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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 quarterly period ended March 31, 2019
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission file number: 001-35913
___________

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
ý
Non-accelerated filer
¨
 
Smaller reporting company
¨
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨

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




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

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



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TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

$
367

Interest-earning deposits with other institutions
237,203

183,625

Federal funds sold
6,344

5,993

Cash and cash equivalents
243,911

189,985

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

233,296

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

196,131

Equity securities, at fair value
11,379

12,661

Federal Home Loan Bank stock
20,071

24,671

Total investment securities
487,087

466,759

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

5,132,873

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

5,119,665

Accrued interest receivable
23,847

20,702

Investment management fees receivable, net
7,894

7,299

Goodwill
41,660

41,660

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

26,203

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

5,126

Operating lease right-of-use asset
24,766


Bank owned life insurance
68,729

68,309

Prepaid expenses and other assets
93,023

89,947

Total assets
$
6,344,010

$
6,035,655

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

$
5,050,461

Borrowings, net
398,216

404,166

Accrued interest payable on deposits and borrowings
5,797

5,204

Deferred tax liability, net
4,315

3,513

Acquisition earn out liability

2,920

Operating lease liability
24,766


Other accrued expenses and other liabilities
76,655

90,037

Total liabilities
5,847,453

5,556,301

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

38,468

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

293,355

Additional paid-in capital
16,940

15,364

Retained earnings
177,894

164,009

Accumulated other comprehensive income (loss), net
502

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

479,354

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

$
6,035,655


See accompanying notes to unaudited condensed consolidated financial statements.

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

$
39,027

Investments
4,353

1,784

Interest-earning deposits
1,287

605

Total interest income
62,902

41,416

 
 
 
Interest expense:
 
 
Deposits
29,333

13,401

Borrowings
3,197

1,753

Total interest expense
32,530

15,154

Net interest income
30,372

26,262

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

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

26,067

Non-interest income:
 
 
Investment management fees
9,424

8,908

Service charges on deposits
136

134

Net gain on the sale and call of debt securities
28

5

Swap fees
1,803

1,248

Commitment and other loan fees
531

332

Other income
1,147

462

Total non-interest income
13,069

11,089

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

15,468

Premises and occupancy costs
1,270

1,290

Professional fees
995

1,095

FDIC insurance expense
1,421

1,146

General insurance expense
294

247

State capital shares tax
380

427

Travel and entertainment expense
835

646

Intangible amortization expense
502

461

Other operating expenses
4,200

3,070

Total non-interest expense
26,672

23,850

Income before tax
17,146

13,306

Income tax expense
2,582

2,905

Net income
$
14,564

$
10,401

Preferred stock dividends on Series A
679


Net income available to common shareholders
$
13,885

$
10,401

 
 
 
Earnings per common share:
 
 
Basic
$
0.50

$
0.38

Diluted
$
0.48

$
0.36


See accompanying notes to unaudited condensed consolidated financial statements.


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

$
10,401

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

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

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

(161
)
 
 
 
Total comprehensive income
$
16,397

$
10,240


See accompanying notes to unaudited condensed consolidated financial statements.


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

$
289,507

$
10,290

$
111,732

$
1,246

$
(23,704
)
$
389,071

Impact of adoption of ASU 2014-09



534



534

Reclassification for equity securities under ASU 2016-01



(286
)
286



Reclassification for certain income tax effects under ASU 2018-02



(274
)
274



Net income



10,401



10,401

Other comprehensive loss




(161
)

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






38,440

Exercise of stock options

1,211

(690
)



521

Purchase of treasury stock





(575
)
(575
)
Stock-based compensation


1,998




1,998

Balance, March 31, 2018
$
38,440

$
290,718

$
11,598

$
122,107

$
1,645

$
(24,279
)
$
440,229

 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
38,468

$
293,355

$
15,364

$
164,009

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

Net income



14,564



14,564

Other comprehensive income




1,833


1,833

Preferred stock dividend



(679
)


(679
)
Exercise of stock options

342

(154
)



188

Purchase of treasury stock





(433
)
(433
)
Stock-based compensation


1,730




1,730

Balance, March 31, 2019
$
38,468

$
293,697

$
16,940

$
177,894

$
502

$
(30,944
)
$
496,557


See accompanying notes to unaudited condensed consolidated financial statements.


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

$
10,401

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

842

Amortization of deferred financing costs
51

50

Provision (credit) for loan losses
(377
)
195

Net gain on the sale of loans

(19
)
Stock-based compensation expense
1,730

1,998

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

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

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

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

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

Decrease in prepaid income taxes
7,066

12,164

Deferred tax provision
223

582

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

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

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

Purchase of equity securities

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

2,037

Proceeds from the sale of equity securities
2,000


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

3,074

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

895

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

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

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

3,342

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

111,344

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

38,440

Net proceeds from exercise of stock options
188

521

Payment of contingent consideration
(2,920
)

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

Net cash provided by financing activities
277,399

118,530

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

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

156,153

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

$
145,033

 
 
 

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

$
15,169

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

$


See accompanying notes to unaudited condensed consolidated financial statements.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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


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

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

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

[2] INVESTMENT SECURITIES

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

$
1,244

$
721

$
158,446

Trust preferred securities
17,996


518

17,478

Agency collateralized mortgage obligations
32,438

18

50

32,406

Agency mortgage-backed securities
20,194

123

183

20,134

Agency debentures
10,000

258


10,258

Total debt securities available-for-sale
238,551

1,643

1,472

238,722

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

236

41

27,377

Agency debentures
163,861

745

2

164,604

Municipal bonds
21,475

102

2

21,575

Agency mortgage-backed securities
4,397

183


4,580

Total debt securities held-to-maturity
216,915

1,266

45

218,136

Total debt securities
$
455,466

$
2,909

$
1,517

$
456,858



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

$
33

$
1,661

$
151,063

Trust preferred securities
17,964


1,115

16,849

Non-agency collateralized loan obligations
393


3

390

Agency collateralized mortgage obligations
33,680

42

4

33,718

Agency mortgage-backed securities
21,575

37

348

21,264

Agency debentures
9,994

67

49

10,012

Total debt securities available-for-sale
236,297

179

3,180

233,296

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

353

22

27,515

Agency debentures
141,575

472

34

142,013

Municipal bonds
22,963

11

61

22,913

Agency mortgage-backed securities
4,409


27

4,382

Total debt securities held-to-maturity
196,131

836

144

196,823

Total debt securities
$
432,428

$
1,015

$
3,324

$
430,119


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

$
1,414

Non-taxable interest income
104

110

Dividend income
377

260

Total interest income on investment securities
$
4,353

$
1,784


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

$
13,415

 
$
2,124

$
2,127

Due from one to five years
111,769

112,899

 
38,495

38,595

Due from five to ten years
42,663

42,016

 
140,515

141,032

Due after ten years
70,694

70,392

 
35,781

36,382

Total debt securities
$
238,551

$
238,722

 
$
216,915

$
218,136


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

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


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Table of Contents

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

$
2,037

 
$

$

Proceeds from calls
1,224


 
21,460

895

Total proceeds
$
1,224

$
2,037


$
21,460

$
895

 
 
 
 
 
 
Gross realized gains
$
17

$
2

 
$
11

$
3

Gross realized losses


 


Net realized gains
$
17

$
2

 
$
11

$
3


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

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

$
19

 
$
38,191

$
702

 
$
53,053

$
721

Trust preferred securities
17,478

518

 


 
17,478

518

Agency collateralized mortgage obligations
24,099

40

 
2,944

10

 
27,043

50

Agency mortgage-backed securities
2,832

31

 
8,361

152

 
11,193

183

Total debt securities available-for-sale
59,271

608

 
49,496

864

 
108,767

1,472

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

22

 
980

19

 
3,958

41

Agency debentures


 
1,984

2

 
1,984

2

Municipal bonds


 
891

2

 
891

2

Total debt securities held-to-maturity
2,978

22

 
3,855

23

 
6,833

45

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

$
630

 
$
53,351

$
887

 
$
115,600

$
1,517

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


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

$
789

 
$
22,954

$
872

 
$
133,154

$
1,661

Trust preferred securities
16,849

1,115

 


 
16,849

1,115

Non-agency collateralized loan obligations


 
390

3

 
390

3

Agency collateralized mortgage obligations


 
3,015

4

 
3,015

4

Agency mortgage-backed securities
5,851

51

 
8,690

297

 
14,541

348

Agency debentures
3,487

49

 


 
3,487

49

Total debt securities available-for-sale
136,387

2,004

 
35,049

1,176

 
171,436

3,180

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

22

 


 
3,978

22

Agency debentures
1,952

34

 


 
1,952

34

Municipal bonds
16,105

51

 
2,110

10

 
18,215

61

Agency mortgage-backed securities
4,382

27

 


 
4,382

27

Total debt securities held-to-maturity
26,417

134

 
2,110

10

 
28,527

144

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

$
2,138

 
$
37,159

$
1,186

 
$
199,963

$
3,324

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

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

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

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

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

[3] LOANS AND LEASES

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

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

$
859,480

$
1,496,493

$
5,332,424

Deferred loan costs (fees)
5,522

2,925

(4,146
)
4,301

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

862,405

1,492,347

5,336,725

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

$
855,364

$
1,486,677

$
5,322,013



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Table of Contents

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

$
781,836

$
1,482,148

$
5,128,078

Deferred loan costs (fees)
5,449

3,484

(4,138
)
4,795

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

785,320

1,478,010

5,132,873

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

$
779,556

$
1,472,508

$
5,119,665


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

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

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

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

[4] ALLOWANCE FOR LOAN AND LEASE LOSSES

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

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

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

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Table of Contents

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

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

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

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

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

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

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

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

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

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

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

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


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Table of Contents

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

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

$
837,922

$
1,489,947

$
5,307,635

Special mention

19,361

2,400

21,761

Substandard
2,207

5,122


7,329

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

$
862,405

$
1,492,347

$
5,336,725


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

$
767,540

$
1,475,793

$
5,108,107

Special mention
2,532

12,636

2,217

17,385

Substandard
2,237

5,144


7,381

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

$
785,320

$
1,478,010

$
5,132,873


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

$
5,764

$
5,502

$
13,208

Provision (credit) for loan losses
59

(604
)
168

(377
)
Charge-offs




Recoveries

1,881


1,881

Balance, end of period
$
2,001

$
7,041

$
5,670

$
14,712


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

$
8,043

$
4,797

$
14,417

Provision (credit) for loan losses
(21
)
217

(1
)
195

Charge-offs




Recoveries

206


206

Balance, end of period
$
1,556

$
8,466

$
4,796

$
14,818


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

$

$
2,173

$
2,186

$
2,979,787

$
2,981,973

Commercial and industrial




862,405

862,405

Commercial real estate




1,492,347

1,492,347

Loans and leases held-for-investment
$
13

$

$
2,173

$
2,186

$
5,334,539

$
5,336,725



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

$
173

$
2,000

$
3,213

$
2,866,330

$
2,869,543

Commercial and industrial




785,320

785,320

Commercial real estate




1,478,010

1,478,010

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

$
173

$
2,000

$
3,213

$
5,129,660

$
5,132,873


Non-Performing and Impaired Loans

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

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

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

$
2,393

$
557

$
2,216

$

Commercial and industrial
5,122

5,191

1,200

5,122


Commercial real estate





Total with a related allowance recorded
7,329

7,584

1,757

7,338


Without a related allowance recorded:
 
 
 
 
 
Private banking





Commercial and industrial





Commercial real estate





Total without a related allowance recorded





Total:
 
 
 
 
 
Private banking
2,207

2,393

557

2,216


Commercial and industrial
5,122

5,191

1,200

5,122


Commercial real estate





Total
$
7,329

$
7,584

$
1,757

$
7,338

$



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Table of Contents

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

$
2,421

$
437

$
2,293

$

Commercial and industrial





Commercial real estate





Total with a related allowance recorded
2,237

2,421

437

2,293


Without a related allowance recorded:
 
 
 
 
 
Private banking





Commercial and industrial





Commercial real estate





Total without a related allowance recorded





Total:
 
 
 
 
 
Private banking
2,237

2,421

437

2,293


Commercial and industrial





Commercial real estate





Total
$
2,237

$
2,421

$
437

$
2,293

$


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

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

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

$
1,200

$

$
1,757

Collectively evaluated for impairment
1,444

5,841

5,670

12,955

Total allowance for loan and lease losses
$
2,001

$
7,041

$
5,670

$
14,712

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

$
5,122

$

$
7,329

Collectively evaluated for impairment
2,979,766

857,283

1,492,347

5,329,396

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

$
862,405

$
1,492,347

$
5,336,725



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Table of Contents

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

$

$

$
437

Collectively evaluated for impairment
1,505

5,764

5,502

12,771

Total allowance for loan and lease losses
$
1,942

$
5,764

$
5,502

$
13,208

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

$

$

$
2,237

Collectively evaluated for impairment
2,867,306

785,320

1,478,010

5,130,636

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

$
785,320

$
1,478,010

$
5,132,873


Troubled Debt Restructuring

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

$

Non-accrual loans
207

237

Total troubled debt restructurings
$
207

$
237


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

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

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

Other Real Estate Owned

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

[5] OPERATING LEASES

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

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


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Table of Contents

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

2021
2,539

2022
2,793

2023
2,292

2024
2,174

Thereafter
21,664

Total undiscounted lease payments
$
33,972

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


[6] DEPOSITS

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

$
258,268

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

778,131

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

2,781,870

Total demand and savings accounts
 
 
 
 
 
3,948,283

3,818,269

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

1,232,192

Total deposits
 
 
 
 
 
$
5,337,704

$
5,050,461

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

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

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

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

$
992,468

12 months to 24 months
237,847

181,456

24 months to 36 months
54,751

58,268

Total
$
1,389,421

$
1,232,192



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Table of Contents

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

$
1,621

Money market deposit accounts
16,540

8,113

Certificates of deposit
8,251

3,667

Total interest expense on deposits
$
29,333

$
13,401


[7] BORROWINGS

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

5/1/2019
 
2.62%
$
250,000

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

7/1/2019
 



Issued 3/29/2019
2.70%
70,000

4/1/2019
 



Issued 1/8/2019
2.73%
50,000

4/8/2019
 



Issued 12/31/2018



 
2.65%
65,000

1/2/2019
Issued 10/10/2018



 
2.54%
50,000

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

10/17/2019
 
5.47%
4,250

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

7/1/2019
 
5.75%
34,916

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

 
 
 
$
404,166

 

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

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

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

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

$
1,147

Line of credit borrowings
58

52

Subordinated notes payable
554

554

Total interest expense on borrowings
$
3,197

$
1,753



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Table of Contents

[8] STOCK TRANSACTIONS

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

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

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

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

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

28,591,101

Issuance of preferred stock
40,250


Issuance of restricted common stock

359,613

Forfeitures of restricted common stock

(2,000
)
Exercise of stock options

51,700

Purchase of treasury stock

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

28,976,214

 
 
 
Balance, December 31, 2018
40,250

28,878,674

Issuance of restricted common stock

538,703

Forfeitures of restricted common stock

(61,474
)
Exercise of stock options

15,930

Purchase of treasury stock

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

29,351,833


[9] REGULATORY CAPITAL

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


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Table of Contents

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

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

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

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

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

11.26
%
 
$
316,146

8.00
%
 
 N/A

N/A

Bank
$
454,670

11.57
%
 
$
314,293

8.00
%
 
$
392,866

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

10.92
%
 
$
237,110

6.00
%
 
 N/A

N/A

Bank
$
439,408

11.18
%
 
$
235,720

6.00
%
 
$
314,293

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

9.98
%
 
$
177,832

4.50
%
 
 N/A

N/A

Bank
$
439,408

11.18
%
 
$
176,790

4.50
%
 
$
255,363

6.50
%
Tier 1 leverage ratio
 
 
 
 
 
 
 
 
Company
$
431,428

7.13
%
 
$
242,001

4.00
%
 
 N/A

N/A

Bank
$
439,408

7.29
%
 
$
241,042

4.00
%
 
$
301,303

5.00
%


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Table of Contents

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

10.86
%
 
$
313,789

8.00
%
 
 N/A

N/A

Bank
$
437,849

11.25
%
 
$
311,497

8.00
%
 
$
389,371

10.00
%
Tier 1 risk-based capital ratio
 
 
 
 
 
 
 
 
Company