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Section 1: 10-Q (10-Q)

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Table of Contents

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 September 30, 2017
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission file number: 001-35913
_________

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 October 13, 2017, there were 28,642,573 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)
September 30,
2017
December 31,
2016
 
 
 
ASSETS
 
 
 
 
 
Cash
$
380

$
183

Interest-earning deposits with other institutions
129,979

96,244

Federal funds sold
6,220

7,567

Cash and cash equivalents
136,579

103,994

Investment securities available-for-sale, at fair value (cost: $151,012 and $175,158, respectively)
151,810

174,892

Investment securities held-to-maturity, at cost (fair value: $59,605 and $54,498, respectively)
58,314

53,940

Federal Home Loan Bank stock
10,792

9,641

Total investment securities
220,916

238,473

Loans held-for-investment
3,930,670

3,401,054

Allowance for loan losses
(15,979
)
(18,762
)
Loans held-for-investment, net
3,914,691

3,382,292

Accrued interest receivable
11,732

9,614

Investment management fees receivable, net
7,300

7,749

Goodwill and other intangibles, net
65,821

67,209

Office properties and equipment, net
5,103

5,471

Bank owned life insurance
66,154

64,815

Deferred tax asset, net
6,107

7,204

Prepaid expenses and other assets
61,610

43,636

Total assets
$
4,496,013

$
3,930,457

 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Liabilities:
 
 
Deposits
$
3,769,870

$
3,286,779

Borrowings, net
279,162

239,510

Accrued interest payable on deposits and borrowings
1,781

1,867

Other accrued expenses and other liabilities
67,867

50,494

Total liabilities
4,118,680

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 -
30,298,858 and 29,790,383, respectively;
Shares outstanding -
28,642,573 and 28,415,654, respectively
288,800

285,480

Additional paid-in capital
9,020

6,782

Retained earnings
99,689

73,744

Accumulated other comprehensive income, net
1,330

830

Treasury stock (1,656,285 and 1,374,729 shares, respectively)
(21,506
)
(15,029
)
Total shareholders’ equity
377,333

351,807

Total liabilities and shareholders’ equity
$
4,496,013

$
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 September 30,
 
Nine Months Ended September 30,
(Dollars in thousands, except per share data)
2017
2016
 
2017
2016
 
 
 
 
 
 
Interest income:
 
 
 
 
 
Loans
$
33,604

$
23,369

 
$
90,865

$
67,689

Investments
1,531

1,400

 
4,536

3,957

Interest-earning deposits
440

156

 
1,026

434

Total interest income
35,575

24,925

 
96,427

72,080

 
 
 
 
 
 
Interest expense:
 
 
 
 
 
Deposits
10,604

5,187

 
25,813

13,928

Borrowings
1,366

1,034

 
4,060

2,852

Total interest expense
11,970

6,221

 
29,873

16,780

Net interest income
23,605

18,704

 
66,554

55,300

Provision (credit) for loan losses
283

(542
)
 
1,042

(340
)
Net interest income after provision for loan losses
23,322

19,246

 
65,512

55,640

Non-interest income:
 
 
 
 
 
Investment management fees
9,214

10,333

 
27,684

26,814

Service charges
96

134

 
287

393

Net gain on the sale and call of investment securities
15

14

 
254

77

Swap fees
1,391

977

 
3,708

3,422

Commitment and other fees
423

488

 
1,240

1,497

Other income
567

551

 
1,654

656

Total non-interest income
11,706

12,497

 
34,827

32,859

Non-interest expense:
 
 
 
 
 
Compensation and employee benefits
14,683

14,664

 
42,798

39,404

Premises and occupancy costs
1,257

1,285

 
3,763

3,583

Professional fees
968

693

 
2,642

2,483

FDIC insurance expense
1,121

933

 
3,074

2,023

General insurance expense
245

258

 
805

768

State capital shares tax
398

329

 
1,148

986

Travel and entertainment expense
828

718

 
2,190

2,140

Intangible amortization expense
463

463

 
1,388

1,291

Change in fair value of acquisition earn out

(1,209
)
 

(1,209
)
Other operating expenses
2,849

2,380

 
7,946

6,508

Total non-interest expense
22,812

20,514

 
65,754

57,977

Income before tax
12,216

11,229

 
34,585

30,522

Income tax expense
2,184

2,775

 
8,640

9,452

Net income
$
10,032

$
8,454

 
$
25,945

$
21,070

 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
Basic
$
0.36

$
0.31

 
$
0.94

$
0.76

Diluted
$
0.35

$
0.30

 
$
0.90

$
0.75


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 September 30,
 
Nine Months Ended September 30,
(Dollars in thousands)
2017
2016
 
2017
2016
 
 
 
 
 
 
Net income
$
10,032

$
8,454

 
$
25,945

$
21,070

 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) on investment securities, net of tax expense (benefit) of $(19), $397, $490 and $675
(35
)
711

 
855

1,146

 
 
 
 
 
 
Reclassification adjustment for gains included in net income on investment securities, net of tax expense of $0, $(6), $(85) and $(11)

(8
)
 
(154
)
(20
)
 
 
 
 
 
 
Unrealized holding gains (losses) on derivatives, net of tax expense (benefit) of $31, $224, $(25) and $192
55

402

 
(45
)
346

 
 
 
 
 
 
Reclassification adjustment for losses (gains) included in net income on derivatives, net of tax benefit (expense) of $(43), $17, $(87) and $17
(77
)
29

 
(156
)
29

 
 
 
 
 
 
Other comprehensive income (loss)
(57
)
1,134

 
500

1,501

 
 
 
 
 
 
Total comprehensive income
$
9,975

$
9,588

 
$
26,445

$
22,571


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


21,070



21,070

Other comprehensive income



1,501


1,501

Exercise of stock options
2,089

(663
)



1,426

Purchase of treasury stock




(4,309
)
(4,309
)
Cancellation of stock options

(5,220
)



(5,220
)
Stock-based compensation

2,694




2,694

Balance, September 30, 2016
$
283,501

$
7,620

$
66,173

$
58

$
(14,213
)
$
343,139

 
 
 
 
 
 
 
Balance, December 31, 2016
$
285,480

$
6,782

$
73,744

$
830

$
(15,029
)
$
351,807

Net income


25,945



25,945

Other comprehensive income



500


500

Exercise of stock options
3,320

(1,982
)



1,338

Purchase of treasury stock




(6,477
)
(6,477
)
Stock-based compensation

4,220




4,220

Balance, September 30, 2017
$
288,800

$
9,020

$
99,689

$
1,330

$
(21,506
)
$
377,333


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
 
Nine Months Ended September 30,
(Dollars in thousands)
2017
2016
Cash Flows from Operating Activities:
 
 
Net income
$
25,945

$
21,070

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and intangible amortization expense
2,523

2,241

Amortization of deferred financing costs
152

152

Provision (credit) for loan losses
1,042

(340
)
Net gain on the sale of loans
(17
)

Stock-based compensation expense
4,220

2,694

Net gain on the sale or call of investment securities available-for-sale
(239
)
(31
)
Net gain on the call of investment securities held-to-maturity
(15
)
(46
)
Net amortization of premiums and discounts
684

682

Decrease (increase) in investment management fees receivable, net
449

(1,063
)
Increase in accrued interest receivable
(2,118
)
(1,503
)
Decrease in accrued interest payable
(86
)
(347
)
Bank owned life insurance income
(1,339
)
(1,331
)
Decrease in income taxes payable
(11
)
(353
)
Increase in prepaid income taxes
(745
)
(2,404
)
Deferred tax provision
805

720

Decrease in accounts payable and other accrued expenses
(5,471
)
(833
)
Change in fair value of acquisition earn out

(1,209
)
Other, net
(2,690
)
(3,944
)
Net cash provided by operating activities
23,089

14,155

Cash Flows from Investing Activities:
 
 
Purchase of investment securities available-for-sale
(12,907
)
(27,419
)
Purchase of investment securities held-to-maturity
(7,467
)
(6,250
)
Proceeds from the sale of investment securities available-for-sale

4,691

Principal repayments and maturities of investment securities available-for-sale
46,760

9,162

Principal repayments and maturities of investment securities held-to-maturity
3,000

2,500

Purchase of bank owned life insurance

(3,000
)
Investment in low income housing tax credit
(1,851
)
(125
)
Investment in small business investment company
(745
)

Net redemption (purchase) of Federal Home Loan Bank stock
(1,152
)
570

Net increase in loans
(540,292
)
(331,988
)
Proceeds from loan sales
6,867

1,196

Proceeds from the sale of other real estate owned
597

1,080

Additions to office properties and equipment
(766
)
(700
)
Acquisition, net of acquired cash

(14,095
)
Net cash used in investing activities
(507,956
)
(364,378
)
Cash Flows from Financing Activities:
 
 
Net increase in deposit accounts
483,091

397,386

Net increase in Federal Home Loan Bank advances
35,000


Net decrease in Federal Home Loan Bank advances

(15,000
)
Net increase in line of credit advances
4,500


Net proceeds from exercise of stock options
1,338

1,426

Cancellation of stock options

(5,220
)
Purchase of treasury stock
(6,477
)
(4,309
)
Net cash provided by financing activities
517,452

374,283

Net change in cash and cash equivalents during the period
32,585

24,060

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

96,676

Cash and cash equivalents at end of the period
$
136,579

$
120,736


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Nine Months Ended September 30,
(Dollars in thousands)
2017
2016
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
Cash paid during the period for:
 
 
Interest
$
29,807

$
16,975

Income taxes
$
8,591

$
11,273

Acquisition of non-cash assets and liabilities:
 
 
Assets acquired
$

$
1,038

Liabilities assumed
$

$
1,402

Other non-cash activity:
 
 
Loan foreclosures and repossessions
$

$
3,618

Unsettled purchase of investment securities available-for-sale
$
10,000

$

Contingent consideration
$

$
2,478


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.

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

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 Securities and Exchange Commission (“SEC”). Chartwell was established through the acquisition of substantially all the assets of Chartwell Investment Partners, LP on 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 Financial Industry Regulatory Authority (“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 different 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.

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

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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 estimated life of the security utilizing the level yield method. We evaluate impaired investment securities quarterly to determine if impairments are temporary or other-than-temporary. For impaired debt and equity securities, management first determines whether it intends to sell or if it is more-likely than not that it will be required to sell the impaired securities. This determination considers current and forecasted liquidity requirements, regulatory and capital requirements and securities portfolio management. If the Company intends to sell a security with a fair value below amortized cost or if it is more-likely than not that it will be required to sell such a security before recovery, an other-than-temporary impairment (“OTTI”) charge is recorded through current period earnings for the full decline in fair value below amortized cost. For debt securities that the Company does not intend to sell or it is more likely than not that it will not be required to sell before recovery, an OTTI charge is recorded through current period earnings for the amount of the valuation decline below amortized cost that is attributable to credit losses. The remaining difference between the security’s fair value and amortized cost (that is, the decline in fair value not attributable to credit losses) is recognized in other comprehensive income (loss), in the consolidated statements of comprehensive income and the shareholders’ equity section of the consolidated statements of financial condition, on an after-tax basis. 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 September 30, 2017 and December 31, 2016. Cash and stock dividends are reported as interest income on investments, 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 estimated life of the loan, taking into consideration scheduled payments and prepayments.

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

The recognition of interest income on a loan is discontinued when, in management’s opinion, it is probable the borrower is unable to meet payments as they become due or when the loan becomes 90 days past due, whichever occurs first. 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 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.


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

ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through provisions for loan losses that are recorded in the consolidated statements of 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.

In management’s judgment the allowance was appropriate to cover probable losses inherent in the loan portfolio as of September 30, 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 two components of the allowance for loan losses represent estimates of general reserves based upon Accounting Standards Codification (“ASC”) Topic 450, Contingencies; and specific reserves based upon ASC Topic 310, Receivables. ASC Topic 450 applies to homogeneous loan pools such as commercial loans, consumer lines of credit, and residential mortgages that are not individually evaluated for impairment. ASC Topic 310 is applied to commercial and consumer loans that are individually evaluated for impairment.

In management’s opinion a loan is impaired, based upon current information and events, 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 of general reserves 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 of general reserves on two factors: the primary factor and the secondary factor. The primary factor is based on the inherent risk identified by management within each of the Company’s three loan portfolios based on the historical loss experience of each loan portfolio 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 $322,000 of bad debt expense associated with a single relationship recorded for the nine months ended September 30, 2017, and no allowance for uncollectible accounts as of September 30, 2017. There was no bad debt expense recorded for the nine months ended September 30, 2016, and there was no allowance for uncollectible accounts as of December 31, 2016.

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 may lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. The Company has determined that certain of its acquired mutual fund client relationships meet the criteria to be considered indefinite-lived assets because the Company expects both the renewal of these contracts and the cash flows generated by these assets to continue indefinitely. Accordingly, the Company does not amortize these intangible assets, but instead reviews these assets annually or more frequently whenever events or circumstances occur indicating that the recorded indefinite-lived assets may be impaired. Each reporting period, the Company assesses whether events or circumstances have occurred which indicate that the indefinite life criteria are no longer met. If the indefinite life criteria are no longer met, the Company 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 non-interest expense over the estimated remaining life of the asset. When the Bank receives an allowance for improvements to be made to one of its leased offices, we record the allowance as a deferred liability and recognize it as a reduction to rent expense over the life of the related lease.

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. Interest on deposits is accrued and charged to interest expense daily and is paid or credited in accordance with the terms of the respective accounts.

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

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. Any interest and penalties related to unrecognized tax benefits would be recognized in income tax expense in the consolidated statements of income.

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


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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 of the share-based awards made to employees and directors.

Compensation cost for all share-based payments is based on the estimated grant-date fair value. The value of the portion of the award that is ultimately expected to vest is included in 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 August 2017, the FASB issued Accounting Standard Update (“ASU”) 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities,” which changes the recognition and presentation requirements of hedge accounting, including: eliminating the requirement to separately measure and report hedge ineffectiveness; and presenting all items that affect earnings in the same income statement line item as the hedged item. The standard also provides new alternatives for: applying hedge accounting to additional hedging strategies; measuring the hedged item in fair value hedges of interest rate risk; reducing the cost and complexity of applying hedge accounting by easing the requirements for effectiveness testing, hedge documentation and application of the critical terms match method; and reducing the risk of material error correction if a company applies the shortcut method inappropriately. This standard is effective for public business entities, 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 May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting,” which clarifies what constitutes a modification of a share-based payment award. This standard is effective for all entities for annual and interim periods in fiscal years beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities,” which shortens the premium amortization period for purchased non-contingently callable debt securities. Shortening the amortization period is generally expected to more closely align the interest income recognition with the expectations incorporated in the market pricing on the underlying securities. This standard is effective for public business entities 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 January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The changes are effective for public business entities, for annual and interim periods in fiscal years beginning after December 15, 2019. All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.


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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 adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

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 standard is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

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 statement of cash flows. This standard is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

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 standard is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In September 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 standard is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2017. Entities should apply this standard using a retrospective transition method to each period presented. If it is impracticable for an entity to apply this standard retrospectively for some of the issues, it may apply the amendments for those issues prospectively as of the earliest date practicable. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

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. 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 standard is effective for public business entities, certain not-for-profit entities, and certain employee benefit plans for annual and interim periods in fiscal years beginning after December 15, 2018. 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 standard is effective for public business entities for interim and annual periods in fiscal years beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” This standard implements a common approach 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. This standard establishes a five-step model that

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entities must follow to recognize revenue. This update is effective for annual periods and interim periods in fiscal years beginning after December 15, 2017, for public business entities. A significant amount of the Company’s revenues are derived from net interest income on financial assets and liabilities, which are excluded from the scope of the amended guidance. The Company is substantially complete with its overall assessment of revenue streams and review of related contracts potentially affected by the standard, including asset management fees, deposit related fees, interchange fees and merchant income. The Company’s assessment suggests that adoption of this standard should not materially change the method in which we currently recognize revenue for these revenue streams. The Company is also in the final stages of its evaluation of certain contract acquisition costs related to these revenue streams to determine whether such costs should be capitalized and deferred over the life of the contract. With respect to the capitalization of costs to acquire a contract, the Company believes adoption of this standard will likely alter the timing, measurement and recognition of those costs in the income statement; however, the Company does not expect the impact to be material. In addition, the Company is evaluating the standard’s expanded disclosure requirements. The Company plans to adopt this standard on January 1, 2018, utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be material.

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

[2] INVESTMENT SECURITIES

Investment securities available-for-sale and held-to-maturity were comprised of the following:
 
September 30, 2017
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Investment securities available-for-sale:
 
 
 
 
Corporate bonds
$
57,571

$
261

$
60

$
57,772

Trust preferred securities
17,807

871


18,678

Non-agency mortgage-backed securities
5,587



5,587

Non-agency collateralized loan obligations
903


9

894

Agency collateralized mortgage obligations
40,096

26

94

40,028

Agency mortgage-backed securities
20,197

132

125

20,204

Equity securities
8,851


204

8,647

Total investment securities available-for-sale
151,012

1,290

492

151,810

Investment securities held-to-maturity:
 
 
 
 
Corporate bonds
31,190

959


32,149

Agency debentures
1,983

16


1,999

Municipal bonds
25,141

316


25,457

Total investment securities held-to-maturity
58,314

1,291


59,605

Total
$
209,326

$
2,581

$
492

$
211,415



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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.

Interest income on investment securities was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands)
2017
2016
 
2017
2016
Taxable interest income
$
1,156

$
1,078

 
$
3,540

$
3,067

Non-taxable interest income
113

107

 
339

338

Dividend income
262

215

 
657

552

Total interest income on investment securities
$
1,531

$
1,400

 
$
4,536

$
3,957


As of September 30, 2017, the contractual maturities of the debt securities were:
 
September 30, 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
$
8,898

$
8,920

 
$
6,005

$
6,199

Due from one to five years
34,576

34,812

 
11,564

11,681

Due from five to ten years
14,167

14,391

 
39,837

40,788

Due after ten years
84,520

85,040

 
908

937

Total debt securities
$
142,161

$
143,163

 
$
58,314

$
59,605


The $85.0 million fair value of debt securities available-for-sale with a contractual maturity due after ten years as of September 30, 2017, included $65.2 million, or 76.6%, that are floating-rate securities. The $39.8 million amortized cost of debt securities held-to-maturity with a contractual maturity due from five to ten years as of September 30, 2017, included $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 September 30, 2017 and 2016, were $0 and $1.7 million, respectively. During the three months ended September 30, 2016, net gains of $14,000 on sales were comprised of gross gains of $14,000 and gross losses of $0.


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Proceeds from the sale of investment securities available-for-sale during the nine months ended September 30, 2017 and 2016, were $0 and $4.7 million, respectively. Proceeds from the call and prepayments of investment securities available-for-sale during the nine months ended September 30, 2017 and 2016, were $21.7 million and $0, respectively. During the nine months ended September 30, 2017, net gains of $239,000 on calls were comprised of gross gains of $241,000 and gross losses of $2,000, which were realized and reclassified out of accumulated other comprehensive income (loss). During the nine months ended September 30, 2016, net gains of $31,000 on sales were comprised of gross gains of $34,000 and gross losses of $3,000.

During the nine months ended September 30, 2017 and 2016, there were proceeds from the call of investment securities held-to-maturity of $3.0 million and $2.5 million, respectively, which had gross gains of $15,000 and $46,000, respectively, that were realized on these calls and reclassified out of accumulated other comprehensive income (loss).

Investment securities available-for-sale of $4.2 million, as of September 30, 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 September 30, 2017 and December 31, 2016, respectively:
 
September 30, 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
$
8,950

$
60

 
$

$

 
$
8,950

$
60

Non-agency collateralized loan obligations


 
894

9

 
894

9

Agency collateralized mortgage obligations
1,641

1

 
33,642

93

 
35,283

94

Agency mortgage-backed securities
9,866

117

 
1,092

8

 
10,958

125

Equity securities


 
8,647

204

 
8,647

204

Total investment securities available-for-sale
20,457

178

 
44,275

314

 
64,732

492

Investment securities held-to-maturity:
 
 
 
 
 
 
 
 
Total investment securities held-to-maturity


 


 


Total temporarily impaired securities (1)
$
20,457

$
178

 
$
44,275

$
314

 
$
64,732

$
492

(1) 
The number of investment positions with unrealized losses totaled 20 for available-for-sale securities and 0 for held-to-maturity securities.

 
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 (1)
$
48,670

$
385

 
$
63,766

$
656

 
$
112,436

$
1,041

(1) 
The number of investment positions with unrealized losses totaled 30 for available-for-sale securities and 18 for held-to-maturity securities.

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 credit impairment, management evaluates the underlying

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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.

There were no investment securities classified as trading securities outstanding as of September 30, 2017 and December 31, 2016. There was no activity in investment securities classified as trading during the nine months ended September 30, 2017 and 2016.

There was $10.8 million and $9.6 million in FHLB stock outstanding as of September 30, 2017 and December 31, 2016, respectively. There were $1.2 million of net purchases in FHLB stock during the nine months ended September 30, 2017, and $570,000 of net redemptions during the nine months ended September 30, 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 primarily includes loans made to high-net-worth individuals, trusts and businesses that are typically secured by cash and marketable securities. 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 in our primary markets.

Loans held-for-investment were comprised of the following:
 
September 30, 2017
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Loans held-for-investment, before deferred fees
$
2,052,037

$
647,910

$
1,229,548

$
3,929,495

Deferred loan costs (fees)
3,771

810

(3,406
)
1,175

Loans held-for-investment, net of deferred fees
2,055,808

648,720

1,226,142

3,930,670

Allowance for loan losses
(1,491
)
(9,593
)
(4,895
)
(15,979
)
Loans held-for-investment, net
$
2,054,317

$
639,127

$
1,221,247

$
3,914,691


 
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 and conditions 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 September 30, 2017 and December 31, 2016, was $2.19 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 reserve for losses on unfunded commitments was $588,000 and $650,000 as of September 30, 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.

The total unfunded commitments above included loans in the process of origination totaling approximately $45.8 million and $59.8 million as of September 30, 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.

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Table of Contents

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 September 30, 2017 and December 31, 2016, included in the total unfunded commitments above, was $73.5 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. During the nine months ended September 30, 2017, there were seven draws on standby letters of credit totaling $191,000, which were converted to loans and subsequently repaid by the borrowers. During the nine months ended September 30, 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 potential liability for losses on standby letters of credit was included in the reserve for losses on unfunded commitments.

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

[4] ALLOWANCE FOR LOAN 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 remainder of the loan portfolio. Additions are made to the allowance through both periodic provisions recorded in the consolidated statements of income and recoveries of losses previously incurred. Reductions to the allowance occur as loans are charged off or when the credit history of any of the 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 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. This portfolio also has some loans that are secured by residential real estate or other financial assets, lines of credit and unsecured loans. The primary sources of repayment for these loans are the income and/or assets of the borrower.

The underlying collateral is the most important indicator of risk for this loan portfolio. The overall lower risk profile of this portfolio is driven by loans secured by cash and marketable securities, which were 93.9% and 91.3% of total private banking loans as of September 30, 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 borrower’s industry and local and regional economic conditions are important indicators of risk for this loan portfolio. Collateral for these types of loans at times does not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. C&I loans collateralized by 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, hospitality, healthcare and self-storage. The primary source of repayment for commercial real estate loans secured by owner occupied properties is cash flow from the borrower’s operations. Individual project cash flows, global cash flows and liquidity from the developer, or the sale of the property are the primary sources of repayment for commercial real estate loans secured by investment properties. Also included are commercial construction loans

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to finance the construction or renovation of structures as well as to finance the acquisition and development of raw land for various purposes. The increased level of risk for these loans is generally confined to the construction period. If there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal.

The underlying purpose/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.

On a monthly basis, management monitors various credit quality indicators for the loan portfolio, including delinquency, non-performing status, changes in risk ratings, changes in the underlying performance of the borrowers and other relevant factors. On a daily basis, the Company monitors the collateral of loans secured by cash 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.

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

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

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

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

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

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:
 
September 30, 2017
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Pass
$
2,055,401

$
613,584

$
1,224,292

$
3,893,277

Special mention

28,607

1,850

30,457

Substandard
407

6,529


6,936

Loans held-for-investment
$
2,055,808

$
648,720

$
1,226,142

$
3,930,670


 
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



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Table of Contents

Changes in the allowance for loan losses were as follows for the three months ended September 30, 2017 and 2016:
 
Three Months Ended September 30, 2017
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Balance, beginning of period
$
1,448

$
9,901

$
4,619

$
15,968

Provision (credit) for loan losses
43

(31
)
271

283

Charge-offs

(413
)

(413
)
Recoveries

136

5

141

Balance, end of period
$
1,491

$
9,593

$
4,895

$
15,979


 
Three Months Ended September 30, 2016
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Balance, beginning of period
$
1,502

$
10,841

$
4,872

$
17,215

Provision (credit) for loan losses
85

2,548

(3,175
)
(542
)
Charge-offs




Recoveries

127

3,411

3,538

Balance, end of period
$
1,587

$
13,516

$
5,108

$
20,211


Changes in the allowance for loan losses were as follows for the nine months ended September 30, 2017 and 2016:
 
Nine Months Ended September 30, 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
67

1,097

(122
)
1,042

Charge-offs

(4,302
)

(4,302
)
Recoveries

472

5

477

Balance, end of period
$
1,491

$
9,593

$
4,895

$
15,979


 
Nine Months Ended September 30, 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
21

3,286

(3,647
)
(340
)
Charge-offs

(1,542
)

(1,542
)
Recoveries

708

3,411

4,119

Balance, end of period
$
1,587

$
13,516

$
5,108

$
20,211


The following tables present the age analysis of past due loans segregated by class of loan:
 
September 30, 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
$

$

$

$

$
2,055,808

$
2,055,808

Commercial and industrial


97

97

648,623

648,720

Commercial real estate




1,226,142

1,226,142

Loans held-for-investment
$

$

$
97

$
97

$
3,930,573

$
3,930,670



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Table of Contents

 
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 are 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.

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 Nine Months Ended September 30, 2017
(Dollars in thousands)
Recorded Investment
Unpaid Principal Balance
Related Allowance
Average Recorded Investment
Interest Income Recognized
With a related allowance recorded:
 
 
 
 
 
Private banking
$
407

$
575

$
407

$
457

$

Commercial and industrial
6,433

6,997

3,197

6,687


Commercial real estate





Total with a related allowance recorded
6,840

7,572

3,604

7,144


Without a related allowance recorded:
 
 
 
 
 
Private banking





Commercial and industrial
3,545

16,111


5,932

92

Commercial real estate





Total without a related allowance recorded
3,545

16,111


5,932

92

Total:
 
 
 
 
 
Private banking
407

575

407

457


Commercial and industrial
9,978

23,108

3,197

12,619

92

Commercial real estate





Total
$
10,385

$
23,683

$
3,604

$
13,076

$
92



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Table of Contents

 
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 September 30, 2017 and December 31, 2016, were $10.4 million and $18.3 million, respectively. There was no interest income recognized on these loans while on non-accrual status for the nine months ended September 30, 2017, and the twelve months ended December 31, 2016. As of September 30, 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 there were specific reserves totaling $3.6 million and $6.9 million as of September 30, 2017 and December 31, 2016.

The following tables present the allowance for loan losses and recorded investment in loans by class:
 
September 30, 2017
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Allowance for loan losses:
 
 
 
 
Individually evaluated for impairment
$
407

$
3,197

$

$
3,604

Collectively evaluated for impairment
1,084

6,396

4,895

12,375

Total allowance for loan losses
$
1,491

$
9,593

$
4,895

$
15,979

Loans held-for-investment:
 
 
 
 
Individually evaluated for impairment
$
407

$
9,978

$

$
10,385

Collectively evaluated for impairment
2,055,401

638,742

1,226,142

3,920,285

Loans held-for-investment
$
2,055,808

$
648,720

$
1,226,142

$
3,930,670



25

Table of Contents

 
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)
September 30,
2017
December 31,
2016
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
 
 
Performing loans accruing interest
$
3,449

$
471

Non-accrual loans
6,936

17,273

Total troubled debt restructurings
$
10,385

$
17,744


There were unused commitments of $1.0 million on these loans as of September 30, 2017, of which $704,000 was related to a performing TDR. There were unused commitments of $121,000 on these loans as of December 31, 2016, of which $7,000 was related to a 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 nine months ended September 30, 2017, and no loans modified as a TDR within twelve months of the corresponding balance sheet date with a payment default during the nine months ended September 30, 2016.

The financial effects of modifications made to loans newly designated as TDRs during three months ended September 30, 2017 and 2016, were as follows:
 
Three Months Ended September 30, 2017
(Dollars in thousands)
Count
Recorded Investment at the time of Modification
Current Recorded Investment
Allowance for Loan Losses at the time of Modification
Current Allowance for Loan Losses
Private banking:
 
 
 
 
 
Extended term, deferred principal and reduced interest rate
2
$
433

$
407

$
433

$
407

Total
2
$
433

$
407

$
433

$
407


 
Three Months Ended September 30, 2016
(Dollars in thousands)
Count
Recorded Investment at the time of Modification
Current Recorded Investment
Allowance for Loan Losses at the time of Modification
Current Allowance for Loan Losses
Commercial and industrial:
 
 
 
 
 
Extended term and deferred principal
1
$
7,160

$
7,181

$
1,360

$
1,360

Total
1
$
7,160

$
7,181

$
1,360

$
1,360



26

Table of Contents

The financial effects of modifications made to loans newly designated as TDRs during nine months ended September 30, 2017 and 2016, were as follows:
 
Nine Months Ended September 30, 2017
(Dollars in thousands)
Count
Recorded Investment at the time of Modification
Current Recorded Investment
Allowance for Loan Losses at the time of Modification
Current Allowance for Loan Losses
Private banking:
 
 
 
 
 
Extended term, deferred principal and reduced interest rate
2
$
433

$
407

$
433

$
407

Total
2
$
433

$
407

$
433

$
407


 
Nine Months Ended September 30, 2016
(Dollars in thousands)
Count
Recorded Investment at the time of Modification
Current Recorded Investment
Allowance for Loan Losses at the time of Modification
Current Allowance for Loan Losses
Commercial and industrial:
 
 
 
 
 
Extended term and deferred principal
1
$
7,160

$
7,181

$
1,360

$
1,360

Total
1
$
7,160

$
7,181

$
1,360

$
1,360


Other Real Estate Owned

As of September 30, 2017 and December 31, 2016, the balance of the other real estate owned portfolio was $3.6 million and $4.2 million, respectively. Properties were sold from other real estate owned totaling $597,000 with net gains of $141,000 realized during the nine months ended September 30, 2017. There were no residential mortgage loans in the process of foreclosure as of September 30, 2017.

[5] DEPOSITS

As of September 30, 2017 and December 31, 2016, deposits were comprised of the following:
 
Interest Rate
Range
 
Weighted Average
Interest Rate
 
Balance
(Dollars in thousands)
September 30,
2017
 
September 30,
2017
December 31,
2016
 
September 30,
2017
December 31,
2016
Demand and savings accounts:
 
 
 
 
 
 
 
Noninterest-bearing checking accounts
 
 
$
209,982

$
230,226

Interest-bearing checking accounts
0.05 to 1.50%
 
1.26%
0.56%
 
403,348

218,984

Money market deposit accounts
0.10 to 1.63%
 
1.24%
0.82%
 
2,108,324

1,938,707

Total demand and savings accounts
 
 
 
 
 
2,721,654

2,387,917

Certificates of deposit
0.80 to 1.94%
 
1.32%
0.95%
 
1,048,216

898,862

Total deposits
 
 
 
 
 
$
3,769,870

$
3,286,779

Weighted average rate on interest-bearing accounts
 
 
1.27%
0.84%
 
 
 

As of September 30, 2017 and December 31, 2016, the Bank had total brokered deposits of $1.07 billion 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 $645.5 million and $448.1 million as of September 30, 2017 and December 31, 2016, respectively.

As of September 30, 2017 and December 31, 2016, certificates of deposit with balances of $100,000 or more, excluding brokered deposits, amounted to $457.9 million and $441.1 million, respectively. Certificates of deposit with balances of $250,000 or more, excluding brokered deposits, amounted to $192.3 million and $178.1 million as of September 30, 2017 and December 31, 2016, respectively.


27

Table of Contents

The contractual maturity of certificates of deposit was as follows:
(Dollars in thousands)
September 30,
2017
December 31,
2016
12 months or less
$
935,943

$
751,204

12 months to 24 months
88,208

121,011

24 months to 36 months
24,065

26,647

36 months to 48 months


48 months to 60 months


Over 60 months


Total
$
1,048,216

$
898,862


Interest expense on deposits was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands)
2017
2016
 
2017
2016
Interest-bearing checking accounts
$
1,173

$
234

 
$
2,295

$
541

Money market deposit accounts
6,263

3,017

 
15,511

7,847

Certificates of deposit
3,168

1,936

 
8,007

5,540

Total interest expense on deposits
$
10,604

$
5,187

 
$
25,813

$
13,928


[6] BORROWINGS

As of September 30, 2017 and December 31, 2016, borrowings were comprised of the following:
 
September 30, 2017
 
December 31, 2016
(Dollars in thousands)
Interest Rate
Ending Balance
Maturity Date
 
Interest Rate
Ending Balance
Maturity Date
FHLB borrowings:
 
 
 
 
 
 
 
Issued 9/29/2017
1.30%
$
140,000

10/2/2017
 

$


Issued 9/29/2017
1.33%
100,000

12/29/2017
 



Issued 12/30/2016



 
0.77%
105,000

1/3/2017
Issued 12/29/2016



 
0.85%
100,000

3/29/2017
Line of credit borrowings
4.24%
4,500

12/28/2017
 



Subordinated notes payable (net of debt issuance costs of $338 and $490)
5.75%
34,662

7/1/2019
 
5.75%
34,510

7/1/2019
Total borrowings, net
 
$
279,162

 
 
 
$
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 September 30, 2017, the Bank’s borrowing capacity is based on the information provided in the June 30, 2017, QCR filing. As of September 30, 2017, the Bank had securities held in safekeeping at the FHLB with a fair value of $4.2 million, combined with pledged loans of $1.07 billion, for a gross borrowing capacity of $761.8 million, of which $240.0 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 September 30, 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, of which $4.5 million was outstanding as of September 30, 2017, as reflected in the table above.

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.


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Table of Contents

Interest expense on borrowings was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands)