Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.93M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 30K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 30K
4: EX-32 Certification -- §906 - SOA'02 HTML 27K
10: R1 Cover Page HTML 89K
11: R2 Unaudited Condensed Consolidated Statements of HTML 143K
Financial Condition
12: R3 Unaudited Condensed Consolidated Statements of HTML 53K
Financial Condition (Parenthetical)
13: R4 Unaudited Condensed Consolidated Statements of HTML 139K
Income
14: R5 Unaudited Condensed Consolidated Statements of HTML 60K
Comprehensive Income
15: R6 Unaudited Condensed Consolidated Statements of HTML 36K
Comprehensive Income (Parenthetical)
16: R7 Unaudited Condensed Consolidated Statements of HTML 66K
Changes in Shareholders? Equity
17: R8 Unaudited Condensed Consolidated Statements of HTML 158K
Cash Flows
18: R9 Basis of Information and Summary of Significant HTML 93K
Accounting Policies
19: R10 Investment Securities HTML 256K
20: R11 Loans and Leases HTML 56K
21: R12 Allowance for Credit Losses on Loans and Leases HTML 297K
22: R13 Deposits HTML 59K
23: R14 Borrowings HTML 62K
24: R15 Stock Transactions HTML 57K
25: R16 Regulatory Capital HTML 91K
26: R17 Earnings Per Common Share HTML 60K
27: R18 Derivatives and Hedging Activity HTML 112K
28: R19 Disclosures About Fair Value of Financial HTML 167K
Instruments
29: R20 Changes in Accumulated Other Comprehensive Income HTML 50K
(Loss)
30: R21 Contingent Liabilities HTML 32K
31: R22 Segments HTML 98K
32: R23 Subsequent Events HTML 29K
33: R24 Basis of Information and Summary of Significant HTML 149K
Accounting Policies (Policies)
34: R25 Investment Securities (Tables) HTML 349K
35: R26 Loans and Leases (Tables) HTML 52K
36: R27 Allowance for Credit Losses on Loans and Leases HTML 291K
(Tables)
37: R28 Deposits (Tables) HTML 58K
38: R29 Borrowings (Tables) HTML 59K
39: R30 Stock Transactions (Tables) HTML 50K
40: R31 Regulatory Capital (Tables) HTML 85K
41: R32 Earnings Per Common Share (Tables) HTML 93K
42: R33 Derivatives and Hedging Activity (Tables) HTML 114K
43: R34 Disclosures About Fair Value of Financial HTML 155K
Instruments (Tables)
44: R35 Changes in Accumulated Other Comprehensive Income HTML 49K
(Loss) (Tables)
45: R36 Segments (Tables) HTML 94K
46: R37 BASIS OF INFORMATION AND SUMMARY OF SIGNIFICANT HTML 60K
ACCOUNTING POLICIES - Narrative (Details)
47: R38 INVESTMENT SECURITIES - Investment Types (Details) HTML 96K
48: R39 INVESTMENT SECURITIES - Narrative (Details) HTML 48K
49: R40 INVESTMENT SECURITIES - Interest Income on HTML 35K
Investment Securities (Details)
50: R41 INVESTMENT SECURITIES - Contractual Maturities HTML 84K
(Details)
51: R42 INVESTMENT SECURITIES - Gains and Losses on Sales HTML 53K
and Calls of Investment Securities (Details)
52: R43 INVESTMENT SECURITIES - Debt Securities, HTML 55K
Held-to-maturity, Allowance for Credit Loss
(Details)
53: R44 INVESTMENT SECURITIES - Unrealized Losses HTML 80K
(Details)
54: R45 INVESTMENT SECURITIES - Credit Quality Indicator HTML 83K
(Details)
55: R46 LOANS AND LEASES - Loans Receivable by Class HTML 58K
(Details)
56: R47 LOANS AND LEASES - Narrative (Details) HTML 40K
57: R48 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES - HTML 69K
Narrative (Details)
58: R49 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES - HTML 119K
Credit Quality Indicator (Details)
59: R50 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES - HTML 48K
Changes in Allowance (Details)
60: R51 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES - HTML 65K
Analysis of Past Due Loans (Details)
61: R52 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES - HTML 84K
Impaired Loans (Details)
62: R53 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES - HTML 57K
Allowance (Details)
63: R54 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES- HTML 35K
Troubled Debt Restructuring (Details)
64: R55 ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES - HTML 41K
Modifications (Details)
65: R56 DEPOSITS - Schedule of Deposits by Type (Details) HTML 61K
66: R57 DEPOSITS - Narrative (Details) HTML 33K
67: R58 DEPOSITS - Contractual Maturities of Time Deposits HTML 34K
(Details)
68: R59 DEPOSITS - Interest Expense on Deposits by Type HTML 35K
(Details)
69: R60 BORROWINGS - Schedule of Borrowings (Details) HTML 65K
70: R61 BORROWINGS - Narrative (Details) HTML 83K
71: R62 BORROWINGS - Interest Expense on Borrowings by HTML 35K
Type (Details)
72: R63 STOCK TRANSACTIONS - Narrative (Details) HTML 48K
73: R64 STOCK TRANSACTIONS - Shares Outstanding Activity HTML 56K
(Details)
74: R65 REGULATORY CAPITAL - Narrative (Details) HTML 28K
75: R66 REGULATORY CAPITAL - Regulatory Capital HTML 101K
Requirements (Details)
76: R67 EARNINGS PER COMMON SHARE - Schedule of Earnings HTML 94K
Per Common Share (Details)
77: R68 EARNINGS PER COMMON SHARE - Anti-Dilutive Shares HTML 37K
(Details)
78: R69 DERIVATIVES AND HEDGING ACTIVITY - Financial HTML 45K
Position, Fair Value (Details)
79: R70 DERIVATIVES AND HEDGING ACTIVITY - Offsetting of HTML 45K
Derivative Assets (Details)
80: R71 DERIVATIVES AND HEDGING ACTIVITY - Offsetting of HTML 44K
Derivative Liabilities (Details)
81: R72 DERIVATIVES AND HEDGING ACTIVITY - Interest Rate HTML 52K
Derivative Transactions (Details)
82: R73 DERIVATIVES AND HEDGING ACTIVITY - Gain (Loss) in HTML 40K
Statement of Financial Performance (Details)
83: R74 DERIVATIVES AND HEDGING ACTIVITY - Narrative HTML 36K
(Details)
84: R75 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL HTML 107K
INSTRUMENTS - Assets and Liabilities Measured on
Recurring Basis (Details)
85: R76 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL HTML 43K
INSTRUMENTS - Fair Value Measurements,
Nonrecurring (Details)
86: R77 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL HTML 28K
INSTRUMENTS - Narrative (Details)
87: R78 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL HTML 42K
INSTRUMENTS - Fair Value Inputs, Assets,
Quantitative Information (Details)
88: R79 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL HTML 80K
INSTRUMENTS - Financial Assets and Liabilities
(Details)
89: R80 Changes in Accumulated Other Comprehensive Income HTML 55K
(Loss) (Details)
90: R81 SEGMENTS - Schedule of Segment Reporting HTML 122K
Information (Details)
91: R82 Subsequent Events (Details) HTML 45K
94: XML IDEA XML File -- Filing Summary XML 179K
92: XML XBRL Instance -- tsc-20220331_htm XML 5.17M
93: EXCEL IDEA Workbook of Financial Reports XLSX 156K
6: EX-101.CAL XBRL Calculations -- tsc-20220331_cal XML 325K
7: EX-101.DEF XBRL Definitions -- tsc-20220331_def XML 1.13M
8: EX-101.LAB XBRL Labels -- tsc-20220331_lab XML 2.42M
9: EX-101.PRE XBRL Presentations -- tsc-20220331_pre XML 1.52M
5: EX-101.SCH XBRL Schema -- tsc-20220331 XSD 216K
95: JSON XBRL Instance as JSON Data -- MetaLinks 562± 851K
96: ZIP XBRL Zipped Folder -- 0001380846-22-000025-xbrl Zip 509K
(Exact name of registrant as specified in its charter)
___________
iPennsylvania
i20-4929029
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
iOne Oxford Centre
i(412)
i304-0304
i301
Grant Street, Suite 2700
(Registrant’s telephone number, including area code)
iPittsburgh,
iPennsylvania
i15219
(Address
of principal executive offices)
(Zip Code)
___________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, no par value
iTSC
iNasdaq Global Select Market
iDepositary
Shares, Each Representing a 1/40th Interest in a Share of 6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock
iTSCAP
iNasdaq Global Select Market
iDepositary
Shares, Each Representing a 1/40th Interest in a Share of 6.375% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock
iTSCBP
iNasdaq Global Select Market
___________
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. ýiYes¨ 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). ýiYes¨ 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
☐
iAccelerated
filer
ý
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
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 iý
No
___________
As of April 30, 2022, there were i33,636,862 shares of the registrant’s common stock, no par value, outstanding.
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,”“goal,”“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:
•risks associated with COVID-19 and their expected impact and duration, including effects on our operations, our clients, economic conditions and the demand for our products and services;
•risks associated with the acquisition of our Company by Raymond James Financial, Inc., including risks related to our failure to satisfy conditions of the closing of the acquisition, which could result in the acquisition not closing, which in turn could
have a material adverse impact on the value of our stock;
•deterioration of our asset quality;
•our level of non-performing assets and the costs associated with resolving problem loans, including litigation and other costs;
•possible additional loan and lease losses and impairment, changes in the value of collateral securing our loans and leases and the collectability of loans and leases, particularly as a result of the COVID-19 pandemic and the programs implemented by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, including its automatic loan forbearance provisions;
•our ability to prudently manage our growth and execute our strategy;
•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 areas, including the effects of an increase in unemployment levels, slowdowns in economic growth and changes in demand for products or services or the value of assets under management;
•changes in management personnel;
•our ability to recruit and retain key employees;
•our ability to maintain important deposit customer relationships and our reputation and otherwise avoid liquidity risks;
•our ability to provide investment
management performance competitive with our peers and benchmarks;
•operational risks associated with our business, including technology and cyber-security related risks;
•risks related to the phasing out of London Interbank Offered Rate (“LIBOR”) and changes in the manner of calculating reference rates, as well as the impact of the phase out of LIBOR and introduction of alternative reference rates on the value of loans and other financial instruments that are linked to LIBOR;
•volatility and direction of market interest rates;
•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 accounting policies, accounting standards, or authoritative accounting guidance;
•any impairment of our goodwill or other intangible assets;
•our ability to develop and provide competitive products and services that appeal to our customers and target markets;
•fluctuations in the carrying value of the assets under management held by our Chartwell Investment Partners, LLC subsidiary, as well as the relative and absolute investment performance of such subsidiary’s investment products;
•changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters , including economic stimulus programs, and potential expenses associated with complying with such laws and regulations;
•our ability to comply with applicable capital and liquidity requirements, including our ability to generate liquidity internally or raise capital on favorable terms;
•regulatory
limits on our ability to receive dividends from our subsidiaries and pay dividends to shareholders;
•changes and direction of government policy towards and intervention in the U.S. financial system;
•natural disasters and adverse weather, acts of terrorism, regional or national civil unrest, cyber-attacks, an outbreak of hostilities or war, a public health outbreak (such as COVID-19) or other international or domestic calamities, and other matters beyond our control;
•the effects of any reputation, credit, interest rate, market, operational, legal, liquidity, regulatory or compliance risk resulting from developments related to any of the risks discussed above; 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. New factors emerge from time to time, and it is not possible for us to predict which will arise. 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. 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.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
[1]
iBASIS OF INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
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 ithree wholly owned subsidiaries: TriState Capital Bank, a Pennsylvania-chartered state bank (the “Bank”);
Chartwell Investment Partners, LLC, a registered investment adviser (“Chartwell”); and Chartwell TSC Securities Corp., a registered broker-dealer (“CTSC Securities”).
The Bank was established to serve the commercial banking needs of middle-market businesses and financial services providers and focused private banking needs of high-net-worth individuals nation-wide. The Bank has itwo wholly owned subsidiaries: TSC
Equipment Finance LLC (“TSC Equipment Finance”), established to hold and manage loans and leases of our equipment finance business, and Meadowood Asset Management, LLC (“Meadowood”), established to hold and manage other real estate owned by the Bank and/or foreclosed properties for the Bank.
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 and supervision by the Federal Deposit Insurance
Corporation (“FDIC”), the Pennsylvania Department of Banking and Securities and the Board of Governors of the Federal Reserve System (“Federal Reserve”). Since the Bank’s consolidated total assets exceeded $10 billion for four consecutive quarters, as of December 31, 2021, the Company and the Bank are subject to regulatory examination and supervision of the Consumer Financial Protection Bureau (“CFPB”) with respect to certain consumer protection laws. Chartwell is a registered investment adviser regulated by the U.S. 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 ifour 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.
On October 20, 2021, the
Company announced that it entered into a definitive agreement under which Raymond James Financial, Inc. (“Raymond James”) will acquire the outstanding shares of stock of the Company for consideration that is a combination of cash and Raymond James stock at a fixed exchange rate, valued in aggregate at approximately $i1.10 billion based on the trading value of Raymond James’ stock on the announcement date. The
Company’s shareholders approved the transaction on February 28, 2022. The acquisition is subject to customary closing conditions, including receipt of regulatory approvals, and is currently expected to close by the end of the second quarter of 2022.
/
i
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the
United States (“GAAP”) 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 credit losses on loans and leases, valuation of goodwill and other intangible assets and their evaluation for impairment, fair
value measurements and deferred income taxes and their related recoverability, each of which is discussed later in this section.
i
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 subsidiaries, TSC Equipment Finance and Meadowood, 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, 2021, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2022.
i
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 i90 days or less. Under agreements with certain of its derivative counterparties, the Company is required to maintain minimum cash collateral posting thresholds with such counterparties. The
cash subject to these agreements is considered restricted for these purposes.
/
i
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 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 amount is recorded to non-interest expense in the consolidated statements of income.
i
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, net of allowance for credit losses; (2) trading, which are debt securities bought and held principally for the purpose of selling them in the near term and are 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 are 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. Management evaluates expected credit losses on held-to-maturity debt securities on a collective or pool basis, by investment category and credit rating. The Company measures credit losses by comparing the present value of cash flows expected to be collected to the amortized cost of the security considering historical credit loss information, adjusted for current conditions and reasonable and supportable economic forecasts. The
Company’s investment securities can be classified into the following pools based on similar risk characteristics: (1) U.S. government agencies, (2) state and local municipalities, (3) domestic corporations, including trust preferred securities, and (4) non-agency securitizations.The Company’s U.S. government agency securities are issued by U.S. government entities and agencies and are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses.For the remaining pools of securities, the credit rating of the issuers, the investment’s cash flow characteristics and the underlying instruments securitizing certain bonds are the most relevant risk characteristics of the investment portfolio.The
Company’s investment policy only allows for purchases of investments with investment grade credit ratings and the Company continuously monitors for changes in credit ratings. Probability of default and loss given default rates are based on historical averages for each investment pool, adjusted to reflect the impact of a single, forward-looking forecast of certain macroeconomic variables, such as unemployment rates and interest rate spreads, which management considers to be both reasonable and supportable. The forecast of these macroeconomic variables is applied over a period of three years and reverts to historical averages over a two-year reversion period.
Management evaluates available-for-sale debt securities in an unrealized loss position quarterly for expected credit losses. 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 an available-for-sale 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, the security’s amortized cost is written down to fair value through current period earnings. For available-for-sale 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, a provision for credit losses is recorded through current period earnings
for the amount of the valuation decline below amortized cost that is attributable to credit losses. Management considers the extent to which fair value is less than amortized cost, credit ratings and other factors related to
the security in assessing whether credit loss exists. The Company measures credit loss by comparing the present value of cash flows expected to be collected to the amortized cost of the security. An allowance for credit losses is measured by the difference that the present value of cash flows expected to be collected is less than the amortized
cost, limited by the amount that the fair value is less than the amortized cost. 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. Changes in the allowance for credit losses are recorded as provision for credit losses. Losses are charged against the allowance when management believes the security is uncollectible or management intends to sell or is required to sell the security.
The recognition of interest income on a debt security is discontinued when any principal or interest payment becomes 90 days past due, at which time the debt security is placed on non-accrual
status. All accrued and unpaid interest on such debt security is then reversed. Accrued interest receivable is excluded from the estimate of expected credit losses.
i
FEDERAL HOME LOAN BANK STOCK
The Bank 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, 2022 and December 31, 2021. Cash and stock dividends are reported as interest income on investments in the consolidated statements of income.
i
LOANS
AND LEASES
Loans and leases held-for-investment are stated at amortized cost. Amortized cost is the unpaid principal balance, 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. 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. The Company evaluates any loan reasonably expected to become a TDR, regardless of whether the loan is on accrual or non-accrual status. 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 i90 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 with such customer. Commitments generally have fixed expiration dates or other termination
clauses (e.g., 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 creditworthiness 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.
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.
i
ALLOWANCE
FOR CREDIT LOSSES ON LOANS AND LEASES
The allowance for credit losses is a valuation account that is deducted from the amortized cost of loans and leases to present management’s best estimate of the net amount expected to be collected. Adjustments to the allowance for credit losses are established through provisions for credit losses that are recorded in the consolidated statements of income. Loans and leases are charged off against the allowance for credit 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 allowance for credit losses. Accrued interest receivable is excluded from the estimate of expected credit losses.
The allowance for credit losses represents estimates of expected credit
losses for homogeneous loan pools that share similar risk characteristics such as commercial and industrial (“C&I”) loans and leases, commercial real estate (“CRE”) loans, and private banking loans, which include consumer lines of credit and residential mortgages. The Company periodically reassesses each loan pool to ensure that the loans within the pool continue to share similar risk characteristics. Non-accrual loans and loans designated as TDRs are assessed individually using a discounted cash flow method or, where a loan is collateral dependent, based upon the fair value of the collateral less estimated selling costs.
The collateral on our private banking loans that are secured by cash, marketable securities and/or cash value life insurance is monitored daily and requires borrowers
to continually replenish such collateral as a result of changes in its fair value. Therefore, it is expected that the fair value of the collateral securing each loan will exceed the loan’s amortized cost and no allowance for credit losses would be required under Accounting Standard Codification (“ASC”) 326-20-35-6, “Financial Assets Secured by Collateral Maintenance Provisions.”
In estimating the general allowance for credit losses for loans evaluated on a collective or pool basis, management considers past events, current conditions, and reasonable and supportable economic forecasts, including historical charge-offs and subsequent recoveries. Management also considers qualitative factors that influence our credit quality, including, but not limited to, 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 and forecasted local and regional economic conditions in the markets that we serve.
Management bases the computation of the general allowance for credit losses 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 ithree
loan portfolios based on the historical loss experience of each loan portfolio. Management has developed a methodology that is applied to each of the ithree primary loan portfolios: C&I loans and leases, CRE loans and private banking loans (other than those secured by cash, marketable securities and/or cash value life insurance).
For each portfolio, management estimates expected credit losses over the life of each loan utilizing lifetime or cumulative loss rate methodology, which identifies macroeconomic
factors and asset-specific characteristics that are correlated with credit loss experience, including loan age, loan type, leverage, risk rating, interest rate spread and industry. The lifetime loss rate is applied to the amortized cost of the loan. This methodology builds on default and recovery probabilities by utilizing pool-specific historical loss rates to calculate expected credit losses. These pool-specific historical loss rates may be adjusted for a forecast of certain macroeconomic variables, as further discussed below, and other factors such as differences in underwriting standards, portfolio mix, or when historical asset terms do not reflect the contractual terms of the financial assets being evaluated as of the measurement date. Each time the Company measures expected credit losses, the
Company assesses the relevancy of historical loss information and considers any necessary adjustments to address any differences in asset-specific characteristics.
The allowance for credit losses represents management’s current estimate of expected credit losses in the loan and lease portfolio. Expected credit losses are estimated over the contractual term of the loans, which includes extension or renewal options that are not unconditionally cancellable by the Company and are adjusted for expected prepayments when appropriate. Management’s judgment takes into consideration past events, current conditions and reasonable and supportable economic forecasts including 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 in making such determinations, and that the present allowance for credit losses represents management’s best estimate of current expected credit losses, 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.
The lifetime
loss rates are estimated by analyzing a combination of internal and external data related to historical performance of each loan pool over a complete economic cycle. Loss rates are based on historical averages for each loan pool, adjusted to reflect the impact of a single, forward-looking forecast of certain macroeconomic variables such as gross domestic product, unemployment rates, corporate bond credit spreads and commercial property values, which management considers to be both reasonable and supportable. The single, forward-looking forecast of these macroeconomic variables is applied over the remaining life of the loan pools. The development of the reasonable and supportable forecast incorporates an assumption that each macroeconomic variable will revert to a long-term expectation starting in years two to four of the forecast and largely completing within the first five years of the forecast.
The
secondary factor is intended to capture additional risks related to events and circumstances that management believes have an impact on the performance of the loan portfolio that are not considered as part of the primary factor. 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. Nine risk factors have been identified and each risk factor is assigned an allowance level based on management’s judgment as to the expected impact of each risk factor on each loan portfolio and is monitored on a quarterly basis. As the trend in any risk factor changes, management evaluates the need for a corresponding change to occur in the allowance associated with each respective risk factor to provide the most appropriate estimate of allowance for credit losses on loans and leases.
The
Company also maintains an allowance for credit losses on off-balance sheet credit exposures for unfunded loan commitments. This allowance is reflected as a component of other liabilities which represents management’s current estimate of expected losses in the unfunded loan commitments. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life based on management’s consideration of past events, current conditions and reasonable and supportable economic forecasts. Management tracks the level and trends in unused commitments and takes into consideration the same factors as those considered for purposes of the allowance for credit losses on outstanding loans. Unconditionally cancellable loans are excluded from the calculation of allowance for credit losses on off-balance sheet credit exposures.
i
INVESTMENT
MANAGEMENT FEES
Revenue from contracts with customers is recognized when promised services are delivered to our customers in an amount we expect to receive in exchange for those services (i.e., the transaction price). Payment for the majority of our services is considered to be variable consideration, as the amount of revenue we expect to receive is subject to factors outside of our control, including market conditions. Variable consideration is only included in revenue when amounts are not subject to significant reversal, which is generally when uncertainty around the amount of revenue to be received is resolved. We record deferred revenue from contracts with customers when payment is received prior to the performance of our obligation to the
customer.
We earn investment management fees for performing portfolio management for retail and institutional clients. Such fees are generally calculated as a percentage of the value of client assets or, for certain pooled assets such as mutual funds, on the net asset value of assets managed. The value of these assets is impacted by market fluctuations and net inflows or outflows of assets. Fees are generally collected quarterly and are based on balances either at the beginning of the quarter or the end of the quarter, or on average balances throughout the quarter. Asset management fees are recognized on a monthly basis (i.e., over time) as the services are performed.
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. The Company has not experienced any losses on receivables for investment management fees for the three months ended March 31, 2022 and 2021. The Company had iino/
allowance for credit losses on investment management fees as of March 31, 2022 and December 31, 2021.
i
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 a 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 a goodwill impairment test is not required.
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 assets, 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 its trade names, 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 i25 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 of such assets may not be recoverable.
i
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 i10
years. Repairs and maintenance are charged to expense as incurred, while improvements that extend the useful life of the assets are capitalized and depreciated to non-interest expense over the estimated remaining life of the asset.
/
i
OPERATING LEASES
The Company is a lessee in noncancellable operating
leases, primarily for its office spaces and other office equipment. The Company 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 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.
i
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.
i
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.
i
BORROWINGS
The
Company records FHLB advances, line of credit borrowings, senior notes payable 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.
i
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.
i
EARNINGS PER COMMON SHARE
Earnings per common share (“EPS”) is computed using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for common stock and participating securities, according to dividends and participation rights in undistributed earnings. Under this method, net earnings is reduced by the amount of dividends declared in the current period for common shareholders and participating security holders. The remaining earnings or “undistributed
earnings” are allocated between common stock and participating securities to the extent that each security may share in earnings as if all the earnings for the period had been distributed.
The two-class method requires the Company’s Series C perpetual non-cumulative convertible non-voting preferred stock (the “Series C Preferred Stock”) and outstanding warrants to be treated as participating classes of securities in the computation of EPS. In addition, net income is reduced by dividends declared on all series of preferred stock to derive net income available to common shareholders. Basic EPS is computed by dividing net income allocable to common shareholders by the weighted average number of the Company’s
common shares outstanding for the period, excluding non-vested restricted stock. Diluted EPS reflects the potential dilution upon the exercise of stock options and warrants, and the vesting of restricted stock awards granted utilizing the treasury stock method.
i
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation awards based on estimated fair values of stock-based
awards made to employees and directors. 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.
i
DERIVATIVES AND HEDGING
ACTIVITIES
All derivatives are evaluated at inception as to whether 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. The Company is required to have minimum collateral posting thresholds with certain of its derivative counterparties, and this collateral is considered restricted cash.
The Company executes interest rate derivatives with its commercial banking customers to facilitate their respective risk management strategies. The Company generates swap fee income through these transactions. These derivatives are simultaneously
and economically hedged by offsetting derivatives that the Company executes with a third party, such that the Company generally eliminates its interest rate exposure resulting from such transactions and these derivatives are not designated as hedging instruments. Swap fees are based on the notional amount and weighted maturity of each individual transaction and are collected and recorded to non-interest income in the consolidated statements of income when the transaction is executed.
i
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.
i
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 mature and as liabilities are extinguished.
i
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.
i
RECLASSIFICATION
Certain items previously reported have been reclassified to conform with the current year’s reporting presentation and are considered immaterial.
i
RECENT
ACCOUNTING DEVELOPMENTS
In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2022-02—Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the separate recognition and measurement guidance for TDRs such that creditors will apply the same guidance to all loan modifications when determining whether a modification results in a new receivable or a continuation of an existing receivable. The ASU also enhances existing loan modification related financial statement disclosures while also requiring new disclosure of current-period gross charge-offs by year of origination for financing receivables and net investments in leases. For entities that have adopted the current expected credit loss (“CECL”) methodology, the ASU is effective for fiscal years
beginning after December 15, 2022, including interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2022-02 on its consolidated financial statements.
In March 2022, the FASB issued ASU 2022-01—Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. ASU 2022-01 establishes the portfolio-layer method, which expands an entity’s ability to achieve fair value hedge accounting for hedges of financial assets in a closed portfolio. The ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years with early adoption permitted. The
Company is currently evaluating the impact of adopting ASU 2022-01 on its consolidated financial statements.
On October 28, 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2022 and provides an exception to fair value measurement for revenue contracts
acquired in business combinations. Early adoption is permitted for both interim and annual financial statements that have not yet been issued (or made available for issuance). The Company is currently evaluating the impact of adopting ASU 2021-05 on its consolidated financial statements.
(1)Available-for-sale
debt securities are recorded on the consolidated statements of financial condition at estimated fair value, which includes allowance for credit losses, if applicable.
(1)Held-to-maturity
debt securities are recorded on the consolidated statements of financial condition at amortized cost, net of allowance for credit losses.
//
During the first quarter of 2021, the Company transferred $i480.8
million in fair value of previously designated available-for-sale agency mortgage-backed securities to held-to-maturity.
Debt securities available-for-sale and held-to-maturity were comprised of the following as of December 31, 2021:
(1)Available-for-sale
debt securities are recorded on the consolidated statements of financial condition at estimated fair value, which includes allowance for credit losses, if applicable.
(1)Held-to-maturity
debt securities are recorded on the consolidated statements of financial condition at amortized cost, net of allowance for credit losses.
i
Interest income on investment securities was as follows:
Three
Months Ended March 31,
(Dollars in thousands)
2022
2021
Taxable interest income
$
i5,997
$
i2,429
Non-taxable
interest income
i22
i35
Dividend
income
i138
i182
Total
interest income on investment securities
$
i6,157
$
i2,646
/
i
As
of March 31, 2022, the contractual maturities of the debt securities were:
Prepayments
may shorten the contractual lives of the collateralized mortgage obligations, mortgage-backed securities and collateralized loan obligations.
i
Proceeds from the sale and call of debt securities available-for-sale and held-to-maturity and related gross realized gains and losses were:
The
following tables show the fair value and gross unrealized losses on debt securities available-for-sale, by investment category and length of time that the individual securities have been in a continuous unrealized loss position as of March 31, 2022 and December 31, 2021:
(1)The
number of investment positions with unrealized losses totaled i39 for available-for-sale securities.
The changes in the fair values of our agency collateralized mortgage obligations and agency mortgage-backed securities are primarily the result of interest rate fluctuations. These agency securities are either explicitly or implicitly guaranteed by the U.S. government, highly rated, and have a long history of no credit losses.
To
assess for credit losses on debt securities available-for-sale in unrealized loss position, 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. The most recent assessment for credit losses 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, ino
allowance for credit losses has been recognized on debt securities available-for-sale in an unrealized loss position.
i
The Company monitors the credit quality of debt securities held-to-maturity including credit ratings quarterly. The following tables present the amortized costs basis of debt securities held-to-maturity by Moody’s bond credit rating.
Accrued
interest receivable of $i1.5 million and $i1.6
million on debt securities held-to-maturity as of March 31, 2022 and December 31, 2021, respectively, was excluded from the amortized cost used in the calculation of allowance for credit losses. The Company had ino debt securities held-to-maturity that were past due as of March 31, 2022.
Equity securities consisted of mutual funds investing in short-duration, investment grade corporate bonds. The investments in these securities were $i4.9 million and $i5.0
million as of March 31, 2022 and December 31, 2021, respectively.
There was $i11.8 million and $i11.8
million in FHLB stock outstanding as of March 31, 2022 and December 31, 2021, respectively.
[3] iLOANS 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 and/or cash value life insurance. The middle-market banking channel consists of the Company’s 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, before deferred fees and costs
$
i6,870,961
$
i1,509,418
$
i2,369,335
$
i10,749,714
Net
deferred loan costs (fees)
i15,537
i4,005
(i5,932)
i13,610
Loans
and leases held-for-investment, net of deferred fees and costs
i6,886,498
i1,513,423
i2,363,403
i10,763,324
Allowance
for credit losses on loans and leases
(i1,891)
(i8,453)
(i18,219)
(i28,563)
Loans
and leases held-for-investment, net
$
i6,884,607
$
i1,504,970
$
i2,345,184
$
i10,734,761
/
The
Company’s customers have unused loan commitments based on the availability of eligible collateral or other terms and conditions under their loan agreements. Included in unused loan commitments are commitments to fund loans secured by residential properties, 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. The amount of unfunded commitments, including standby letters of credit, as of March 31, 2022 and December 31, 2021, was $i11.54
billion and $i10.74 billion, respectively. The interest rate for each commitment is based on the prevailing market conditions at the time of funding. The total unfunded commitments above included loans in the process of origination totaling approximately $i120.4
million and $i162.0 million as of March 31, 2022 and December 31, 2021, respectively, which extend over varying periods of time.
Also included in commitments is unused availability under demand loans for our private banking clients secured by cash, marketable securities and/or cash value life insurance. Because these loans are demand loans, the
company is not obligated to fund or fully fund draw requests.
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, 2022 and December 31, 2021, included in the total unfunded commitments above, was $i57.3 million and $i60.8
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, 2022 and 2021, there were draws on letters of credit totaling $i4.2
million and $i3,000, 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 allowance for credit losses on off-balance-sheet credit exposures was $i3.4
million and $i2.9 million as of March 31, 2022 and December 31, 2021, respectively, which includes allowance for credit losses on unfunded loan commitments and standby letters of credit. The Company recorded a provision on off-balance sheet exposures as liabilities of $ii500,000/
for the three months ended March 31, 2022, and a credit to provision on off-balance sheet exposures as liabilities of $ii433,000/
for the three months ended March 31, 2021.
[4] iALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES
Our allowance for credit losses represents our current estimate of expected credit losses in the portfolio at a specific point in time. This estimate includes
credit losses associated with loans and leases evaluated on a collective or pool basis, as well as expected credit losses of the individually evaluated loans and leases that do not share similar risk characteristics. Management evaluates the adequacy
of the allowance at least 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, and economic forecasts over a reasonable and supportable period of time. This evaluation is subjective and requires material estimates that may
change over time. The calculation of the allowance for credit losses on loans and leases takes into consideration the inherent risk identified within each of the Company’s ithree primary loan portfolios. The lifetime loss rates are estimated by analyzing a combination of internal and external data related to historical performance of each loan pool over a complete economic cycle. Results for the three months ended March
31, 2022 and 2021 are presented under CECL methodology. Refer to Note 1, Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements for more details on the Company’s policy on allowance for credit losses on loans and leases.
The following discusses key characteristics and risks within each primary loan portfolio:
Private Banking Loans
Our private banking lending business is 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 marketable securities, cash, and/or cash value
life insurance. The Company actively monitors the value of the collateral securing these loans on a daily basis and requires borrowers to continually replenish such collateral as a result of changes in its fair value. Therefore, it is expected that the fair value of the collateral value securing each loan will exceed the loan’s amortized cost and no allowance for credit loss would be required under ASC 326-20-35-6, “Financial Assets Secured by Collateral Maintenance Provisions.”
This portfolio also has some loans that are secured by residential real estate or other financial assets and some that are 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 and/or cash value life insurance, which were i99.2% and i99.0% of total private banking loans as of March 31,
2022 and December 31, 2021, respectively.
Commercial Banking: Commercial and Industrial Loans and Leases
This loan portfolio primarily includes loans and leases made to financial services and other service and/or manufacturing companies generally for the purposes of financing production, operating capacity, accounts receivable, inventory, equipment, acquisitions and/or recapitalizations. Cash flow from the borrower’s operations is the primary source of repayment for these loans and leases; however, most loans are collateralized by commercial assets.
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 calculation of the allowance for credit losses on loans and leases.
Commercial 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 in this portfolio 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 problems arise, 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 and/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 and applicable regulatory guidance. 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. 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 – A pass 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.
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.
i
The
following table presents the amortized cost of loans by portfolio, risk rating and year of origination:
(1)The
Company had ino revolving loans which were converted to term loans included in loans and leases held-for-investment as of December 31, 2021.
Accrued interest receivable of $i22.2
million and $i21.8 million on loans and leases as of March 31, 2022 and December 31, 2021, respectively, was excluded from the amortized cost used in the calculation of allowance for credit losses.
i
Changes
in the allowance for credit losses on loans and leases were as follows for the three months ended March 31, 2022 and 2021:
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 i90 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.
i
The
following tables present the Company’s amortized cost of individually evaluated loans and related information on those loans as of and for the three months ended March 31, 2022 and as of and for the twelve months ended December 31, 2021:
Individually
evaluated loans were $i12.5 million and $i16.8 million as of March 31,
2022 and December 31, 2021, respectively. There was iino/
interest income recognized on individually evaluated loans that were also on non-accrual status for the three months ended March 31, 2022, and the twelve months ended December 31, 2021. As of March 31, 2022 and December 31, 2021, there were iino/
loans 90 days or more past due and still accruing interest income.
The Company estimates allowance for credit losses individually for loans that do not share similar risk characteristics, including non-accrual loans and loans designated as TDRs, 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 $i406,000
and $i4.7 million as of March 31, 2022 and December 31, 2021, respectively. 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 expected credit losses and interest income.
i
The
following tables present the allowance for credit losses on loans and leases and amortized costs of individually evaluated loans:
Total
allowance for credit losses on loans and leases
$
i1,891
$
i8,453
$
i18,219
$
i28,563
Loans
and leases held-for-investment:
Individually evaluated for impairment
$
i—
$
i15,673
$
i1,139
$
i16,812
Collectively
evaluated for impairment
i6,886,498
i1,497,750
i2,362,264
i10,746,512
Loans
and leases held-for-investment
$
i6,886,498
$
i1,513,423
$
i2,363,403
$
i10,763,324
Troubled
Debt Restructuring
The aggregate recorded investment in individually evaluated loans with terms modified through a TDR on non-accrual was $ii0/
as of March 31, 2022 and December 31, 2021. The aggregate recorded investment in individually evaluated loans with terms modified through a TDR also accruing interest was $i12.5 million as of March 31, 2022 and December 31, 2021. There were iino/
unused commitments on loans designated as TDR as of March 31, 2022 and December 31, 2021.
The modifications made to restructured loans typically consist of an extension of the payment terms or the deferral of principal payments. Loans with an amortized cost of approximately $i3.0 million as of March 31,
2022, that have been modified as a TDR within the prior 12 months, were 30 days past due as of March 31, 2022. There were iino/
loans modified as TDRs within 12 months of the corresponding balance sheet date with payment defaults during the three months ended March, 31, 2021.
There were ino loans newly designated as TDRs during the three months ended March 31, 2022.
i
iThe
financial effects of our modifications made to loans newly designated as TDRs during the three months ended March 31, 2021,
Allowance for Credit Losses on Loans and Leases at the time of Modification
Current Allowance for Credit Losses on Loans and Leases
Commercial Real Estate:
Extended term, deferred principal
i2
$
i4,454
$
i4,454
$
i445
$
i445
Total
i2
$
i4,454
$
i4,454
$
i445
$
i445
/
Other
Real Estate Owned
As of March 31, 2022 and December 31, 2021, the balance of OREO was $ii2.0/
million. There were ino residential mortgage loans that were in the process of foreclosure as of March 31, 2022.
Weighted
average rate on interest-bearing accounts
i0.54%
i0.38%
/
As
of March 31, 2022 and December 31, 2021, the Bank had total brokered deposits of $i1.21 billion and $i955.5
million, respectively. Reciprocal deposits through Certificate of Deposit Account Registry Service® (“CDARS®”) and Insured Cash Sweep® (“ICS®”) totaled $i1.85 billion and $i2.06
billion as of March 31, 2022 and December 31, 2021, respectively, and were not considered brokered deposits.
As of March 31, 2022 and December 31, 2021, certificates of deposit with balances of $100,000 or more, excluding brokered and reciprocal deposits, totaled $i453.4 million and $i477.0
million, respectively. As of March 31, 2022 and December 31, 2021, certificates of deposit with balances of $250,000 or more, excluding brokered and reciprocal deposits, totaled $i125.3 million and $i126.4
million.
i
The contractual maturity of certificates of deposit was as follows:
Subordinated
notes payable (net of debt issuance costs of $i1,738 and $i1,792, respectively)
i5.75%
i95,762
5/15/2030
i5.75%
i95,708
5/15/2030
Senior
notes payable (net of debt issuance costs of $i500 and $i545, respectively)
i2.25%
i124,500
12/15/2024
i2.25%
i124,455
12/15/2024
Total
borrowings, net
$
i470,262
$
i470,163
/
On
December 15, 2021, the Company issued a senior unsecured fixed-to-floating rate note (the “Senior Note”) to Raymond James in the amount of $i125 million. The Senior Note, which matures on December 15, 2024, bears interest at a fixed annual rate of i2.25%
from the date of issuance to December 15, 2022, and thereafter until maturity at a floating annual rate, reset quarterly, equal to the then current three-month Secured Overnight Financing Rate (SOFR). The Senior Note is not redeemable prior to December 15, 2022. On and after December 15, 2022, the Senior Note is redeemable on any interest payment date at i100% of the principal amount thereof, plus accrued and unpaid interest
to the redemption date.
In 2020, the Company completed underwritten public offerings of subordinated notes due 2030, raising aggregate proceeds of $i97.5 million. The subordinated notes have a term of i10
years at a fixed-to-floating rate of i5.75%. The subordinated notes constitute Tier 2 capital for the Company under federal regulatory capital rules. Beginning on May 15, 2025, with respect to the subordinated notes issued on May 11, 2020, and August 15, 2025, with respect to the subordinated notes issued on June
3, 2020, and on any interest payment date thereafter, the Company may redeem the subordinated notes, in whole or in part, at a redemption price equal to i100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to, but excluding, the date of redemption.
The Bank’s FHLB borrowing capacity is based on the collateral value of certain securities held in safekeeping at the FHLB,
if applicable, and loans pledged to the FHLB. The Bank submits a quarterly Qualifying Collateral Report (“QCR”) to the FHLB to update the value of the loans pledged. As of March 31, 2022, the Bank’s borrowing capacity is based on the information provided in its December 31, 2021 QCR filing. As of March 31, 2022, the Bank had pledged loans of $i1.52
billion with the FHLB, for a gross borrowing capacity of $i1.09 billion, of which $i250.0 million was outstanding in advances. As of December 31,
2021, there was $i250.0 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 $i10.0
million with M&T Bank and an unsecured line of credit of $i20.0 million with Texas Capital Bank. As of March 31, 2022 and December 31, 2021, there were iiiino///
outstanding borrowings under these lines of credit, and they are available to the Bank at the lenders’ discretion. In addition, the Bank maintains an $i8.0 million unsecured line of credit with PNC Bank for private label credit card facilities for certain existing commercial clients of the Bank, of which $i3.4
million in notional value of credit cards have been issued. The clients of the Bank are responsible for repaying any balances due on these credit cards directly to PNC; however, if the customer fails to repay PNC, the Bank could be required to satisfy the obligation to PNC and initiate collection from its customer as part of the existing credit facility of that customer. In August 2021, the Bank entered into a standby letter of credit with PNC Bank for $i643,000, which expires on August 16, 2022.
The
Company maintains an unsecured line of credit of $i75.0 million with The Huntington National Bank. As of March 31, 2022, and December 31, 2021 there were iino/
outstanding borrowings under this line of credit.
During the three months ended March 31, 2022 and 2021, the Company paid dividends of $ii2.0/
million on its ii6.75/% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, no par value
(the “Series A Preferred Stock”) and its ii6.375/% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual
Preferred Stock, no par value (the “Series B Preferred Stock”). During the three months ended March 31, 2022, the Company paid an in-kind dividend of i11 shares of the Series C Preferred Stock, plus cash paid in lieu of a fractional share.
Under authorization by the Board of Directors of the Company (the “Board”), the
Company is permitted to repurchase its common stock up to prescribed amounts, of which $i7.3 million remained available as of March 31, 2022. 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. The company did not repurchase any shares under this program during the three months ended March 31, 2022 and 2021.
During the three months ended March 31, 2022, treasury shares increased i123,132, or approximately $i4.0
million, in connection with the net settlement of equity awards exercised or vested. During the three months ended March 31, 2021, treasury shares increased i73,384, or approximately $i1.5
million, in connection with the net settlement of equity awards exercised or vested.
Under prior authorization of the Board, stock option cancellation programs were approved to allow for certain outstanding and vested stock option awards to be canceled by the option holder at a price based on the closing day’s stock price less the option exercise price. There were no such cancellations during the three months ended March 31, 2022 and 2021.
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 and material adverse 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.
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”) capital, Tier 1 capital and Total capital to risk-weighted assets, and of Tier 1 capital to average assets (as each term is defined in the applicable regulations). As of March 31, 2022 and December 31, 2021, TriState Capital Holdings, Inc. and TriState Capital Bank exceeded all capital adequacy requirements to which they were subject.
Insured
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 for the period ending March 31, 2022 that management believes have materially changed the Bank’s capital adequacy, as presented in the tables below.
A banking organization is also subject to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of CET 1 capital to risk-weighted assets ratio of i2.5%
or more, in addition to the minimum risk-based capital adequacy levels shown in the tables below. As of March 31, 2022 and December 31, 2021, both the Company and the Bank had CET 1 capital above the levels required to avoid limitations on capital distributions and discretionary bonus payments.
In 2020, U.S. federal regulatory authorities issued a final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay the impact of CECL on regulatory capital for up to two years, beginning January 1, 2020, followed by a three-year transition period. As the
Company adopted CECL on December 31, 2020, the Company elected to utilize the
The
computation of basic and diluted earnings per common share for the periods presented were as follows:
Three Months Ended March 31,
(Dollars in thousands, except per share data)
2022
2021
Basic
earnings per common share:
Net income
$
i21,641
$
i16,200
Less:
Preferred dividends on Series A and Series B
i1,962
i1,962
Less:
Preferred dividends on Series C
i1,171
i1,097
Net
income available to common shareholders
$
i18,508
$
i13,141
Allocation
of net income available:
Common shareholders
$
i15,575
$
i11,127
Series
C convertible preferred shareholders
i2,480
i1,685
Warrant
shareholders
i453
i329
Total
$
i18,508
$
i13,141
Basic
weighted average common shares outstanding:
Basic common shares
i31,699,023
i31,224,474
Series
C convertible preferred stock, as-if converted
i5,047,272
i4,727,272
Warrants,
as-if exercised
i922,438
i922,438
Basic
earnings per common share
$
i0.49
$
i0.36
Diluted
earnings per common share:
Income available to common shareholders after allocation
$
i15,575
$
i11,127
Diluted
weighted average common shares outstanding:
Basic common shares
i31,699,023
i31,224,474
Restricted
stock - dilutive
i956,414
i801,798
Stock
options - dilutive
i119,410
i160,762
Diluted
common shares
i32,774,847
i32,187,034
Diluted
earnings per common share
$
i0.48
$
i0.35
Three
Months Ended March 31,
Anti-dilutive shares:
2022
2021
Restricted stock
i48,147
i71,810
Series
C convertible preferred stock, as-if converted
i5,047,272
i4,727,272
Warrants,
as-if exercised
i922,438
i922,438
Total
anti-dilutive shares
i6,017,857
i5,721,520
//
The
Series C Preferred Stock and warrants are anti-dilutive under the treasury stock method compared to the basic EPS calculation under the two-class method.
[10] iDERIVATIVES 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 and to manage the volatility of the change in fair value related to certain of the Company’s equity investments. The Company also has derivatives that are a result of a service the Company provides to certain qualifying customers.
When providing this service, the Company generally enters into an offsetting derivative transaction in order to eliminate its interest rate risk exposure resulting from such transactions.
FAIR VALUES OF DERIVATIVE INSTRUMENTS ON THE STATEMENTS OF FINANCIAL CONDITION
i
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, 2022 and December 31, 2021:
Derivatives
not designated as hedging instruments:
Interest rate products
Other assets
i88,956
Other liabilities
i88,919
Total
Other
assets
$
i90,173
Other liabilities
$
i91,757
/
i
The
following tables show the impact legally enforceable master netting agreements had on the Company’s derivative financial instruments as of March 31, 2022 and December 31, 2021:
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
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 these objectives, 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 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, 2022.
i
Characteristics of the Company’s interest rate derivative transactions designated as cash
flow hedges of interest rate risk as of March 31, 2022, were as follows:
(Dollars in thousands)
Notional Amount
Effective Rate (1)
Estimated Increase/ (Decrease) to Interest Expense in the Next Twelve Months
Maturity
Date
Remaining Term (in Months)
Interest rate products:
Issued 5/30/2019
$
i50,000
i2.05%
$
i130
6/1/2022
i2
Issued
5/30/2019
i50,000
i2.03%
i89
6/1/2023
i14
Issued
5/30/2019
i50,000
i2.04%
i95
6/1/2024
i26
Issued
3/2/2020
i50,000
i0.98%
(i438)
3/2/2025
i35
Issued
3/20/2020
i50,000
i0.60%
(i657)
3/20/2025
i36
Total
$
i250,000
$
(i781)
(1)The
effective rate is adjusted for the difference between the three-month FHLB advance rate and three-month LIBOR.
/
i
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)
2022
2021
2022
2021
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
$
(i778)
$
(i846)
$
i6,026
$
i2,216
/
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 and private 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 generally 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, 2022, the Company had interest rate derivative transactions with an aggregate notional amount of $i4.99 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)
2022
2021
Derivatives
not designated as hedging instruments:
Location of Gain (Loss) Recognized in Income on Derivatives
Amount of Gain (Loss) Recognized in Income on Derivatives
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-capitalized or 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.
As of March 31, 2022, the termination value of derivatives for which the Company had master netting arrangements with the counterparty and in a net liability position was $i3.3
million, including accrued interest. As of March 31, 2022, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $i4.9 million which is considered restricted cash. If the Company had breached any of these provisions as of March 31,
2022, it could have been required to settle its obligations under the agreements at their termination value.
[11] iDISCLOSURES 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, such as 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.
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. U.S. treasury securities and equity securities (including mutual funds) are classified as Level 1 because these securities are in actively traded markets.
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.
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.
i
The
following tables represent the balances of assets measured at fair value on a non-recurring basis as of March 31, 2022 and December 31, 2021:
As
of March 31, 2022 and December 31, 2021, the Company recorded $i406,000 and $i4.7
million, respectively, of specific reserves to allowance for credit losses on loans and leases as a result of adjusting the fair value of individually evaluated loans.
INDIVIDUALLY EVALUATED LOANS
The Company evaluates individually loans that do not share similar risk characteristics, including non-accrual loans and loans designated as TDRs. Specific allowance for credit losses is measured based on a market approach, 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 individually evaluated 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, individually evaluated loans are classified as Level 3.
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.
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, 2022 and December 31, 2021:
Appraisal value and discount due to salability conditions
i12%
(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.
(2)The collateral which is used in the valuation of these loans is commercial real estate.
Appraisal value and discount due to salability conditions
i12%
(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.
(2)The collateral which is used in the valuation of these loans is commercial real estate.
/
FAIR VALUE OF FINANCIAL INSTRUMENTS
i
The
following table summarizes the carrying amounts and estimated fair values of financial instruments:
The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of March 31, 2022 and December 31, 2021:
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 third-party pricing models. U.S. treasury securities and equity securities (including mutual funds) are classified as Level 1 because these securities are in
actively traded markets.
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 general account BOLI is based on the insurance contract net cash surrender value.
OTHER REAL ESTATE OWNED
OREO is carried at fair value less estimated selling costs.
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.
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.
Losses
(gains) reclassified from other comprehensive income
i—
i591
i591
(i1)
i642
i641
Net
other comprehensive income (loss)
(i22,822)
i5,164
(i17,658)
(i955)
i2,325
i1,370
Balance,
end of period
$
(i25,207)
$
i4,125
$
(i21,082)
$
i2,879
$
(i4,206)
$
(i1,327)
/
[13]
iCONTINGENT LIABILITIES
Following the public announcement of the Agreement and Plan of Merger (the “Merger Agreement”) dated as of October 20, 2021, among the Company, Raymond James Financial, Inc. (“Raymond James”), Macaroon One LLC
(“Merger Sub 1”) and Macaroon Two LLC (“Merger Sub 2”), six lawsuits were filed by purported stockholders of the Company against the Company and the members of the Company’s board of directors. Each complaint contains allegations contending, among other things, that the proxy statement/ prospectus contained within the Registration Statement on Form S-4 filed in connection with the proposed acquisition of the Company by Raymond James failed to disclose certain allegedly material information in violation of federal securities laws. The complaints seek injunctive relief enjoining the acquisition, attorneys’ and experts’
fees, and other remedies. The outcome of the pending and any additional future litigation is uncertain. If any case is not resolved, the lawsuit(s) could prevent or delay completion of the acquisition and result in substantial costs to Raymond James and the Company, including any costs associated with the indemnification of directors and officers. One of the conditions to the closing of the acquisition is the absence of any order, injunction, law, regulation or other legal restraints preventing, prohibiting or making illegal the completion of the acquisition or any other transactions contemplated by the Merger Agreement. As such, if the plaintiffs are successful in obtaining an order or injunction prohibiting the completion of the acquisition on the agreed-upon terms, then the acquisition may not be completed within the expected timeframe or at all. The defense or settlement of any
lawsuit or claim that remains unresolved at the time the acquisition is completed may adversely affect the combined company’s business, financial condition, results of operations and cash flows.
From time to time the Company is a party to various litigation matters incidental to the conduct of its business. The Company is not aware of any other material unasserted claims. In the opinion of management, there are no other potential claims that could have a material adverse effect on the Company’s financial position, liquidity or results of operations.
[14]
iSEGMENTS
The Company operates itwo
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.
iThe
following tables provide financial information for the itwo 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 reportable segment, which includes parent company activity as well as eliminations and adjustments that are necessary for purposes of reconciliation to the consolidated amounts.
Net
interest income (loss) after provision for credit losses
i55,222
i—
(i2,184)
i53,038
i39,929
i—
(i1,497)
i38,432
Non-interest
income:
Investment management fees
i—
i9,444
(i359)
i9,085
i—
i9,234
(i234)
i9,000
Net
gain on the sale and call of debt securities
i—
i—
i—
i—
(i1)
i—
i—
(i1)
Other
non-interest income (loss)
i6,167
(i31)
(i124)
i6,012
i4,631
i21
i—
i4,652
Total
non-interest income (loss)
i6,167
i9,413
(i483)
i15,097
i4,630
i9,255
(i234)
i13,651
Non-interest
expense:
Intangible amortization expense
i—
i478
i—
i478
i—
i478
i—
i478
Other
non-interest expense
i31,238
i8,208
i1,261
i40,707
i22,655
i7,442
i703
i30,800
Total
non-interest expense
i31,238
i8,686
i1,261
i41,185
i22,655
i7,920
i703
i31,278
Income
(loss) before tax
i30,151
i727
(i3,928)
i26,950
i21,904
i1,335
(i2,434)
i20,805
Income
tax expense (benefit)
i5,833
i199
(i723)
i5,309
i4,729
i310
(i434)
i4,605
Net
income (loss)
$
i24,318
$
i528
$
(i3,205)
$
i21,641
$
i17,175
$
i1,025
$
(i2,000)
$
i16,200
[15]
iSUBSEQUENT EVENTS
On April 11, 2022, the Board declared a dividend payable of approximately $i679,000,
or $i0.42 per depositary share, on the Company’s Series A Preferred Stock and a dividend payable of approximately $i1.3
million, or $i0.40 per depositary share, on the Company’s Series B Preferred Stock, each of which is payable on July 1, 2022, to preferred shareholders of record as of the close of business on June 15, 2022. The Board also declared an in-kind dividend of i11
shares of the Company’s Series C Preferred Stock, plus cash in lieu of a fractional share, which is payable on July 1, 2022, to preferred shareholders of record of the Series C Preferred Stock as of the close of business on June 15, 2022.
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, 2022. 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 on Form 10-Q 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, 2021, included in the
Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2022.
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” at the beginning of this document and “Item 1A. Risk Factors.”
General
TriState
Capital Holdings, Inc. (“we,”“us,”“our,” the “holding company,” the “parent company,” or the “Company”) is 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 and financial services 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, swap fees, loan 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 present 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 (which is a non-GAAP financial measure). Other salient metrics include the ratio of allowance for credit losses on loans and leases to loans and leases; net interest margin; the efficiency ratio of the Bank segment (which is a non-GAAP financial measure); return on average assets; return on average common equity; regulatory leverage and risk-based capital ratios; and assets under management and EBITDA
of the Investment Management segment (which is a non-GAAP financial measure).
Executive Overview
We are 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 and financial services 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. The Bank’s total assets were $13.60 billion as of March 31, 2022. 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 $11.23 billion as of March 31, 2022. CTSC Securities, our broker-dealer subsidiary, supports marketing efforts for Chartwell’s proprietary investment products and is regulated by the SEC and the Financial Industry Regulatory Authority, Inc. (“FINRA”).
On
October 20, 2021, the Company announced that it entered into a definitive agreement under which Raymond James will acquire the outstanding shares of stock of the Company for consideration that is a combination of cash and Raymond James stock at a fixed exchange rate, valued in aggregate at approximately $1.1 billion based on the trading value of Raymond James’ stock on the announcement date. Raymond James is a leading diversified financial services company providing private client group, capital markets, asset management, banking and other services to individuals, corporations and municipalities. Subsequent to closing,
TriState Capital Bank will continue operating as a separately branded stand-alone, independently chartered bank subsidiary of Raymond James, and Chartwell will continue to operate as a separately branded stand-alone investment adviser. The Company’s shareholders approved the transaction on February 28, 2022. The acquisition is subject to customary closing conditions, including receipt of regulatory approvals, and is currently expected to close by the end of the second quarter of 2022.
Performance
For the three months ended March 31, 2022, our net income available
to common shareholders was $18.5 million compared to $13.1 million for the same period in 2021, an increase of $5.4 million, or 40.8%. This increase in net income available to common shareholders from the same period in 2021 was primarily due to an increase in net interest income of $14.9 million, or 38.7%, driven primarily by loan growth and reduced deposit cost and an increase in non-interest income of $1.4 million, or 10.6%, which was partially offset by an increase of $9.9 million, or 31.7%, in non-interest expense as the Company continues to invest in people, processes and technology and an increase of $704,000 in income tax expense.
Our diluted EPS was $0.48 for the three months ended March
31, 2022, compared to $0.35 for the same period in 2021, an increase of $0.13 per share, or 37.1%. Results for the three months ended March 31, 2022, as compared to the same period in 2021, included higher net income available to common shareholders, as well as a higher number of diluted shares outstanding. EPS is computed using the two-class method, which is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends accumulated or declared and participation rights in undistributed earnings. For more information on the Company’s calculation of EPS, refer to Note 1, Summary of Significant Accounting Policies and Note 9, Earnings per Common
Share, to our unaudited condensed consolidated financial statements.
For the three months ended March 31, 2022, total revenue increased $16.4 million, or 31.3%, to $68.7 million from $52.3 million for the same period in 2021. This increase in total revenue was driven largely by higher net interest income due to decreased funding costs and loan growth, and increased non-interest income, resulting primarily from higher levels of swap fees.
Our annualized net interest margin was 1.70% and 1.59%for the three months ended March 31, 2022 and 2021,
respectively. This increase in net interest margin was driven primarily by higher average interest-earning assets and a decrease of 13 basis points in the cost of interest-bearing liabilities, partially offset by a decrease of 12 basis points in the yield on loans and higher average interest-bearing liabilities.
The significant reduction in interest rates by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) in response to the COVID-19 pandemic impacted our interest-earning assets and interest-bearing liabilities. Our loans are predominantly variable rate loans, of which many are indexed to one-month LIBOR, the Prime Rate, or another benchmark rate such as one-month
term Secured Overnight Financing Rate (“SOFR”). At the end of the first quarter 2020, we placed interest rate floors on the majority of our floating rate loans, particularly our private banking loans, and we have continued to implement floors on newly originated loans. As a result, approximately 40% of our total loans have floors that are currently benefiting the Bank compared to their contractual index. While we continue our strategy to implement floors on recently originated loans, we have modified our pricing strategy to balance wider spreads with lower floor rates to manage our interest rate sensitivity while managing overall yield. In the current rising rate environment, the impact of these floors is less consequential. Our deposits include fixed-rate time deposits but are primarily comprised of variable rate deposits, many of which are linked to an index such as the effective federal funds rate and others that are priced at the Bank’s discretion.
Our
non-interest income is largely comprised of investment management fees for Chartwell, which totaled $9.1 million for the three months ended March 31, 2022, as compared to $9.0 million for the same period in 2021. Assets under management were $11.23 billion as of March 31, 2022, an increase of $27.0 million from March 31, 2021, driven by market appreciation of $221.0 million, partially offset by net outflows of $194.0 million. Chartwell’s annual run-rate revenue decreased to $36.8 million as of March 31, 2022, compared to $38.8 million as of March 31, 2021. For the three months ended March 31, 2022, investment
fees grew $0.2 million, or 2.3%, while expenses grew $0.8 million, or 9.7%. As a result, EBITDA declined 31% for the three months ended March 31, 2022 from $1.9 million to $1.3 million.
Another large component of our non-interest income is swap fees for the Bank, which totaled $4.7 million for the three months ended March 31, 2022, and $2.7 million for the same period in 2021. We have continued to enhance our distribution and product strategies to drive consistent opportunities for interest rate protection through swaps in both our commercial banking and private banking clients. The number of swaps executed as well as the notional amount and term of each swap transaction impact our fee income from period to period.
Our
annualized ratio of non-interest expense to average assets was 1.27% and 1.24% for the three months ended March 31, 2022 and 2021, respectively. The Bank’s efficiency ratio was 50.42% and 50.59% for the three months ended March 31, 2022 and 2021, respectively. The Bank’s efficiency ratio reflects growth in the Bank’s total revenue of 38.3%, partially offset by growth in the Bank’s non-interest expense of 37.9% for the three months ended March 31, 2022 as compared to the same period in 2021.
Our annualized return on average assets (net income to average total assets) was 0.67% and 0.64% for the three months ended March 31, 2022 and 2021, respectively. Our annualized return on average common equity (net income available to common shareholders to average common equity) was 11.40% and 9.06% for the three months ended March 31, 2022 and 2021, respectively.
Our total assets were $13.68 billion as of March 31, 2022, an increase of $0.67 billion, or 21.0% on an annualized basis,
from December 31, 2021, primarily due to growth in our loan and lease portfolio and growth in our investment portfolio. Loans and leases held-for-investment grew by $483.6 million to $11.25 billion as of March 31, 2022, an annualized increase of 18.2% from December 31, 2021, as a result of growth in our commercial and private banking loan portfolios. Total investment securities increased $132.8 million, or 38.3% on an annualized basis, to $1.54 billion as of March 31, 2022, from December 31, 2021. Total
deposits increased $0.66 billion, or 23.3% on an annualized basis, to $12.17 billion as of March 31, 2022, from December 31, 2021. We focus on high quality loan growth and correspondingly grow our investment portfolio at a similar pace as part of our strategy to continue building greater on-balance sheet liquidity, funded by our deposits.
Our ratio of adverse rated credits to total loans declined to 0.29% at March 31, 2022, from 0.34% at December 31, 2021, primarily due to a reduction in criticized assets of $4.7 million. Our ratio of allowance for credit losses on loans and leases to loans and leases was
0.22% and 0.27% as of March 31, 2022 and December 31, 2021, respectively. We recorded provision for credit losses of $563,000 for the three months ended March 31, 2022, compared to $224,000 for the three months ended March 31, 2021.
Our book value per common share decreased $0.21 to $19.49 as of March 31, 2022, from $19.70 as of December 31,
2021. This decrease was largely as a result of higher levels of retained earnings as of March 31, 2022 being more than offset by the effect increased shares outstanding and an increase in accumulated other comprehensive loss as of March 31, 2022.
Non-GAAP Financial Measures
We report 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,”“pre-tax, pre-provision net revenue,”“efficiency ratio” and “EBITDA.” These non-GAAP financial measures are supplemental measures that we believe provide management and our investors with a more detailed understanding of our performance, although these measures are not necessarily comparable to similar measures that may be presented by other companies. These disclosures should not be viewed as a substitute for financial measures in accordance with GAAP.
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 total 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.
“Pre-tax, pre-provision net revenue” is defined as net interest income and non-interest income, excluding gains and losses on the sale and call of debt securities and total non-interest expense. We believe this measure is important because it allows management and investors to better assess our performance in relation to
our core operating revenue, excluding the volatility that is associated with provision for credit losses and changes in our tax rates and other items that are unrelated to our core business.
“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.
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 78.0% and 73.9% of total revenue for the three months ended March
31, 2022 and 2021, 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 2022 and 2021.
Three
Months Ended March 31,
(Dollars in thousands)
2022
2021
Interest income
$
67,577
$
51,992
Fully taxable equivalent adjustment
6
7
Interest
income adjusted
67,583
51,999
Less: interest expense
13,976
13,336
Net interest income adjusted
$
53,607
$
38,663
Yield
on earning assets (1) (2)
2.15
%
2.14
%
Cost of interest-bearing liabilities (1)
0.49
%
0.62
%
Net interest spread (1) (2)
1.66
%
1.52
%
Net
interest margin (1) (2)
1.70
%
1.59
%
(1)Annualized.
(2)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, 2022 and 2021. Non-accrual loans are included in the calculation of average loan balances, while interest collected on non-accrual loans is 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 2022 and 2021.
(1)Calculated on
a fully taxable equivalent basis.
(2)Annualized.
Net Interest Income for the Three Months Ended March 31, 2022 and 2021. Net interest income, calculated on a fully taxable equivalent basis, increased $14.9 million, or 38.7%, to $53.6 million for the three months ended March 31, 2022, from $38.7 million for the same period in 2021. The increase in net interest income for the three months ended March 31, 2022, was comprised of an increase of $15.6 million, or 30.0%, in interest income and an increase of $640,000, or 4.8%, in interest expense. Net
interest margin increased to 1.70% for the three months ended March 31, 2022, as compared to 1.59% for the same period in 2021.
The increase in interest income on interest-earning assets was primarily the result of an increase in average total loans, an increase in average debt securities available-for-sale and held-to-maturity, and increases in the yields on debt securities available-for-sale and held-to-maturity partially offset by a decrease in the yield on total loans. The change in yield on loans is partially attributable to an increased portion of our portfolio being comprised of our lower-risk, lower-yielding marketable-securities-backed private banking
loans. The overall yield on interest-earning assets increased 1 basis points to 2.15% for the three months ended March 31, 2022, as compared to 2.14% for the same period in 2021.
The increase in interest expense on interest-bearing liabilities was primarily the result higher average interest-bearing checking accounts, money market deposit accounts and senior and subordinated notes payable partially offset by lower yields paid on all deposit categories and senior and subordinated notes payable. The decrease in the average rate paid for deposits was largely driven by the repricing of our deposits as a result of the current interest rate environment. The increase in average interest-bearing
liabilities was driven primarily by an increase of $1.20 billion in average interest-bearing checking accounts and an increase of $1.69 billion in average money market deposit accounts, partially offset by a decrease of $314.5 million in average certificates of deposit. The ongoing success of our treasury management business contributed to the growth in our checking account deposit categories.
The following table analyzes the dollar amount of the changes 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, 2022, compared to the same period in 2021. 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 interest rate is measured by applying the change in rate between the two periods to the average volume during the first period.
(1)The
change in interest income and interest 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 Credit Losses on Loans and Leases
The provision for credit losses on loans and leases represents our determination of the amount necessary to be recorded against the current period’s earnings to maintain the allowance for credit losses at a level that is consistent with management’s assessment of credit losses in the loan and lease portfolio at a specific point in time under the methodology required by CECL.
For additional information regarding our allowance for credit losses on loans and leases, see “Allowance for Credit Losses on Loans and Leases.”
Provision for Loan and Lease Losses for the Three Months Ended March 31, 2022 and 2021. We recorded provision expense for loan and lease losses of $654,000 for the three months ended March 31, 2022, compared to
provision expense of $213,000 for the three months ended March 31, 2021. The provision expense for loan and lease losses for the three months ended March 31, 2022, was comprised of an increase in general reserves, net of recoveries, of approximately $619,000 and an increase of specific reserves, net of charge-offs, of approximately $35,000. The increase in general reserves was largely due to changes in the economic forecasts utilized in the qualitative management overlay. The provision expense for credit losses on loans and leases for the three months ended March 31, 2021, was comprised of a decrease in general reserves of $4.9 million largely due to adjustments to the qualitative risk factors related to consensus forecasts
of an economic recovery and reductions in modeled losses, and a net increase of $4.9 million in specific reserves on non-performing loans, largely driven by two new non-accrual loans and a charge-off of $199,000, all in our commercial loan portfolio.
Non-Interest Income
Non-interest income is an important component of our total revenue and is comprised largely 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, 2022 and 2021:
(1)Other
income is largely comprised of items such as change in fair value on swaps, losses on the sale of loans or OREO, and other general operating income.
Non-Interest Income for the Three Months Ended March 31, 2022 and 2021. Our non-interest income was $15.1 million for the three months ended March 31, 2022, an increase of $1.4 million, or 10.6%, from $13.7 million for the same period in 2021. This increase was primarily related to increases in swap fees, commitment and other loan fees, and bank owned lifer insurance income partially offset by a decrease in other income:
Bank
Segment:
•Swap fees increased $1.9 million for the three months ended March 31, 2022, compared to the same period in 2021, due to changing demand from customers for interest rate protection through swaps given recent movement in the yield curve. The number of swaps executed as well as the notional amount and term of each swap transaction impact the fee income from period to period.
•Commitment and other loan fees increased $275,000 for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to an increase in letter
of credit fee income.
•Bank owned life insurance income increased $177,000 for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to additional investments made in bank owned life insurance during the second quarter of 2021.
•Other non-interest income decreased $964,000 for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to a $852,000 reduction in the gain on sale of loans and leases.
•Investment management fees increased $210,000, or 2.3%, for the three months ended March 31, 2022, compared to the same period in 2021, due primarily to slightly higher assets under management of $11.23 billion as of March 31, 2022, an increase of $27.0 million from March 31, 2021. The weighted average fee rate was 0.33% and 0.35% as of March 31, 2022 and 2021, respectively.
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 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, 2022 and 2021:
(1)Other
operating expenses include items such as impairment on historic tax credit investments, charitable contributions, investor relations fees, platform distribution expenses, provision for credit losses on unfunded commitments and other general operating expenses.
(2)Employee headcount as of the end of the periods presented.
Non-Interest Expense for the Three Months Ended March 31, 2022 and 2021. Our non-interest expense for the three months ended March 31, 2022, increased $9.9 million, or 31.7%, as compared to the same period in 2021, which included a $8.6 million increase
in expenses of the Bank segment and a $766,000 increase 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 increased by $4.6 million for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to an increase in the number of employees, increases in the overall annual wage and benefits costs of our existing employees, and increases in incentive and stock-based compensation expenses. The increases in the number of employees and related expenses in 2022 are a result of our investment in talent to support our risk management, scalable
growth and client experience.
•Premises and equipment expense increased $568,000 for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to an increase in rent expense of $513,000.
•FDIC insurance expense increased $459,000 for the three months ended March 31, 2022 compared to the same period in 2021. The
FDIC insurance assessment has increased in line with the Bank’s growth over the last year.
•Technology and data services increased by $1.0 million for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to increased software depreciation expense, maintenance costs and software licensing fees all as a result of our continued enhancements in technology and product innovation to support our risk management, scalable growth and client experience.
•Other operating expenses increased by $1.2 million for the three months ended March
31, 2022, compared to the same period in 2021, primarily due to a $933,000 increase in the provision for credit losses associated with unfunded commitments. In the current year quarter, the Bank recognized a provision for credit losses on unfunded commitments of $500,000 and in the prior year quarter the Bank recognized a credit of $433,000.
Investment Management Segment:
•Chartwell’s compensation and employee benefits costs increased by $190,000 for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to higher revenue-based compensation expenses in the current quarter.
•Professional
fees increased by $354,000 for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to increased audit expense and executive search fees.
•Marketing and advertising expense increased by $94,000 for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to increased marketing activity and third-party distribution expenses.
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, 2022 and 2021. For
the three months ended March 31, 2022, we recognized income tax expense of $5.3 million, or 19.7% of income before tax, as compared to income tax expense of $4.6 million, or 22.1% of income before tax, for the same period in 2021. Our effective tax rate of 19.7% for the three months ended March 31, 2022, decreased compared to the same period in the prior year primarily due to the amount and timing of tax credits recognized in 2021 compared to 2020.
Financial Condition
Our total assets as of March 31,
2022, were $13.68 billion, an increase of $0.67 billion, or 21.0% on an annualized basis, from December 31, 2021, driven primarily by growth in our loan and investment portfolios. As of March 31, 2022, our loan portfolio totaled $11.25 billion, an increase of $483.6 million, or 18.2% on an annualized basis, from December 31, 2021. Total investment securities increased
$132.8 million, or 38.3% on an annualized basis, to $1.54 billion as of March 31, 2022, from December 31, 2021. We focus on high quality loan growth and correspondingly grow our investment portfolio at a similar pace as part of our strategy to continue building greater on-balance sheet liquidity, funded by our deposits.
As of March 31, 2022, our total deposits were $12.17 billion, an increase
of $661.1 million, or 23.3% annualized, from December 31, 2021. Net borrowings increased $99,000 to $470.3 million as of March 31, 2022, from December 31, 2021. Our shareholders’ equity increased$1.4 million to $838.1 million as of March 31, 2022, from December 31, 2021,
primarily due to net income of $21.6 million and the $3.1 million impact of stock-based compensation mostly offset by other comprehensive loss of $17.7 million, $2.0 million of preferred stock dividends paid, and an increase of $4.0 million in treasury stock related to the net settlement of equity awards exercised or vested.
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, 2022, 94.8% of our loans had a floating interest rate.
The following table presents the composition of our loan portfolio as of the dates indicated:
Loans
and Leases Held-for-Investment. Loans and leases held-for-investment increased by $483.6 million, or 18.2% on an annualized basis, to $11.25 billion as of March 31, 2022, from December 31, 2021. Our growth for the three months ended March 31, 2022, was comprised of an increase in private banking loans of $381.7 million, an increase in commercial real estate loans of $51.0
million, and an increase in commercial and industrial loans and leases of $50.9 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 and marketable securities. We also originate loans that are secured by cash value life insurance and to a lesser extent 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.
As of March 31, 2022, $7.21 billion, or 99.2%, of our private banking loans were secured by cash, marketable securities and/or cash value life insurance as compared to $6.82 billion, or 99.0%, as of December 31, 2021. 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 banking business. We believe we have strong competitive advantages
in this line of business given our robust distribution channel relationships and proprietary technology. These loans usually 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 and/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 and/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 and/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.
Secured by cash, marketable securities and/or cash value life insurance
$
7,208,454
$
6,816,517
Secured
by real estate
39,683
37,285
Other
20,025
32,696
Total private banking loans
$
7,268,162
$
6,886,498
As of March 31, 2022, there were $7.15 billion of total private
banking loans with a floating interest rate and $115.7 million with a fixed interest rate, compared to $6.80 billion and $84.4 million, respectively, as of December 31, 2021.
Commercial Banking - Commercial and Industrial Loans and Leases. Our commercial and industrial loan and lease portfolio primarily includes loans and equipment 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, 2022, there were $1.20 billion of total commercial and industrial loans with a floating interest rate and $363.5 million with a fixed interest rate, compared to $1.16 billion and $350.4 million, respectively, as of December 31, 2021.
Commercial 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 $210.4 million and $212.6 million of owner-occupied commercial real estate loans as of March 31,
2022 and December 31, 2021, respectively.
As of March 31, 2022, there were $2.31 billion of total commercial real estate loans with a floating interest rate and $103.3 million with a fixed interest rate, as compared to $2.26 billion and $105.2 million, respectively, as of December 31, 2021.
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.
As of March 31, 2022, loans with interest reserves totaled $331.7 million, which represented 2.9% of loans and leases held-for-investment, compared to $350.5 million, or 3.3%, as of December 31, 2021. 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 project budget and schedule for completion, 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.
Allowance for Credit Losses on Loans and Leases
Our allowance for credit losses on loans and leases represent our current estimate of expected credit losses in the loan and lease portfolio at a specific point in time. This estimate includes credit losses associated with individually evaluated loans and leases that do not share similar risk characteristics. 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 current estimate of expected credit losses in of any of the three loan portfolios decreases. Refer to Note 1,
Summary of Significant Accounting Policies and Note 4, Allowance for Credit Losses on Loans and Leases, to our unaudited condensed consolidated financial statements for more details on the
Company’s allowance for credit losses on loans and leases.
The following table summarizes the allowance for loan and lease losses, as of the dates indicated:
Total allowance for credit losses on loans and leases
$
25,024
$
28,563
Allowance for credit losses on loans and leases to loans and leases
0.22
%
0.27
%
As of March 31,
2022, we had specific reserves totaling $406,000 related to individually evaluated loans with an aggregate total outstanding balance of $12.5 million. As of December 31, 2021, we had specific reserves totaling $4.7 millionrelated to individually evaluated loans with an aggregate total outstanding balance of $16.8 million. Interest income of $151,000 and $0 was recognized on individually evaluated loans during the three months ended March 31, 2022 and 2021, respectively.
The following
table summarizes allowance for credit losses on loans and leases and the percentage of loans and leases by category, as of the dates indicated:
Total allowance for credit losses on loans and leases
$
25,024
100.0
%
$
28,563
100.0
%
Allowance
for Credit Losses on Loans and Leases as of March 31, 2022 and December 31, 2021. Our allowance for credit losses on loans and leases was $25.0 million, or 0.22% of loans as of March 31, 2022, compared to $28.6 million, or 0.27% of loans, as of December 31, 2021. Our allowance for credit losses on commercial loans decreased to 0.58% of total commercial
loans as of March 31, 2022, compared to 0.69% of commercial loans as of December 31, 2021. Our allowance for credit losses decreased $3.5 million from December 31, 2021, driven by an increase of $0.7 million in general reserves more than offset by a decrease of $4.3 million in specific reserves due to a charge-off which was fully reserved. Our allowance for credit losses related to private banking loans increased $169,000 fromDecember 31, 2021 to March 31, 2022. Our
allowance for credit losses related to commercial and industrial loans decreased $3.3 million from December 31, 2021 to March 31, 2022, which was attributable to lower specific reserves due to a $4.3 million charge-off, partially offset by an increase in general reserves of $923,000. Our allowance for credit losses related to commercial real estate loans decreased by $0.4 million from December 31, 2021 to March 31, 2022 primarily due to decreased
general reserves.
The increase in general reserves in our commercial loan portfolio was primarily driven by changing economic forecasts related to assumptions utilized in the qualitative management overlay. We applied a management overlay to our allowance for credit loss model to provide a reserve level that supports management’s best estimate of current expected credit losses within the loan portfolio. The management overlay includes three scenarios: near-term economic stress, a next-cycle recession, and a period of stagflation as well as other factors based upon management judgement. The consensus forecast within our model provided for a greater reserve release based on optimism around the economic environment and loss forecasts, which we believe may be an overreaction to the early onset of historically high level and rate of changes in the forecast and transactional
values within commercial asset types. We would release reserves to the extent suggested by our model if we believe that there is a sustained trend in the economic recovery data and continued progress with pandemic associated economic and supply chain issues as well as clarity on the effectiveness of monetary policy.
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 net charge-offs and average total loans and leases by channel for the periods indicated:
Three
Months Ended March 31,
(Dollars in thousands)
2022
2021
Net charge-offs (recoveries):
Commercial and industrial
$
4,312
$
199
Commercial real estate
(119)
—
Private
banking
—
—
Total
$
4,193
$
199
Average total loans and leases:
Commercial and industrial
$
1,431,455
$
1,206,647
Commercial
real estate
2,378,308
2,174,239
Private banking
7,020,701
4,895,173
Total
$
10,830,464
$
8,276,059
Net loan charge-offs (recoveries) to average total loans and leases: (1)
Commercial
and industrial
1.22
%
0.07
%
Commercial real estate
(0.02)
%
—
%
Private banking
—
%
—
%
Total
0.16
%
0.01
%
(1)Ratios
are annualized
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.
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 was no interest income recognized on loans
while on non-accrual status for the three months ended March 31, 2022 and 2021. As of March 31, 2022 and December 31, 2021, there were no loans 90 days or more past due and still accruing income. As of March 31, 2022, there were no non-performing loans, compared to $4.3 million, or 0.04% of total loans, as of December 31, 2021. We had specific reserves of $4.3 million as of December 31, 2021 on non-performing loans. The net loan balance of our non-performing loans was 0.0% of the customer’s outstanding balance after payments, charge-offs
and specific reserves as of December 31, 2021.
For additional information on our non-performing loans as of March 31, 2022 and December 31, 2021, refer to Note 4, Allowance for Credit Losses on Loans and Leases, 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 credit quality
of the 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 $2.0 million, or 0.01% of total assets, as of March 31, 2022, as compared to $6.3 million, or 0.05% of total assets, as of December 31,
2021. The decrease in non-performing assets was the result of a $4.3 million non-performing loan charge-off during the three months ended March 31, 2022. As of March 31, 2022 and December 31, 2021, we had OREO properties totaling $2.0 million.
Allowance for credit losses on loans and leases to non-performing loans
NA
662.25
%
Non-performing assets to total assets
0.01
%
0.05
%
Potential
Problem Loans
Potential problem loans are those loans that are not categorized as non-performing loans, but for which current information indicates that the borrower may not be able to comply with repayment terms in the future. Among other factors, we monitor 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 individually as we would with other problem loans and consider the effect of any potential loss in determining any additional provision for credit losses on loans and leases. 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, 2022 and December 31, 2021, refer to Note 4, Allowance for Credit Losses on Loans and Leases, to our unaudited condensed consolidated financial statements.
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 and/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 amortized cost of loans by credit quality indicator for March 31, 2022 and December 31, 2021, refer to Note 4, Allowance for Credit Losses on Loans and Leases, 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 are recorded at fair value and changes to fair value are recognized in the consolidated statements of income. Equity securities are also recorded at fair value with changes in fair value 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, net of allowance for credit losses.
The Bank has engaged Chartwell to provide securities portfolio advisory services, subject to the investment parameters set forth in our investment policy.
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, and trading securities 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.
Our available-for-sale
debt securities portfolio consists of U.S. government treasury and agency obligations, mortgage-backed securities, collateralized mortgage obligations, corporate bonds, single-issuer trust preferred securities, and certain municipal bonds, all with varying contractual maturities. Our held-to-maturity debt securities consists of certain municipal bonds, agency obligations, mortgage-backed securities, U.S. treasury notes 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, 2022 was approximately 4.8, 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 and Liability Committee (“ALCO”) reviews the investment portfolio on an ongoing basis to ensure that the investments conform to our investment policy.
Available-for-Sale Debt Securities. We held $714.2 million and $586.3 million in debt securities available-for-sale as of March 31, 2022 and December 31, 2021, respectively. The increase of $127.8 million was primarily attributable
to purchases of $176.2 million, partially offset by prepayments, calls and maturities of $17.9 million and a reduction in fair value of approximately $30 million during the three months ended March 31, 2022.
On a fair value basis, 18.6% of our available-for-sale debt securities as of March 31, 2022 were floating-rate securities, for which yields increase or decrease based on changes in market interest rates. As of December 31, 2021, floating-rate securities comprised 23.1% of our available-for-sale debt securities.
On
a fair value basis, 35.9% of our available-for-sale debt securities as of March 31, 2022 were U.S. government and agency securities, which tend to have a lower risk profile than certain corporate bonds, single-issuer trust preferred securities, non-agency residential mortgage-backed securities, and municipal bonds, which comprised the remainder of the portfolio. As of December 31, 2021, agency securities comprised 24.6% of our available-for-sale debt securities.
Held-to-Maturity Debt Securities. We held $807.7 million and $802.7 million in debt securities held-to-maturity as
of March 31, 2022 and December 31, 2021, respectively. The increase of $4.9 million was primarily attributable to purchases of $42.3 million, net of calls and maturities of $35.5 million, during the three months ended March 31, 2022. 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, net of allowance for credit losses, as of March 31, 2022 and December 31,
2021.
Equity Securities. Equity securities consisted of mutual funds investing in short-duration, investment grade corporate bonds and are carried at fair value. Our investment in these securities were valued at $4.9 million and $5.0 million as of March 31, 2022 and December 31, 2021, respectively.
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:
(1)Available-for-sale debt securities are recorded on the consolidated statements of financial condition at estimated fair value, which includes allowance for credit losses, if applicable.
(1)Held-to-maturity
debt securities are recorded on the consolidated statements of financial condition at amortized cost, net of allowance for credit losses.
(1)Available-for-sale
debt securities are recorded on the consolidated statements of financial condition at estimated fair value, which includes allowance for credit losses, if applicable.
(1)Held-to-maturity
debt securities are recorded on the consolidated statements of financial condition at amortized cost, net of allowance for credit losses.
The changes in the fair values of our municipal bonds, agency debentures, agency collateralized mortgage obligations, agency mortgage-backed securities, and U.S. treasury notes are primarily the result of interest rate fluctuations. To assess for credit impairment on debt securities available-for-sale, 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. The most recent assessment for credit impairment 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, no allowance for credit losses has been recognized on debt securities available-for-sale in an unrealized loss position.
There were $27.1 million of debt securities held-to-maturity that were pledged as collateral for certain deposit relationships as of March 31, 2022.
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, 2022, 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.
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
Chartwell’s total assets under management of $11.23 billion decreased $614.0 million, or 5.2%, as of March 31, 2022, from $11.84 billion as of December 31, 2021.
(1)Inflows consist of new business and contributions to existing accounts.
(2)Outflows consist of business lost as well as distributions from existing accounts.
Deposits
Deposits
are our primary source of funds to support our earning assets. We have focused on creating and growing diversified, stable, and lower all-in cost deposit channels without operating through a traditional branch network. We market liquidity and treasury management products, payment processing products, and other deposit products to high-net-worth individuals, family offices, trust companies, wealth management firms, municipalities, endowments and foundations, broker/dealers, futures commission merchants, investment management firms, property management firms, payroll providers 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. With respect to our treasury management business, we utilize hybrid interest-bearing accounts that provide our clients with certainty around their fee structures and returns
for their total cash position while enhancing our ability to obtain their full liquidity relationship and still meeting our cost of funds expectations, rather than the more traditional combination of separate non-interest bearing and interest-bearing accounts, which has reduced transparency and increased client burden.
We continue to enhance our liquidity and treasury management capabilities and team to support our efforts to grow this source of funding. Treasury management deposit accounts totaled $2.98 billion as of March 31, 2022, an increase of $122.2 million, or 4.3%, from December 31, 2021. Treasury management deposit accounts contributed to almost 19% of our total deposit growth for the three months ended March
31, 2022. As of March 31, 2022, we had approximately 524 treasury management clients, the majority of which were payment processors, lending client-operating accounts, bankruptcy, and real estate accounts.
The table below depicts average balances of, and rates paid on, our deposit portfolio by major deposit category for the three months ended March 31, 2022 and 2021.
Average
Deposits for the Three Months Ended March 31, 2022 and 2021. For the three months ended March 31, 2022, our average total deposits were $11.65 billion, representing an increase of $2.80 billion, or 31.7%, from the same period in 2021. The average deposit growth was driven by increases in our interest-bearing checking account, money market deposit account and noninterest-bearing deposit account categories as we continue to attract clients to our treasury management business and grow our deposit product offerings. Our average cost of interest-bearing deposits decreased 12 basis points to 0.40% for the three months ended March 31, 2022, from 0.52% for the
same period in 2021, as average rates paid were lower in all interest-bearing deposit categories, driven by the repricing of our deposits as a result of the continued low interest rate environment. Another driver of the combination of higher average deposits and lower rates is our continued addition of meaningful and long-term client relationships that support our efforts to
manage deposit costs through variable rate and discretionary pricing in the economic environment. Average interest-bearing checking accounts increased to 38.8% of total average interest-bearing
deposits for the three months ended March 31, 2022, compared to 36.4% for the same period in 2021. Average money market deposits increased to 54.8% of total average interest-bearing deposits for the three months ended March 31, 2022, from 51.6% for the same period in 2021. Average certificates of deposit decreased to 6.4% of total average interest-bearing deposits for the three months ended March 31, 2022, compared to 12.0% for the same period in 2021. Average noninterest-bearing deposits increased $228.3 million, or 53.8%, in the three months
ended March 31, 2022, from the three months ended March 31, 2021, and the average cost of total deposits decreased 12 basis points to 0.37% for the three months ended March 31, 2022, from 0.49% for the same period in 2021.
Uninsured Deposits and Related Information
As of March 31, 2022, we estimate the total value of uninsured deposits to be approximately $5.69 billion.
The
following table summarizes the aggregate amount of individual certificates of deposit exceeding $250,000 by remaining months to maturity.
As of March 31, 2022, we consider approximately 90% 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, 2022, the Bank had CDARS® and ICS® reciprocal deposits totaling $1.85 billion, which were not classified as brokered deposits. 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. As of March 31, 2022, brokered deposits were approximately 10% of total deposits. For additional information on our deposits, refer to Note 5, Deposits, to our unaudited condensed consolidated financial statements.
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 for the Bank, 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 Company previously entered into cash flow hedge transactions to establish the interest rate paid on $250.0 million of its FHLB borrowings at varying effective rates and maturities. For additional information on the detail of each cash flow hedge transaction, refer to Note 10, 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, 2022, 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 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, 2022, our primary liquidity needs at the parent company level were the quarterly dividends on our preferred stock, interest payments on our subordinated debt and other borrowings, and share repurchase programs. 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, 2022, the parent company paid $2.0 million related to our preferred stock dividends, $0 million related to interest payments on our subordinated notes payable and other borrowings, and $4.0 million for the purchase of treasury shares in connection with the net settlement of equity awards exercised or vested. During the three months ended March 31, 2021, the parent company paid $1.5 million in purchase of treasury shares in connection with the net settlement of equity awards exercised or vested, $3.1 million related to our preferred stock dividends and $54,000 related to interest payments on our other borrowings. 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 all foreseeable short-term and long-term parent company obligations as of March 31, 2022. In addition,we maintain an unsecured line of credit with Huntington National Bank. As of March 31, 2022, the unsecured line was $75.0 million, of which $75.0 million was available for borrowing.
Our primary 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 or arrangements, 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 stress 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 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 and liquidity needs, 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.
Our strong liquidity position is due to our ability to generate strong growth
in deposits, which is evidenced by our ratio of total deposits to total assets of 88.9% and 88.5% as of March 31, 2022 and December 31, 2021, respectively. Our ratio of average deposits to average assets increased to 88.6% for the three months ended March 31, 2022, from 86.6% for the same period in 2021. As of March 31, 2022, we had available liquidity of $2.82 billion, or 20.6%
of total assets. The sources of liquidity consisted of available cash totaling $467.8 million, unpledged investment securities totaling $1.42 billion, or 10.4% of total assets, and the ability to borrow from the FHLB and correspondent bank lines totaling $937.9 million, or 6.9% 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:
Investing activities resulted in a net cash outflow of $653.7 million for the three months ended March 31, 2022, as compared to a net cash outflow of $701.4 million for the same period in 2021. The outflows for the three months ended March
31, 2022, were primarily due to net loan growth of $491.9 million and purchases of investment securities totaling $213.7 million, partially offset by the proceeds from the sale, principal repayments and maturities from investment securities totaling $53.3 million. The outflows for the three months ended March 31, 2021, included net loan growth of $310.6 million and purchases of investment securities totaling $471.9 million, partially offset by the proceeds from the sale, principal repayments and maturities from investment securities totaling $77.1 million.
Financing activities resulted in a net inflow of $655.5
million for the three months ended March 31, 2022, compared to a net inflow of $702.9 million for the same period in 2021. The inflows for the three months ended March 31, 2022, were primarily a result of a net
increase in deposits of $661.1 million. The
inflows for the three months ended March 31, 2021, included a net increase in deposits of $760.9 million, partially offset by a net decrease in FHLB borrowings of $50.0 million.
We believe that the Bank’s sources of liquidity are adequate to fund all foreseeable short-term and long-term obligations as of March 31, 2022.
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 assessment of capital adequacy depends on a number of factors, including loan composition, 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.
Shareholders’ Equity. Shareholders’ equity was $838.1 million as of March 31,
2022, compared to $836.7 million as of December 31, 2021. The $1.4 millionincrease during the three months ended March 31, 2022, was primarily attributable to net income of $21.6 million and$3.1 million in stock-based compensation partially offset and by $17.7 million in other comprehensive loss, preferred stock dividends of $2.0 million and a purchase of $4.0 million in treasury stock related to the net settlement of equity awards exercised or vested.
Regulatory
Capital. As of March 31, 2022 and December 31, 2021, 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 capital conservation buffer requirement is a CET 1 capital to risk-weighted assets ratio of 2.5% or more, in addition
to the minimum risk-based capital adequacy levels shown in the tables below. As of March 31, 2022 and December 31, 2021, both the Company and the Bank maintained capital conservation buffers at levels that avoid limitations on capital distributions and discretionary bonus payments.
In 2020, U.S. federal regulatory authorities issued a final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay the impact of CECL on regulatory capital for up to two years, beginning January 1, 2020, followed by a three-year transition period. As the
Company adopted CECL on December 31, 2020, the Company elected to utilize the remainder of the two-year delay of CECL’s impact on its regulatory capital, from December 31, 2020 through December 31, 2021, followed by the three-year transition period of CECL impact on regulatory capital, from January 1, 2022 through December 31, 2024.
The following tables present the actual capital amounts and regulatory capital ratios for the Company and the Bank as of the dates indicated:
To
be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital ratio
Company
$
910,320
13.43
%
$
542,409
8.00
%
N/A
N/A
Bank
$
986,657
14.60
%
$
540,639
8.00
%
$
675,798
10.00
%
Tier
1 risk-based capital ratio
Company
$
788,910
11.64
%
$
406,807
6.00
%
N/A
N/A
Bank
$
960,955
14.22
%
$
405,479
6.00
%
$
540,639
8.00
%
Common
equity tier 1 risk-based capital ratio
Company
$
607,367
8.96
%
$
305,105
4.50
%
N/A
N/A
Bank
$
960,955
14.22
%
$
304,109
4.50
%
$
439,269
6.50
%
Tier
1 leverage ratio
Company
$
788,910
6.36
%
$
496,431
4.00
%
N/A
N/A
Bank
$
960,955
7.76
%
$
495,417
4.00
%
$
619,271
5.00
%
Contractual
Obligations and Commitments
There were no material changes to contractual obligations during the three months ended March 31, 2022 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.
Unfunded
loan commitments and demand line of credit availability, including standby letters of credit, are recorded on our statement of financial condition as they are funded. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Our measure of unfunded loan commitments and demand line of credit availability include unused availability under demand loans for our private banking lines secured by cash, marketable securities and/or cash value life insurance, as well as commitments to fund loans secured by residential properties, 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 and we continuously monitor utilization of our unfunded lines of credit and on both commercial and private
banking loans. We believe that we maintain sufficient liquidity or otherwise have the ability to generate the liquidity necessary to fund anticipated draws under unused loan commitments and demand lines of credit.
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
and unfunded demand lines 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 under certain contractual agreements, 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 demand lines of credit availability as well as standby
letters of credit commitments, based on the values of eligible collateral or other terms under the loan agreement, by contractual maturities outstanding as of the date indicated.
Unused loan commitments and demand lines of credit
$
9,929,535
$
754,011
$
525,476
$
214,024
$
57,041
$
11,480,087
Standby
letters of credit
100
40,138
14,494
2,559
—
57,291
Total off-balance sheet arrangements
$
9,929,635
$
794,149
$
539,970
$
216,583
$
57,041
$
11,537,378
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 deemed appropriate as of the date of this filing. For the purpose of this exercise, it is assumed that rates do not fall below zero.
Our
means of managing interest rate risk over the longer term include our focus on growing the low-cost deposit balances associated with our treasury management services, controlled adjustments within our discretionary priced accounts to respond to rising rates, and our future ability to extend duration in liabilities. Additionally, while we will continue to implement floors on certain new loan originations, our pricing strategy has transitioned to emphasizing loan spread as the primary tool to achieve yield and implementing lower levels of floors, which will reduce our liability sensitivity over time. In order to maintain appropriate levels of on balance sheet liquidity, we have continued to grow the investment portfolio despite the rising rate environment. The result is an increase in liability sensitivity in our EVE analysis at March 31, 2022 as compared to December 31,
2021. We have become significantly more asset sensitive in all of our NII scenarios in conjunction with the increase in short-term rates and the continued expectations of higher short-term rates at March 31, 2022 as compared to December 31, 2021.
The following gap analysis presents the amounts of interest-earning assets and interest-bearing liabilities and related cash flow hedging instruments that are subject to re-pricing within the periods indicated.
Cumulative
interest rate sensitive assets to rate sensitive liabilities
107.4
%
106.4
%
102.2
%
104.5
%
105.9
%
112.3
%
106.5
%
Cumulative gap to total assets
5.7
%
5.0
%
1.8
%
3.9
%
5.1
%
10.6
%
The
cumulative 12-month ratio of interest rate sensitive assets to interest rate sensitive liabilities decreased to 102.2% as of March 31, 2022, from 104.5% as of December 31, 2021.
The Company entered into cash flow hedge transactions to fix the interest rate on certain of the Company’s borrowings for varying periods of time. During the life of these transactions, they have the effect on our gap analysis of moving borrowings from the less than 90 days re-pricing category to the 181
to 365 days and longer re-pricing categories. As of March 31, 2022, $200.0 million was moved from the less than 90 days re-pricing category to the one to three years re-pricing category as a result of the cash flow hedging strategy. For additional information on cash flow hedge transactions, refer to Note 10, Derivatives and Hedging Activity, to our unaudited condensed consolidated financial statements. 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.
LIBOR Transition
On
March 5, 2021, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rate (“LIBOR”), confirmed that the publication of most LIBOR term rates will end on June 30, 2023, (excluding 1-week U.S. LIBOR and 2-month U.S. LIBOR, the publication of which ended on December 31, 2021). Given LIBOR’s extensive use across financial markets, the transition away from LIBOR presents various risks and challenges to financial markets and institutions, including the Company. The Company’s commercial and consumer businesses issue, trade and hold various products that are currently indexed to LIBOR. As
of March 31, 2022, the Company had a material amount of loans, investment securities, and notional value of derivatives indexed to LIBOR that will mature after the cessation of LIBOR. If not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational and compliance risks to financial markets and institutions, including the Company.
The Alternative Reference Rates Committee (“ARRC”) has proposed the Secured Overnight Financing Rate (“SOFR”) as its preferred rate as an alternative to LIBOR, although the ARRC has not proposed that SOFR be required. The selection of SOFR as the
alternative reference rate currently presents certain market concerns because it is a risk-free rate, while LIBOR incorporates credit risk, and because the methodology for the proposed term structure for SOFR differs from the LIBOR framework. The federal banking agencies are not requiring SOFR as the replacement rate. In April 2021, New York adopted legislation that provides for the substitution of SOFR as an alternative reference rate in any LIBOR-based contract governed by New York state law that does not include clear fallback language, once LIBOR is discontinued. Additionally, the Adjustable Interest Rate (LIBOR) Act was signed into law as part of the Consolidated Appropriations Act, 2022, on March 15, 2022. The Adjustable Interest Rate (LIBOR) Act establishes
a nationwide process for replacing LIBOR in financial contracts that mature after the cessation of the overnight, one-, three-, six- and 12-month USD LIBOR tenors on June 30, 2023 and that do not provide for an effective means to replace LIBOR upon its cessation. The Act also provides a safe harbor to lenders if they choose SOFR in existing contracts in which a party has the discretion to select a successor rate.
The ARRC has released final recommended fallback contract language for new issuances of LIBOR-indexed bilateral business loans, syndicated loans, floating
rate notes, securitizations and adjustable-rate mortgage loans, and it continues to develop other LIBOR transition guidance. The International Swaps and Derivatives Association, Inc. (“ISDA”) has announced protocol for the transition of derivative instruments away from LIBOR. The process for modification of legacy contracts that do not provide for a permanent transition from LIBOR remains a work in progress.
The Company continues to monitor this activity and evaluate the related risks. One of the major identified risks is inadequate fallback language in various instruments’ that may result in issues establishing the alternative index and adjusting the margin as applicable. The
Company has: (1) established a cross-functional team to identify, assess and monitor risks associated with the transition of LIBOR and other benchmark rates; (2) developed an inventory of affected products; (3) implemented more robust fallback contract language; and (4) implemented a plan to adhere to the ISDA protocol for the transition of derivatives away from LIBOR. The Company’s cross-functional team is also tasked with managing clear communication of the Company’s transition plans with both internal and external stakeholders and ensuring that the Company appropriately updates its business processes, analytical
tools, information systems and contract language to minimize disruption during and after the LIBOR transition. Due to the uncertainty surrounding the future of LIBOR, it is expected that our LIBOR transition process will span several reporting periods through the end of LIBOR publication in June 2023. The Company stopped entering into new contracts indexed to LIBOR as of January 1, 2022. For historical contracts indexed to LIBOR that will continue to exist beyond June 2023, the
Company is on track with its plans to perform the necessary modifications to replace LIBOR with an alternative index. For additional information related to the potential impact surrounding the transition from LIBOR on the Company’s business, see “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K filed with the SEC on March 1, 2022.
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, 2022. 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, 2022.
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, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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, 2022, the
Company was not a party to any new 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, 2021previously filed with the SEC.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
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, 2022:
(1)There
were 123,132 shares of treasury stock acquired in connection with the net settlement of equity awards exercised or vested included in the total number of shares purchased reflected in the table above. These repurchases were not part of a publicly announced plan or program.
(2)On July 15, 2019, the Board of Directors of the Company approved a share repurchase program of up to $10 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.
The following materials from TriState Capital Holdings, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2022, 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, (vi) the Notes to Unaudited Condensed Consolidated Financial Statements, and (vii) the Cover Page, furnished herewith.*
104
Cover
Page Interactive Data File, formatted in Inline XBRL (included in Exhibit 101).
* This information is deemed furnished, not filed.
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.
