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Section 1: 10-Q (10-Q)

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

FORM 10-Q
_________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 2017
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission file number: 001-35913
_________

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
ý Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
ý
Non-accelerated filer
¨
 
Smaller reporting company
¨
  (Do not check if a smaller reporting company)
Emerging growth company
ý

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.    ý



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

As of April 14, 2017, there were 28,731,963 shares of the registrant’s common stock, no par value, outstanding.



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TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
March 31,
2017
December 31,
2016
 
 
 
ASSETS
 
 
 
 
 
Cash
$
183

$
183

Interest-earning deposits with other institutions
108,490

96,244

Federal funds sold
3,828

7,567

Cash and cash equivalents
112,501

103,994

Investment securities available-for-sale, at fair value (cost: $160,234 and $175,158, respectively)
160,254

174,892

Investment securities held-to-maturity, at cost (fair value: $62,312 and $54,498, respectively)
61,371

53,940

Federal Home Loan Bank stock
13,241

9,641

Total investment securities
234,866

238,473

Loans held-for-investment
3,537,090

3,401,054

Allowance for loan losses
(16,185
)
(18,762
)
Loans held-for-investment, net
3,520,905

3,382,292

Accrued interest receivable
10,375

9,614

Investment management fees receivable, net
7,725

7,749

Goodwill and other intangibles, net
66,746

67,209

Office properties and equipment, net
5,312

5,471

Bank owned life insurance
65,265

64,815

Deferred tax asset, net
6,816

7,204

Prepaid expenses and other assets
44,526

43,636

Total assets
$
4,075,037

$
3,930,457

 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Liabilities:
 
 
Deposits
$
3,317,880

$
3,286,779

Borrowings, net
349,561

239,510

Accrued interest payable on deposits and borrowings
1,421

1,867

Other accrued expenses and other liabilities
46,516

50,494

Total liabilities
3,715,378

3,578,650

 
 
 
Shareholders’ Equity:
 
 
Preferred stock, no par value; Shares authorized - 150,000; Shares issued - none


Common stock, no par value; Shares authorized - 45,000,000;
Shares issued -
30,151,558 and 29,790,383, respectively;
Shares outstanding -
28,731,963 and 28,415,654, respectively
286,334

285,480

Additional paid-in capital
7,117

6,782

Retained earnings
81,236

73,744

Accumulated other comprehensive income, net
1,042

830

Treasury stock (1,419,595 and 1,374,729 shares, respectively)
(16,070
)
(15,029
)
Total shareholders’ equity
359,659

351,807

Total liabilities and shareholders’ equity
$
4,075,037

$
3,930,457


See accompanying notes to unaudited condensed consolidated financial statements.


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TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended March 31,
(Dollars in thousands, except per share data)
2017
2016
 
 
 
Interest income:
 
 
Loans
$
27,019

$
21,977

Investments
1,470

1,245

Interest-earning deposits
248

138

Total interest income
28,737

23,360

 
 
 
Interest expense:
 
 
Deposits
6,713

4,138

Borrowings
1,108

845

Total interest expense
7,821

4,983

Net interest income
20,916

18,377

Provision for loan losses
243

122

Net interest income after provision for loan losses
20,673

18,255

Non-interest income:
 
 
Investment management fees
9,340

7,019

Service charges
94

136

Net gain (loss) on the sale and call of investment securities
(2
)
1

Swap fees
1,099

1,240

Commitment and other fees
408

502

Other income
470

17

Total non-interest income
11,409

8,915

Non-interest expense:
 
 
Compensation and employee benefits
13,893

11,933

Premises and occupancy costs
1,266

1,129

Professional fees
851

801

FDIC insurance expense
953

522

General insurance expense
301

245

State capital shares tax
352

329

Travel and entertainment expense
615

577

Intangible amortization expense
463

390

Other operating expenses
2,464

2,080

Total non-interest expense
21,158

18,006

Income before tax
10,924

9,164

Income tax expense
3,432

3,321

Net income
$
7,492

$
5,843

 
 
 
Earnings per common share:
 
 
Basic
$
0.27

$
0.21

Diluted
$
0.26

$
0.21


See accompanying notes to unaudited condensed consolidated financial statements.


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TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended March 31,
(Dollars in thousands)
2017
2016
 
 
 
Net income
$
7,492

$
5,843

 
 
 
Other comprehensive income (loss):
 
 
 
 
 
Unrealized holding gains (losses) on investment securities, net of tax expense (benefit) of $115 and $(327)
183

(650
)
 
 
 
Reclassification adjustment for losses (gains) included in net income on investment securities, net of tax benefit (expense) of $1 and $0
1

(1
)
 
 
 
Unrealized holding gains on derivatives, net of tax expense of $31 and $0
55


 
 
 
Reclassification adjustment for gains included in net income on derivatives, net of tax expense of $(15) and $0
(27
)

 
 
 
Other comprehensive income (loss)
212

(651
)
 
 
 
Total comprehensive income
$
7,704

$
5,192


See accompanying notes to unaudited condensed consolidated financial statements.


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TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands)
Common
Stock
Additional
Paid-in-Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss), net
Treasury Stock
Total Shareholders' Equity
Balance, December 31, 2015
$
281,412

$
10,809

$
45,103

$
(1,443
)
$
(9,904
)
$
325,977

Net income


5,843



5,843

Other comprehensive loss



(651
)

(651
)
Exercise of stock options
32

(12
)



20

Purchase of treasury stock




(1,742
)
(1,742
)
Stock-based compensation

795




795

Balance, March 31, 2016
$
281,444

$
11,592

$
50,946

$
(2,094
)
$
(11,646
)
$
330,242

 
 
 
 
 
 
 
Balance, December 31, 2016
$
285,480

$
6,782

$
73,744

$
830

$
(15,029
)
$
351,807

Net income


7,492



7,492

Other comprehensive income



212


212

Exercise of stock options
854

(519
)



335

Purchase of treasury stock




(1,041
)
(1,041
)
Stock-based compensation

854




854

Balance, March 31, 2017
$
286,334

$
7,117

$
81,236

$
1,042

$
(16,070
)
$
359,659


See accompanying notes to unaudited condensed consolidated financial statements.


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TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
(Dollars in thousands)
2017
2016
Cash Flows from Operating Activities:
 
 
Net income
$
7,492

$
5,843

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
Depreciation and intangible amortization expense
848

707

Amortization of deferred financing costs
51

51

Provision for loan losses
243

122

Net gain on the sale of loans
(17
)

Stock-based compensation expense
854

795

Net loss (gain) on the sale or call of investment securities available-for-sale
2

(1
)
Net amortization of premiums and discounts
201

219

Decrease in investment management fees receivable, net
24

123

Increase in accrued interest receivable
(761
)
(848
)
Decrease in accrued interest payable
(446
)
(500
)
Bank owned life insurance income
(450
)
(441
)
Increase (decrease) in income taxes payable
4

(353
)
Decrease (increase) in prepaid income taxes
2,972

(284
)
Deferred tax provision
257

224

Decrease in accounts payable and other accrued expenses
(9,582
)
(10,071
)
Other, net
(400
)
(1,252
)
Net cash provided by (used in) operating activities
1,292

(5,666
)
Cash Flows from Investing Activities:
 
 
Purchase of investment securities available-for-sale
(7,776
)
(22,289
)
Purchase of investment securities held-to-maturity
(4,967
)

Proceeds from the sale of investment securities available-for-sale

681

Principal repayments and maturities of investment securities available-for-sale
22,547

2,228

Investment in low income housing tax credit
(84
)

Investment in small business investment company
(235
)

Net purchase of Federal Home Loan Bank stock
(3,600
)
(800
)
Net increase in loans
(145,706
)
(56,064
)
Proceeds from loan sales
6,867

1,196

Additions to office properties and equipment
(226
)
(110
)
Net cash used in investing activities
(133,180
)
(75,158
)
Cash Flows from Financing Activities:
 
 
Net increase in deposit accounts
31,101

66,363

Net increase in Federal Home Loan Bank advances
110,000

30,000

Net proceeds from exercise of stock options
335

20

Purchase of treasury stock
(1,041
)
(1,742
)
Net cash provided by financing activities
140,395

94,641

Net change in cash and cash equivalents during the period
8,507

13,817

Cash and cash equivalents at beginning of the period
103,994

96,676

Cash and cash equivalents at end of the period
$
112,501

$
110,493

 
 
 

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Three Months Ended March 31,
(Dollars in thousands)
2017
2016
Supplemental Disclosure of Cash Flow Information:
 
 
Cash paid during the period for:
 
 
Interest
$
8,217

$
5,433

Income taxes
$
199

$
3,734

Other non-cash activity:
 
 
Unsettled purchase of investment securities held-to-maturity
$
2,500

$


See accompanying notes to unaudited condensed consolidated financial statements.

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

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

The Bank was established to serve the commercial banking and private banking needs of middle-market businesses and high-net-worth individuals. Chartwell provides investment management services to institutional, sub-advisory, and separately managed account clients and had assets under management of $8.19 billion as of March 31, 2017. CTSC Securities primary business is facilitating marketing efforts for the proprietary investment products provided by Chartwell, including shares of mutual funds advised and/or administered by Chartwell.

Regulatory approval was received and the Bank commenced operations on January 22, 2007. The Company and the Bank are subject to regulatory examination by the Federal Deposit Insurance Corporation (“FDIC”), the Pennsylvania Department of Banking and Securities, and the Federal Reserve. Chartwell is a registered investment advisor regulated by the SEC. Chartwell was established through the acquisition of substantially all the assets of Chartwell Investment Partners, LP that was effective March 5, 2014. CTSC Securities was capitalized in May 2014, and its broker/dealer registration was approved on March 7, 2017. CTSC Securities is regulated by the SEC and FINRA.

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

USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of related revenue and expense 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 worse than those anticipated in the estimates, which could materially affect the financial results of our operations and financial condition.

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

CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, the Bank, Chartwell and CTSC Securities, after elimination of inter-company accounts and transactions. The accounts of the Bank, in turn, include its wholly-owned subsidiary, Meadowood Asset Management, LLC, after elimination of inter-company accounts and transactions. The unaudited consolidated financial statements of the Company presented herein have been prepared pursuant to rules of the Securities and Exchange Commission 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 consolidated financial statements, have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended December 31, 2016, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 14, 2017.

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


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

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

FEDERAL HOME LOAN BANK STOCK
The Company is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”). 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, 2017 and December 31, 2016. Cash and stock dividends are reported as interest income, in the consolidated statements of income.

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

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

The recognition of interest income on a loan is discontinued when, in management’s opinion, it is probable the borrower is unable to meet payments as they become due or when the loan becomes 90 days past due, whichever occurs first. All accrued and unpaid interest on such loans is reversed. Such 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 (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 commitment. Commitments generally have fixed expiration dates or other termination clauses (i.e. demand loans) and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the unfunded commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis using the same credit policies in making commitments and

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conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary by the Company upon extension of a commitment, is based on management’s credit evaluation of the borrower.

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

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

The allowance was appropriate, in management’s judgment, to cover probable losses inherent in the loan portfolio as of March 31, 2017 and December 31, 2016. Management’s judgment takes into consideration general economic conditions, diversification and seasoning of the loan portfolio, historic loss experience, identified credit problems, delinquency levels and adequacy of collateral. Although management believes it has used the best information available to it in making such determinations, and that the present allowance for loan losses is adequate, future adjustments to the allowance may be necessary, and net income may be adversely affected if circumstances differ substantially from the assumptions used in determining the level of the allowance. In addition, as an integral part of their periodic examination, certain regulatory agencies review the adequacy of the Bank’s allowance for loan losses and may direct the Bank to make additions to the allowance based on their judgments about information available to them at the time of their examination.

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

Under ASC Topic 310, a loan is impaired, based upon current information and events, in management’s opinion, when it is probable that the loan will not be repaid according to its original contractual terms, including both principal and interest, or if a loan is designated as a TDR. Management performs individual assessments of impaired loans to determine the existence of loss exposure based upon a discounted cash flows method or where a loan is collateral dependent, based upon the fair value of the collateral less estimated selling costs.

In estimating probable loan loss under ASC Topic 450 management considers numerous factors, including historical charge-offs and subsequent recoveries. Management also considers, but is not limited to, qualitative factors that influence our credit quality, such as delinquency and non-performing loan trends, changes in loan underwriting guidelines and credit policies, the results of internal loan reviews, etc. Finally, management considers the impact of changes in current local and regional economic conditions in the markets that we serve. Assessment of relevant economic factors indicates that some of the Company’s primary markets may historically tend to lag the national economy, with local economies in our primary market areas also improving or weakening, as the case may be, but at a more measured rate than the national trends.

Management bases the computation of the allowance for loan losses under ASC Topic 450 on two factors: the primary factor and the secondary factor. The primary factor is based on the inherent risk identified by management within each of the Company’s three loan portfolios based on the historical loss experience of each loan portfolio and the loss emergence period. Management has developed a methodology that is applied to each of the three primary loan portfolios: private banking, commercial and industrial, and commercial real estate. As the loan loss history, mix and risk ratings of each loan portfolio change, the primary factor adjusts accordingly. The allowance for loan losses related to the primary factor is based on our estimates as to probable losses for each loan portfolio. The secondary factor is intended to capture risks related to events and circumstances that management believes have an impact on the performance of the loan portfolio. Although this factor is more subjective in nature, the methodology focuses on internal and external trends in pre-specified categories (risk factors) and applies a quantitative percentage that drives the secondary factor. There are nine risk factors and each risk factor is assigned a reserve level based on management’s judgment as to the probable impact of each risk factor on each loan portfolio and is monitored on a quarterly basis. As the trend in any risk factor changes, a corresponding change occurs in the reserve associated with each respective risk factor, such that the secondary factor remains current to changes in each loan portfolio.

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

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INVESTMENT MANAGEMENT FEES
The Company recognizes investment management fee revenue when the advisory services are performed. Fees are based on assets under management and are calculated pursuant to individual client contracts. Investment management fees are generally paid on a quarterly basis.

Investment management fees receivable represent amounts due for contractual investment management services provided to the Company’s clients, primarily institutional investors, mutual funds and individual investors. Management performs credit evaluations of its customers’ financial condition when it is deemed to be necessary, and does not require collateral. The Company provides an allowance for uncollectible accounts based on specifically identified receivables. Bad debt expense is recorded to other non-interest expense on the consolidated statements of income and the allowance for uncollectible accounts is recorded to investment management fees receivable, net on the consolidated statements of financial position. Investment management fees receivable are considered delinquent when payment is not received within contractual terms and are charged off against the allowance for uncollectible accounts when management determines that recovery is unlikely and the Company ceases its collection efforts. There was $150,000 and $0 of bad debt expense recorded for the three months ended March 31, 2017 and 2016, respectively, and there was $150,000 and $0 of allowance for uncollectible accounts recorded as of March 31, 2017 and December 31, 2016, respectively.

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 and the fair value of the net assets acquired (including identified intangibles) is recorded as goodwill. The change in the initial estimate of any contingent earn out amounts is reflected in the consolidated statements of income.

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

Other intangible assets represent purchased assets that 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 would assess whether the carrying value of these assets exceeds its fair value, an impairment loss would be recorded in an amount equal to any such excess and these assets would be reclassified to finite-lived. Other intangible assets that the Company has determined to have finite lives, such as trade name, client lists and non-compete agreements, are amortized over their estimated useful lives. These finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from four to twenty-five years. Finite-lived intangibles are evaluated for impairment on an annual basis or more frequently whenever events or circumstances occur indicating that the carrying amount may not be recoverable.

OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated depreciation. Depreciation is computed on 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 ten years. Repairs and maintenance are charged to expense as incurred, while improvements that extend the useful life are capitalized and depreciated to operating expense over the estimated remaining life of the asset. When the Bank receives an allowance for improvements to be made to one of its leased offices, we record the allowance as a deferred liability and recognize it as a reduction to rent expense over the life of the related lease.

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 the BOLI policy the Company receives the cash surrender value.

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BOLI benefits are payable to the Company upon death of the insured. Changes in net cash surrender value are recognized as non-interest income in the consolidated statements of income.

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

BORROWINGS
The Company records FHLB advances and subordinated notes payable at their principal amount net of debt issuance costs, per ASU 2015-03. 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.

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

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. It is the Company’s policy to recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense in the consolidated statements of income.

DERIVATIVES AND HEDGING ACTIVITIES
The Company accounts for derivative instruments and hedging activities in accordance with FASB ASC Topic 815, Derivatives and Hedging. All derivatives are evaluated at inception as to whether or not they are hedging or non-hedging activities, and appropriate documentation is maintained to support the final determination. 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 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.

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 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.

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

STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation awards based on estimated fair values, for all share-based awards, including stock options and restricted shares, made to employees and directors.

The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of ASC Topic 718, Compensation – Stock Compensation. As a result, compensation cost for all share-based payments is based on the grant-date fair value estimated in accordance with ASC Topic 718. The value of the portion of the award that is ultimately expected to vest is included in stock-based compensation expense in the consolidated statements of income and recorded as a component of additional paid-in capital, for equity-based awards. Compensation expense for all awards is recognized on a straight-line basis over the requisite service period for the entire grant.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains and the non-credit component of unrealized losses on the Company’s investment 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 investment 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.

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

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

In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments-Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016, and November 17, 2016, EITF Meetings  (SEC Update),” which incorporates into the FASB Accounting Standards Codification® recent SEC guidance about disclosing, under SEC SAB Topic 11.M, the effect on financial statements of adopting the revenue, leases, and credit losses standards. The SEC staff had previously announced that registrants should include the disclosures starting with their December 2017 financial statements. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805),” which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Entities may early adopt the ASU and apply it to transactions that have not been reported in financial statements that have been issued or made available for issuance. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which requires companies to include cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the

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statement of cash flows. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, adjustments should be reflected at the beginning of the fiscal year that includes that interim period. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory,” which requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Entities may early adopt the ASU, but only at the beginning of an annual period for which no financial statements (interim or annual) have already been issued or made available for issuance. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.

In September of 2016, the FASB issued ASU 2016-15, “Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which addresses eight classification issues related to the statement of cash flows. The eight classification issues are as follows: debt prepayment or debt extinguishment costs; settlement of zero-coupon bonds; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This ASU is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the ASU in an interim period, adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. Entities should apply this ASU using a retrospective transition method to each period presented. If it is impracticable for an entity to apply the ASU retrospectively for some of the issues, it may apply the amendments for those issues prospectively as of the earliest date practicable. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. The changes are effective for public business entities that are SEC filers, for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for annual and interim periods in fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which, among other things, requires lessees to recognize most leases on-balance sheet. This will increase their reported assets and liabilities - in some cases very significantly. Lessor accounting remains substantially similar to current U.S. GAAP. ASU 2016-02 supersedes Topic 840, Leases. This ASU is effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for annual and interim periods in fiscal years beginning after December 15, 2018. This ASU mandates a modified retrospective transition method for all entities. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” which will significantly change the income statement impact of equity investments, and the recognition of changes in fair value of financial liabilities when the fair value option is elected. This ASU is effective for public business entities for interim and annual periods in fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of this update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 establishes a five-step model that entities must follow to recognize revenue and removes inconsistencies and weaknesses in existing guidance. Per ASU 2015-14, this update is effective for annual periods and interim periods in fiscal years beginning after December 15, 2017, for public business entities, certain employee benefit plans, and certain not-for-profit entities applying U.S. GAAP. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.

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


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[2] INVESTMENT SECURITIES

Investment securities available-for-sale and held-to-maturity are comprised of the following:
 
March 31, 2017
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Investment securities available-for-sale:
 
 
 
 
Corporate bonds
$
46,568

$
198

$
13

$
46,753

Trust preferred securities
17,743

247

45

17,945

Non-agency mortgage-backed securities
5,750

4


5,754

Non-agency collateralized loan obligations
11,109

14

28

11,095

Agency collateralized mortgage obligations
42,565

45

228

42,382

Agency mortgage-backed securities
23,009

241

197

23,053

Agency debentures
4,770

57


4,827

Equity securities
8,720


275

8,445

Total investment securities available-for-sale
160,234

806

786

160,254

Investment securities held-to-maturity:
 
 
 
 
Corporate bonds
31,192

710


31,902

Agency debentures
4,967

21


4,988

Municipal bonds
25,212

218

8

25,422

Total investment securities held-to-maturity
61,371

949

8

62,312

Total
$
221,605

$
1,755

$
794

$
222,566


 
December 31, 2016
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Investment securities available-for-sale:
 
 
 
 
Corporate bonds
$
53,902

$
164

$
21

$
54,045

Trust preferred securities
17,711

159

72

17,798

Non-agency mortgage-backed securities
5,750

14


5,764

Non-agency collateralized loan obligations
16,234


54

16,180

Agency collateralized mortgage obligations
44,051

49

279

43,821

Agency mortgage-backed securities
24,107

240

198

24,149

Agency debentures
4,760

23


4,783

Equity securities
8,643


291

8,352

Total investment securities available-for-sale
175,158

649

915

174,892

Investment securities held-to-maturity:
 
 
 
 
Corporate bonds
28,693

596

30

29,259

Municipal bonds
25,247

88

96

25,239

Total investment securities held-to-maturity
53,940

684

126

54,498

Total
$
229,098

$
1,333

$
1,041

$
229,390


The equity securities noted in the tables above consisted of a mutual fund investing in short-duration, corporate bonds.

Income on investment securities included $1.2 million in taxable interest income, $113,000 in non-taxable interest income and $179,000 in dividend income for the three months ended March 31, 2017, as compared to taxable interest income of $961,000, non-taxable interest income of $114,000 and dividend income of $170,000 for the three months ended March 31, 2016.


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As of March 31, 2017, the contractual maturities of the debt securities are:
 
March 31, 2017
 
Available-for-Sale
 
Held-to-Maturity
(Dollars in thousands)
Amortized
Cost
Estimated
Fair Value
 
Amortized
Cost
Estimated
Fair Value
Due in one year or less
$
6,536

$
6,553

 
$

$

Due from one to five years
41,069

41,235

 
17,613

17,947

Due from five to ten years
23,888

23,961

 
40,350

40,883

Due after ten years
80,021

80,060

 
3,408

3,482

Total debt securities
$
151,514

$
151,809

 
$
61,371

$
62,312


Included in the $80.1 million fair value of debt securities available-for-sale with a contractual maturity due after ten years as of March 31, 2017, were $69.6 million, or 87.0%, in floating-rate securities. Included in the $40.4 million amortized cost of debt securities held-to-maturity with a contractual maturity due from five to ten years as of March 31, 2017, were $17.3 million that have call provisions in one to five years that would either mature, if called, or become floating-rate securities after the call date.

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

Proceeds from the sale of investment securities available-for-sale during the three months ended March 31, 2017 and 2016, were $0 and $681,000, respectively. During the three months ended March 31, 2016, gross gains of $1,000 were realized and reclassified out of accumulated other comprehensive income (loss).

During the three months ended March 31, 2017, there was an investment security available-for-sale of $5.0 million that was called and gross losses of $2,000 were realized on this call.

Investment securities available-for-sale of $4.7 million, as of March 31, 2017, were held in safekeeping at the FHLB and were included in the calculation of borrowing capacity.

The following tables show the fair value and gross unrealized losses on temporarily impaired investment securities available-for-sale and held-to-maturity, by investment category and length of time that the individual securities have been in a continuous unrealized loss position as of March 31, 2017 and December 31, 2016, respectively:
 
March 31, 2017
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair value
Unrealized losses
 
Fair value
Unrealized losses
 
Fair value
Unrealized losses
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
Corporate bonds
$
7,194

$
13

 
$

$

 
$
7,194

$
13

Trust preferred securities


 
4,513

45

 
4,513

45

Non-agency collateralized loan obligations


 
1,093

28

 
1,093

28

Agency collateralized mortgage obligations
4,337

11

 
33,603

217

 
37,940

228

Agency mortgage-backed securities
10,442

190

 
1,404

7

 
11,846

197

Equity securities


 
8,445

275

 
8,445

275

Total investment securities available-for-sale
21,973

214

 
49,058

572

 
71,031

786

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
Municipal bonds
2,690

8

 


 
2,690

8

Total investment securities held-to-maturity
2,690

8

 


 
2,690

8

Total temporarily impaired securities
$
24,663

$
222

 
$
49,058

$
572

 
$
73,721

$
794



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December 31, 2016
 
Less than 12 Months
 
12 Months or More
 
Total
(Dollars in thousands)
Fair value
Unrealized losses
 
Fair value
Unrealized losses
 
Fair value
Unrealized losses
Investment securities available-for-sale:
 
 
 
 
 
 
 
 
Corporate bonds
$
10,543

$
21

 
$

$

 
$
10,543

$
21

Trust preferred securities


 
9,038

72

 
9,038

72

Non-agency collateralized loan obligations
6,191

50

 
9,990

4

 
16,181

54

Agency collateralized mortgage obligations
4,593

12

 
34,408

267

 
39,001

279

Agency mortgage-backed securities
12,292

198

 


 
12,292

198

Equity securities


 
8,352

291

 
8,352

291

Total investment securities available-for-sale
33,619

281

 
61,788

634

 
95,407

915

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
Corporate bonds
2,492

8

 
1,978

22

 
4,470

30

Municipal bonds
12,559

96

 


 
12,559

96

Total investment securities held-to-maturity
15,051

104

 
1,978

22

 
17,029

126

Total temporarily impaired securities
$
48,670

$
385

 
$
63,766

$
656

 
$
112,436

$
1,041


The change in the fair values of our municipal bonds, agency debentures, agency collateralized mortgage obligation and agency mortgage-backed securities are primarily the result of interest rate fluctuations. To assess for impairment on municipal bonds, corporate bonds, single-issuer trust preferred securities, non-agency mortgage-backed securities, non-agency collateralized loan obligations and certain equity securities, management evaluates the underlying issuer’s financial performance and the related credit rating information through a review of publicly available financial statements and other publicly available information. This most recent review did not identify any issues related to the ultimate repayment of principal and interest on these securities. In addition, the Company has the ability and intent to hold debt securities in an unrealized loss position until recovery of their amortized cost. Based on this, the Company considers all of the unrealized losses to be temporary impairment losses. Within the available-for-sale portfolio, there were 26 positions, aggregating to $786,000 in unrealized losses that were temporarily impaired as of March 31, 2017, of which 11 positions were in an unrealized loss position for more than twelve months totaling $572,000. As of December 31, 2016, there were 30 positions, aggregating to $915,000 in unrealized losses that were temporarily impaired, of which 12 positions were in an unrealized loss position for more than twelve months totaling $634,000. Within the held-to-maturity portfolio, there were three positions, aggregating to $8,000 in unrealized losses that was temporarily impaired as of March 31, 2017, of which no positions were in an unrealized loss position for more than twelve months. As of December 31, 2016, there were 18 positions, aggregating to $126,000 in unrealized losses that were temporarily impaired, of which one position, for $22,000 was in an unrealized loss position for more than twelve months.

There were no investment securities classified as trading securities outstanding as of March 31, 2017 and December 31, 2016, respectively. There was no activity in investment securities classified as trading during the three months ended March 31, 2017 and 2016.

There was $13.2 million and $9.6 million in FHLB stock outstanding as of March 31, 2017 and December 31, 2016, respectively. There were $3.6 million of net purchases in FHLB stock during the three months ended March 31, 2017, and $800,000 of net purchases during the three months ended March 31, 2016.

[3] LOANS

The Company generates loans through the private banking and middle-market banking channels. These channels provide risk diversification and offer significant growth opportunities. The private banking channel includes loans secured by cash, marketable securities and other asset-based loans to executives, high-net-worth individuals, trusts and businesses, for many of whom we receive referrals based on relationships with independent broker/dealers, wealth managers, family offices, trust companies and other financial intermediaries. The middle-market banking channel consists of our commercial and industrial (“C&I”) and commercial real estate (“CRE”) loan portfolios that serve middle-market businesses and real estate developers.


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Loans held-for-investment were comprised of the following:
 
March 31, 2017
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Loans held-for-investment, before deferred fees
$
1,833,733

$
586,039

$
1,117,094

$
3,536,866

Deferred loan costs (fees)
3,474

(193
)
(3,057
)
224

Loans held-for-investment, net of deferred fees
1,837,207

585,846

1,114,037

3,537,090

Allowance for loan losses
(1,421
)
(10,436
)
(4,328
)
(16,185
)
Loans held-for-investment, net
$
1,835,786

$
575,410

$
1,109,709

$
3,520,905


 
December 31, 2016
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Loans held-for-investment, before deferred fees
$
1,732,578

$
587,791

$
1,080,637

$
3,401,006

Deferred loan costs (fees)
3,350

(368
)
(2,934
)
48

Loans held-for-investment, net of deferred fees
1,735,928

587,423

1,077,703

3,401,054

Allowance for loan losses
(1,424
)
(12,326
)
(5,012
)
(18,762
)
Loans held-for-investment, net
$
1,734,504

$
575,097

$
1,072,691

$
3,382,292


The Company’s customers have unused loan commitments based on the availability of eligible collateral or other terms under the loan agreement. Often these commitments are not fully utilized and therefore the total amount does not necessarily represent future cash requirements. The amount of unfunded commitments, including standby letters of credit, as of March 31, 2017 and December 31, 2016, was $1.91 billion and $1.75 billion, respectively. The interest rate for each commitment is based on the prevailing market conditions at the time of funding. The lending commitment maturities as of March 31, 2017, were as follows: $1.55 billion in one year or less; $195.8 million in one to three years; and $165.3 million in greater than three years. The reserve for losses on unfunded commitments was $588,000 and $650,000 as of March 31, 2017 and December 31, 2016, respectively, which includes reserves for probable losses on unfunded loan commitments, including standby letters of credit and also risk participations.

Included in the unfunded commitment totals listed above, were loans in the process of origination totaling approximately $82.2 million and $59.8 million as of March 31, 2017 and December 31, 2016, respectively, which extend over varying periods of time.

The Company issues standby letters of credit in the normal course of business. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. The Company would be required to perform under the standby letters 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, 2017 and December 31, 2016, included in the total unfunded commitments above, was $71.1 million and $77.4 million, respectively. Should the Company be obligated to perform under the standby letters of credit the Company will seek repayment from the customer for amounts paid. As of March 31, 2017, $37.1 million in standby letters of credit will expire within one year, while the remaining standby letters of credit will expire in periods greater than one year. During the three months ended March 31, 2017, there were three draws on standby letters of credit totaling $105,000, which were converted to loans to be repaid by the borrower. During the three months ended March 31, 2016, there was one draw on a standby letter of credit for $100,000, which was immediately repaid by the borrower. Most of these commitments are expected to expire without being drawn upon and the total amount does not necessarily represent future cash requirements. The probable liability for losses on standby letters of credit was included in the reserve for losses on unfunded commitments.

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

[4] ALLOWANCE FOR LOAN LOSSES

Our allowance for loan losses represents our estimate of probable loan losses inherent in the loan portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the

20

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remainder of the loan portfolio. Additions are made to the allowance through both periodic provisions recorded to income and recoveries of losses previously incurred. Reductions to the allowance occur as loans are charged off or when the credit history of any of the three loan portfolios improves. Management evaluates the adequacy of the allowance quarterly, and in doing so relies on various factors including, but not limited to, assessment of historical loss experience, delinquency and non-accrual trends, portfolio growth, underlying collateral coverage and current economic conditions. This evaluation is subjective and requires material estimates that may change over time. In addition, management evaluates the overall methodology for the allowance for loan losses on an annual basis. The calculation of the allowance for loan losses takes into consideration the inherent risk identified within each of the Company’s three primary loan portfolios: private banking, commercial and industrial, and commercial real estate. In addition, management takes into account the historical loss experience of each loan portfolio, to ensure that the resultant allowance for loan losses is sufficient to cover probable losses inherent in such loan portfolios. Refer to Note 1, Summary of Significant Accounting Policies, for more details on the Company’s allowance for loan losses policy.

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

Private Banking Loans.
Our private banking lending activities are conducted on a national basis. This loan portfolio primarily includes loans made to high-net-worth individuals, trusts and businesses that are typically secured by cash and marketable securities. Some loans are secured by residential real estate or other financial assets. The portfolio also has lines of credit and some 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 and marketable securities, which was 92.2% and 91.3% of total private banking loans as of March 31, 2017 and December 31, 2016, respectively.

Middle-Market Banking: Commercial and Industrial Loans.
This loan portfolio primarily includes loans made to 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.

The industry of the borrower is an important indicator of risk, but there are also more specific risks depending on the condition of the local/regional economy. Collateral for these types of loans at times does not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. Any C&I loans collateralized by cash and marketable securities are treated the same as private banking loans for purposes of the allowance for loan loss calculation. In addition, shared national credit loans that also involve a private equity sponsor are combined as a homogeneous group and evaluated separately based on the historical loss trend of such loans.

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

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

Management further assesses risk within each loan portfolio using key inherent risk differentiators. The components of the allowance for loan losses represent estimates based upon ASC Topic 450, Contingencies, and ASC Topic 310, Receivables. ASC Topic 450 applies to homogeneous loan pools such as consumer installment, residential mortgages and consumer lines of credit, as well as commercial loans that are not individually evaluated for impairment under ASC Topic 310. Impaired loans are individually evaluated for impairment under ASC Topic 310.

On a monthly basis, management monitors various credit quality indicators for both the commercial and consumer loan portfolios, 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 margin loans secured by cash and marketable securities within the private banking portfolio, which further reduces the risk profile of that portfolio. Refer to Note 1, Summary of Significant Accounting Policies, for the Company’s policy for determining past due status of loans.

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Management continually monitors the loan portfolio through its internal risk rating system. Loan risk ratings are assigned based upon the creditworthiness of the borrower and the quality of the collateral for our 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 risk rated as special mention, substandard and doubtful, which are believed to have an increasing risk of loss.

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

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

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

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

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

The following tables present the recorded investment in loans by credit quality indicator:
 
March 31, 2017
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Pass
$
1,836,728

$
546,353

$
1,114,037

$
3,497,118

Special mention

18,350


18,350

Substandard
479

21,143


21,622

Loans held-for-investment
$
1,837,207

$
585,846

$
1,114,037

$
3,537,090


 
December 31, 2016
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Pass
$
1,735,404

$
545,276

$
1,077,703

$
3,358,383

Special mention

18,776


18,776

Substandard
524

23,371


23,895

Loans held-for-investment
$
1,735,928

$
587,423

$
1,077,703

$
3,401,054


Changes in the allowance for loan losses were as follows for the three months ended March 31, 2017 and 2016:
 
Three Months Ended March 31, 2017
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Balance, beginning of period
$
1,424

$
12,326

$
5,012

$
18,762

Provision (credit) for loan losses
(3
)
930

(684
)
243

Charge-offs

(2,889
)

(2,889
)
Recoveries

69


69

Balance, end of period
$
1,421

$
10,436

$
4,328

$
16,185



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Table of Contents

 
Three Months Ended March 31, 2016
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Balance, beginning of period
$
1,566

$
11,064

$
5,344

$
17,974

Provision (credit) for loan losses
(150
)
(50
)
322

122

Charge-offs




Recoveries

450


450

Balance, end of period
$
1,416

$
11,464

$
5,666

$
18,546


There were charge-offs of $2.9 million on two C&I loans and $69,000 of recoveries on two C&I loans for the three months ended March 31, 2017. There were no charge-offs and $450,000 of recoveries on three C&I loans for the three months ended March 31, 2016.

The following tables present the age analysis of past due loans segregated by class of loan:
 
March 31, 2017
(Dollars in thousands)
30-59 Days Past Due
60-89 Days Past Due
Loans Past Due 90 Days or More
Total Past Due
Current
Total
Private banking
$

$

$

$

$
1,837,207

$
1,837,207

Commercial and industrial




585,846

585,846

Commercial real estate




1,114,037

1,114,037

Loans held-for-investment
$

$

$

$

$
3,537,090

$
3,537,090


 
December 31, 2016
(Dollars in thousands)
30-59 Days Past Due
60-89 Days Past Due
Loans Past Due 90 Days or More
Total Past Due
Current
Total
Private banking
$

$

$
224

$
224

$
1,735,704

$
1,735,928

Commercial and industrial




587,423

587,423

Commercial real estate




1,077,703

1,077,703

Loans held-for-investment
$

$

$
224

$
224

$
3,400,830

$
3,401,054


Non-Performing and Impaired Loans

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

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


23

Table of Contents

The following tables present the Company’s investment in loans considered to be impaired and related information on those impaired loans:
 
As of and for the Three Months Ended March 31, 2017
(Dollars in thousands)
Recorded Investment
Unpaid Principal Balance
Related Allowance
Average Recorded Investment
Interest Income Recognized
With a related allowance recorded:
 
 
 
 
 
Private banking
$
479

$
629

$
479

$
496

$

Commercial and industrial
8,733

18,220

3,786

9,280


Commercial real estate





Total with a related allowance recorded
9,212

18,849

4,265

9,776


Without a related allowance recorded:
 
 
 
 
 
Private banking





Commercial and industrial
4,841

7,435


6,317


Commercial real estate





Total without a related allowance recorded
4,841

7,435


6,317


Total:
 
 
 
 
 
Private banking
479

629

479

496


Commercial and industrial
13,574

25,655

3,786

15,597


Commercial real estate





Total
$
14,053

$
26,284

$
4,265

$
16,093

$


 
As of and for the Twelve Months Ended December 31, 2016
(Dollars in thousands)
Recorded Investment
Unpaid Principal Balance
Related Allowance
Average Recorded Investment
Interest Income Recognized
With a related allowance recorded:
 
 
 
 
 
Private banking
$
517

$
656

$
517

$
592

$

Commercial and industrial
17,273

26,126

6,422

19,158


Commercial real estate





Total with a related allowance recorded
17,790

26,782

6,939

19,750


Without a related allowance recorded:
 
 
 
 
 
Private banking





Commercial and industrial
471

487


485

26

Commercial real estate





Total without a related allowance recorded
471

487


485

26

Total:
 
 
 
 
 
Private banking
517

656

517

592


Commercial and industrial
17,744

26,613

6,422

19,643

26

Commercial real estate





Total
$
18,261

$
27,269

$
6,939

$
20,235

$
26


Impaired loans as of March 31, 2017 and December 31, 2016, were $14.1 million and $18.3 million, respectively. There was no interest income recognized on these loans, while on non-accrual status, for the three months ended March 31, 2017, and the twelve months ended December 31, 2016. As of March 31, 2017 and December 31, 2016, there were no loans 90 days or more past due and still accruing interest income.

Impaired loans were evaluated using a discounted cash flow method or based on the fair value of the collateral less estimated selling costs. Based on those evaluations, as of March 31, 2017, there were specific reserves totaling $4.3 million, which were included in the $16.2 million allowance for loan losses. Also included in impaired loans was one partially charged off C&I loan with a balance of $4.8 million as of March 31, 2017, with no corresponding specific reserve since this loan had a net realizable value that management believes will be recovered from the borrower.


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Table of Contents

As of December 31, 2016, there were specific reserves totaling $6.9 million, which were included in the $18.8 million allowance for loan losses. Also included in impaired loans was one C&I loan with a balance of $471,000 as of December 31, 2016, with no corresponding specific reserve since this loan had a net realizable value that management believes will be recovered from the borrower.

The following tables present the allowance for loan losses and recorded investment in loans by class:
 
March 31, 2017
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Allowance for loan losses:
 
 
 
 
Individually evaluated for impairment
$
479

$
3,786

$

$
4,265

Collectively evaluated for impairment
942

6,650

4,328

11,920

Total allowance for loan losses
$
1,421

$
10,436

$
4,328

$
16,185

Loans held-for-investment:
 
 
 
 
Individually evaluated for impairment
$
479

$
13,574

$

$
14,053

Collectively evaluated for impairment
1,836,728

572,272

1,114,037

3,523,037

Loans held-for-investment
$
1,837,207

$
585,846

$
1,114,037

$
3,537,090


 
December 31, 2016
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Allowance for loan losses:
 
 
 
 
Individually evaluated for impairment
$
517

$
6,422

$

$
6,939

Collectively evaluated for impairment
907

5,904

5,012

11,823

Total allowance for loan losses
$
1,424

$
12,326

$
5,012

$
18,762

Loans held-for-investment:
 
 
 
 
Individually evaluated for impairment
$
517

$
17,744

$

$
18,261

Collectively evaluated for impairment
1,735,411

569,679

1,077,703

3,382,793

Loans held-for-investment
$
1,735,928

$
587,423

$
1,077,703

$
3,401,054


Troubled Debt Restructuring

The following table provides additional information on the Company’s loans designated as troubled debt restructurings:
(Dollars in thousands)
March 31,
2017
December 31,
2016
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
 
 
Performing loans accruing interest
$

$
471

Non-accrual loans
13,574

17,273

Total troubled debt restructurings
$
13,574

$
17,744


Of the non-accrual loans as of March 31, 2017, four C&I loans were designated by the Company as TDRs. There were no loans that were still accruing interest and designated by the Company as a performing TDR as of March 31, 2017. The aggregate recorded investment of these loans was $13.6 million. There were unused commitments of $741,000 on these loans as of March 31, 2017.

Of the non-accrual loans as of December 31, 2016, four C&I loans were designated by the Company as TDRs. There was also one C&I loan that was still accruing interest and designated by the Company as a performing TDR as of December 31, 2016. The aggregate recorded investment of these loans was $17.7 million. There were unused commitments of $121,000 on these loans as of December 31, 2016, of which $7,000 was related to the performing TDR.

The modifications made to restructured loans typically consist of an extension of the payment terms or the deferral of principal payments. There were no loans modified as a TDR within twelve months of the corresponding balance sheet date with a payment default during the three months ended March 31, 2017, and no loans modified as a TDR within twelve months of the corresponding balance sheet date with a payment default during the three months ended March 31, 2016.

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Table of Contents


There were no modifications made to loans newly designated as TDRs during the three months ended March 31, 2017 and 2016.

Other Real Estate Owned

As of March 31, 2017 and December 31, 2016, the balance of the other real estate owned portfolio was $4.2 million and $4.2 million, respectively. There were no residential mortgage loans in the process of foreclosure as of March 31, 2017.

[5] DEPOSITS

As of March 31, 2017 and December 31, 2016, deposits were comprised of the following:
 
Interest Rate
Range as of
 
Weighted Average
Interest Rate as of
 
Balance as of
(Dollars in thousands)
March 31,
2017
 
March 31,
2017
December 31,
2016
 
March 31,
2017
December 31,
2016
Demand and savings accounts:
 
 
 
 
 
 
 
Noninterest-bearing checking accounts

 


 
$
195,840

$
230,226

Interest-bearing checking accounts
0.05 to 1.11%

 
0.88
%
0.56
%
 
273,558

218,984

Money market deposit accounts
0.10 to 1.50%

 
0.94
%
0.82
%
 
1,888,325

1,938,707

Total demand and savings accounts
 
 
 
 
 
2,357,723

2,387,917

Certificates of deposit
0.50 to 1.70%

 
1.03
%
0.95
%
 
960,157

898,862

Total deposits
 
 
 
 
 
$
3,317,880

$
3,286,779

Average rate paid on interest-bearing accounts
 
 
0.96
%
0.84
%
 
 
 

As of March 31, 2017 and December 31, 2016, the Bank had total brokered deposits of $821.1 million and $1.06 billion, respectively. The amount for brokered deposits includes reciprocal Certificate of Deposit Account Registry Service® (“CDARS®”) and reciprocal Insured Cash Sweep® (“ICS®”) accounts totaling $460.2 million and $448.1 million as of March 31, 2017 and December 31, 2016, respectively.

As of March 31, 2017 and December 31, 2016, certificates of deposit with balances of $100,000 or more, excluding brokered deposits, amounted to $501.1 million and $441.1 million, respectively. Certificates of deposit with balances of $250,000 or more, excluding brokered deposits, amounted to $205.5 million and $178.1 million as of March 31, 2017 and December 31, 2016, respectively.

The contractual maturity of certificates of deposit, including brokered deposits, was as follows:
(Dollars in thousands)
March 31,
2017
December 31,
2016
12 months or less
$
831,051

$
751,204

12 months to 24 months
98,858

121,011

24 months to 36 months
29,999

26,647

36 months to 48 months
249


48 months to 60 months


Over 60 months


Total
$
960,157

$
898,862


Interest expense on deposits was as follows:
 
Three Months Ended March 31,
(Dollars in thousands)
2017
2016
Interest-bearing checking accounts
$
362

$
153

Money market deposit accounts
4,098

2,207

Certificates of deposit
2,253

1,778

Total interest expense on deposits
$
6,713

$
4,138



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[6] BORROWINGS

As of March 31, 2017 and December 31, 2016, borrowings were comprised of the following:
 
March 31, 2017
 
December 31, 2016
(Dollars in thousands)
Interest Rate
Ending Balance
Maturity Date
 
Interest Rate
Ending Balance
Maturity Date
FHLB borrowings:
 
 
 
 
 
 
 
Issued 3/31/2017
1.02%
$
215,000

4/3/2017
 

$


Issued 3/29/2017
1.07%
100,000

6/29/2017
 



Issued 12/30/2016



 
0.77%
105,000

1/3/2017
Issued 12/29/2016



 
0.85%
100,000

3/29/2017
Subordinated notes payable (net of debt issuance costs of $439 and $490)
5.75%
34,561

7/1/2019
 
5.75%
34,510

7/1/2019
Total borrowings, net
 
$
349,561

 
 
 
$
239,510

 

The Bank’s FHLB borrowing capacity is based on the collateral value of certain securities held in safekeeping at the FHLB and loans pledged to the FHLB. The Bank submits a quarterly Qualified Collateral Report (“QCR”) to the FHLB to update the value of the loans pledged. As of March 31, 2017, the Bank’s borrowing capacity is based on the information provided in the December 31, 2016, QCR filing. As of March 31, 2017, the Bank had securities held in safekeeping at the FHLB with a fair value of $4.7 million, combined with pledged loans of $960.9 million, for a gross borrowing capacity of $687.8 million, of which $315.0 million was outstanding in advances, as reflected in the table above. As of December 31, 2016, there was $205.0 million outstanding in advances from the FHLB. When the Bank borrows from the FHLB, interest is charged at the FHLB’s posted rates at the time of the borrowing.

The Bank maintains an unsecured line of credit of $10.0 million with M&T Bank and an unsecured line of credit of $20.0 million with Texas Capital Bank. As of March 31, 2017, the full amount of these established lines were available to the Bank.

The Holding Company maintains an unsecured line of credit of $25.0 million, with Texas Capital Bank. As of March 31, 2017, the full amount of this established line was available to the Company.

In June 2014, the Company completed a private placement of subordinated notes payable, raising $35.0 million. The subordinated notes have a term of 5 years at a fixed rate of 5.75%. The proceeds qualified as Tier 2 capital for the holding company, under federal regulatory capital rules.

[7] REGULATORY CAPITAL

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the tables below) of Common Equity Tier 1 (“CET 1”), Tier 1 and Total risk-based capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). As of March 31, 2017 and December 31, 2016, TriState Capital Holdings, Inc. and TriState Capital Bank exceeded all capital adequacy requirements to which they were subjected.

Financial depository institutions are categorized as well capitalized if they meet minimum Total risk-based, Tier 1 risk-based, CET 1 risk-based capital ratios and Tier 1 leverage ratio (Tier 1 capital to average assets) as set forth in the tables below. Based upon the information in the most recently filed Call Report, the Bank exceeded the capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since the filing of the most recent Call Report that management believes have changed the Bank’s capital, as presented below.

Basel III, which began phasing in on January 1, 2015, has replaced the existing regulatory capital rules for the Company and the Bank. The Basel III final rules required new minimum capital ratio standards, established a new common equity tier 1 to total risk-weighted

27

Table of Contents

assets ratio, subjected banking organizations to certain limitations on capital distributions and discretionary bonus payments, and established a new standardized approach for risk weightings.

The final rules subject a banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of risk-based capital ratios in an amount greater than 2.5% of its total risk-weighted assets. The implementation of the capital conservation buffer began on January 1, 2016, at 0.625% and will be phased in over a four-year period (increasing by that amount ratably on each subsequent January 1, until it reaches 2.5% on January 1, 2019). As of March 31, 2017 and December 31, 2016, the capital conservation buffer was 1.25% and 0.625%, respectively, in addition to the minimum capital adequacy levels in the tables below. Thus, both the Company and the Bank were above the levels required to avoid limitations on capital distributions and discretionary bonus payments.

The following tables set forth certain information concerning the Company’s and the Bank’s regulatory capital as of March 31, 2017 and December 31, 2016:
 
March 31, 2017
 
Actual
 
For Capital Adequacy Purposes
 
To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)
Amount
Ratio
 
Amount
Ratio
 
Amount
Ratio
Total risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
322,198

12.39
%
 
$
208,110

8.00
%
 
 N/A

N/A

Bank
$
316,207

12.29
%
 
$
205,915

8.00
%
 
$
257,393

10.00
%
Tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
297,060

11.42
%
 
$
156,082

6.00
%
 
 N/A

N/A

Bank
$
304,558

11.83
%
 
$
154,436

6.00
%
 
$
205,915

8.00
%
Common equity tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
297,060

11.42
%
 
$
117,062

4.50
%
 
 N/A

N/A

Bank
$
304,558

11.83
%
 
$
115,827

4.50
%
 
$
167,306

6.50
%
Tier 1 leverage ratio
 
 
 
 
 
 
 
 
Company
$
297,060

7.56
%
 
$
157,159

4.00
%
 
 N/A

N/A

Bank
$
304,558

7.80
%
 
$
156,093

4.00
%
 
$
195,116

5.00
%

 
December 31, 2016
 
Actual
 
For Capital Adequacy Purposes
 
To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)
Amount
Ratio
 
Amount
Ratio
 
Amount
Ratio
Total risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
325,122

12.66
%
 
$
205,488

8.00
%
 
 N/A

N/A

Bank
$
314,419

12.39
%
 
$
203,030

8.00
%
 
$
253,787

10.00
%
Tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
295,089

11.49
%
 
$
154,116

6.00
%
 
 N/A

N/A

Bank
$
298,093

11.75
%
 
$
152,272

6.00
%
 
$
203,030

8.00
%
Common equity tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company
$
295,089

11.49
%
 
$
115,587

4.50
%
 
 N/A

N/A

Bank
$
298,093

11.75
%
 
$
114,204

4.50
%
 
$
164,962

6.50
%
Tier 1 leverage ratio
 
 
 
 
 
 
 
 
Company
$
295,089

7.90
%
 
$
149,369

4.00
%
 
 N/A

N/A

Bank
$
298,093

8.04
%
 
$
148,252

4.00
%
 
$
185,316

5.00
%

[8] EMPLOYEE BENEFIT PLANS

The Company participates in a qualified 401(k) defined contribution plan, under which eligible employees may contribute a percentage of their salary at their discretion. During the three months ended March 31, 2017 and 2016, the Company automatically contributed three percent of the employee’s base salary to the individual’s 401(k) plan, subject to IRS limitations. Full-time employees and certain part-

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time employees are eligible to participate upon the first month following their first day of employment or having attained the age of 21, whichever is later. The Company’s contribution expense was $223,000 and $196,000 for the three months ended March 31, 2017 and 2016, respectively.

On February 28, 2013, the Company entered into a supplemental executive retirement plan (“SERP”) for the Chairman and Chief Executive Officer. The benefits will be earned over a five-year period with the projected payments for this SERP of $25,000 per month for 180 months commencing the later of retirement or 60 months. For the three months ended March 31, 2017, the Company recorded expense related to SERP of $194,000, utilizing a discount rate of 2.62%. For the three months ended March 31, 2016, the Company recorded expense related to SERP of $222,000, utilizing a discount rate of 2.15%. The recorded liability related to the SERP plan was $3.2 million and $3.0 million as of March 31, 2017 and December 31, 2016, respectively.

[9] STOCK TRANSACTIONS

The Board of Directors authorized the following repurchase programs of the Company’s common stock: January 2016 - $10 million; October 2016 - $5 million; and January 2017 - $5 million.

During the three months ended March 31, 2017, the Company repurchased a total of 44,866 shares for approximately $1.0 million, at an average cost of $23.21 per share, which are held as treasury stock. During the three months ended March 31, 2016, the Company repurchased a total of 148,206 shares for approximately $1.7 million, at an average cost of $11.76 per share, which are held as treasury stock.

The tables below show the changes in the Company’s common shares outstanding during the periods indicated:
 
Number of
Common Shares
Outstanding
Balance, December 31, 2015
28,056,195

Issuance of restricted common stock
394,309

Forfeitures of restricted common stock
(4,000
)
Exercise of stock options
2,500

Purchase of treasury stock
(148,206
)
Balance, March 31, 2016
28,300,798

 
 
Balance, December 31, 2016
28,415,654

Issuance of restricted common stock
324,675

Forfeitures of restricted common stock

Exercise of stock options
36,500

Purchase of treasury stock
(44,866
)
Balance, March 31, 2017
28,731,963


[10] EARNINGS PER COMMON SHARE

The computation of basic and diluted earnings per common share for the periods presented was as follows:
 
Three Months Ended March 31,
(Dollars in thousands, except per share data)
2017
2016
 
 
 
Net income available to common shareholders
$
7,492

$
5,843

Weighted average common shares outstanding:
 
 
Basic
27,627,285

27,679,445

Restricted stock - dilutive
551,025

114,326

Stock options - dilutive
539,196

447,579

Diluted
28,717,506

28,241,350

 
 
 
Earnings per common share:
 
 
Basic
$
0.27

$
0.21

Diluted
$
0.26

$
0.21


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Three Months Ended March 31,
 
2017
2016
Anti-dilutive shares (1)
5,000

626,893

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

[11] DERIVATIVES AND HEDGING ACTIVITY

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

FAIR VALUES OF DERIVATIVE INSTRUMENTS ON THE STATEMENTS OF FINANCIAL CONDITION
The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated statements of financial condition as of March 31, 2017 and December 31, 2016:
 
Asset Derivatives
 
Liability Derivatives
 
as of March 31, 2017
 
as of March 31, 2017
(Dollars in thousands)
Balance Sheet Location
Fair Value
 
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate products
Other assets
$
1,837

 
Other liabilities
$
58

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate products
Other assets
$
10,518

 
Other liabilities
$
10,811


 
Asset Derivatives
 
Liability Derivatives
 
as of December 31, 2016
 
as of December 31, 2016
(Dollars in thousands)
Balance Sheet Location
Fair Value
 
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
Interest rate products
Other assets
$
1,793

 
Other liabilities
$
80

Derivatives not designated as hedging instruments:
 
 
 
 
 
Interest rate products
Other assets
$
10,324

 
Other liabilities
$
10,529


FAIR VALUE HEDGES OF INTEREST RATE RISK
The Company is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in benchmark interest rates, which relate predominantly to LIBOR. Interest rate swaps designated as fair value hedges involve the receipt of variable-rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount. As of March 31, 2017, the Company had four interest rate swaps, with an aggregate notional amount of $2.7 million that were designated as fair value hedges of interest rate risk associated with the Company’s fixed-rate loan assets. The notional amounts for the derivatives express the face amount of the positions, however, credit risk was considered insignificant for three months ended March 31, 2017 and 2016. There were no counterparty default losses on derivatives for the three months ended March 31, 2017 and 2016.

For the four derivatives that were designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings by applying the “fair value long haul” method. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the three months ended March 31, 2017, the Company recognized a net gain of $2,000 in non-interest income related to hedge ineffectiveness as compared to a net gain of $1,000 during the three months ended March 31, 2016. The

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Company also recognized a decrease to interest income of $15,000 and $24,000 for the three months ended March 31, 2017 and 2016, respectively, related to the Company’s fair value hedges, which includes net settlements on the derivatives, and any amortization adjustment of the basis in the hedged items.

CASH FLOW HEDGES OF INTEREST RATE RISK
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. In June 2016, the Company 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 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, 2017.

As of March 31, 2017, the Company had two outstanding interest rate derivatives with an aggregate notional amount of $100.0 million that was designated as a cash flow hedge of interest rate risk. During the three months ended March 31, 2017, an unrealized net gain of $86,000 was recognized in accumulated other comprehensive income (loss) on the effective portion of the derivative.

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. During the three months ended March 31, 2017, there was a decrease to interest expense of $42,000. During the next twelve months, the Company estimates $534,000 to be reclassified to earnings as a decrease to interest expense. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a remaining period of 27 months.