INTEREST RATE SWAPS
The fair value of interest rate swaps is estimated through the assistance of an independent third party and compared to the fair value determined by the swap counterparty to establish reasonableness.

OFF-BALANCE SHEET INSTRUMENTS
Fair values for the Company’s off-balance sheet instruments, which consist of lending commitments, standby letters of credit and risk participation agreements related to interest rate swap agreements, 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. Management believes that the fair value of these off-balance sheet instruments is not significant.

[13] CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables show the changes in accumulated other comprehensive income (loss) net of tax, for the periods presented:
 
Three Months Ended March 31,
 
2019
 
2018
(Dollars in thousands)
Debt Securities
Derivatives
Total
 
Debt Securities
Derivatives
Total
Balance, beginning of period
$
(2,363
)
$
1,032

$
(1,331
)
 
$
172

$
1,074

$
1,246

Change in unrealized holding gains (losses)
2,430

(162
)
2,268

 
(758
)
722

(36
)
Gains reclassified from other comprehensive income
(13
)
(422
)
(435
)
 
(4
)
(121
)
(125
)
Reclassification for equity securities under ASU 2016-01
—

—

—

 
286

—

286

Reclassification for certain income tax effects under ASU 2018-02
—

—

—

 
39

235

274

Net other comprehensive income (loss)
2,417

(584
)
1,833

 
(437
)
836

399

Balance, end of period
$
54

$
448

$
502

 
$
(265
)
$
1,910

$
1,645


[14] CONTINGENT LIABILITIES

The Company is not aware of any material unasserted claims. In the opinion of management, there are no potential claims that would have a material adverse effect on the Company’s financial position, liquidity or results of operations.

[15] SEGMENTS

The Company operates two reportable segments: Bank and Investment Management.

•
The Bank segment provides commercial banking services to middle-market businesses and private banking services to high-net-worth individuals through the Bank subsidiary.

•
The Investment Management segment provides advisory and sub-advisory investment management services primarily to institutional investors, mutual funds and individual investors through the Chartwell subsidiary. It also supports marketing efforts for Chartwell’s proprietary investment products through the CTSC Securities subsidiary.

The following tables provide financial information for the two segments of the Company as of and for the periods indicated. The information provided under the caption “Parent and Other” represents general operating activity of the Company not considered to be a

38

reportable segment, which includes parent company activity as well as eliminations and adjustments that are necessary for purposes of reconciliation to the consolidated amounts.
(Dollars in thousands)
March 31,
2019
December 31,
2018
Assets:
 
Bank
$
6,254,361

$
5,947,165

Investment management
90,517

92,894

Parent and other
(868
)
(4,404
)
Total assets
$
6,344,010

$
6,035,655


 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
(Dollars in thousands)
Bank
Investment
Management
Parent
and Other
Consolidated
 
Bank
Investment
Management
Parent
and Other
Consolidated
Income statement data:
 
 
 
Interest income
$
62,830

$
—

$
72

$
62,902

 
$
41,350

$
—

$
66

$
41,416

Interest expense
31,919

—

611

32,530

 
14,549

—

605

15,154

Net interest income (loss)
30,911

—

(539
)
30,372

 
26,801

—

(539
)
26,262

Provision (credit) for loan and lease losses
(377
)
—

—

(377
)
 
195

—

—

195

Net interest income (loss) after provision for loan and lease losses
31,288

—

(539
)
30,749

 
26,606

—

(539
)
26,067

Non-interest income:
 
 
 
 
 
 
 
 
 
Investment management fees
—

9,533

(109
)
9,424

 
—

8,963

(55
)
8,908

Net gain on the sale and call of debt securities
28

—

—

28

 
5

—

—

5

Other non-interest income
2,877

21

719

3,617

 
2,176

—

—

2,176

Total non-interest income
2,905

9,554

610

13,069

 
2,181

8,963

(55
)
11,089

Non-interest expense:
 
 
 
 
 
 
 
 
 
Intangible amortization expense
—

502

—

502

 
—

461

—

461

Other non-interest expense
19,021

7,058

91

26,170

 
15,786

7,573

30

23,389

Total non-interest expense
19,021

7,560

91

26,672

 
15,786

8,034

30

23,850

Income (loss) before tax
15,172

1,994

(20
)
17,146

 
13,001

929

(624
)
13,306

Income tax expense (benefit)
2,024

563

(5
)
2,582

 
2,854

227

(176
)
2,905

Net income (loss)
$
13,148

$
1,431

$
(15
)
$
14,564

 
$
10,147

$
702

$
(448
)
$
10,401


[16] SUBSEQUENT EVENT

On April 15, 2019, the Company’s Board declared a dividend payable of approximately $679,000, or $0.42 per depositary share, on the Company’s Series A Preferred Stock, which is payable on July 1, 2019, to preferred shareholders of record as of the close of business on June 14, 2019.


39

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section presents management’s perspective on our financial condition and results of operations and highlights material changes to our financial condition and results of operations as of and for the three months ended March 31, 2019. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes contained in Item 1 of this quarterly report and our consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections titled “Cautionary Note Regarding Forward-Looking Statements” below and “Item 1A. Risk Factors.”

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, 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, as well as our goals and objectives for future operations, financial and business trends, business prospects and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. These statements are often, but not always, made through the use of words or phrases such as “achieve,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “maintain,” “may,” “opportunity,” “outlook,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “sustain,” “target,” “trend,” “will,” “will likely result,” and “would,” or the negative version of those words or other comparable 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, and beliefs of assumptions made by management, many of which, by their nature, are inherently uncertain. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. 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 change over time and are difficult to predict, including, but not limited to, the following:

•
our ability to prudently manage our growth and execute our strategy, including the successful integration of past and future acquisitions, our ability to fully realize the cost savings and other benefits of our acquisitions, manage risks related to business disruption following those acquisitions, and customer disintermediation;
•
deterioration of our asset quality;
•
possible loan and lease losses and changes in the value of collateral securing our loans;
•
possible changes in the speed of loan prepayments by customers and loan origination or sales volumes;
•
business and economic conditions generally and in the financial services industry, nationally and within our local market area;
•
our ability to maintain important deposit customer relationships, our reputation and otherwise avoid liquidity risks;
•
changes in management personnel;
•
volatility and direction of market interest rates;
•
our ability to provide investment management performance competitive with our peers and benchmarks;
•
operational risks associated with our business, including cyber-security related risks;
•
increased competition in the financial services industry, particularly from regional and national institutions;
•
negative perceptions or publicity with respect to any products or services we offer;
•
adverse judgments or other resolution of pending and future legal proceedings, and cost incurred in defending such proceedings;
•
changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters;
•
our ability to comply with applicable capital and liquidity requirements, including our ability to generate liquidity internally or raise capital on favorable terms;

40

•
regulatory limits on our ability to receive dividends from our subsidiaries and pay dividends to shareholders;
•
further government intervention in the U.S. financial system;
•
natural disasters and adverse weather, acts of terrorism, cyber-attacks, an outbreak of hostilities or other international or domestic calamities, and other matters beyond our control; and
•
other factors that are discussed in the section entitled “Risk Factors,” in our Annual Report on Form 10-K, filed with the SEC, which is accessible at www.sec.gov.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this document. 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 what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

General

We are a bank holding company that operates through two reportable segments: Bank and Investment Management. Through TriState Capital Bank, a Pennsylvania chartered bank (the “Bank”), the Bank segment provides commercial banking services to middle-market businesses and private banking services to high-net-worth individuals and trusts. The Bank segment generates most of its revenue from interest on loans and investments, loan-related fees (including swap fees), and liquidity and treasury management-related fees. Its primary source of funding for loans is deposits and its secondary source of funding is borrowings. The Bank’s largest expenses are interest on these deposits and borrowings, and salaries and related employee benefits. Through Chartwell Investment Partners, LLC, an SEC registered investment adviser (“Chartwell”), the Investment Management segment provides advisory and sub-advisory investment management services primarily to institutional investors, mutual funds and individual investors. It also supports marketing efforts for Chartwell’s proprietary investment products through Chartwell TSC Securities Corp., our registered broker/dealer subsidiary (“CTSC Securities”). The Investment Management segment generates its revenue from investment management fees earned on assets under management, and its largest expenses are salaries and related employee benefits.

This discussion and analysis presents our financial condition and results of operations on a consolidated basis, except where significant segment disclosures are necessary to better explain the operations of each segment and related variances. In particular, the discussion and analysis of non-interest income and non-interest expense is reported by segment.

We measure our performance primarily through our net income available to common shareholders, earnings per common share (“EPS”) and total revenue. Other salient metrics include the ratio of allowance for loan and lease losses to loans; net interest margin; the efficiency ratio of the Bank segment; return on average assets; return on average common equity; regulatory leverage and risk-based capital ratios and assets under management; EBITDA of the Investment Management segment.

Executive Overview

TriState Capital Holdings, Inc. (“we,” “us,” “our,” the “holding company,” the “parent company,” or the “Company”) is a bank holding company headquartered in Pittsburgh, Pennsylvania. The Company has three wholly owned subsidiaries: the Bank, Chartwell and CTSC Securities. Through the Bank, we serve middle-market businesses in our primary markets throughout the states of Pennsylvania, Ohio, New Jersey and New York. We also serve high-net-worth individuals and trusts on a national basis through our private banking channel. We market and distribute our products and services through a scalable, branchless banking model, which creates significant operating leverage throughout our business as we continue to grow. Through Chartwell, our investment management subsidiary, we provide investment management services primarily to institutional investors, mutual funds and individual investors on a national basis. Chartwell’s assets under management were $9.73 billion as of March 31, 2019. CTSC Securities, our broker/dealer subsidiary, supports marketing efforts for Chartwell’s proprietary investment products that require SEC or Financial Industry Regulatory Authority, Inc. (“FINRA”) licensing.

For the three months ended March 31, 2019, our net income available to common shareholders was $13.9 million compared to $10.4 million for the same period in 2018, an increase of $3.5 million, or 33.5%. This increase was primarily due to the impact of (1) a $4.1 million, or 15.6%, increase in net interest income; (2) lower provision for loan and lease losses of $572,000; (3) an increase in non-interest income of $2.0 million, or 17.9%; (4) an increase of $2.8 million, or 11.8%, in non-interest expense; (5) a $323,000 decrease in income taxes; and (6) an increase in preferred stock dividends of $679,000.


41

Our diluted EPS was $0.48 for the three months ended March 31, 2019, compared to $0.36 for the same period in 2018. The increase in diluted EPS was a result of our continued growth of our business lines, which was the driver of additional net income available to common shareholders.

For the three months ended March 31, 2019, total revenue increased $6.1 million, or 16.2%, to $43.4 million from $37.3 million for the same period in 2018. The increase in total revenue for the three months ended March 31, 2019, was driven largely by higher net interest income and swap fees for the Bank, as well as higher investment management fees for Chartwell.

Our annualized net interest margin was 2.10% and 2.35% for the three months ended March 31, 2019 and 2018, respectively. The decrease in net interest margin for the three months ended March 31, 2019, was driven by an increase of 69 basis points in the yield on loans, more than offset by an increase of 99 basis points in the cost of interest-bearing liabilities.

Our non-interest income is largely comprised of investment management fees for Chartwell, which totaled $9.4 million for the three months ended March 31, 2019, as compared to $8.9 million for the same period in 2018. The increase was driven by higher assets under management from the Columbia acquisition of $1.07 billion, market appreciation of $288.0 million and net inflows of $33.0 million.

Our annualized ratio of non-interest expense to average assets was 1.77% and 2.03% for the three months ended March 31, 2019 and 2018, respectively. The Bank’s efficiency ratio was 56.30% and 54.48% for the three months ended March 31, 2019 and 2018, respectively. The Bank’s efficiency ratio reflects growth in the Bank’s total revenue of 16.6% and growth in the Bank’s non-interest expense of 20.5%.

Our annualized return on average assets was 0.92% and 0.89% for the three months ended March 31, 2019 and 2018, respectively. Our annualized return on average common equity was 12.50% and 10.65% for the three months ended March 31, 2019 and 2018, respectively. Both of these ratios increased primarily due to continued growth in earnings.

Out total assets were $6.34 billion as of March 31, 2019, an increase of $308.4 million, or 20.7% on an annualized basis, from December 31, 2018. Loans held-for-investment grew by $203.9 million to $5.34 billion as of March 31, 2019, an annualized increase of 16.1%, from December 31, 2018, as a result of growth in our commercial and private banking loan portfolios. Total deposits increased $287.2 million, or 23.1% on an annualized basis, to $5.34 billion as of March 31, 2019, from December 31, 2018.

Our ratio of adverse rated credits to total loans increased to 0.55% at March 31, 2019, from 0.48% at December 31, 2018. Our ratio of allowance for loan and leases losses to loans was 0.28% and 0.26% as of March 31, 2019 and December 31, 2018, respectively. We had a credit to provision for loan and lease losses of $377,000 for the three months ended March 31, 2019, compared to provision expense of $195,000 for the three months ended March 31, 2018.

Our book value per common share increased $0.34 to $15.61 as of March 31, 2019, from $15.27 as of December 31, 2018, largely as a result of an increase in our net income available to common shareholders, which was partially offset by the issuance of restricted stock during the three months ended March 31, 2019.

Non-GAAP Financial Measures

The information set forth above contains certain financial information determined by methods other than in accordance with GAAP. These non-GAAP financial measures are “tangible common equity,” “tangible book value per common share,” “total revenue,” “efficiency ratio” and “EBITDA.” Although we believe these non-GAAP financial measures provide management and our investors with a more detailed understanding of our performance, these measures are not necessarily comparable to similar measures that may be presented by other companies. The non-GAAP financial measures presented herein are calculated as follows:

“Tangible common equity” is defined as common shareholders’ equity reduced by intangible assets, including goodwill. We believe this measure is important to management and investors so that they can better understand and assess changes from period to period in common shareholders’ equity exclusive of changes in intangible assets associated with prior acquisitions. Intangible assets are created when we buy businesses that add relationships and revenue to our Company. Intangible assets have the effect of increasing both equity and assets, while not increasing our tangible equity or tangible assets.

“Tangible book value per common share” is defined as common shareholders’ equity reduced by intangible assets, including goodwill, divided by common shares outstanding. We believe this measure is important to many investors who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets associated with prior acquisitions.

“Total revenue” is defined as net interest income and non-interest income, excluding gains and losses on the sale and call of debt securities. We believe adjustments made to our operating revenue allow management and investors to better assess our core operating revenue by removing the volatility that is associated with certain items that are unrelated to our core business.


42

“Efficiency ratio” is defined as total non-interest expense divided by our total revenue. We believe this measure allows management and investors to better assess our operating expenses in relation to our core operating revenue, particularly at the Bank.

“EBITDA” is defined as net income before interest expense, income tax expense, depreciation expense and intangible amortization expense. We use EBITDA particularly to assess the strength of our investment management business. We believe this measure is important because it allows management and investors to better assess our investment management performance in relation to our core operating earnings by excluding certain non-cash items and the volatility that is associated with certain discrete items that are unrelated to our core business.

The following tables present the financial measures calculated and presented in accordance with GAAP that are most directly comparable to the non-GAAP financial measures and a reconciliation of the differences between the GAAP financial measures and the non-GAAP financial measures.

(Dollars in thousands, except per share data)
March 31,
2019
December 31,
2018
Tangible book value per common share:
 
 
Common shareholders’ equity
$
458,089

$
440,886

Less: goodwill and intangible assets
67,361

67,863

Tangible common equity (numerator)
$
390,728

$
373,023

Common shares outstanding (denominator)
29,351,833

28,878,674

Tangible book value per common share
$
13.31

$
12.92


 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
Total revenue:
 
 
Net interest income
$
30,372

$
26,262

Total non-interest income
13,069

11,089

Less: net gain on the sale and call of debt securities
28

5

Total revenue
$
43,413

$
37,346


BANK SEGMENT
 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
Bank total revenue:
 
 
Net interest income
$
30,911

$
26,801

Total non-interest income
2,905

2,181

Less: net gain on the sale and call of debt securities
28

5

Bank total revenue
$
33,788

$
28,977

 
 
 
Bank efficiency ratio:
 
 
Total non-interest expense (numerator)
$
19,021

$
15,786

Total revenue (denominator)
$
33,788

$
28,977

Bank efficiency ratio
56.30
%
54.48
%


43

INVESTMENT MANAGEMENT SEGMENT
 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
Investment Management EBITDA:
 
 
Net income
$
1,431

$
702

Interest expense
—

—

Income tax expense
563

227

Depreciation expense
125

125

Intangible amortization expense
502

461

EBITDA
$
2,621

$
1,515



44

Results of Operations

Net Interest Income

Net interest income represents the difference between the interest received on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the volume of interest-earning assets and interest-bearing liabilities and changes in interest yields earned and interest rates paid. Net interest income comprised 70.0% and 70.3% of total revenue for the three months ended March 31, 2019 and 2018, respectively.

The table below reflects an analysis of net interest income, on a fully taxable equivalent basis, for the periods indicated. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the statutory federal income tax rate of 21% for 2019 and 2018.
 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
Interest income
$
62,902

$
41,416

Fully taxable equivalent adjustment
28

29

Interest income adjusted
62,930

41,445

Less: interest expense
32,530

15,154

Net interest income adjusted
$
30,400

$
26,291

 
 
 
Yield on earning assets
4.35
%
3.70
%
Cost of interest-bearing liabilities
2.50
%
1.51
%
Net interest spread
1.85
%
2.19
%
Net interest margin (1)
2.10
%
2.35
%
(1) 
Net interest margin is calculated on a fully taxable equivalent basis.

The following table provides information regarding the average balances and yields earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities for the three months ended March 31, 2019 and 2018. Non-accrual loans are included in the calculation of average loan balances, while interest payments collected on non-accrual loans are recorded as a reduction to principal. Where applicable, interest income and yield are reflected on a fully taxable equivalent basis, and have been adjusted based on the statutory federal income tax rate of 21% for 2019 and 2018.

45

 
Three Months Ended March 31,
 
2019
 
2018
(Dollars in thousands)
Average
Balance
Interest Income (1)/
Expense
Average
Yield/
Rate
 
Average
Balance
Interest Income (1)/
Expense
Average
Yield/
Rate
Assets
 
 
 
 
 
 
 
Interest-earning deposits
$
202,474

$
1,256

2.52
%
 
$
150,121

$
579

1.56
%
Federal funds sold
8,595

31

1.46
%
 
7,042

26

1.50
%
Debt securities available-for-sale
236,235

1,986

3.41
%
 
142,323

958

2.73
%
Debt securities held-to-maturity
211,833

2,018

3.86
%
 
58,953

595

4.09
%
Equity securities
12,755

72

2.29
%
 
8,627

66

3.10
%
FHLB stock
20,498

305

6.03
%
 
14,195

194

5.54
%
Total loans and leases
5,177,844

57,262

4.49
%
 
4,165,180

39,027

3.80
%
Total interest-earning assets
5,870,234

62,930

4.35
%
 
4,546,441

41,445

3.70
%
Other assets
242,553

 
 
 
208,679

 
 
Total assets
$
6,112,787

 
 
 
$
4,755,120

 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
Interest-bearing checking accounts
$
792,690

$
4,542

2.32
%
 
$
464,247

$
1,621

1.42
%
Money market deposit accounts
2,682,390

16,540

2.50
%
 
2,281,606

8,113

1.44
%
Certificates of deposit
1,300,296

8,251

2.57
%
 
977,689

3,667

1.52
%
Borrowings:
 
 
 
 
 
 
 
FHLB borrowings
459,333

2,585

2.28
%
 
310,000

1,147

1.50
%
Line of credit borrowings
4,139

58

5.68
%
 
5,373

52

3.92
%
Subordinated notes payable, net
34,933

554

6.43
%
 
34,731

554

6.47
%
Total interest-bearing liabilities
5,273,781

32,530

2.50
%
 
4,073,646

15,154

1.51
%
Noninterest-bearing deposits
261,682

 
 
 
228,257

 
 
Other liabilities
88,485

 
 
 
56,655

 
 
Shareholders’ equity
488,839

 
 
 
396,562

 
 
Total liabilities and shareholders’ equity
$
6,112,787

 
 
 
$
4,755,120

 
 
 
 
 
 
 
 
 
 
Net interest income (1)
 
$
30,400

 
 
 
$
26,291

 
Net interest spread
 
 
1.85
%
 
 
 
2.19
%
Net interest margin (1)
 
 
2.10
%
 
 
 
2.35
%
(1)
Interest income and net interest margin are calculated on a fully taxable equivalent basis.

Net Interest Income for the Three Months Ended March 31, 2019 and 2018. Net interest income, calculated on a fully taxable equivalent basis, increased $4.1 million, or 15.6%, to $30.4 million for the three months ended March 31, 2019, from $26.3 million for the same period in 2018. The increase in net interest income for the three months ended March 31, 2019, was primarily attributable to a $1.32 billion, or 29.1%, increase in average interest-earning assets driven primarily by loan growth. The increase in net interest income reflects an increase of $21.5 million, or 51.8%, in interest income, partially offset by an increase of $17.4 million, or 114.7%, in interest expense. Net interest margin was 2.10% for the three months ended March 31, 2019, compared to 2.35% for the same period in 2018, driven by higher cost of deposits and Federal Home Loan Bank (“FHLB”) borrowings, partially offset by higher yield on our loan portfolio.

The increase in interest income on interest-earning assets was primarily the result of an increase in average total loans, which are our primary earning assets, of $1.01 billion, or 24.3%, as well as an increase of 69 basis points in yield on our loans for the three months ended March 31, 2019, compared to the same period in 2018. The most significant factor driving the yield on our loan portfolio was the four increases in 2018 to the Federal Reserve’s target federal funds rate impacting our floating-rate loans. This was partially offset by the continuing shift between lower-risk, lower-yielding marketable-securities-backed private banking loans and commercial loans. The overall yield on interest-earning assets increased 65 basis points to 4.35% for the three months ended March 31, 2019, as compared to 3.70% for the same period in 2018, primarily from the higher loan yields.

The increase in interest expense on interest-bearing liabilities was primarily the result of an increase of 99 basis points in the average rate paid on our interest-bearing liabilities, as well as an increase of $1.20 billion, or 29.5%, in average interest-bearing liabilities for the three months ended March 31, 2019, compared to the same period in 2018. The increase in average rate paid was reflective of increases

46

in rates paid in all deposit categories and FHLB borrowings, which was driven by the four increases in 2018 to the Federal Reserve’s target federal funds rate impacting our variable-rate liabilities. The increase in average interest-bearing liabilities was driven primarily by an increase of $400.8 million in average money market deposit accounts, an increase of $328.4 million in average interest-bearing checking accounts and an increase of $322.6 million in average certificates of deposit.

The following table analyzes the dollar amount of the change in interest income and interest expense with respect to the primary components of interest-earning assets and interest-bearing liabilities. The table shows the amount of the change in interest income or interest expense caused by either changes in outstanding balances or changes in interest rates for the three months ended March 31, 2019 compared to the same period in 2018. The effect of a change in balances is measured by applying the average rate during the first period to the balance (“volume”) change between the two periods. The effect of changes in rate is measured by applying the change in rate between the two periods to the average volume during the first period.
 
Three Months Ended March 31,
 
2019 over 2018
(Dollars in thousands)
Yield/Rate
 
Volume
 
Change(1)
Increase (decrease) in:
 
 
 
 
 
Interest income:
 
 
 
 
 
Interest-earning deposits
$
430

 
$
247

 
$
677

Federal funds sold
(1
)
 
6

 
5

Debt securities available-for-sale
282

 
746

 
1,028

Debt securities held-to-maturity
(35
)
 
1,458

 
1,423

Equity securities
(20
)
 
26

 
6

FHLB stock
18

 
93

 
111

Total loans
7,764

 
10,471

 
18,235

Total increase in interest income
8,438

 
13,047

 
21,485

 
 
 
 
 
 
Interest expense:
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
Interest-bearing checking accounts
1,389

 
1,532

 
2,921

Money market deposit accounts
6,800

 
1,627

 
8,427

Certificates of deposit
3,104

 
1,480

 
4,584

Borrowings:
 
 
 
 
 
FHLB borrowings
747

 
691

 
1,438

Line of credit borrowings
20

 
(14
)
 
6

Subordinated notes payable, net
(3
)
 
3

 
—

Total increase in interest expense
12,057

 
5,319

 
17,376

Total increase (decrease) in net interest income
$
(3,619
)
 
$
7,728

 
$
4,109

(1)
The change in interest income and expense due to changes in both composition and applicable yields/rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Provision for Loan and Lease Losses

The provision for loan and lease losses represents our determination of the amount necessary to be recorded against the current period’s earnings to maintain the allowance for loan and lease losses at a level that is considered adequate in relation to the estimated losses inherent in the loan and lease portfolio. For additional information regarding our allowance for loan losses, see “Allowance for Loan and Lease Losses.”

Provision for Loan and Lease Losses for the Three Months Ended March 31, 2019 and 2018. We recorded a credit to provision for loan and lease losses of $377,000 for the three months ended March 31, 2019, compared to a provision expense of $195,000 for the three months ended March 31, 2018. The provision for loan and lease losses for the three months ended March 31, 2019, was comprised of a net increase of $1.3 million in specific reserves on non-performing loans and an increase in general reserves of $184,000, which were more than offset by recoveries of $1.9 million. The provision for loan and lease losses for the three months ended March 31, 2018, was comprised of a net increase in general reserves of $431,000, partially offset by recoveries of $206,000 and a decrease to specific reserves of $30,000 on non-performing loans.


47

Non-Interest Income

Non-interest income is an important component of our total revenue and is comprised primarily of investment management fees from Chartwell coupled with fees generated from loan and deposit relationships with our Bank customers, including swap transactions. The information provided in the table below under the caption “Parent and Other” represents general operating activity of the Company not considered to be a reportable segment, which includes parent company activity as well as eliminations and adjustments that are necessary for purposes of reconciliation to the consolidated amounts.

The following table presents the components of our non-interest income by operating segment for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
 
Investment
Parent
 
 
 
Investment
Parent
 
(Dollars in thousands)
Bank
Management
and Other
Consolidated
 
Bank
Management
and Other
Consolidated
Investment management fees
$
—

$
9,533

$
(109
)
$
9,424

 
$
—

$
8,963

$
(55
)
$
8,908

Service charges on deposits
136

—

—

136

 
134

—

—

134

Net gain on the sale and call of debt securities
28

—

—

28

 
5

—

—

5

Swap fees
1,803

—

—

1,803

 
1,248

—

—

1,248

Commitment and other loan fees
531

—

—

531

 
332

—

—

332

Other income (1)
407

21

719

1,147

 
462

—

—

462

Total non-interest income
$
2,905

$
9,554

$
610

$
13,069

 
$
2,181

$
8,963

$
(55
)
$
11,089

(1) 
Other income largely includes items such as income from bank-owned life insurance, change in fair value on swaps and equity securities, gains on the sale of loans or other real estate owned (“OREO”), and other general operating income.

Non-Interest Income for the Three Months Ended March 31, 2019 and 2018. Our non-interest income was $13.1 million for the three months ended March 31, 2019, an increase of $2.0 million, or 17.9%, from $11.1 million for the same period in 2018. This increase was primarily related to increases in investment management fees, swap fees, commitment and other loan fees, and other income, as follows:

Investment Management Segment:

•
Investment management fees increased $570,000 for the three months ended March 31, 2019, compared to the same period in 2018, which was driven by higher assets under management partially related to the Columbia acquisition as well as market appreciation and net inflows. Assets under management were $9.73 billion as of March 31, 2019, an increase of $1.39 billion from March 31, 2018.

Bank Segment:

•
Swap fees increased $555,000 for the three months ended March 31, 2019, compared to the same period in 2018, driven by ongoing demand for long-term interest rate protection from both new and existing customers. The level and frequency of income associated with swap transactions can vary materially from period to period based on customers’ expectations of market conditions and term loan originations.

•
Commitment and other loan fees increased $199,000 for the three months ended March 31, 2019, compared to the same period in 2018, driven largely by certain one-time loan fees.

Parent and Other:

•
Other income reflected $719,000 of unrealized gains on equity securities for the three months ended March 31, 2019, related to our mutual funds invested in short-duration, corporate bonds and mid-cap value equities.

Non-Interest Expense

Our non-interest expense represents the operating cost of maintaining and growing our business. The largest portion of non-interest expense for each segment is compensation and employee benefits, which include employee payroll expense as well as the cost of incentive compensation, benefit plans, health insurance and payroll taxes, all of which are impacted by the growth in our employee base, coupled with increases in the level of compensation and benefits of our existing employees. The information provided in the table below under the caption “Parent and Other” represents general operating activity of the Company not considered to be a reportable segment, which

48

includes parent company activity as well as eliminations and adjustments that are necessary for purposes of reconciliation to the consolidated amounts.

The following table presents the components of our non-interest expense by operating segment for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31, 2019
 
Three Months Ended March 31, 2018
 
 
Investment
Parent
 
 
 
Investment
Parent
 
(Dollars in thousands)
Bank
Management
and Other
Consolidated
 
Bank
Management
and Other
Consolidated
Compensation and employee benefits
$
11,799

$
4,976

$
—

$
16,775

 
$
9,899

$
5,569

$
—

$
15,468

Premises and occupancy costs
975

295

—

1,270

 
1,009

281

—

1,290

Professional fees
934

142

(81
)
995

 
770

373

(48
)
1,095

FDIC insurance expense
1,421

—

—

1,421

 
1,146

—

—

1,146

General insurance expense
227

67

—

294

 
179

68

—

247

State capital shares tax
380

—

—

380

 
427

—

—

427

Travel and entertainment expense
612

223

—

835

 
465

181

—

646

Intangible amortization expense
—

502

—

502

 
—

461

—

461

Other operating expenses (1)
2,673

1,355

172

4,200

 
1,891

1,101

78

3,070

Total non-interest expense
$
19,021

$
7,560

$
91

$
26,672

 
$
15,786

$
8,034

$
30

$
23,850

 
 
 
 
 
 
 
 
 
 
Full-time equivalent employees (2)
197

62

—

259

 
169

63

—

232

 
 
 
 
 
 
 
 
 
 
(1) 
Other operating expenses largely include items such as organizational dues and subscriptions, charitable contributions, data processing, investment research fees, sub-advisory fees, telephone, marketing, employee-related expenses and other general operating expenses.
(2) 
Full-time equivalent employees shown are as of the end of the periods presented.

Non-Interest Expense for the Three Months Ended March 31, 2019 and 2018. Our non-interest expense for the three months ended March 31, 2019, increased $2.8 million, or 11.8%, as compared to the same period in 2018, which included a $3.2 million increase in expenses of the Bank segment and a $474,000 decrease in expenses of the Investment Management segment. Notable changes in each segment’s expenses are as follows:

Bank Segment:

•
The Bank’s compensation and employee benefits costs for the three months ended March 31, 2019, increased by $1.9 million compared to the same period in 2018, primarily due to an increase in the number of full-time equivalent employees, increases in the overall annual wage and benefits costs of our existing employees, and increases in incentive and stock-based compensation expenses.

•
Federal Deposit Insurance Corporation (“FDIC”) insurance expense for the three months ended March 31, 2019, increased by $275,000 compared to the same period in 2018, due to the increase in the Bank’s assets.

•
Other operating expenses for the three months ended March 31, 2019, increased by $782,000 compared to the same period in 2018, primarily related to a valuation adjustment on OREO, higher marketing expenses, an increase in organization dues and subscriptions, and higher data processing expenses.

Investment Management Segment:

•
Chartwell’s compensation and employee benefits costs for the three months ended March 31, 2019, decreased by $593,000 compared to the same period in 2018, primarily due to decreases in incentive and stock-based compensation expenses.

•
Professional fees for the three months ended March 31, 2019, decreased by $231,000 compared to the same period in 2018. The prior year period included higher legal fees incurred in connection with the 2018 acquisition of Columbia.

•
Other operating expenses for the three months ended March 31, 2019, increased by $254,000 compared to the same period in 2018, primarily due to higher investment research fees.


49

Income Taxes

We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities with regard to a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate whether it is more likely than not that we will be able to realize the benefit of identified deferred tax assets.

Income Taxes for the Three Months Ended March 31, 2019 and 2018. For the three months ended March 31, 2019, we recognized income tax expense of $2.6 million, or 15.1% of income before tax, as compared to income tax expense of $2.9 million, or 21.8% of income before tax, for the same period in 2018. Our effective tax rate of 15.1% for the three months ended March 31, 2019, decreased as compared to the same period in the prior year largely due to the tax credits to be recognized in 2019.

Financial Condition

Our total assets as of March 31, 2019, were $6.34 billion, an increase of $308.4 million, or 20.7% on an annualized basis, from December 31, 2018, driven primarily by growth in our loan and investment portfolios. As of March 31, 2019, our loan portfolio totaled $5.34 billion, an increase of $203.9 million, or 16.1% on an annualized basis, from December 31, 2018. Total investment securities increased $20.3 million, or 17.7% on an annualized basis, to $487.1 million as of March 31, 2019, from December 31, 2018, primarily as a result of purchases made to continue to strengthen the balance sheet and liquidity of the Bank. Cash and cash equivalents increased $53.9 million to $243.9 million as of March 31, 2019, from December 31, 2018. As of March 31, 2019, our total deposits were $5.34 billion, an increase of $287.2 million, or 23.1% annualized, from December 31, 2018. Net borrowings decreased $6.0 million to $398.2 million as of March 31, 2019, from December 31, 2018. Our shareholders’ equity increased $17.2 million to $496.6 million as of March 31, 2019, from December 31, 2018. This increase was primarily the result of net income of $14.6 million, an increase of $1.8 million in accumulated other comprehensive income (loss), and $1.7 million in stock-based compensation, partially offset by purchases of treasury stock totaling $433,000 and preferred stock dividends of $679,000.

Loans and Leases

Our loan and lease portfolio, which represents our largest earning asset, primarily consists of loans to our private banking clients, commercial and industrial loans and leases, and real estate loans secured by commercial properties. As of March 31, 2019, 92.7% of our loans had a floating interest rate.

The following table presents the composition of our loan portfolio as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
(Dollars in thousands)
Outstanding
Percent of
Loans
 
Outstanding
Percent of
Loans
Private banking loans
$
2,981,973

55.9
%
 
$
2,869,543

55.9
%
Middle-market banking loans:
 
 
 
 
 
Commercial and industrial
862,405

16.1
%
 
785,320

15.3
%
Commercial real estate
1,492,347

28.0
%
 
1,478,010

28.8
%
Total middle-market banking loans
2,354,752

44.1
%
 
2,263,330

44.1
%
Loans and leases held-for-investment
$
5,336,725

100.0
%
 
$
5,132,873

100.0
%

Loans and Leases Held-for-Investment. Loans held-for-investment increased by $203.9 million, or 16.1% on an annualized basis, to $5.34 billion as of March 31, 2019, as compared to December 31, 2018. Our growth for the three months ended March 31, 2019, was comprised of an increase in private banking loans of $112.4 million, an increase in commercial and industrial loans and leases of $77.1 million and an increase in commercial real estate loans of $14.3 million.

Primary Loan Categories

Private Banking Loans. Our private banking loans include personal and commercial loans that are sourced through our private banking channel (which operates on a national basis), including referral relationships with financial intermediaries. These loans primarily consist of loans made to high-net-worth individuals, trusts and businesses that are secured by cash, marketable securities, cash value life insurance, residential property or other financial assets. The primary source of repayment for these loans is the income and assets of the borrower. We also have a limited number of unsecured loans and lines of credit in our private banking loan portfolio.


50

As of March 31, 2019, $2.89 billion, or 96.9%, of our private banking loans were secured by cash, marketable securities or cash value life insurance as compared to $2.77 billion, or 96.7%, as of December 31, 2018. Our private banking lines of credit are typically due on demand. We expect the growth in these loans to continue as a result of our focus on this portion of our private banking business. We believe we have strong competitive advantages in this line of business given our proprietary technology and distribution channels. These loans tend to have a lower risk profile and are an efficient use of capital because they typically are zero percent risk-weighted for regulatory capital purposes. On a daily basis, we monitor the collateral of the loans secured by cash, marketable securities or cash value life insurance, which further reduces the risk profile of the private banking portfolio. Since inception, we have had no charge-offs related to our loans secured by cash, marketable securities or cash value life insurance.

Loans sourced through our private banking channel also include loans that are classified for regulatory purposes as commercial, most of which are also secured by cash, marketable securities or cash value life insurance. The table below includes all loans made through our private banking channel, by collateral type, as of the dates indicated.
(Dollars in thousands)
March 31,
2019
December 31,
2018
Private banking loans:
 
 
Secured by cash, marketable securities or cash value life insurance
$
2,890,030

$
2,774,800

Secured by real estate
68,075

69,766

Other
23,868

24,977

Total private banking loans
$
2,981,973

$
2,869,543


As of March 31, 2019, there were $2.85 billion of total private banking loans with a floating interest rate and $135.4 million with a fixed interest rate, as compared to $2.75 billion and $122.6 million, respectively, as of December 31, 2018.

Middle-Market Banking - Commercial and Industrial Loans and Leases. Our commercial and industrial loan and lease portfolio primarily includes loans and leases made to financial and other service companies or manufacturers generally for the purposes of financing production, operating capacity, accounts receivable, inventory, equipment, acquisitions and recapitalizations. Cash flow from the borrower’s operations is the primary source of repayment for these loans and leases, except for certain commercial loans that are secured by marketable securities.

As of March 31, 2019, there were $722.2 million of total commercial and industrial loans with a floating interest rate and $140.2 million with a fixed interest rate, as compared to $645.5 million and $139.8 million, respectively, as of December 31, 2018.

Middle-Market Banking - Commercial Real Estate Loans. Our commercial real estate loan portfolio includes loans secured by commercial purpose real estate, including both owner-occupied properties and investment properties for various purposes including office, industrial, multifamily, retail, hospitality, healthcare and self-storage. Also included are commercial construction loans to finance the construction or renovation of structures as well as to finance the acquisition and development of raw land for various purposes. Individual project cash flows, global cash flows and liquidity from the developer, or the sale of the property are the primary sources of repayment for commercial real estate loans secured by investment properties. The primary source of repayment for commercial real estate loans secured by owner-occupied properties is cash flow from the borrower’s operations. There were $184.7 million and $183.7 million of owner-occupied commercial real estate loans as of March 31, 2019 and December 31, 2018, respectively.

As of March 31, 2019, there were $1.38 billion of total commercial real estate loans with a floating interest rate and $115.3 million with a fixed interest rate, as compared to $1.34 billion and $137.5 million, respectively, as of December 31, 2018.


51

Loan and Lease Maturities and Interest Rate Sensitivity

The following table presents the contractual maturity ranges and the amount of such loans and leases with fixed and adjustable rates in each maturity range as of the date indicated.
 
March 31, 2019
(Dollars in thousands)
One Year
or Less (1)
One to
Five Years
Greater Than
Five Years
Total
Maturity:
 
 
 
 
Private banking
$
2,820,537

$
53,160

$
108,276

$
2,981,973

Commercial and industrial
175,461

517,633

169,311

862,405

Commercial real estate
246,965

640,227

605,155

1,492,347

Loans and leases held-for-investment
$
3,242,963

$
1,211,020

$
882,742

$
5,336,725

 
 
 
 
 
Interest rate sensitivity:
 
 
 
 
Fixed interest rates
$
143,631

$
117,648

$
129,646

$
390,925

Floating or adjustable interest rates
3,099,332

1,093,372

753,096

4,945,800

Loans and leases held-for-investment
$
3,242,963

$
1,211,020

$
882,742

$
5,336,725

(1) 
The amounts outstanding reflected in the “One Year or Less” column include $2.77 billion of loans that are due on demand with no stated maturity.

Interest Reserve Loans

As of March 31, 2019, loans with interest reserves totaled $254.9 million, which represented 4.8% of loans and leases held-for-investment, as compared to $255.4 million, or 5.0%, as of December 31, 2018. Certain loans reserve a portion of the proceeds to be used to pay interest due on the loan. These loans with interest reserves are common for construction and land development loans. The use of interest reserves is based on the feasibility of the project, the creditworthiness of the borrower and guarantors, and the loan to value coverage of the collateral. The interest reserve may be used by the borrower, when certain financial conditions are met, to draw loan funds to pay interest charges on the outstanding balance of the loan. When drawn, the interest is capitalized and added to the loan balance, subject to conditions specified during the initial underwriting and at the time the credit is approved. We have procedures and controls for monitoring compliance with loan covenants, advancing funds and determining default conditions. In addition, most of our construction lending is performed within our geographic footprint and our lenders are familiar with trends in the local real estate market.

Allowance for Loan and Lease Losses

Our allowance for loan and lease losses represents our estimate of probable loan and lease losses inherent in the loan portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan and lease portfolio. Additions are made to the allowance through both periodic provisions recorded in the consolidated statements of income and recoveries of losses previously incurred. Reductions to the allowance occur as loans and lease are charged off or when the credit history of any of the three loan portfolios improves. Refer to Note 1, Summary of Significant Accounting Policies and Note 4, Allowance for Loan and Lease Losses, to our unaudited condensed consolidated financial statements for more details on the Company’s allowance for loan and lease losses.

The following table summarizes the allowance for loan and lease losses, as of the dates indicated:
(Dollars in thousands)
March 31,
2019
December 31,
2018
General reserves
$
12,955

$
12,771

Specific reserves
1,757

437

Total allowance for loan and lease losses
$
14,712

$
13,208

Allowance for loan and lease losses to loans and leases
0.28
%
0.26
%

As of March 31, 2019, we had specific reserves totaling $1.8 million related to impaired loans with an aggregated total outstanding balance of $7.3 million. As of December 31, 2018, we had specific reserves totaling $437,000 related to impaired loans, with an aggregated total outstanding balance of $2.2 million. These loans were on non-accrual status as of March 31, 2019 and December 31, 2018.


52

The following table summarizes allowance for loan and lease losses and the percentage of loans and leases by category, as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
(Dollars in thousands)
Reserve
Percent of Loans
 
Reserve
Percent of Loans
Private banking
$
2,001

55.9
%
 
$
1,942

55.9
%
Commercial and industrial
7,041

16.1
%
 
5,764

15.3
%
Commercial real estate
5,670

28.0
%
 
5,502

28.8
%
Total allowance for loan and lease losses
$
14,712

100.0
%
 
$
13,208

100.0
%

Allowance for Loan and Lease Losses as of March 31, 2019 and December 31, 2018. Our allowance for loan and lease losses increased to $14.7 million, or 0.28% of loans, as of March 31, 2019, as compared to $13.2 million, or 0.26% of loans, as of December 31, 2018. Our allowance for loan and lease losses related to private banking loans increased $59,000 from December 31, 2018 to March 31, 2019, which was primarily attributable to higher specific reserves on a non-performing loan secured by residential real estate. Our allowance for loan and lease losses related to commercial and industrial loans increased $1.3 million from December 31, 2018 to March 31, 2019, which was primarily attributable to higher specific reserves related to a loan that has been placed on non-accrual. Our allowance for loan and lease losses related to commercial real estate loans increased by $168,000 from December 31, 2018 to March 31, 2019, which was attributable to higher general reserves primarily due to growth in this portfolio.

Charge-Offs and Recoveries

Our charge-off policy for commercial and private banking loans and leases requires that obligations that are not collectible be promptly charged off in the month the loss becomes probable, regardless of the delinquency status of the loan or lease. We recognize a partial charge-off when we have determined that the value of the collateral is less than the remaining ledger balance at the time of the evaluation. An obligation is not required to be charged off, regardless of delinquency status, if we have determined there exists sufficient collateral to protect the remaining loan or lease balance and there exists a strategy to liquidate the collateral. We may also consider a number of other factors to determine when a charge-off is appropriate, including: the status of a bankruptcy proceeding, the value of collateral and probability of successful liquidation, and the status of adverse proceedings or litigation that may result in collection.

The following table provides an analysis of the allowance for loan and lease losses, charge-offs, recoveries and provision for loan and lease losses for the periods indicated:
 
Three Months Ended March 31,
(Dollars in thousands)
2019
2018
Beginning balance
$
13,208

$
14,417

Charge-offs:
 
 
Private banking
—

—

Commercial and industrial
—

—

Commercial real estate
—

—

Total charge-offs
—

—

Recoveries:
 
 
Private banking
—

—

Commercial and industrial
1,881

206

Commercial real estate
—

—

Total recoveries
1,881

206

Net recoveries
1,881

206

Provision (credit) for loan and lease losses
(377
)
195

Ending balance
$
14,712

$
14,818

 
 
 
Net loan recoveries to average total loans, annualized
(0.15
)%
(0.02
)%
Provision (credit) for loan losses to average total loans, annualized
(0.03
)%
0.02
 %

Non-Performing Assets

Non-performing assets consist of non-performing loans and OREO. Non-performing loans are loans that are on non-accrual status. OREO is real property acquired through foreclosure on the collateral underlying defaulted loans and includes in-substance foreclosures. We record OREO at fair value, less estimated costs to sell the assets.

53


Our policy is to place loans in all categories on non-accrual status when collection of interest or principal is doubtful, or when interest or principal payments are 90 days or more past due. There were no loans 90 days or more past due and still accruing interest as of March 31, 2019 and December 31, 2018, and there was no interest income recognized on loans while on non-accrual status for the three months ended March 31, 2019 and 2018. As of March 31, 2019, non-performing loans were $7.3 million, or 0.14% of total loans, compared to $2.2 million, or 0.04% of total loans, as of December 31, 2018. We had specific reserves of $1.8 million and $437,000 as of March 31, 2019 and December 31, 2018, respectively, on these non-performing loans. The net loan balance of our non-performing loans was 73.5% and 74.3% of the customer’s outstanding balance after payments, charge-offs and specific reserves as of March 31, 2019 and December 31, 2018, respectively.

For additional information on our non-performing loans as of March 31, 2019 and December 31, 2018, refer to Note 4, Allowance for Loan and Lease Losses, to our unaudited condensed consolidated financial statements.

Once the determination is made that a foreclosure is necessary, the loan is reclassified as “in-substance foreclosure” until a sale date and title to the property is finalized. Once we own the property, it is maintained, marketed, and rented or sold to repay the original loan. Historically, foreclosure trends in our loan portfolio have been low due to the improved credit quality of the commercial real estate portfolio. Any loans that are modified or extended are reviewed for potential classification as a troubled debt restructuring (“TDR”) loan. For borrowers that are experiencing financial difficulty, we complete a process that outlines the terms of the modification, the reasons for the proposed modification, and documents the current status of the borrower.

We had non-performing assets of $10.5 million, or 0.16% of total assets, as of March 31, 2019, as compared to $5.7 million, or 0.09% of total assets, as of December 31, 2018. The increase in non-performing assets was due to the addition of a new non-performing loan of $5.1 million, partially offset by $330,000 in write-downs on OREO and paydowns on non-performing loans during the three months ended March 31, 2019. This increase was considered within the assessment of the determination of the allowance for loan and lease losses. As of March 31, 2019 and December 31, 2018, we had OREO properties totaling $3.1 million and $3.4 million, respectively.

The following table summarizes our non-performing assets as of the dates indicated:
(Dollars in thousands)
March 31,
2019
December 31,
2018
Non-performing loans:
 
 
Private banking
$
2,207

$
2,237

Commercial and industrial
5,122

—

Commercial real estate
—

—

Total non-performing loans
$
7,329

$
2,237

Other real estate owned
3,124

3,424

Total non-performing assets
$
10,453

$
5,661

 
 
 
Non-performing troubled debt restructured loans
$
207

$
237

Performing troubled debt restructured loans
$
—

$
—

Non-performing loans to total loans
0.14
%
0.04
%
Allowance for loan and lease losses to non-performing loans
200.74
%
590.43
%
Non-performing assets to total assets
0.16
%
0.09
%

Potential Problem Loans

Potential problem loans are those loans that are not categorized as non-performing loans, but where current information indicates that the borrower may not be able to comply with repayment terms. Among other factors, we monitor the past due status as an indicator of credit deterioration and potential problem loans. A loan is considered past due when the contractual principal and/or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. To the extent that loans become past due, we assess the potential for loss on such loans as we would with other problem loans and consider the effect of any potential loss in determining any provision for loan and lease losses. We also assess alternatives to maximize collection of any past due loans, including and without limitation, restructuring loan terms, requiring additional loan guarantee(s) or collateral, or other planned action.

For additional information on the age analysis of past due loans segregated by class of loan for March 31, 2019 and December 31, 2018, refer to Note 4, Allowance for Loan and Lease Losses, to our unaudited condensed consolidated financial statements.


54

On a monthly basis, we monitor various credit quality indicators for our loan portfolio, including delinquency, non-performing status, changes in risk ratings, changes in the underlying performance of the borrowers and other relevant factors. On a daily basis, we monitor the collateral of loans secured by cash, marketable securities or cash value life insurance within the private banking portfolio, which further reduces the risk profile of that portfolio.

Loan risk ratings are assigned based on the creditworthiness of the borrower and the quality of the collateral for loans secured by marketable securities. Loan risk ratings are reviewed on an ongoing basis according to internal policies. Loans within the pass rating are believed to have a lower risk of loss than loans that are risk rated as special mention, substandard or doubtful, which are believed to have an increasing risk of loss. Our internal risk ratings are consistent with regulatory guidance. We also monitor the loan portfolio through a formal periodic review process. All non-pass rated loans are reviewed monthly and higher risk-rated loans within the pass category are reviewed three times a year.

For additional information on the definitions of our internal risk rating and the recorded investment in loans by credit quality indicator for March 31, 2019 and December 31, 2018, refer to Note 4, Allowance for Loan and Lease Losses, to our unaudited condensed consolidated financial statements.

Investment Securities

We utilize investment activities to enhance net interest income while supporting liquidity management and interest rate risk management. Our securities portfolio consists of available-for-sale debt securities, held-to-maturity debt securities, equity securities and, from time to time, debt securities held for trading purposes. Also included in our investment securities is FHLB stock. For additional information on FHLB stock, refer to Note 2, Investment Securities, to our unaudited condensed consolidated financial statements. Debt securities purchased with the intent to sell under trading activity and equity securities are recorded at fair value and changes to fair value are recognized in the consolidated statements of income. Debt securities categorized as available-for-sale are recorded at fair value and changes in the fair value of these securities are recognized as a component of total shareholders’ equity, within accumulated other comprehensive income (loss), net of deferred taxes. Debt securities categorized as held-to-maturity are securities that the Company intends to hold until maturity and are recorded at amortized cost.

The Bank has engaged Chartwell to provide securities portfolio advisory services, subject to the investment parameters set forth in our investment policy.

As of March 31, 2019 and December 31, 2018, we reported debt securities in available-for-sale and held-to-maturity categories as well as equity securities. In general, fair value is based on quoted market prices of identical assets, when available. Where sufficient data is not available to produce a fair valuation, fair value is based on broker quotes for similar assets. We validate the prices received from these third parties on a quarterly basis by comparing them to prices provided by a different independent pricing service. We have also reviewed the valuation methodologies provided to us by our pricing services. Broker quotes may be adjusted to ensure that financial instruments are recorded at fair value. Adjustments may include unobservable parameters, among other things. Securities, like loans, are subject to interest rate risk and credit risk. In addition, by their nature, debt securities classified as available-for-sale or trading and equity securities are also subject to fair value risks that could negatively affect the level of liquidity available to us, as well as shareholders’ equity.

We perform a quarterly review of our investment securities to identify those that may indicate other-than-temporary impairment (“OTTI”). Our policy for OTTI is based on a number of factors, including, but not limited to the length of time and extent to which the estimated fair value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the investment security’s ability to recover any decline in its estimated fair value and, for debt securities, whether we intend to sell the security or if it is more likely than not that we will be required to sell the security prior to its recovery. If the financial markets experience deterioration, charges to income could occur in future periods as a result of OTTI determinations.

Our available-for-sale debt securities portfolio consists of U.S. government agency obligations, mortgage-backed securities, collateralized mortgage obligations, corporate bonds and single-issuer trust preferred securities, all with varying contractual maturities. Our held-to-maturity debt securities consists of certain municipal bonds, agency obligations, mortgage-backed securities and corporate bonds while our trading portfolio, when active, typically consists of U.S. treasury notes, also with varying contractual maturities. However, these maturities do not necessarily represent the expected life of certain securities as the securities may be called or paid down without penalty prior to their stated maturities. The effective duration of our debt securities portfolio as of March 31, 2019, was approximately 1.9, where duration is defined as the approximate percentage change in price for a 100 basis point change in rates. No investment in any of these securities exceeds any applicable limitation imposed by law or regulation. Our Asset/Liability Management Committee (“ALCO”) reviews the investment portfolio on an ongoing basis to ensure that the investments conform to our investment policy.


55

Available-for-Sale Debt Securities. We held $238.7 million and $233.3 million in debt securities available-for-sale as of March 31, 2019 and December 31, 2018, respectively. The increase of $5.4 million was primarily attributable to purchases of $12.4 million, net of repayments, including calls and maturities, of $10.2 million, of certain securities during the three months ended March 31, 2019.

On a fair value basis, 32.8% of our available-for-sale debt securities as of March 31, 2019, were floating-rate securities, for which yields increase or decrease based on changes in market interest rates. As of December 31, 2018, floating-rate securities comprised 31.4% of our available-for-sale debt securities.

On a fair value basis, 26.3% of our available-for-sale debt securities as of March 31, 2019, were U.S. government and agency securities, which tend to have a lower risk profile than certain corporate bonds and single-issuer trust preferred securities, which comprised the remainder of the portfolio. As of December 31, 2018, agency securities comprised 27.9% of our available-for-sale debt securities.

Held-to-Maturity Debt Securities. We held $216.9 million and $196.1 million in debt securities held-to-maturity as of March 31, 2019 and December 31, 2018, respectively. The increase of $20.8 million was primarily attributable to purchases of $42.4 million, net of calls and maturities of $21.6 million of certain securities during the three months ended March 31, 2019. As part of our asset and liability management strategy, we determined that we have the intent and ability to hold these bonds until maturity, and these securities were reported at amortized cost as of March 31, 2019 and December 31, 2018.

Trading Debt Securities. We held no trading debt securities as of March 31, 2019 and December 31, 2018. From time to time, we may identify opportunities in the marketplace to generate supplemental income from trading activity, principally based on the volatility of U.S. treasury notes with maturities up to 10 years. The level and frequency of income generated from these transactions can vary materially based on market conditions.

Equity Securities. Equity securities consists of mutual funds investing in short-duration, corporate bonds and mid-cap value equities. We had $11.4 million and $12.7 million in equity securities outstanding as of March 31, 2019 and December 31, 2018, respectively. The decrease was primarily attributable to the sale of $2.0 million of certain equity securities during the three months ended March 31, 2019.

The following tables summarize the amortized cost and fair value of debt securities available-for-sale and held-to-maturity, as of the dates indicated:
 
March 31, 2019
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Debt securities available-for-sale:
 
 
 
 
Corporate bonds
$
157,923

$
1,244

$
721

$
158,446

Trust preferred securities
17,996

—

518

17,478

Agency collateralized mortgage obligations
32,438

18

50

32,406

Agency mortgage-backed securities
20,194

123

183

20,134

Agency debentures
10,000

258

—

10,258

Total debt securities available-for-sale
238,551

1,643

1,472

238,722

Debt securities held-to-maturity:
 
 
 
 
Corporate bonds
27,182

236

41

27,377

Agency debentures
163,861

745

2

164,604

Municipal bonds
21,475

102

2

21,575

Agency mortgage-backed securities
4,397

183

—

4,580

Total debt securities held-to-maturity
216,915

1,266

45

218,136

Total debt securities
$
455,466

$
2,909

$
1,517

$
456,858



56

 
December 31, 2018
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Debt securities available-for-sale:
 
 
 
 
Corporate bonds
$
152,691

$
33

$
1,661

$
151,063

Trust preferred securities
17,964

—

1,115

16,849

Non-agency collateralized loan obligations
393

—

3

390

Agency collateralized mortgage obligations
33,680

42

4

33,718

Agency mortgage-backed securities
21,575

37

348

21,264

Agency debentures
9,994

67

49

10,012

Total debt securities available-for-sale
236,297

179

3,180

233,296

Debt securities held-to-maturity:
 
 
 
 
Corporate bonds
27,184

353

22

27,515

Agency debentures
141,575

472

34

142,013

Municipal bonds
22,963

11

61

22,913

Agency mortgage-backed securities
4,409

—

27

4,382

Total debt securities held-to-maturity
196,131

836

144

196,823

Total debt securities
$
432,428

$
1,015

$
3,324

$
430,119


The changes in the fair values of our municipal bonds, agency debentures, agency collateralized mortgage obligations and agency mortgage-backed securities are primarily the result of interest rate fluctuations. To assess for credit impairment, management evaluates the underlying issuer’s financial performance and the related credit rating information through a review of publicly available financial statements and other publicly available information. This most recent review did not identify any issues related to the ultimate repayment of principal and interest on these debt securities. In addition, the Company has the ability and intent to hold debt securities in an unrealized loss position until recovery of their amortized cost. Based on this, the Company considers all of the unrealized losses to be temporary.


57

The following table sets forth the fair value, contractual maturities and approximated weighted average yield, calculated on a fully taxable equivalent basis, of our available-for-sale and held-to-maturity debt securities portfolios as of March 31, 2019, based on estimated annual income divided by the average amortized cost of these securities. Contractual maturities may differ from expected maturities because issuers and/or borrowers may have the right to call or prepay obligations with or without penalties, which would also impact the corresponding yield.
 
March 31, 2019
 
Less Than
One Year
 
One to
Five Years
 
Five to
10 Years
 
Greater Than
10 Years
 
Total
(Dollars in thousands)
Amount
Yield
 
Amount
Yield
 
Amount
Yield
 
Amount
Yield
 
Amount
Yield
Debt securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
$
13,415

2.55
%
 
$
112,246

3.31
%
 
$
32,785

3.90
%
 
$
—

—
%
 
$
158,446

3.37
%
Trust preferred securities
—

—
%
 
—

—
%
 
9,231

4.76
%
 
8,247

4.86
%
 
17,478

4.81
%
Agency collateralized mortgage obligations
—

—
%
 
653

2.81
%
 
—

—
%
 
31,753

2.92
%
 
32,406

2.92
%
Agency mortgage-backed securities
—

—
%
 
—

—
%
 
—

—
%
 
20,134

2.83
%
 
20,134

2.83
%
Agency debentures
—

—
%
 
—

—
%
 
—

—
%
 
10,258

3.18
%
 
10,258

3.18
%
Total debt securities available-for-sale
13,415

 
 
112,899

 
 
42,016

 
 
70,392

 
 
238,722

 
Weighted average yield
 
2.55
%
 
 
3.31
%
 
 
4.09
%
 
 
3.17
%
 
 
3.37
%
Debt securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
—

—
%
 
—

—
%
 
27,377

5.33
%
 
—

—
%
 
27,377

5.33
%
Agency debentures
—

—
%
 
24,988

3.41
%
 
107,814

3.75
%
 
31,802

4.09
%
 
164,604

3.76
%
Municipal bonds
2,127

1.60
%
 
13,607

2.14
%
 
5,841

2.60
%
 
—

—
%
 
21,575

2.21
%
Agency mortgage-backed securities
—

—
%
 
—

—
%
 
—

—
%
 
4,580

3.59
%
 
4,580

3.59
%
Total debt securities held-to-maturity
2,127

 
 
38,595

 
 
141,032

 
 
36,382

 
 
218,136

 
Weighted average yield
 
1.60
%
 
 
2.96
%
 
 
4.01
%
 
 
4.03
%
 
 
3.80
%
Total debt securities
$
15,542

 
 
$
151,494

 
 
$
183,048

 
 
$
106,774

 
 
$
456,858

 
Weighted average yield
 
2.42
%
 
 
3.22
%
 
 
4.03
%
 
 
3.46
%
 
 
3.57
%

The table above excludes equity securities because they have an indefinite life. For additional information regarding our investment securities portfolios, refer to Note 2, Investment Securities, to our unaudited condensed consolidated financial statements.

Assets Under Management

Our total assets under management of $9.73 billion increased $543.0 million, or 5.9%, as of March 31, 2019, from $9.19 billion as of December 31, 2018.

The following table shows the changes of our assets under management by investment style for the three months ended March 31, 2019.
 
Three Months Ended March 31, 2019
(Dollars in thousands)
Beginning
Balance
Inflows (1)
Outflows (2)
Market Appreciation (Depreciation)
Ending
Balance
Equity investment styles
$
3,419,000

$
120,000

$
(131,000
)
$
410,000

$
3,818,000

Fixed income investment styles
4,263,000

90,000

(57,000
)
123,000

4,419,000

Balanced investment styles
1,507,000

69,000

(137,000
)
56,000

1,495,000

Total assets under management
$
9,189,000

$
279,000

$
(325,000
)
$
589,000

$
9,732,000

(1) 
Inflows consist of new business and contributions to existing accounts.
(2) 
Outflows consist of business lost as well as distributions from existing accounts.


58

Deposits

Deposits are our primary source of funds to support our earning assets. We have focused on creating and growing diversified, stable, and low all-in cost deposit channels without operating through a traditional branch network. We market liquidity and treasury management products to middle-market commercial clients as well as other deposit products to high-net-worth individuals, family offices, trust companies, wealth management firms, municipalities, endowments and foundations, broker/dealers, futures commission merchants and other financial institutions. We believe that our deposit base is stable and diversified. We further believe we have the ability to attract new deposits, which is the primary source of funding our projected loan growth.

As of March 31, 2019, we consider approximately 88% of our total deposits to be relationship-based deposits, which include reciprocal certificates of deposit placed through CDARS® and reciprocal demand deposits placed through ICS®. As of March 31, 2019, the Bank had CDARS® and ICS® reciprocal deposits totaling $799.5 million, which are classified as non-brokered deposits, as a result of recent legislation. We continue to utilize brokered deposits as a tool for us to manage our cost of funds and to efficiently match changes in our liquidity needs based on our loan growth with our deposit balances and origination activity. As of March 31, 2019, brokered deposits were approximately 12% of total deposits. For additional information on our deposits, refer to Note 6, Deposits, to our unaudited condensed consolidated financial statements.

The table below depicts average balances of and rates paid on our deposit portfolio broken out by deposit type, for the three months ended March 31, 2019 and 2018.
 
Three Months Ended March 31,
 
2019
 
2018
(Dollars in thousands)
Average Amount
Average Rate Paid
 
Average Amount
Average Rate Paid
Interest-bearing checking accounts
$
792,690

2.32
%
 
$
464,247

1.42
%
Money market deposit accounts
2,682,390

2.50
%
 
2,281,606

1.44
%
Certificates of deposit
1,300,296

2.57
%
 
977,689

1.52
%
Total average interest-bearing deposits
4,775,376

2.49
%
 
3,723,542

1.46
%
Noninterest-bearing deposits
261,682

—

 
228,257

—

Total average deposits
$
5,037,058

2.36
%
 
$
3,951,799

1.38
%

Average Deposits for the Three Months Ended March 31, 2019 and 2018. For the three months ended March 31, 2019, our average total deposits were $5.04 billion, representing an increase of $1.09 billion, or 27.5%, from the same period in 2018. The average deposit growth was driven by increases in all deposit categories. Our average cost of interest-bearing deposits increased 103 basis points to 2.49% for the three months ended March 31, 2019, from 1.46% for the same period in 2018, as average rates paid were higher in all interest-bearing deposit categories, which was driven by the four increases in 2018 to the Federal Reserve’s target federal funds rate impacting our variable-rate deposits. Average money market deposits decreased to 56.2% of total average interest-bearing deposits for the three months ended March 31, 2019, from 61.3% for the same period in 2018. Average certificates of deposit increased to 27.2% of total average interest-bearing deposits for the three months ended March 31, 2019, compared to 26.2% for the same period in 2018. Average interest-bearing checking accounts increased to 16.6% of total average interest-bearing deposits for the three months ended March 31, 2019, compared to 12.5% for the same period in 2018. Average noninterest-bearing deposits increased $33.4 million, or 14.6%, in the three months ended March 31, 2019, from the three months ended March 31, 2018, and the average cost of total deposits increased 98 basis points to 2.36% for the three months ended March 31, 2019, from 1.38% for the same period in 2018.

Certificates of Deposit

Maturities of certificates of deposit of $100,000 or more outstanding are summarized below, as of March 31, 2019.
(Dollars in thousands)
March 31, 2019
Months to maturity:
 
Three months or less
$
420,321

Over three to six months
276,965

Over six to 12 months
243,894

Over 12 months
177,064

Total
$
1,118,244



59

Borrowings

Deposits are the primary source of funds for our lending and investment activities, as well as the Bank’s general business purposes. As an alternative source of liquidity, we may obtain advances from the FHLB of Pittsburgh, sell investment securities subject to our obligation to repurchase them, purchase Federal funds or engage in overnight borrowings from the FHLB or our correspondent banks.

The following table presents certain information with respect to our outstanding borrowings, as of March 31, 2019 and December 31, 2018.
 
March 31, 2019
 
December 31, 2018
(Dollars in thousands)
Amount
Interest Rate
Maximum Balance at Any Month End
Average
Balance During the Period
Maximum
Original Term
 
Amount
Interest Rate
Maximum Balance at Any Month End
Average
Balance During the Period
Maximum
Original Term
FHLB borrowings
$
360,000

2.71%
$
605,000

$
459,333

12 months
 
$
365,000

2.61%
$
565,000

$
325,356

12 months
Line of credit borrowings
3,250

5.48%
4,250

4,139

12 months
 
4,250

5.47%
6,200

2,568

12 months
Subordinated notes payable
35,000

5.75%
35,000

35,000

5 years
 
35,000

5.75%
35,000

35,000

5 years
Total borrowings outstanding
$
398,250

3.00%
$
644,250

$
498,472

 
 
$
404,250

2.91%
$
606,200

$
362,924

 

In June 2016, the Company entered into a three-year cash flow hedge transaction to establish the interest rate paid on $100.0 million of its FHLB borrowings at an effective rate of 0.83% plus the difference between the three-month FHLB advance rate and three-month LIBOR. In January 2018, the Company entered into a three-year cash flow hedge transaction to establish the interest rate paid on $50.0 million of its FHLB borrowings at an effective rate of 2.21% plus the difference between the three-month FHLB advance rate and three-month LIBOR. For additional information on cash flow hedges, refer to Note 11, Derivatives and Hedging Activity, to our unaudited condensed consolidated financial statements.

Liquidity

We evaluate liquidity both at the holding company level and at the Bank level. As of March 31, 2019, the Bank and Chartwell represent our only material assets. Our primary sources of funds at the parent company level are cash on hand, dividends paid to us from the Bank and Chartwell, availability on our line of credit, and the net proceeds from the issuance of our debt and/or equity securities. As of March 31, 2019, our primary liquidity needs at the parent company level were the semi-annual interest payments on our subordinated notes payable, the quarterly dividend on our preferred stock, interest payments on other borrowings and our share repurchase program. All other liquidity needs were minimal and related to reimbursing the Bank for management, accounting and financial reporting services provided by Bank personnel. During the three months ended March 31, 2019, the parent company paid $1.1 million related to interest payments on our subordinated notes and other borrowings, $679,000 related to our preferred stock dividend and $433,000 related to our share repurchase program. During the three months ended March 31, 2018, the parent company paid $1.1 million related to interest payments on our subordinated notes and other borrowings, and $575,000 related to our share repurchase program. We believe that our cash on hand at the parent company level, coupled with the dividend paying capacity of the Bank and Chartwell, were adequate to fund any foreseeable parent company obligations as of March 31, 2019. In addition, the holding company maintains an unsecured line of credit of $50.0 million with Texas Capital Bank, of which $46.8 million was available as of March 31, 2019.

Our goal in liquidity management at the Bank level is to satisfy the cash flow requirements of depositors and borrowers, as well as our operating cash needs. These requirements include the payment of deposits on demand or at their contractual maturity, the repayment of borrowings as they mature, the payment of our ordinary business obligations, the ability to fund new and existing loans and other funding commitments, and the ability to take advantage of new business opportunities. Our ALCO, which includes members of executive management, has established an asset/liability management policy designed to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, well capitalized regulatory status and adequate levels of liquidity. The ALCO has also established a contingency funding plan to address liquidity crisis conditions. The ALCO is designated as the body responsible for the monitoring and implementation of these policies. The ALCO reviews liquidity on a frequent basis and approves significant changes in strategies that affect balance sheet or cash flow positions.

Sources of asset liquidity are cash, interest-earning deposits with other banks, federal funds sold, certain unpledged debt and equity securities, loan repayments (scheduled and unscheduled) and future earnings. Sources of liability liquidity include a stable deposit base, the ability to renew maturing certificates of deposit, borrowing availability at the FHLB of Pittsburgh, unsecured lines with other financial institutions, access to reciprocal CDARS® and ICS® deposits and brokered deposits, and the ability to raise debt and equity. Customer

60

deposits, which are an important source of liquidity, depend on the confidence of customers in us. Deposits are supported by our capital position and, up to applicable limits, the protection provided by FDIC insurance.

We measure and monitor liquidity on an ongoing basis, which allows us to more effectively understand and react to trends in our balance sheet. In addition, the ALCO uses a variety of methods to monitor our liquidity position, including a liquidity gap, which measures potential sources and uses of funds over future periods. We have established policy guidelines for a variety of liquidity-related performance metrics, such as net loans to deposits, brokered funding composition, cash to total loans and duration of certificates of deposit, among others, all of which are utilized in measuring and managing our liquidity position. The ALCO performs contingency funding and capital stress analyses at least annually to determine our ability to meet potential liquidity and capital needs under various stress scenarios.

We believe that our liquidity position continues to be strong due to our ability to generate strong growth in deposits, which is evidenced by our ratio of total deposits to total assets of 84.1% and 83.7% as of March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, we had available liquidity of $1.09 billion, or 17.1% of total assets. These sources consisted of available cash totaling $117.4 million, or 1.9% of total assets, unpledged investment securities totaling $416.1 million, or 6.6% of total assets, and the ability to borrow from the FHLB and correspondent bank lines totaling $552.1 million, or 8.7% of total assets. Available cash excludes cash posted as collateral for derivative and letter of credit transactions and the reserve balance requirement at the Federal Reserve.

The following table shows our available liquidity, by source, as of the dates indicated:
(Dollars in thousands)
March 31,
2019
December 31,
2018
Available cash
$
117,402

$
97,703

Certain unpledged debt and equity securities
416,058

389,010

Net borrowing capacity
552,060

476,686

Total liquidity
$
1,085,520

$
963,399


For the three months ended March 31, 2019, we used $4.1 million of cash for operating activities, compared to cash generated of $14.9 million for the same period in 2018. This change in cash flow was primarily the result of an increase in net income of $4.2 million for the three months ended March 31, 2019, more than offset by changes in working capital items largely related to timing. In addition, we received a federal income tax refund of $5.0 million during the three months ended March 31, 2019, compared to a $10 million refund during the three months ended March 31, 2018.

Investing activities resulted in a net cash outflow of $219.3 million for the three months ended March 31, 2019, as compared to a net cash outflow of $144.5 million for the same period in 2018. The outflows for the three months ended March 31, 2019, were primarily due to net loan growth of $202.0 million and purchases of investment securities totaling $54.8 million, partially offset by the proceeds from the sale, principal repayments and maturities from investment securities totaling $33.8 million. The outflows for the three months ended March 31, 2018, included net loan growth of $121.6 million and purchases of investment securities totaling $29.0 million, partially offset by the proceeds from the sale, principal repayments and maturities from investment securities totaling $6.0 million.

Financing activities resulted in a net inflow of $277.4 million for the three months ended March 31, 2019, compared to a net inflow of $118.5 million for the same period in 2018. The inflows for the three months ended March 31, 2019, were primarily a result of a net increase in deposits of $287.2 million, partially offset by a net decrease in FHLB borrowings of $5.0 million. The inflows for the three months ended March 31, 2018, included a net increase in deposits of $111.3 million and proceeds from the issuance of preferred stock of $38.4 million, partially offset by a net decrease in FHLB borrowings of $25.0 million.

We continue to evaluate the potential impact on liquidity management of various regulatory proposals, including those being established under the Dodd-Frank Wall Street Reform and Consumer Protection Act, as government regulators continue the final rule-making process.

Capital Resources

The access to and cost of funding for new business initiatives, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit insurance costs and the level and nature of regulatory oversight depend, in part, on our capital position. The Company filed a registration statement on Form S-3 with the SEC on December 15, 2017, which was declared effective on December 21, 2017, and which provides a means to allow us to issue registered securities to finance our growth objectives.

The assessment of capital adequacy depends on a number of factors, including asset quality, liquidity, earnings performance, changing competitive conditions and economic forces. We seek to maintain a strong capital base to support our growth and expansion activities, to provide stability to our current operations and to promote public confidence in our Company.


61

Shareholders’ Equity. Shareholders’ equity was $496.6 million as of March 31, 2019, compared to $479.4 million as of December 31, 2018. The $17.2 million increase during the three months ended March 31, 2019, was primarily attributable to net income of $14.6 million, an increase of $1.8 million in accumulated other comprehensive income (loss), $1.7 million in stock-based compensation and $188,000 in exercises of stock options, partially offset by the purchase of $433,000 in treasury stock and preferred stock dividends of $679,000.

In March 2018, the Company completed the issuance and sale of a registered, underwritten public offering of 1,610,000 depositary shares, each representing a 1/40th interest in a share of its 6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, no par value (the “Series A Preferred Stock”), with a liquidation preference of $1,000 per share (equivalent to $25 per depository share). The Company received net proceeds of $38.5 million from the offering, after deducting underwriting discounts, commissions and direct offering expenses. Our Series A Preferred Stock provides Tier 1 capital for the holding company under federal regulatory capital rules.

When, as, and if declared by the board of directors of the Company, dividends will be payable on the Series A Preferred Stock from the date of issuance to, but excluding April 1, 2023 at a rate of 6.75% per annum, payable quarterly, in arrears, and from and including April 1, 2023, dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 398.5 basis points per annum, payable quarterly, in arrears. The Company may redeem the Series A Preferred Stock at its option, subject to regulatory approval, on or after April 1, 2023, as described in the prospectus supplement relating to the offering filed with the SEC on March 19, 2018.

Regulatory Capital. As of March 31, 2019 and December 31, 2018, TriState Capital Holdings, Inc. and TriState Capital Bank were in compliance with all applicable regulatory capital requirements, and TriState Capital Bank was categorized as well capitalized for purposes of the FDIC’s prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease. However, we will monitor our capital in order to remain categorized as well capitalized under the applicable regulatory guidelines and in compliance with all regulatory capital standards applicable to us.

The Basel III regulatory capital framework (the “Basel III”), which began phasing in on January 1, 2015, has replaced the regulatory capital rules for the Company and the Bank. The Basel III final rules required new minimum capital ratio standards, established a new common equity tier 1 to total risk-weighted assets ratio, subjected banking organizations to certain limitations on capital distributions and discretionary bonus payments, and established a new standardized approach for risk weightings.

The final rules subject a banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of risk-based capital ratios in an amount greater than 2.5% of its total risk-weighted assets. The implementation of the capital conservation buffer began on January 1, 2016, at 0.625%, and was phased in ratably over a four-year period until it reached 2.5% on January 1, 2019. As of March 31, 2019 and December 31, 2018, the capital conservation buffer was 2.5% and 1.875%, respectively, in addition to the minimum capital adequacy levels shown in the tables below. Thus, both the Company and the Bank were above the levels required to avoid limitations on capital distributions and discretionary bonus payments.

The following tables present the actual capital amounts and regulatory capital ratios for the Company and the Bank as of the dates indicated:
 
March 31, 2019
 
Actual
 
For Capital Adequacy Purposes
 
To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)
Amount
Ratio
 
Amount
Ratio
 
Amount
Ratio
Total risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
444,937

11.26
%
 
$
316,146

8.00
%
 
 N/A

N/A

Bank
$
454,670

11.57
%
 
$
314,293

8.00
%
 
$
392,866

10.00
%
Tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
431,428

10.92
%
 
$
237,110

6.00
%
 
 N/A

N/A

Bank
$
439,408

11.18
%
 
$
235,720

6.00
%
 
$
314,293

8.00
%
Common equity tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
394,213

9.98
%
 
$
177,832

4.50
%
 
 N/A

N/A

Bank
$
439,408

11.18
%
 
$
176,790

4.50
%
 
$
255,363

6.50
%
Tier 1 leverage ratio
 
 
 
 
 
 
 
 
Company
$
431,428

7.13
%
 
$
242,001

4.00
%
 
 N/A

N/A

Bank
$
439,408

7.29
%
 
$
241,042

4.00
%
 
$
301,303

5.00
%


62

 
December 31, 2018
 
Actual
 
For Capital Adequacy Purposes
 
To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)
Amount
Ratio
 
Amount
Ratio
 
Amount
Ratio
Total risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
426,066

10.86
%
 
$
313,789

8.00
%
 
 N/A

N/A

Bank
$
437,849

11.25
%
 
$
311,497

8.00
%
 
$
389,371

10.00
%
Tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
414,808

10.58
%
 
$
235,342

6.00
%
 
 N/A

N/A

Bank
$
424,418

10.90
%
 
$
233,622

6.00
%
 
$
311,497

8.00
%
Common equity tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
378,117

9.64
%
 
$
176,506

4.50
%
 
 N/A

N/A

Bank
$
424,418

10.90
%
 
$
175,217

4.50
%
 
$
253,091

6.50
%
Tier 1 leverage ratio
 
 
 
 
 
 
 
 
Company
$
414,808

7.28
%
 
$
227,851

4.00
%
 
 N/A

N/A

Bank
$
424,418

7.49
%
 
$
226,762

4.00
%
 
$
283,453

5.00
%

Contractual Obligations and Commitments

There were no material changes to contractual obligations during the three months ended March 31, 2019, that were outside the ordinary course of business.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions that are not included in our consolidated balance sheets in accordance with GAAP. These transactions include commitments to extend credit in the ordinary course of business to approved customers.

Loan commitments are recorded on our financial statements as they are funded. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Loan commitments include unused commitments for open end lines secured by cash, marketable securities, cash value life insurance or residential properties, and commitments to fund loans secured by commercial real estate, construction loans, business lines of credit and other unused commitments of loans in various stages of funding. Not all commitments will fund or fully fund as customers often only draw on a portion of their available credit. We have the ability to generate the liquidity necessary to fund anticipated draws under unused loan commitments.

Standby letters of credit are written conditional commitments issued by us to guarantee the performance of our customer to a third party. In the event our customer 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 customer.

We minimize our exposure to loss under loan commitments and standby letters of credit by subjecting them to credit approval and monitoring procedures. The effect on our revenues, expenses, cash flows and liquidity of the unused portions of these commitments cannot be reasonably predicted because, while the borrower has the ability to draw upon these commitments at any time, these commitments often expire without being drawn. There is no guarantee that the lines of credit will be used.

The following table is a summary of the total notional amount of unused loan commitments and standby letters of credit commitments, based on the availability of eligible collateral or other terms under the loan agreement, by contractual maturities outstanding as of the date indicated.
 
March 31, 2019
(Dollars in thousands)
One Year
or Less (1)
One to
Three Years
Three to
Five Years
Greater Than
Five Years
Total
Unused loan commitments
$
3,247,582

$
371,073

$
152,862

$
37,465

$
3,808,982

Standby letters of credit
42,962

19,995

8,368

—

71,325

Total off-balance sheet arrangements
$
3,290,544

$
391,068

$
161,230

$
37,465

$
3,880,307

(1) 
The off-balance sheet amounts reflected in the “One Year or Less” column include $2.95 billion in unused loan commitments and $835,000 in standby letters of credit that are due on demand with no stated maturity.

63


Market Risk

Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices. Our primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact the level of both income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those that have a short term to maturity. Because of the nature of our operations, we are not subject to foreign exchange or commodity price risk. From time to time we hold market risk sensitive instruments for trading purposes. The summary information provided in this section should be read in conjunction with our unaudited condensed consolidated financial statements and related notes.

Interest rate risk is comprised of re-pricing risk, basis risk, yield curve risk and option risk. Re-pricing risk arises from differences in the cash flow or re-pricing between asset and liability portfolios. Basis risk arises when asset and liability portfolios are related to different market rate indexes, which do not always change by the same amount or at the same time. Yield curve risk arises when asset and liability portfolios are related to different maturities on a given yield curve; when the yield curve changes shape, the risk position is altered. Option risk arises from embedded options within asset and liability products as certain borrowers may prepay their loans and certain depositors may redeem their certificates when rates change.

Our ALCO actively measures and manages interest rate risk. The ALCO is responsible for the formulation and implementation of strategies to improve balance sheet positioning and earnings, and for reviewing our interest rate sensitivity position. This involves devising policy guidelines, risk measures and limits, and managing the amount of interest rate risk and its effect on net interest income and capital.

We utilize an asset/liability model to measure and manage interest rate risk. The specific measurement tools used by management on at least a quarterly basis include net interest income (“NII”) simulation, economic value of equity (“EVE”) analysis and gap analysis. All are static measures that do not incorporate assumptions regarding future business. All are also measures of interest rate sensitivity used to help us develop strategies for managing exposure to interest rate risk rather than projecting future earnings.

In our view, all three measures have specific benefits and shortcomings. NII simulation explicitly measures exposure to earnings from changes in market rates of interest but does not provide a long-term view of value. EVE analysis helps identify changes in optionality and price over a longer term horizon, but its liquidation perspective does not convey the earnings-based measures that are typically the focus of managing and valuing a going concern. Gap analysis compares the difference between the amount of interest-earning assets and interest-bearing liabilities subject to re-pricing over a period of time but only captures a single rate environment. Reviewing these various measures together helps management obtain a comprehensive view of our interest risk rate profile.

The following NII simulation and EVE analysis metrics were calculated using rate shocks that represent immediate rate changes that move all market rates by the same amount instantaneously. The variance percentages represent the change between the NII simulation and EVE calculated under the particular rate scenario versus the NII simulation and EVE analysis calculated assuming market rates as of the dates indicated.
 
March 31, 2019
 
December 31, 2018
(Dollars in thousands)
Amount Change from
Base Case
Percent Change from
Base Case
 
Amount Change from
Base Case
Percent Change from
Base Case
Net interest income (loss):
 
 
 
 
 
+300
$
32,411

26.65
 %
 
$
26,950

22.28
 %
+200
$
21,800

17.92
 %
 
$
18,056

14.93
 %
+100
$
11,478

9.44
 %
 
$
9,399

7.77
 %
–100
$
(11,876
)
(9.76
)%
 
$
(9,712
)
(8.03
)%
–200
$
(24,998
)
(20.55
)%
 
$
(22,079
)
(18.25
)%
 
 
 
 
 
 
Economic value of equity:
 
 
 
 
 
+300
$
(9,138
)
(1.85
)%
 
$
(19,782
)
(4.09
)%
+200
$
(4,481
)
(0.91
)%
 
$
(12,468
)
(2.58
)%
+100
$
2,046

0.41
 %
 
$
(3,526
)
(0.73
)%
–100
$
(4,905
)
(0.99
)%
 
$
(505
)
(0.10
)%
–200
$
(9,759
)
(1.98
)%
 
$
(1,380
)
(0.29
)%


64

We plan to continue to manage an asset sensitive interest rate risk position when it comes to net interest income due to the ongoing desire for some duration in the liability portfolio. Given the longer term nature of the EVE analysis and with longer term interest rates being less certain, we plan to continue to manage a near neutral interest rate risk position when it comes to economic value of equity.

The following gap analysis presents the amounts of interest-earning assets and interest-bearing liabilities that are subject to re-pricing within the periods indicated.
 
March 31, 2019
(Dollars in thousands)
Less Than
90 Days
91 to 180
Days
181 to 365
Days
One to Three
Years
Three to Five
Years
Greater Than Five Years
Non-Sensitive
Total Balance
Assets:
 
 
 
 
 
 
 
 
Interest-earning deposits
$
237,203

$
—

$
—

$
—

$
—

$
—

$
—

$
237,203

Federal funds sold
6,344

—

—

—

—

—

—

6,344

Total investment securities
206,337

1,534

66,119

134,215

42,406

38,841

(2,365
)
487,087

Total loans
5,015,504

24,378

72,827

144,772

49,861

19,238

10,145

5,336,725

Other assets
—

—

—

—

—

—

276,651

276,651

Total assets
$
5,465,388

$
25,912

$
138,946

$
278,987

$
92,267

$
58,079

$
284,431

$
6,344,010

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Transaction deposits
$
3,399,190

$
—

$
13,500

$
193,405

$
50,000

$
—

$
292,188

$
3,948,283

Certificates of deposit
554,968

265,317

276,538

292,598

—

—

—

1,389,421

Borrowings, net
213,250

135,000

—

50,000

—

—

(34
)
398,216

Other liabilities
—

—

—

—

—

—

111,533

111,533

Total liabilities
4,167,408

400,317

290,038

536,003

50,000

—

403,687

5,847,453

 
 
 
 
 
 
 
 
 
Equity
—

—

—

—

—

—

496,557

496,557

Total liabilities and equity
$
4,167,408

$
400,317

$
290,038

$
536,003

$
50,000

$
—

$
900,244

$
6,344,010

 
 
 
 
 
 
 
 
 
Interest rate sensitivity gap
$
1,297,980

$
(374,405
)
$
(151,092
)
$
(257,016
)
$
42,267

$
58,079

$
(615,813
)
 
Cumulative interest rate sensitivity gap
$
1,297,980

$
923,575

$
772,483

$
515,467

$
557,734

$
615,813

 
 
Cumulative interest rate sensitive assets to rate sensitive liabilities
131.1
%
120.2
%
115.9
%
109.6
%
110.2
%
111.3
%
108.5
%
 
Cumulative gap to total assets
20.5
%
14.6
%
12.2
%
8.1
%
8.8
%
9.7
%
 
 

The cumulative 12-month ratio of interest rate sensitive assets to interest rate sensitive liabilities increased to 115.9% as of March 31, 2019, from 112.2% as of December 31, 2018.

In January 2018, the Company entered into a cash flow hedge transaction to fix the interest rate on $50.0 million of the Company’s borrowings for a period of three years. This transaction has the effect on our gap analysis of moving $50.0 million of borrowings from the less than 90 days re-pricing category to the one to three years re-pricing category. For additional information on the cash flow hedge, refer to Note 11, Derivatives and Hedging Activity, to our unaudited condensed consolidated financial statements.

Additionally, in all of these analyses (NII, EVE and gap), we use what we believe is a conservative treatment of non-maturity, interest-bearing deposits. In our gap analysis, the allocation of non-maturity, interest-bearing deposits is fully reflected in the less than 90 days re-pricing category. The allocation of non-maturity, noninterest-bearing deposits is fully reflected in the non-sensitive category. In taking this approach, we provide ourselves with no benefit to either NII or EVE from a potential time lag in the rate increase of our non-maturity, interest-bearing deposits.

Impact of Inflation

Our financial statements and related data presented herein have been prepared in accordance with GAAP, which requires the measure of financial position and operating results in terms of historic dollars, without considering changes in the relative purchasing power of money over time due to inflation.


65

Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation. In addition, inflation affects a financial institution’s cost of goods and services purchased, the cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and shareholders’ equity.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about market risk are presented under the caption “Market Risk” in Part I, Item 2 of this Quarterly Report on Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2019. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of March 31, 2019.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2019, 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 a party to various litigation matters incidental to the conduct of its business. During the three months ended March 31, 2019, the Company was not a party to any legal proceedings the resolution of which management believes will be material to the Company’s business, future prospects, financial condition, liquidity, results of operation, cash flows or capital levels.

ITEM 1A. RISK FACTORS

There have not been any material changes to the risk factors previously disclosed under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, previously filed with the SEC.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

None.


66

Purchases of Equity Securities by the Company and Affiliated Purchasers

The table below sets forth information regarding the Company’s purchases of its common stock during its fiscal quarter ended March 31, 2019:
 
Total Number
of Shares
Purchased
 
Weighted
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
 
Approximate Dollar Value
of Shares that May 
Yet Be Purchased
Under the Plans or
Programs (1)
January 1, 2019 - January 31, 2019
—

 
$
—

—

 
$
2,247,442

February 1, 2019 - February 28, 2019
5,000

 
21.52

5,000

 
2,139,822

March 1, 2019 - March 31, 2019
15,000

 
21.71

15,000

 
1,814,244

Total
20,000

 
$
21.66

20,000

 
$
1,814,244

(1) 
On October 16, 2018, the Company announced that its board of directors had approved an additional share repurchase program of up to $5 million. Under this authorization, purchases of shares may be made at the discretion of management from time to time in the open market or through negotiated transactions, as well as purchases of shares or the options to acquire shares subject to common stock incentive compensation award agreements from officers, directors or employees of the Company.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibit No.    Description

31.1
31.2
32
101
The following materials from TriState Capital Holdings, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2019, formatted in XBRL: (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) the Unaudited Condensed Consolidated Statements of Income, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Unaudited Condensed Consolidated Financial Statements.*
* This information is deemed furnished, not filed.


67

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.


TRISTATE CAPITAL HOLDINGS, INC.
 
 
By
/s/ James F. Getz
 
James F. Getz
 
Chairman, President and Chief Executive Officer
 
 
By
/s/ David J. Demas
 
David J. Demas
 
Chief Financial Officer


Date: May 7, 2019


68