TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events, and our financial performance, as well as our goals and objectives for future operations, financial and business trends, business prospects and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other future financial or business performance, strategies or expectations. These statements are often, but not always, made through the use of words or phrases such as “achieve,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “maintain,” “may,” “opportunity,” “outlook,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “sustain,” “target,” “trend,” “will,” “will likely result,” and “would,” or the negative version of those words or other comparable of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, and beliefs of assumptions made by management, many of which, by their nature, are inherently uncertain. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that change over time and are difficult to predict, including, but not limited to, the following:
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this document. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
ITEM 1. BUSINESS
We operate two reportable segments: Bank and Investment Management.
average over 20 years of industry experience. We believe that our distinct business model, culture, and scalable platform enable us to attract and retain high quality professionals. Additionally, our low overhead costs give us the financial capability to attract and incentivize qualified professionals who desire to work in an entrepreneurial and results-oriented organization.
As shown in the following table, we have continued to achieve loan growth through both of our banking channels. As of December 31, 2019,2021, loans and leases sourced through our middle-market banking channel were $2.88$3.88 billion, or 43.8%36.0% of our loans held-for-investment.
We take a multi-faceted approach to our deposit growth strategy. We believe our relationship managers are an integral part of this approach and, accordingly, we measure and incentivize them to increase the breadth and scope of deposits associated with their relationships. We have relationship
managers who are specifically dedicated to deposit generation and treasury management, and we plan to continue adding such professionals as appropriate to support our growth. Additionally, we believe that our financial performance and our products and services, which are targeted to our markets, enhance our responsible growth of cost-effective deposits.
For our middle-market banking business, our primary markets of Pennsylvania, Ohio, New Jersey and New York include the four major metropolitan statistical areas (“MSA”) of Pittsburgh and Philadelphia, Pennsylvania; Cleveland, Ohio and New York (which includes northern New Jersey). We believe that our primary markets including these MSAs are long-term, attractive markets for the types of products and services that we offer, and we anticipate that these markets will continue to support our projected growth. With respect to our loans and other financial services and products, we selected the locations for our representative offices partially based upon the number of middle-market businesses located in these MSAs and their respective states. According to SNL Financial, as of December 31, 2019,2021, there were nearly 84,000over 849,000 middle-market businesses in our primary markets with annual sales between $5.0 million and $300.0 million, which represented approximately 18%10% of the national total of such businesses as of that date. The 20192021 aggregate population of the four MSAs in which our headquarters and four representative offices are located was approximately 30 million, which represented approximately 10%9% of the national population. We believe that the population and business concentrations within our primary markets provide attractive opportunities to grow our business.
perspective on the size of the deposit markets in which we have offices, the total aggregate domestic deposits of banks headquartered within the four MSAs werewas approximately $1.6$3.1 trillion as of December 31, 2019,2021, according to SNL Financial.
Our investment management products are primarily distributed in two markets. These markets and their relative percentage of our assets under management as of December 31, 2019,2021, were as follows: institutional and sub-advisory (74%(81%) and broker/dealersbroker-dealers and registered investment advisors (26%(19%).
We offer our clients an array of products and services, including loan and deposit products, cash management services, capital market services such as interest rate swaps and investment management products.
More information about our key products and services, including a discussion about how we manage our products and services within our overall business and enterprise risk strategy, is set forth below.
Our primary source of income in our Bank segment is interest on loans and leases. Our loan and lease portfolio primarily consist of loans to our private banking clients, commercial and industrial loans and leases, and real estate loans secured by commercial real estate properties. Our loan and lease portfolio represents the largest component of our earning assets.
The following table presents the composition of our loan and lease portfolio as of December 31, 2019.2021.
Our private banking lines of credit predominantly are due on demand or have terms of 365 days or less. Our term loans (other than mortgage loans) in this category generally have maturities of three to five years. On an accommodative basis, we have made personal residential real estate loans consisting primarily of first and second mortgage loans for residential properties, including jumbo mortgages. Our residential mortgage loans typically have maturities of seven years or less. On a limited basis we originated mortgage loans with maturities of up to ten10 years and acquired other residential mortgages that had original maturities of up to 30 years. Our personal lines of credit typically have floating interest rates. We examine the personal cash flow, amount of outstanding business and related debt service, and liquidity of our individual borrowers when underwriting our private banking loans not secured by cash, marketable securities and/or cash value life insurance. In some cases we require our borrowers to agree to maintain a minimum level of liquidity that will be sufficient to repay the loan.
The table below includes all loans made through our private banking channel by collateral type as of the date indicated.
accounts receivable, inventory, equipment, acquisitions and recapitalizations. Cash flow from the borrower’s operations is the primary source of repayment for these loans, except for certain commercial loans that are secured by marketable securities. The primary risks associated with commercial and industrial loans include a deterioration in cash flow, a decline in the value of collateral securing these loans, increased leverage andand/or reduced liquidity. We work throughout the lending process to manage and mitigate such risks within this portfolio. In addition, a portion of our commercial and industrial loan portfolio.loans consist of loans to private investment funds for short-term liquidity purposes which are secured by their ability to call additional capital and/or the net asset value of the investments held and managed by the fund.
The table below shows the composition of our commercial and industrial loan and lease portfolio by borrower industry as of December 31, 2019.2021.
Our commercial real estate loans are primarily made to borrowers with projects or properties located within our primary markets. Our relationship managers are experienced lenders who are familiar with the trends within their local real estate markets.
The table below shows the composition of our commercial real estate portfolio as of December 31, 2019.2021.
Our focus on maintaining strong asset quality is pervasive through all aspects of our lending activities, and it is apparent inincluding our loan and lease underwriting function. We are selective in targeting our lending to middle-market businesses, commercial real estate investors and
developers, and high-net-worth individuals that we believe will meet our credit standards. Our credit standards are determined by our Credit Risk Policy Committee that is made up of senior bank officers, including our Chief Credit Officer, Chief Risk Officer, Bank President and Chief Executive Officer, Chief Financial Officer, President of Commercial Banking and President of Private Banking.
Our underwriting process is multilayered. Prospective loans are first reviewed by our relationship managers and regional presidents. The prospective commercial and certain private banking loans are then discussed in a pre-screen group composed of the Chief Credit Officer, Senior Credit Officer, President of Commercial Banking, President of Private Banking and all of our regional presidents. Applications for prospective loans that are accepted are fully underwritten by our credit administration group in combination with the relationship manager. Finally, the prospective loans are submitted to our Senior Loan Committee for approval, with the exception of certain loans that are fully secured by cash, marketable securities and/or cash value life insurance. Members of the Senior Loan Committee include our Chairman, Vice Chairman, Bank President and Chief Executive Officer, Chief Financial Officer, Vice Chairman, Chief Credit Officer, Senior Credit Officer, Bank President and Chief Executive Officer, President of Commercial Banking, President of Private Banking and our regional presidents. All of our lending personnel, from our relationship managers to the members of our Senior Loan Committee, have significant experience that benefits our underwriting process.
We maintain high credit quality standards. Each credit approval, renewal, extension, modification or waiver is documented in written form to reflect all pertinent aspects of the transaction. Our underwriting analysis generally includes an evaluation of the borrower’s business, industry, operating performance, financial condition and typically includes a sensitivity analysis of the borrower’s ability to repay the loan. Our underwriting is conducted by our team of highly experienced portfolio managers.
Our lending activities are subject to internal exposure limits that restrict concentrations of loans within our portfolio to certain targets and maximums based on a percentage of total loan commitments and as a multiple of total risk-based capital. These exposure limits are approved by our Senior Loan Committee and our board of directors. Our internal exposure limits are established to avoid unacceptable concentrations in a number of areas, including in our different loan categories and in specific industries. In addition, we have established a preferred lending limit that is significantly lower than our legal lending limit.
Our loan portfolio includes Shared National Credits (“SNC”). Effective January 1, 2018, the bank regulatory agencies revised the SNC definition to increase the loan size from $20 million or more to $100 million or more and that are still shared by three or more financial institutions. We are typically part of the originating bank group in connection with these loan participations. We utilize the same underwriting criteria for these loans that we use for loans that we originate directly. These loans are to borrowers typically located within our primary markets and are generally made to companies that are known to us and with whom we have direct contact. We participate in the SNC loans of the financial intermediaries that refer private banking loans to us. These intermediaries are also a source of significant deposit balances. These loans have helped us to diversify the risk inherent in our loan portfolio by allowing us to access a broader array of corporations with different credit profiles, repayment sources, geographic footprints and with larger revenue bases than those businesses associated with our direct loans. Still, we are focused more on growing our direct loans than SNC loans. As of December 31, 2019,2021, we had $281.2$250.0 million of SNC loans compared to $236.1$273.6 million as of December 31, 2018.2020.
The table below shows the composition of our commercial loan and lease portfolios based upon the states where our borrowers are located. Loans and leases to borrowers located in our four primary market states made up 87.0%83.0% of our total commercial loans outstanding as of December 31, 2019.2021. When those loans are aggregated with our loans to borrowers located in states that are contiguous to our primary market states, the percentage increases to approximately 92.4%88.5% of our commercial loan and lease portfolio.
Loans in contiguous and other states include loans to the financial intermediaries that have substantial deposits with us, and are a referral source for private banking loans.
The table below shows the balances of our deposit portfolio by type as of the dates indicated.
•Core Plus Fixed Income: With flexibility to adjust to each client’s specific guidelines, Chartwell’s Core Plus product invests across both the U.S. Investment Grade and High Yield markets. By strategically expanding our credit-driven, valued-based opportunity set, the portfolio is able to take advantage of Chartwell’s broad ranging corporate bond expertise and to benefit from the potential for increased income, total return and diversification.
•High Yield Fixed Income: Chartwell's Chartwell’s philosophy of high yield bond management stresses preservation of principal and compounding of the income stream as keys to adding value in the high yield bond market. In evaluating investment candidates our perspective is that of a lender. We focus on the higher quality tiers of the market, which offer an attractive yield premium but a lower incidence of credit erosion relative to the market as a whole. Chartwell believes that the consistent application of high credit standards and strict trading disciplines is the most predictable route to outperformance in the high yield bond market.
•Short Duration BB-Rated High Yield Fixed Income: Chartwell's Chartwell’s philosophy of high yield bond management stresses preservation of principal and compounding of the income stream as keys to adding value in the high yield bond market. Again, our focus is on the higher quality tiers of the market, which offer an attractive yield premium but a lower incidence of credit erosion relative to the market as a whole. We focus on duration of less than three years with maximum maturities of five years.
Balanced Investment Strategies:
•Conservative Allocation: The Conservative Allocation strategy is managed utilizing Chartwell’s value-oriented security selection process and includes the BerwynChartwell Income Fund as one of its main products. While the majority of funds managed under this strategy are invested in bonds, it may invest up to 30% of its assets in dividend-paying common stocks. We believe the fund’s balanced, income-oriented approach may afford a greater level of price stability than an all equity portfolio.
portfolio.
Our total assets under management of $9.70$11.84 billion increased $512.0 million,$1.58 billion, or 5.6%15.4%, as of December 31, 2019,2021, from $9.19$10.26 billion as of December 31, 2018.2020. We reported new business and new flows from existing accounts and acquired assets of $1.11$2.11 billion and market appreciation of $1.28$1.06 billion, partially offset by outflows of $1.88$1.59 billion during the year ended December 31, 2019.2021.
The following table shows the changes of our assets under management by investment style for the year ended December 31, 2019.2021.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
(Dollars in thousands) | Beginning Balance | Inflows (1) | Outflows (2) | Market Appreciation (Depreciation) | Ending Balance |
Equity investment styles | $ | 4,042,000 | | $ | 431,000 | | $ | (970,000) | | $ | 951,000 | | $ | 4,454,000 | |
Fixed income investment styles | 5,663,000 | | 1,628,000 | | (494,000) | | 72,000 | | 6,869,000 | |
Balanced investment styles | 558,000 | | 49,000 | | (123,000) | | 37,000 | | 521,000 | |
Total assets under management | $ | 10,263,000 | | $ | 2,108,000 | | $ | (1,587,000) | | $ | 1,060,000 | | $ | 11,844,000 | |
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
(Dollars in thousands) | Beginning Balance | Inflows (1) | Outflows (2) | Market Appreciation (Depreciation) | Ending Balance |
Equity investment styles | $ | 3,419,000 |
| $ | 424,000 |
| $ | (733,000 | ) | $ | 822,000 |
| $ | 3,932,000 |
|
Fixed income investment styles | 4,263,000 |
| 550,000 |
| (341,000 | ) | 344,000 |
| 4,816,000 |
|
Balanced investment styles | 1,507,000 |
| 139,000 |
| (809,000 | ) | 116,000 |
| 953,000 |
|
Total assets under management | $ | 9,189,000 |
| $ | 1,113,000 |
| $ | (1,883,000 | ) | $ | 1,282,000 |
| $ | 9,701,000 |
|
(1)Inflows consist of new business and contributions to existing accounts. | |
(1)
| Inflows consist of new business and contributions to existing accounts. |
| |
(2)
| Outflows consist of business lost as well as distributions from existing accounts. |
(2)Outflows consist of business lost as well as distributions from existing accounts.
Competition
We operate in a very competitive industry and face significant competition for customers from bank and non-bank competitors, particularly regional and national institutions, in originating loans, attracting deposits and providing other financial services. We compete for loans and deposits based upon the personal and responsive service offered by our highly experienced relationship managers, access to management and interest rates. As a result of our low operating costs, we believe we are able to compete for customers with the competitive interest rates that we pay on deposits and that we charge on our loans.
Our management believes that our most direct competition for deposits comes from commercial banks, savings and loan associations, credit unions, money market funds and brokerage firms, particularly national and large regional banks, many of which target the same customers as we do. With respect to our deposits from treasury management, competition is mainly based on sophistication and reliability of service, experience and expertise with our clients’ businesses, and fee structure. Competition for other deposit products is generally based on pricing becauselength and depth of relationship, comfort with the ease with which customers can transfer deposits from one institution to another.bank, and pricing. Our cost of funds fluctuates with market interest rates and our ability to further reduce our cost of funds may be affected by higher rates being offered by other financial institutions. During certain interest rate environments, additional significant competition for deposits may be expected to arise from corporate and government debt securities and money market mutual funds.
Our competition in making commercial loans comes principally from national, regional and large community banks and insurance companies. Many large national and regional commercial banks have a significant number of branch offices in the areas in which we operate. Competition for our private banking loans is more limited than for commercial loans due largely to our niche offering of loans backed by cash, marketable securities and/or or cash value life insurance, which represent 55%63% of our entire loan portfolio.portfolio as of
December 31, 2021. Aggressive pricing policies and terms of our competitors on middle-market and private banking loans may result in a decrease in our loan origination volume and a decrease in our yield on loans. We compete for loans principally through the quality of products and service we provide to middle-market customers, financial services firms, and private banking referral relationships, while maintaining competitive interest rates, loan fees and other loan terms.
Our relationship-based approach to business also enables us to compete with other financial institutions in attracting loans and deposits. Our relationship managers and regional presidents have significant experience in the banking industry in the markets they serve and are focused on customer service. By capitalizing on this experience and by tailoring our products and services to the specific needs of our clients, we have been successful in cultivating stable relationships with our customers and also with financial intermediaries who refer their clients to us for banking services. We believe our approach to customer relationships will assist us in continuing to compete effectively for loans and deposits in our primary markets and nationally through our private banking channel.
The investment management business is intensely competitive. In the markets where we compete, there are over 1,000 firms which we consider to be primary competitors. In addition to competition from other institutional investment management firms, Chartwell, along with the active-management industry, competes with passive index funds, exchange traded funds (“ETFs”) and investment alternatives such as hedge funds. We compete for investment management business by delivering excellent investment performance with a committed customer service model.
Employees and Human Capital Resources
As of December 31, 2019,2021, we had approximately 276361 full-time equivalent employees (219with 308 in our banking businessbank segment and 5753 in our investment management business)segment. During 2021, our voluntary turnover rate was 7.8%. We consider our employee relations to be very good, and we aspire to keep them exceptional. Our employees are not represented by a collective bargaining unit.
Compensation and Benefits
We endeavor to create an environment based in fairness, respect, and equal opportunity that encourages high-performance; provides challenging opportunities; promotes safety and well-being; fosters diversity and new thought; and rewards execution. We focus on attracting, developing, and retaining a team of exceptionally talented and motivated employees. We conduct regular assessments of our compensation and benefits practices and pay levels to help ensure that employees are compensated competitively and fairly. We provide every full-time employee the ability to participate in comprehensive benefits programs, including paid time off, company-paid health insurance and medical concierge services, § 401(k) plan with a company funded matching program, and company-paid identity theft protection.
Health, Safety, and Wellness
The safety, health and wellness of our employees is always a top priority for us. We know that the success of our business is intricately tied to the well-being of our team. We have always approached this priority with a holistic approach, focused on physical, mental, and financial health, and continuously review existing and potential programming and the evolving needs of our team. We strongly encourage work-life balance, minimize the employee portion of health care premiums and sponsor a medical concierge service that provides healthcare education and support from personal consultants designed to help employees and their families navigate their healthcare experience.
In response to the COVID-19 pandemic, we used this holistic approach to craft our strategy and execution. We promptly initiated remote work plans to enhance the health environment within our offices and mitigate against transmission of the virus by significantly reducing the number of employees working on-site. As an essential business, we retained an in-office-work environment, and took many initiatives to promote the health and well-being of those in our offices, including continuous enhanced cleaning, paid on-site parking, delivered lunches, and access to on-site nurses in our offices with mandatory temperature checks. In consideration the financial health of our team during this time, we established enhanced benefit programs to address expenses tied to balancing work with life under quarantine conditions, including stipends for employees working in our offices as well as working from home to assist in that transition, which we ultimately made permanent through salary increases. We also formed a COVID-19 steering team to advise on the Company’s overall response to the pandemic, including developing and monitoring mitigation strategies; tracking relevant national, state and local government guidelines, directives and regulations; and assessing appropriate work-in-office protocols.
Diversity and Inclusion
We are committed to maintaining a diverse and inclusive workforce and culture. To foster this goal, we focus on promoting a culture that leverages the talents of all employees, as well as implementing practices that attract, develop, and retain diverse talent. For example, we are a member of Vibrant Pittsburgh, an economic development nonprofit that seeks to accelerate the growth rate of diverse workers in the Pittsburgh region, and we continue to pursue similar opportunities where we have our loan production offices.
Supervision and Regulation
The following is a summary of material laws, rules and regulations governing banks, investment management businesses and bank holding companies, but does not purport to be a complete summary of all applicable laws, rules and regulations. These laws and regulations may change from time to time and the regulatory agencies often have broad discretion in interpreting them. We cannot predict the outcome of any future changes to these laws, regulations, regulatory interpretations, guidance and policies, which may have a material and adverse impact on the financial markets in general, and our operations and activities, financial condition, results of operations, growth plans and future prospects.
General
The common stock and preferred stock of TriState Capital Holdings, Inc. is publicly traded and listed and, as a result, we are subject to securities laws and stock market rules, including oversight from the Securities and Exchange Commission (“SEC”) and the Nasdaq Stock Market Rules.
Banking is highly regulated under federal and state law. Regulation and supervision by the federal and state banking agencies are intended primarily for the protection of depositors, the Deposit Insurance Fund (“DIF”) administered by the FDIC, consumers and the banking system as a whole, and not for the protection of our investors. We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and are subject to supervision, regulation and examination by the Federal Reserve. TriState Capital Bank is a commercial bank chartered under the laws of the Commonwealth of Pennsylvania. It is not a member of the Federal Reserve System and is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and Securities (the “PDBS”) and the FDIC. The Consumer Financial Protection Bureau (“CFPB”) examines the Bank for compliance with federal consumer protection laws and regulations.
Our investment management business is subject to extensive regulation in the United States. Chartwell and CTSC Securities are subject to Federalfederal securities laws, principally the Securities Act of 1933, the Investment Company Act of 1940, the Investment Advisers Act of 1940, state laws regarding securities fraud and regulations and rules promulgated by various regulatory authorities, including the SEC, the Financial Industry Regulatory Authority, Inc. (“FINRA”), applicable state lawsregulators and stock exchanges. OurWith respect to certain derivative products, our investment management business also may be subject to regulation by the U.S. Commodity Futures Trading Commission (“CFTC”) and the National Futures Association (“NFA”). Changes in laws, regulations or governmental policies, both domestically and abroad, and the costs associated with compliance, could materially and adversely affect our business, results of operations, financial condition and/or cash flows.
This system of supervision and regulation establishes a comprehensive framework for our operations. Failure to meet regulatory standards could have a material and adverse impact on our operations and activities, financial condition, results of operations, growth plans and future prospects.
Regulatory Developments
The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), enacted in 2010, has resulted in broad changes to the U.S. financial system where its provisions have resulted in enhanced regulation and supervision of the financial services industry. In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) was signed into law. While the EGRRCPA preserves the fundamental elements of the post Dodd-Frank regulatory framework, it includes modifications that are intended to result in meaningful regulatory relief for smaller and certain regional banking organizations.
Over several years the Department of Labor (“DOL”) developed a rule governing the circumstances in which a person rendering investment advice with respect to an employee benefit plan under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), would be treated as a fiduciary for the recipient of the advice. DOL finalized a regulation in 2016, which might have affected our investment advisory business, but DOL extended the effective date, and the U.S. Court of Appeals for the Tenth Circuit effectively vacated the rule in 2018. While this matter now appears to beIn December 2020, the DOL finalized a new fiduciary regulation that becomes fully effective in abeyance,February 2022. A similar rule, issued by the SEC, is considering a comparable rule, popularly known as Regulation BI, for best interest. The SEC has not issued a proposal, however, andinterest took effect in June 2020. These regulations will affect our investment advisory business, but we cannot predict what effect, if any, such a regulation might have on our investment advisory business.the nature or extent of these effects at this time, or whether these regulations will change in the future.
Regulatory Capital Requirements
Capital adequacy. The Federal Reserve monitors the capital adequacy of our holding company, on a consolidated basis, and the FDIC and the Pennsylvania Department of Banking and SecuritiesPDBS monitor the capital adequacy of TriState Capital Bank. The regulatory agencies use a combination of risk-based ratios and a leverage ratio to evaluate capital adequacy and consider these capital levels when taking action on various types of applications and when conducting supervisory activities related to safety and soundness. The current capital rules, which began to take effect for us in 2015, are popularly known as the Basel III Capital Rules because they are based on international standards known as Basel III.
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among financialbanking institutions and their holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk categories, each with appropriate risk weights. Regulatory capital, in turn, is classified into three “tiers”categories of capital. Common Equity Tier 1 capital (“CET 1”) includes common equity, retained earnings, and minority interests in equity accounts of consolidated subsidiaries, less goodwill, most intangible assets and certain other assets. Additional “Tier 1” capital includes, among other things, qualifying non-cumulative perpetual preferred stock. “Tier 2” capital includes, among other things, qualifying subordinated debt and allowances for loan and leasecredit losses, subject to limitations. Total risk-based capital is the total of all three tiers.categories. The resulting capital ratios represent capital as a percentage of average assets or total risk-weighted assets, including off-balance sheet items.
As discussed above in connection with EGRRCPA, the Company and the Bank may be able to satisfy all the capital requirements, including those under both theThe Basel III Capital Rules and prompt corrective action if both entities maintain the necessary Community Bank Leverage Ratio (“CBLR”). The federal banking agencies have finalized the CBLR rule at 9% and we exceed this standard.
In the meantime, the Basel III Capital Rules apply to us and require banks and bank holding companies generally to maintain four minimum capital standards to be “adequately capitalized”: (1) a tier 1 capital to total average assets ratio (“tier 1 leverage capital ratio”) of at least 4%; (2) a common equity tier 1 capital to risk-weighted assets ratio (“CET 1 risk-based capital ratio”) of at least 4.5%; (3) a tier 1 capital to risk-weighted assets ratio (“tier 1 risk-based capital ratio”) of at least 6%; and (4) a total risk-based capital to risk-weighted assets ratio (“total risk-based capital ratio”) of at least 8%. These capital requirements are minimum requirements. Higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual institutions, or if required by the banking regulators due to the economic conditions impacting our primary markets. For example, FDIC regulationsthe Basel III Capital Rules provide that higher capital may be required to take adequate account of, among other things, interest rate risk and the risks posed by concentrations ofa bank’s or bank holding company’s credit, nontraditional activitiesmarket, operational, or securities trading activities.other risks.
In addition, the Basel III Capital 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 (a ratio of CET1 to total risk-based assets of at least 2.5% on top of the minimum risk-based capital requirements). The implementation of the capital conservation buffer began on January 1, 2016, at 0.625%; in 2018 the buffer was 1.875%; and the full 2.5% requirement took effect on January 1, 2019. As a result, the Company and the Bank must adhere tomeet or exceed the following minimum capital ratios to satisfy the Basel III Capital Rule requirements and to avoid the limitations on capital distributions and discretionary bonus payments to executive officers:
4.0% •tier 1 leverage ratio;ratio of 4.0%;
minimum •CET1 risk-based capital ratio of 7.0%;
minimum •tier 1 risk-based capital ratio of 8.5%; and
minimum •total risk-based capital ratio toof 10.5%.
When assets are risk weighted for the purpose of the risk-based capital ratios, the Basel III Capital Rules present a large number of risk weight categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures. These categories may result in higher risk weights than under the earlier rules for a variety of asset classes, including certain commercial real estate mortgages. Additional aspects of the new capital rulesBasel III Capital Rules that are most relevanthave particular relevance to us include:
•a formula-based approach, referred to as the collateral haircut approach, to determine the risk weight of eligible margin loans collateralized by liquid and readily marketable debt or equity securities, where the collateral is marked to fair value daily, and the transaction is subject to daily margin maintenance requirements;
•consistent with the prior risk-based capital rules, assigning exposures secured by single family residential properties to either a 50% risk weight for first-lien mortgages that meet prudential underwriting standards or a 100% risk weight category for all other mortgages;
•providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (previously set at 0%);
•assigning a 150% risk weight to all exposures that are non-accrual or 90 days or more past due (previously set at 100%), except for those secured by single family residential properties, which will be assigned a 100% risk weight, consistent with the prior risk-based capital rules;
•applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate loans for acquisition, development and construction; and
•the option to use a formula-based approach referred to as the simplified supervisory formula approach to determine the risk weight of various securitization tranches in addition to the previous “gross-up” method (replacing the credit ratings approach for certain securitization).
Further, under the Dodd-Frank Act, the federal banking agencies adopted new capital requirements to address the risks that the activities of an institution poses to the institution and the public and private stakeholders, including risks arising from certain enumerated activities. Capital guidelines may continue to evolve and may have material impacts on us or our banking subsidiary.
In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay the impact of CECL on regulatory capital for up to two years (beginning January 1, 2020), followed by a three-year transition period. Due to the delayed implementation of CECL under the CARES Act, the Company will be eligible and has elected to utilize the two-year delay of CECL’s impact on its regulatory capital (from January 1, 2020 through December 31, 2021) followed by the three-year transition period of CECL impact on regulatory capital (from January 1, 2022 through December 31, 2024).
Based on our calculations, we expect that TriState Capital Holdings, Inc. and TriState Capital Bank will continue to meet all minimum capital requirements, when effective and that we andinclusive of the Bank would continue to meet all capital requirements as fully phased inconservation buffer, without material adverse effects on our business. However, the capital rules may continue to evolve over time and future changes may have a material adverse effect on our business. Failure to meet capital guidelines could subject us to a variety of enforcement remedies, including issuance of a capital directive, a prohibition on accepting brokered deposits, other restrictions on our business and the termination of deposit insurance by the FDIC.
Prompt corrective action regulations. Under the prompt corrective action regulations, the FDIC is required and authorized to take supervisory actions against undercapitalized insured depository institutions. For this purpose, a bank is placed in one of the following five categories based on its capital:capital level: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.”
Under the current prompt corrective action provisions of the FDIC, after adopting the Basel III Capital rules, an insured depository institution generally will be classified in the following categories based on the capital measures indicated:
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“Well capitalized” | “Adequately capitalized” |
Tier 1 leverage ratio of at least 5%, | Tier 1 leverage ratio of at least 4%, |
CET 1 risk-based ratio of at least 6.5%, | CET 1 risk-based ratio of at least 4.5%, |
Tier 1 risk-based ratio of at least 8%, | Tier 1 risk-based ratio of at least 6%, and |
Total risk-based ratio of at least 10%, and | Total risk-based ratio of at least 8% |
Not subject to written agreement, order, capital directive or prompt corrective action directive that requires a specific capital level. | |
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“Undercapitalized” | “Significantly undercapitalized” |
Tier 1 leverage ratio less than 4%, | Tier 1 leverage ratio less than 3%, |
CET 1 risk-based ratio less than 4.5%, | CET 1 risk-based ratio less than 3%, |
Tier 1 risk-based ratio less than 6%, or | Tier 1 risk-based ratio less than 4%, or |
Total risk-based ratio less than 8% | Total risk-based ratio less than 6% |
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“Critically undercapitalized” | |
Tangible equity to total assets equal to or less than 2% | |
Various consequences flow from a bank’s prompt corrective action category. A bank that is adequately capitalized but not well capitalized must obtain a waiver from the FDIC in order to continue to accept, renew or roll over brokered deposits. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Subject to a narrow exception, banking regulators must appoint a receiver or conservator for an institution that is critically undercapitalized. An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. An undercapitalized institution also is generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new linelines of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.
A bank holding company must guarantee that a subsidiary bank performs under a capital restoration plan, including an obligation to contribute capital to the bank up to the lesser of 5% of an “undercapitalized” subsidiary’ssubsidiary bank’s assets at the time it became “undercapitalized” or the amount required to meet regulatory capital requirements.
The prompt corrective action classification of a bank affects the frequency of regulatory examinations, the bank’s ability to engage in certain activities and the deposit insurance premiums paid by the bank. As of December 31, 2019,2021, TriState Capital Bank met the requirements to be categorized as “well capitalized” based on the aforementioned ratios for purposes of the prompt corrective action regulations, as currently in effect.regulations.
Source of Strength Doctrine for Bank Holding Companies
Under longstanding Federal Reserve policy which has been codified by the Dodd-Frank Act, we are expectedrequired to act as a source of financial strength to, and to commit resources to support, TriState Capital Bank. This support may be required at times when we may not be inclined to provide it. In addition, any capital loans that we make to TriState Capital Bank are subordinate in right of payment to deposits and to certain other indebtedness of TriState Capital Bank. In the event of our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of TriState Capital Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. These obligations are in addition to the performance guaranty we must provide in the event that TriState Capital Bank is required to develop a capital restoration plan under prompt corrective action.
Acquisitions by Bank Holding Companies
We must obtain the prior approval of the Federal Reserve before: (1) acquiring more than five percent of the voting stock of any bank or other bank holding company; (2) acquiring all or substantially all of the assets of any bank or bank holding company; or (3) merging or consolidating with any other bank holding company. The Federal Reserve may determine not to approve any of these transactions if it would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the anticompetitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve also may not approve a transaction in which the resulting institution would hold a share of state or nationwide deposits in excess of certain caps. The Federal Reserve is also required to consider the financial condition and managerial resources and future prospects of the bank holding companies and banks concerned, the convenience and needs of the community to be served, whether the transaction would result in greater or more concentrated risks to the stability of the United States banking or financial system, and the records of a bank holding company and its subsidiary bank(s) in compliance with applicable banking, consumer protection, and anti-money laundering laws.
Scope of Permissible Bank Holding Company Activities
In general, the Bank Holding Company Act limits the activities permissible for bank holding companies to the business of banking, managing or controlling banks and such other activities as the Federal Reserve has determined to be so closely related to banking as to be properly incident thereto.
A bank holding company may elect to be treated as a financial holding company if it and its depository institution subsidiaries are categorized as “well capitalized” and “well managed.” and if its depository institution subsidiaries have Community Reinvestment Act (“CRA”) records of at least “satisfactory.” A financial holding company may engage in a range of activities that are (1) financial in nature or incidental to such financial activity or (2) complementary to a financial activity and which do not pose a substantial risk to the safety and soundness of a depository institution or to the financial system generally. These activities include securities dealing, underwriting and market making, insurance underwriting and agency activities, merchant banking and insurance company portfolio investments. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators and insurance activities by insurance regulators. While we may determine in the future to become aelect financial holding company status, we do not have an intention to make that election at this time.
The Bank Holding Company Act does not place territorial limitations on permissible non-banking activities of bank holding companies. The Federal Reserve has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
Dividends
As a bank holding company, we are subject to certain restrictions on dividends under applicable banking laws and regulations. The Federal Reserve has issued a policy statement that provides that a bank holding company should not pay dividends unless: (1) its net income over the last four quarters (net of dividends paid)paid during that period) has been sufficient to fully fund the dividends; (2) the prospective rate of earnings retention appears to be consistent with the capital needs, asset quality and overall financial condition of the bank holding company and its subsidiaries; and (3) the bank holding company will continue to meet minimum required capital adequacy ratios. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Dodd-Frank Act and the Basel III Capital Rules impose additional restrictions on the ability of banking institutions to pay dividends, such as limits that come into play when the capital conservation buffer falls below the required ratio. In addition, in the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.
A part of our income could be derived from, and a potential material source of our liquidity could be, dividends from TriState Capital Bank. The ability of TriState Capital Bank to pay dividends to us is also restricted by federal and state laws, regulations and policies. Under applicable Pennsylvania law, TriState Capital Bank may only pay cash dividends out of its accumulated net earnings, subject to certain requirements regarding the level of surplus relative to capital.
Under federal law, TriState Capital Bank may not pay any dividend to us if the Bank is undercapitalized or the payment of the dividend would cause it to become undercapitalized. The FDIC may further restrict the payment of dividends by requiring TriState Capital Bank to maintain a higher level of capital than would otherwise be required for it to be adequately capitalized for regulatory purposes. Moreover, if, in the opinion of the FDIC, TriState Capital Bank is engaged in an unsafe or unsound practice (which could include the payment of dividends), the FDIC may require, generally after notice and hearing, the Bank to cease such practice. The FDIC has indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe banking practice. The FDIC has also issued guidance to the effect that insured depository institutions generally should pay dividends out of current operating earnings.
Incentive Compensation Guidance
The federal banking agencies have issued comprehensive guidance intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The incentive
compensation guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes. In addition, under the incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation arrangements pose a risk to the safety and soundness of the organization. Further, provisions of the Basel III regime described above limit discretionary bonus payments to bank and bank holding company executives if the institution’s regulatory capital ratios fail to exceed certain thresholds. The scope and content of the U.S. banking regulators’ policies on incentive compensation are likely to continue evolving. In 2016, the federal banking agencies, together with certain other federal agencies, proposed a regulation to limit certain incentive-based compensation arrangements that encourage inappropriate risks by banks, bank holding companies, and certain other financial institutions. We do not know whether and when the agencies will finalize this regulation, and what the final requirements will be.be, and how a final rule would apply to institutions of our size.
Restrictions on Transactions with Affiliates and Loans to Insiders
Federal law strictly limits the ability of banks to engage in transactions with their affiliates, including their bank holding companies. Section 23A and 23B of the Federal Reserve Act, and the Federal Reserve’s Regulation W, impose quantitative limits, qualitative standards, and collateral requirements on certain transactions by a bank with, or for the benefit of, its affiliates, and generally require those transactions to be on terms at least as favorable to the bank as transactions with non-affiliates. The Dodd-Frank Act significantly expands the coverage and scope of the limitations on affiliate transactions within a banking organization, including an expansion of the covered transactions to include credit exposures related to derivatives, repurchase agreements and securities lending arrangements and an increase in the amount of time for which collateral requirements regarding covered transactions must be satisfied.
Federal law also limits a bank’s authority to extend credit to its directors, executive officers and 10%principal shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. In addition, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital. TriState Capital Bank maintains a policy that does not permit loans to employees, including executive officers.
FDIC Deposit Insurance Assessments
FDIC-insured banks are required to pay deposit insurance assessments to the FDIC, which fund the Deposit Insurance Fund (“DIF”). TheDIF. An institution’s assessment rate for institutions with less than $10 billion in assets is now determined by the FDIC’s financial ratios method, which takes into account seven financial ratios for each institutiona number of factors and metrics, including the weighted average of the institution’s CAMELS composite ratings.rating, and metrics to measure the institution’s ability to withstand asset-related stress and funding-related stress, and has different calculation methodologies for banks that are considered “large banks” for regulator examination purposes, which the Bank began implementing in the fourth quarter of 2020. The rate also may be adjusted by the institution’s long-term unsecured debt and its brokered deposits. In addition, the FDIC can impose special assessments in certain instances. The FDIC has in past years raised assessment rates to increase funding for the Deposit Insurance Fund.DIF.
All assessment rates may change based on the reserve ratio of the DIF. The Dodd-Frank Act changed the way that deposit insurance premiums are calculated, increased the minimum designated reserve ratio of the Deposit Insurance FundDIF from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminated the upper limit for the reserve ratio designated by the FDIC each year, and eliminates the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. AsSince the outbreak of the COVID-19 pandemic, the amount of total estimated insured deposits has grown very rapidly while the funds in the DIF have grown at a normal rate, causing the DIF reserve ratio to fall below the statutory minimum of 1.35%. The FDIC adopted a restoration plan on September 15, 2020, to restore the DIF reserve ratio to at least 1.35% by September 30, 2019,2028. Under the DIF’srestoration plan, the FDIC will continue to closely monitor the factors that affect the DIF reserve ratio was 1.41%. Rates may be reduced if this ratio rises above 2.0% or 2.5%. Weand maintain its current schedule of assessment rates. Any future changes in insurance premiums could have an adverse effect on the operating expenses and results of operations and we cannot predict how the reserve ratio may changewhat insurance assessment rates will be in the future.
Further increases in assessment rates or special assessments may occur in the future, especially if there are significant additional financial institution failures. Continued action by the FDIC to replenish and increase the Deposit Insurance Fund,DIF as well as the changes contained in the Dodd-Frank Act, or changes in the assessment calculation methodologies, may result in higher assessment rates, which could reduce our profitability or otherwise negatively impact our operations, financial condition or future prospects.
Branching and Interstate Banking
Under Pennsylvania law, TriState Capital Bank is permitted to establish additional branch offices within Pennsylvania, subject to the approval of the Pennsylvania Department of BankingPDBS and Securities.the FDIC. The Bank is also permitted to establish additional offices outside of Pennsylvania, subject to prior regulatory approval.
TriState Capital Bank operates four representative offices, with one each located in the states of Pennsylvania, Ohio, New Jersey and New York. Because our representative offices are not branches for purposes of applicable state law and FDIC regulations, there are restrictions on the types of activities we may conduct through our representative offices. Relationship managers in our representative offices may solicit loan and deposit products and services in their markets and act as liaisons to our headquarters in Pittsburgh, Pennsylvania.
However, consistent with our centralized operations and regulatory requirements, we do not disburse or transmit funds, accept loan repayments or accept or contract for deposits or deposit-type liabilities through our representative offices.
Community Reinvestment Act
TriState Capital Bank has a responsibility under the Community Reinvestment Act (“CRA”),CRA, and related FDIC regulations to help meet the credit needs of its communities, including low-income and moderate-income borrowers. In connection with its examinationsupervision of TriState Capital Bank, the FDIC is required to assess the Bank’s record of compliance with the CRA. The Bank’s failure to comply with the provisionsmaintain a satisfactory record of the CRA performance could result in denial of certain corporate applications, such as for branches or mergers, or in restrictions on its or our activities, including additional financial activities if we elect to be treated as a financial holding company.
CRA regulations provide that a financial institution may elect to have its CRA performance evaluated under the strategic plan option. The strategic plan enables the institution to structure its CRA goals and objectives to address the needs of its community consistent with its business strategy, operational focus, capacity and constraints. In January 2018, theThe Bank has operated under FDIC approved our updatedCRA Strategic Plans since January 1, 2013 and has maintained an Outstanding CRA rating since its first examination under a strategic plan in 2015.
The federal banking agencies have indicated their intent to coverengage in an interagency rulemaking process to modernize the years 2018 through 2020. TriState Capital Bank received an “outstanding” CRA rating in its most recent CRA examination, which covered an approximately three-year period ending on September 10, 2018.regulatory framework.
Financial Privacy
The federal banking and securities regulators have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer information is transmitted through financial services companies and
conveyed to outside vendors. In addition, consumers may also prevent disclosure of certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer credit reports and asset and income information from applications. Consumers also have the option to direct banks and other financial institutions not to share information about transactions and experiences with affiliated companies for the purpose of marketing products or services. In addition to applicable federal privacy regulations, TriState Capital Bank is subject to certain state privacy laws.
Anti-Money Laundering and OFAC
Under federal law, including the Bank Secrecy Act (“BSA”) and the USA PATRIOT Act of 2001, certain financial institutions must maintain anti-money laundering programs that are reasonably designed to prevent and detect money laundering and terrorist financing, including enhanced scrutiny of account relationships, and to comply with the recordkeeping and reporting requirements of the Bank Secrecy Act (the “BSA”)BSA including the requirement to report suspicious activities. The programs are required to include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and customer identification in their dealings with foreign financial institutions and foreign customers. Law enforcement authorities also have been granted increased access to financial information maintained by financial institutions to investigate suspected money laundering or terrorist financing. The United States Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) and the federal banking agencies continue to issue regulations and guidance with respect to the application and requirements of the BSA and their expectations for effective anti-money laundering programs. The Anti-Money Laundering Act of 2020, which became law in January 2021, made a number of changes to anti-money laundering laws, including increasing penalties for anti-money laundering violations.
The United States Department of Treasury’s Office of Foreign Assets Control (“OFAC”) administers laws and Executive Orders that prohibit U.S. entities from engaging in transactions with certain prohibited parties. OFAC publishes lists of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. Generally, if a bank identifies a transaction, account or wire transfer relating to a person or entity on an OFAC list, it must freeze the account or block the transaction, file a suspicious activity report and notify the appropriate authorities.
Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution’s compliance in connection with the regulatory review of applications, including applications for bank mergers and acquisitions. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing and comply with OFAC sanctions, or to comply with relevant laws and regulations, could have serious legal, reputational and financial consequences for the institution.
Safety and Soundness Standards
Federal bank regulatory agencies have adopted guidelines that establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. Additionally, the agencies have adopted regulations that provide the authority to order an institution that has been given
notice by an agency that it is not satisfying any of these safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the Federal Deposit Insurance Act. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
In addition to federal consequences for failure to satisfy applicable safety and soundness standards, the Pennsylvania Department of Banking and Securities Code grants the Pennsylvania Department of Banking and SecuritiesPDBS the authority to impose a civil money penalty of up to $25,000 per violation against a Pennsylvania financial institution, or any of its officers, employees, directors, or trustees for: (1) violations of any law or department order; (2) engaging in any unsafe or unsound practice; or (3) breaches of a fiduciary duty in conducting the institution’s business.
Bank holding companies are also prohibited from engaging in unsound banking practices. For example, the Federal Reserve’s Regulation Y requires a holding company to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believesconcludes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. As another example, a bank holding company is forbidden from impairing its subsidiary bank’s soundness by causing it to make funds available to non-banking subsidiaries or their customers if the Federal Reserve believeddeems it not prudent to do so. The Federal Reserve has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries that present unsafe and unsound banking practices or that constitute violations of laws or regulations.
In addition to complying with the agencies’ written regulations, standards and guidelines, banks and bank holding companies are regularly examined for safety and soundness by their appropriate federal and state regulators. These examinations are extensive and cover many items, including loan concentrations. At the end of an examination, a bank is assigned ratings for capital, assets, management, earnings, liquidity, and sensitivity to market risk as well as on overall composite rating for these elements, commonly referred to as the CAMELS rating. The Federal Reserve makes comparable findings for bank holding companies. These ratings and the reports on which they are based are highly confidential and not available to the public.
Consumer Laws and Regulations
TriState Capital Bank is subject to numerous laws and regulations intended to protect consumers in transactions with the Bank. These laws include, among others, laws regarding unfair, deceptive andor abusive acts and practices, usury laws, and other federal consumer protection statutes. These federal laws include the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act of 1974, the S.A.F.E. Mortgage Licensing Act of 2008, the Truth in Lending Act and the Truth in Savings Act, among others. Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those enacted under federal law. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions deal with customers when taking deposits, making loans and conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability.
In addition, the Dodd-Frank Act created a new independent Consumer Finance Protection Bureau thatCFPB has broad authority to regulate and supervise retail financial services activities of banks with greater than $10 billion in total consolidated assets and various non-bank providers. The Consumer Financial Protection BureauCFPB has authority to promulgate regulations, issue orders, guidance and policy statements, conduct examinations and bring enforcement actions with regard to consumer financial products and services. In general, banks with assets of $10 billion or less, such asBecause TriState Capital Bank will continuehas surpassed $10 billion in total consolidated assets for four consecutive quarters, the CFPB examines TriState Capital Bank for compliance with federal consumer protection laws and regulations. CFPB rulemaking with respect to be examined forthese federal consumer compliance by their primary federal bank regulator. Nevertheless, positions established byprotection laws also has the Consumer Financial Protection Bureau may become applicablepotential to us, and the bureau has back-up enforcement authority.have a significant impact on our operations.
Effect of Governmental Monetary Policies
Our commercial banking business and investment management business are affected not only by general economic conditions but also by U.S. fiscal policy and the monetary policies of the Federal Reserve. Some of the instruments of monetary policy available to the Federal Reserve include changes in the discount rate on member bank borrowings, the fluctuating availability of borrowings at the “discount window,” open market operations, the imposition of and changes in reserve requirements against member banks’ deposits and assets of foreign branches, the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates, and asset purchase programs. These policies influence to a significant extent the overall growth of bank loans, investments, and deposits, as well as the performance of our investment management products and services and the interest rates charged on loans or paid on deposits. We cannot predict the nature of future fiscal and monetary policies or the effect of these policies on our operations and activities, financial condition, results of operations, growth plans or future prospects.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) implemented a broad range of corporate governance, accounting and reporting measures for companies that have securities registered under the Exchange Act, including publicly-held bank holding companies. Specifically, the Sarbanes-Oxley Act and the various regulations promulgated thereunder, established, among other things: (i) requirements for audit committees, including independence, expertise, and responsibilities; (ii) responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) the forfeiture of bonuses or other incentive-based compensation and profits from the sale of the reporting company’s securities by the Chief Executive Officer and Chief Financial Officer in the twelve-month12-month period following the initial publication of any financial statements that later require restatement; (iv) the creation of an independent accounting oversight board; (v) standards for auditors and regulation of audits, including independence provisions that restrict non-audit services that accountants may provide to their audit clients; (vi) disclosure and reporting obligations for the reporting company and their directors and executive officers, including accelerated reporting of stock transactions and a prohibition on trading during pension blackout periods; (vii) a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions on non-preferential terms and in compliance with other bank regulatory requirements; and (viii) a range of civil and criminal penalties for fraud and other violations of the securities laws.
Asset Management
The asset management industry is subject to extensive federal, state and international laws and regulations promulgated by various governments, securities exchanges, central banks and regulatory bodies that are intended to benefit and protect investors in products. In addition, our distribution activities also may be subject to regulation by U.S. federal agencies, self-regulatory organizations and
securities commissions in those jurisdictions in which we conduct business. Due to the extensive laws and regulations to which we are subject, we must devote substantial time, expense and effort to remaining vigilant about, and addressing, legal and regulatory compliance matters.
Existing U.S. Regulation
Chartwell is a registered investment adviser regulated by the SEC. Chartwell is also currently subject to regulation by the Department of Labor (the “DOL”)DOL and other government agencies and regulatory bodies. The Investment Advisers Act of 1940 imposes numerous obligations on registered investment advisers such as Chartwell, including recordkeeping, operational and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The Investment Company Act of 1940 imposes stringent governance, compliance, operational, disclosure and related obligations on registered investment companies and their investment advisers and distributors. The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act of 1940 and the Investment Company Act of 1940, ranging from fines and censure to termination of an investment adviser’s registration. Investment advisers also are subject to certain state securities laws and regulations. Non-compliance with the Investment Advisers Act of 1940, the Investment Company Act of 1940 or other federal and state securities laws and regulations could result in investigations, sanctions, disgorgement, fines and reputational damage.
Chartwell’s trading and investment activities for client accounts are also regulated under the Exchange Act, as well asand implementing regulations, and the rules of various U.S. exchanges and self-regulatory organizations, includingorganizations. These laws, governingregulations, and rules govern trading on inside information and, market manipulation, and include a broad number of technical requirements and market regulation policies in the United States.policies.
CTSC Securities, our broker/dealerbroker-dealer subsidiary, is subject to regulations that cover all aspects of the securities business. Much of the regulation of broker/dealersbroker-dealers has been delegated to self-regulatory organizations, principally FINRA. These self-regulatory organizations have adopted extensive regulatory requirements relating to matters such as sales practices, compensation and disclosure, and conduct periodic examinations of member broker/dealersbroker-dealers in accordance with rules they have adopted and amended from time to time, subject to approval by the SEC. The SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker/dealer,broker-dealer, its officers or registered employees. These administrative proceedings, whether or not resulting in adverse findings, can require substantial expenditures and can have an adverse impact on the reputation or business of a broker/dealer.broker-dealer. The principal purpose of regulation and discipline of broker/dealersbroker-dealers is the protection of clients and the securities markets, rather than protection of creditors and stockholders of the regulated entity.
There has been substantial regulatory and legislative activity at federal and state levels regarding standards of care for financial services firms, related to both retirement and taxable accounts. This includesIn December 2020, the DOL adoption offinalized a new fiduciary regulation that becomes fully effective in February 2022.A comparable rule that was ultimately struck downissued by the Fifth Circuit Court of Appeals and the SEC’s proposal of a package of related rules and interpretationsSEC, popularly known as Regulation BI, for best interest, took effect in April 2018. The ultimate action taken byJune 2020.Further actions that the DOL, SEC or other applicable regulatory or legislative bodybodies take to alter duties to clients may impact our business activities and increase our costs.
In addition, Chartwell also may be subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”),ERISA and related regulations, particularly insofar as they actit acts as a “fiduciary” or “investment manager” under ERISA with respect to benefit plan clients.
ERISA imposes duties on persons who are fiduciaries of ERISA plan clients, and ERISA and related provisions of the Internal Revenue Code prohibit certain transactions involving the assets of ERISA plan and Individual Retirement Account (“IRA”) clients and certain transactions by the fiduciaries (and several other related parties) to such clients. In April 2016, the Department of Labor, which administers ERISA, issued a final fiduciary rule expanding the circumstances in which advice furnished to retirement investors will be treated as fiduciary in nature as well as related prohibited transaction class exemptions.
Net Capital Requirements
CTSC Securities is a non-clearing broker/dealerbroker-dealer subsidiary with a primary business of wholesaling and marketing the proprietary investment products and services provided by Chartwell. CTSC Securities is subject to net capital rules imposed by various federal, state, and foreign authorities that mandate that it maintain certain levels of capital.
Impact of Current Laws and Regulations
The cumulative effect of these laws and regulations while providing certain benefits, addadds significantly to the cost of our operations and may reduce revenue opportunities, and thus havehas a negative impact on our profitability. There has also been a notable expansion in recent years of financial service providers that are not subject to the examination, oversight, and other rules and regulations to which we are subject. ThoseIn this regard, these providers because they are not so highly regulated, may have a competitive advantage over us and may continue to draw large amounts of funds away fromsuccessfully compete against traditional banking institutions, with a continuing adverse effect on the banking industry in general.
Future Legislation and Regulatory Reform
New statutes, regulations and statutespolicies are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating in the United States. We cannot predict whether or in what form any proposedstatute, regulation or statutepolicy will be proposed or adopted or the extent to which our business may be affected by any new regulationstatue or statute.regulation. Future legislation and policies, and the effects of that legislation and those policies, may have a significant influence on our operations and activities, financial condition, results of operations, growth plans or future prospects and the overall growth and distribution of loans, investments and deposits. Such legislation and policies have had a significant effect on the operations and activities, financial condition, results of operations, growth plans and future prospects of commercial banks and investment management businesses in the past and are expected to continue.continue having such effects.
Available Information
All of our reports filed electronically with the United States Securities and Exchange Commission (“SEC”),SEC, including this Annual Report on Form 10-K for the fiscal year ended December 31, 2019, our Registration Statements on Forms S-1 and S-3, quarterly reports2021, Quarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K and proxy statements, as well as any amendments to those reports are accessible at no cost on our website at www.tristatecapitalbank.com under “Who We Are,” “Investor Relations,” “SEC Documents”. These filings are also accessible on the SEC’s website at www.sec.gov. You may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. There are risks, many beyond our control, that could cause our financial condition or results of operations to differ materially from management’s expectations. Some of the risks that may affect us are described below. If any of the following risks, singly or together with one or more other factors, actually occur, our business, financial condition, results of operations and future prospects could be materially and adversely affected. These risks are not the only risks that we may face. Our business, financial condition, results of operations and future prospects could also be affected by additional risks that apply to all companies operating in the United States, as well as other risks that are not currently known to us or that we currently consider to be immaterial to our business, financial condition, results of operations and growth prospects. Further, some statements contained herein constitute forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” on page 4. The risks described below should also be considered together with the other information included in this Annual Report on Form 10-K, including the disclosures in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included in “Item 8. Financial Statements and Supplementary Data”.
Risk Factor Summary
The risks and uncertainties facing our company include, but are not limited to, the following:
Risks Relating to our Business
•COVID-19 and mitigation efforts may materially and adversely affect our business, financial condition and results of operations.
•We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
Our business depends on our ability to successfully measure and manage credit risk and maintaining disciplined and prudent underwriting standards. The business of lending is inherently risky, and includes the risk that the principal or interest on any loan will not be repaid timely or at all or that the value of any collateral supporting the loan will be insufficient to cover our outstanding exposure. In addition, we are exposed to risks with respect to the period of time over which loans may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual loans and borrowers. The creditworthiness of a borrower is affected by many factors, including local market conditions and general economic conditions, and many of our loans are made to middle-market businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers.
Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit approval, review and administrative practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of our loan portfolio, which may result in loan defaults, foreclosures and additional charge-offs, and may require us to significantly increase our allowance for loan and lease losses (ALL), each of which could adversely affect our net income. In addition, the weakening of our underwriting standards for any reason, such as to seek higher yielding loans, or a lack of discipline or diligence by our employees, may result in loan defaults, foreclosures and additional charge-offs or an increase in ALL, any of which could adversely affect our net income. As a result, our inability to successfully manage credit risk and our underwriting standards could have a material adverse effect on our business, financial condition, results of operations and future prospects.
•Our allowance for loancredit losses on loans and lease lossesleases may prove to be insufficient to absorb our loan losses, which could have a material adverse effect on our financial condition and results of operations.insufficient.
Our experience in the banking industry indicates that some portion of our loans will not be fully repaid in a timely manner or at all. Accordingly, we maintain an ALL that represents management’s judgment of probable losses in our loan portfolio. The level of the allowance reflects management’s continuing evaluation of historical losses in our portfolio and general economic conditions, among other factors. The determination of the ALL is inherently subjective and requires us to make significant assumptions which may change or be incorrect. Inaccurate assumptions, deterioration of economic conditions, new information, the identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our ALL. In addition, our regulators, as an integral part of their periodic examination, review the adequacy of our ALL and may direct us to make additions to it. Further, if actual charge-offs in future periods exceed the amounts allocated to the ALL, we may need additional provision for loan losses to restore the adequacy of our ALL. While we believe that our ALL was adequate at December 31, 2019, there is no assurance that it will be sufficient to cover future loan losses, especially if there is a significant deterioration in economic conditions. If we are required to materially increase our level of ALL for any reason, such increase could materially decrease our net income and could have a material adverse effect on our business, financial condition, results of operations and future prospects.
A material portion of our loan portfolio is comprised of commercial loans secured by general business assets, the deterioration in value of which could expose us to credit losses.
Historically, a material portion of our loans held-for-investment have been comprised of commercial loans to businesses collateralized by business assets including, among other things, accounts receivable, inventory, equipment, cash value life insurance and owner-occupied real estate. These commercial loans are typically larger in amount than loans to individuals and, therefore, have the potential for larger losses on a single loan basis. Additionally, the repayment of commercial loans is subject to the ongoing business operations of the
borrower. The collateral securing such loans generally includes movable property, such as equipment and inventory, which may decline in value more rapidly than we anticipate, exposing us to increased credit risk. In addition, a portion of our customer base, may be exposed to volatile businesses or industries which are sensitive to commodity prices or market fluctuations, such as energy prices. Accordingly, negative changes in commodity prices, real estate values and liquidity could impair the value of the collateral securing these loans.
Historically, losses in our commercial credits have been higher than losses in other segments of our loan portfolio. Significant adverse changes in various industries could cause rapid declines in values and collectability resulting in inadequate collateral coverage that may expose us to credit losses. An increase in specific reserves and charge-offs related to our commercial and industrial loan portfolio could have a material adverse effect on our business, financial condition, results of operations and future prospects. As of December 31, 2019, we had commercial and industrial loans outstanding of $1.09 billion, or 16.5% of our loans held-for-investment, and owner-occupied commercial real estate loans outstanding of $210.7 million, or 3.2% of our loans held-for-investment.
•Our business may be adversely affected by conditions in the financial markets and economic conditions generally, and in the states in which we operate in particular.
If the overall economic climate in the U.S., generally, and our market areas, specifically, experiences material disruption, our borrowers may experience difficulties in repaying their loans, the collateral we hold may decrease in value or become illiquid, and the level of non-performing loans, charge-offs and delinquencies could rise and require significant additional provisions for loan losses.
Many of our customers are commercial enterprises whose business and financial condition are sensitive tocompetition, changes in the general economy of the United States. Our businesses and operations are, in turn, sensitive to these same general economic conditions. If the United States experiences a deterioration or other significant volatility in economic conditions our growth and profitability could be constrained. In addition, any future downgrade of the credit rating of the United States, failures to raise the U.S. statutory debt limit, or deterioration in the fiscal outlook of the United States federal government, could, among other things, materially adversely affect the market value of the U.S. and other government and governmental agency securities that we may hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable terms. In addition, any resulting decline in the financial markets could affect the value of marketable securities that serve as collateral for our loans and the ability of our customers to repay loans. In addition, economic conditions in foreign countries, including uncertainty over the stability of the euro currency and the withdrawal of the United Kingdom from the European Union, as well as concerns regarding terrorism and potential hostilities with various countries, could affect the stability of global financial markets, which could negatively affect U.S. economic conditions. Any of these developments could have a material adverse effect on our business, financial condition and future prospects.
Our commercial banking operations are concentrated in Pennsylvania, New Jersey, New York, and Ohio. As a result, our business is affected by changes in the economic conditions of those states and the regions of which they are a part. Our success depends to a significant extent upon the business activity, population, income levels, deposits and real estate activity in these markets, and we are vulnerable to a downturn in the local economies in these areas. For example, low energy prices have adversely impacted and may continue to adversely impact the economies of Western Pennsylvania and Northeastern Ohio, two of our significant commercial banking markets, which have industries focused on shale gas exploration and shale gas production. Although we do not make loans to companies directly engaged in oil and gas production, adverse conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans, affect the value of collateral underlying loans, impact our ability to attract deposits and generally affect our business and financial condition. Because of our geographic concentration, we may be less able than other financial institutions to diversify our credit risks across multiple markets.
Weak economic conditions can be characterized by deflation, fluctuations in debt and equity capital markets, lack of liquidity and depressed prices in the secondary market for loans, increased delinquencies on loans, real estate price declines, and lower commercial activity. All of these factors can be detrimental to the business and/or financial position of our customers and their ability to repay loans as well as the value of the collateral supporting our loans which could adversely impact demand for our credit products as well as our credit quality. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our non-owner-occupied commercial real estate loan portfolio exposes us to credit risks that may be greater than the risks related to other types of loans.
Our loan portfolio includes non-owner-occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties, as well as real estate construction and development loans. As of December 31, 2019, we had outstanding loans secured by non-owner-occupied commercial properties of $1.59 billion, or 24.1%, of our loans held-for-investment. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the secured property. These loans typically expose a lender to greater credit risk than loans secured by other types of collateral due to a number of factors, including the concentration of principal in a limited number of loans and borrowers, the difficulty of liquidating the collateral securing these loans and the relatively larger loan balances compared to single borrowers. In addition, the amount we may realize after a default is dependent
upon factors outside of our control, including, but not limited to, economic conditions, environmental cleanup liabilities, assessments, interest rates, real estate tax rates, operating expenses of the mortgaged property, occupancy rates, zoning laws, regulatory rules, and natural disasters. Accordingly, charge-offs on non-owner-occupied commercial real estate loans may be larger on a per loan basis than those incurred with residential or consumer loan portfolios.market conditions.
An unexpected deterioration in the credit quality of our non-owner-occupied commercial real estate loan portfolio or if only a few of our largest borrowers become unable to repay their loan obligations, could result in us increasing our ALL, which would reduce our profitability and have a material adverse effect on our business, financial condition and future prospects.
•Our private banking business could be negatively impacted by volatility or a prolonged downturn in the securities markets.
Marketable-securities-backed private banking loans represent a material portion of our business and are the fastest growing portion of our loan portfolio. As of December 31, 2019, we had outstanding marketable-securities-backed private banking loans of $3.60 billion, or 54.7% of our loans held-for-investment. We expect to continue to increase the percentage of our loan portfolio represented by marketable-securities-backed private banking loans in the future. •A sharp or prolonged decline in the value of the collateral that secures these loans could materially adversely affect the growth prospects and loan performance in this segment of our loan portfolio and, as a result, could materially adversely affect our business, financial condition, results of operations and future prospects.
A downturn in the real estate market especially in our primary markets,downturn could result in losses and adversely affect our profitability.
A material portion of our loans are secured by real estate as a primary component of collateral. The real estate collateral provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value. A general decline in real estate values, particularly in our primary markets, could impair the value of our collateral and our ability to sell the collateral upon any foreclosure, which would likely require us to increase our ALL. In addition, we could be subject to costly environmental liabilities with respect to foreclosed properties. In the event of a default with respect to any of these loans, the amount we receive upon sale of the collateral may be insufficient to recover the outstanding principal and interest on the loan. If we are required to re-value the collateral securing a loan to satisfy the debt during a period of reduced real estate values or to increase our ALL, our profitability could be adversely affected, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
•Our lending limit may restrict our growth and prevent us from effectively implementing our business strategy.
We are limited in the amount we can loan to a single borrower by the amount•The loss of our capital. Generally, under current law, we may lend up to15.0% of our unimpaired capital and surplus to any one borrower. We have established an internal lending limit that is significantly lower than our legal lending limit and, based upon our current capital levels, the amount we may lend is significantly less than that of many of our competitors and may discourage potential borrowers who have credit needs in excess of our lending limit from doing business with us. We accommodate larger loans by selling participations in those loans to other financial institutions, but this strategy may not always be available. If we are unable to compete effectively for loans, we may not be able to effectively implement our business strategy, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We rely heavily on our executive management team members and other key employees and the loss of the services of any of these individuals could adversely impact our business and reputation.
Our success depends in large part on the performance of our key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees. Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to execute our business plan may be lengthy. We currently do not have any employment or non-compete agreements with any of our executive officers or key employees other than certain non-solicitation and restrictive agreements from certain key employees in connection with our investment management business. We may not be successful in retaining our key employees, and the loss of one or more of our key personnel could have a material adverse effect on our business because of their skills, knowledge of our markets, relationships, industry experience and the difficulty of finding qualified replacement personnel. If the services of any of our key personnel become unavailable for any reason, we may not be able to hire qualified persons on terms acceptable to us, or at all, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our business has grown rapidly, and we may not be able to maintain our historical rate of growth.
Our business has grown rapidly. Although rapid business growth can be a favorable business condition, financial institutions that grow rapidly can experience significant difficulties as a result of rapid growth. Successful growth in our banking business requires that we follow adequate loan underwriting standards, balance loan and deposit growth while managing interest rate risk and our net interest margin, maintain adequate capital at all times, produce investment performance results competitive with our peers and benchmarks, further diversify our revenue sources, meet the expectations of our clients, and hire and retain qualified employees.
We may not be able to sustain our historical rate of growth or continue to grow our business at all. Because of factors such as the uncertainty in the general economy and the recent government intervention in the credit markets, it may be difficult for us to repeat our historic earnings growth as we continue to expand. Failure to grow or failure to manage our growth effectively could have a material adverse effect on our business and future prospects, and could adversely affect the implementation our business strategy.
Our utilization of brokered deposits could adversely affect our liquidity and results of operations.
Since our inception, we have utilized both brokered and non-brokered deposits as a source of funds to support our growing loan demand and other liquidity needs. As a bank regulatory supervisory matter, reliance upon brokered deposits as a significant source of funding is discouraged. Brokered deposits may not be as stable as other types of deposits and, in the future, those depositors may not renew their deposits, or we may have to pay a higher interest rate to keep those deposits or replace them with other deposits or with funds from other sources. Additionally, if TriState Capital Bank ceases to be categorized as “well capitalized” for bank regulatory purposes, it will not be able to accept, renew or roll over brokered deposits without a waiver from the Federal Deposit Insurance Corporation, or FDIC. Our inability to maintain or replace these brokered deposits as they mature could adversely affect our liquidity and results of operations. Further, paying higher interest rates to maintain or replace these deposits could adversely affect our net interest margin, our net income, and financial condition.
•Liquidity risk could impair our ability to fund operations and meet our obligations as they become due.
Our ability to implement our business strategy will depend on our liquidity and ability to obtain funding for loan originations, working capital and other general purposes. Our preferred source of funds for our banking business consists of customer deposits; however, we rely on other sources such as brokered deposits and Federal Home Loan Bank or “FHLB” advances. In addition to our competition with other banks for deposits, such account and deposit balances can decrease when customers perceive alternative investments as providing a better risk/return trade off. •If customers move money out of bank deposits and into other investments, we may increase our utilization of brokered deposits, FHLB advances and other wholesale funding sources necessary to fund desired growth levels.
We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities and other sources of liquidity, respectively, to ensure that we have adequate liquidity to fund our banking operations. Any decline in available funding could adversely impact our ability to fund new loan balances, invest in securities, meet our expenses or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse effect on our liquidity, financial condition, results of operations and future prospects.
We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, we may not be able to maintain regulatory compliance.
We face significant capital and other regulatory requirements as a financial institution. We may need•Reductions to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the financing of acquisitions. In addition, we, on a consolidated basis, and Tristate Capital Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity required by regulators. Regulatory capital requirements could increase from current levels or our regulators could ask us to maintain capital levels that are in excess of such requirements, which could require us to raise additional capital or reduce our operations. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, as well as on our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, we could be subject to enforcement actions or other regulatory consequences, which could have an adverse effect on our business, financial condition, results of operations and future prospects.
Any future reductions in our credit ratings may increase our funding costs or impair our ability to effectively compete for business.
Credit ratings or changes in ratings policies and practices are subject•A transition away from LIBOR to change at any time, and it is possible that any rating agency will take action to downgrade us in the future. We have used and may in the future use debt as a funding source. One or more rating agencies regularly evaluate us and their ratings of our long-term debt are based on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix and level and quality of earnings, and we may not be able to maintain our current credit ratings.
Any future decrease in our credit ratings by one or more rating agencies could impact our access to the capital markets or short-term funding or increase our financing costs, and thereby adversely affect our financial condition and liquidity. In the event of a ratings downgrade, our clients and counterparties may terminate their relationships with us, be less likely to engage in transactions with us, or only engage in transactions with us on terms that are less favorable. We cannot predict whether client relationships or opportunities for
future relationships could be adversely affected by clients who choose to do business with a higher-rated institution. The inability to maintain our credit ratings have a material adverse effect on our business, financial condition, results of operations or future prospects.
Changes inan alternative reference interest ratesrate could negatively impactaffect the profitability of our banking business.
Our profitability depends to a significant extent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and investment securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. These rates are highly sensitive to many factors beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, in particular the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities and the average duration of our assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore net income, could be adversely affected.
Our loans are predominantly variable rate loans, with the majority being based on the London Interbank Offered Rate, or LIBOR. A decline in interest rates could cause the spread between our loan yields and our deposit rates paid to compress our net interest margin and our net income could be adversely affected. Further, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our business, financial condition, results of operations and future prospects.
In addition, an increase in interest rates could also have a negative impact on our results of operations by reducing the market value of our investment securities and the ability of borrowers to repay their current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also necessitate increases to our ALL. Each of these factors could have a material adverse effect on our business, results of operations, financial condition and future prospects.
The phasing out and ultimate replacement of LIBOR with an alternative reference rate and changes in the manner of calculating other reference rates may adversely impact the value of loans and other financial instruments we hold that are linked to LIBOR or other reference rates in ways that are difficult to predict and could adversely impact our financial condition.
In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021, and for LIBOR to be replaced with an alternative reference rate that will be calculated in a different manner. The Company’s commercial and consumer businesses issue, trade and hold various products that are currently indexed to LIBOR. As of December 31, 2019, the Company had a material amount of loans, investment securities, FHLB advances and notional value of derivatives indexed to LIBOR that will mature after 2021. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based instruments or arrangements. One of the major identified risks is inadequate fallback language in the various instruments’ contracts that may result in issues establishing the alternative index and adjusting the margin as applicable. The Company has (1) established a cross-functional team to identify, assess and monitor risks associated with the transition of LIBOR and other benchmark rates; (2) developed an inventory of affected products; and (3) implemented fallback contractual language where no fallback language previously existed and developed a plan to assess the appropriateness of existing fallback contractual language in legacy loans.
Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans and securities. If not sufficiently planned for, the discontinuation of LIBOR could result in financial,present operational legal, reputational or compliance risks to financial markets and institutions, including to the Company. In addition, we may incur significant expenses in effecting the transition, and may be subject to disputes or litigation with customers over the appropriateness or comparability to LIBOR of the substitute indices, which could have a material adverse effect on our financial condition or results of operations.
Our investment management business may be negatively impacted by competition, changes in economic and market conditions, changes in interest rates and investment performance.
A material portion of our earnings is derived from Chartwell, our investment management business. Chartwell may be negatively impacted by competition, changes in economic and market conditions, changes in interest rates and investment performance. The investment management business is intensely competitive. There are over 1,000 firms which we consider to be primary competitors. In addition to competition from other institutional investment management firms, Chartwell competes with passive index funds, ETFs and investment alternatives such as hedge funds. Many competitors offer similar products to those offered by Chartwell and its performance of competitors’ products could lead to a loss of investment in similar Chartwell products, regardless of the performance of such products.
Our investment management contracts are typically terminable in nature and our ability to successfully attract and retain investment management clients will depend on, among other things, our ability to compete with our competitors’ investment products, our investment performance, fees, client services, marketing and distribution capabilities. Most of our clients may withdraw funds from under our management at their discretion at any time for any reason, including as a result of competition or poor performance of our products. If we cannot effectively attract and retain customers, our business, financial condition, results of operations and future prospects may be adversely affected.
Additionally, it is possible our management fees could be reduced for a variety of reasons, including, among other things, pressure resulting from competition or regulatory changes, and we may from time to time reduce or waive investment management fees, or limit total expenses, on certain products or services offered for particular time periods to manage fund expenses, to help retain or increase managed assets or for other reasons. If our revenues decline without a commensurate reduction in our expenses, our net income from our investment management business would be reduced, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We cannot guaranty that our investment performance will be favorable in the future. The financial markets and businesses operating in the securities industry are highly volatile and affected by, among other factors, economic conditions and trends in business, all of which are beyond our control. Declines in the financial markets, changes in interest rates or a lack of sustained growth may result in declines in the performance of our investment management business and the assets under management. Because the revenues of our investment management business are, to a large extent, fees based on assets under management, such declines could adversely affect our business.
We face significant competitive pressures that could impair our growth, decrease our profitability or reduce our market share.
We operate in the highly competitive financial services industry and face significant competition for customers from bank and non-bank competitors, particularly regional and nationwide institutions, in originating loans, attracting deposits, providing financial management products and services, and providing other financial services. Our competitors are generally larger and may have significantly more resources, greater name recognition, and more extensive and established branch networks or geographic footprints. Because of their scale, many of these competitors can be more aggressive than we can on loan, deposit and financial services pricing. In addition, many of our non-bank and non-institutional financial management competitors have fewer regulatory constraints and may have lower cost structures. We expect competition to continue to intensifyproblems due to financial institution consolidation; legislative, regulatory and technological changes; and the emergence of alternative banking sources and investment management products and services. Additionally, technology has lowered barriers to entry.market disruption.
Our ability to compete successfully will depend on a number of factors, including, our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound business practices; the scope, relevance, performance and pricing of products and services that we offer; customer satisfaction with our products and services; industry and general economic trends; and our ability to keep pace with technological advances and to invest in new technology. Increased competition could require us to increase the rates we pay on deposits or lower the rates we offer on loans or the fees we charge on banking or investment management products and services, all of which could reduce our profitability. Our failure to compete effectively in our primary markets could cause us to lose market share and could have a material adverse effect on our business, financial condition, results of operations and future prospects.
•Our ability to maintain our reputation is critical to the success of our business.
Our business plan emphasizes building and maintaining strong relationships with our clients. We have benefited from strong relationships with and among our customers, and also from our relationships with financial intermediaries. As a result, our reputation is one of the most valuable components of our business. If our reputation is negatively affected by the actions of our employees or otherwise, our existing relationships may be damaged. We could lose some of our existing customers, including groups of large customers who have relationships with each other, and we may not be successful in attracting new customers from competing financial institutions. Any of these developments could have a material adverse effect on our business, financial condition, results of operations and future prospects.
The fair value of our investment securities can fluctuate due to factors outside of our control.
Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect to the securities, defaults by the issuer or with respect to the underlying securities, changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized or unrealized losses in future periods, which could have a material adverse effect on our business, financial condition, results of operations and future prospects. The process for determining whether impairment of a security is other-than-temporary often requires complex, subjective judgments about whether there has been a significant deterioration in the financial condition of the issuer, whether management has the intent or ability to hold a
security for a period of time sufficient to allow for any anticipated recovery in fair value, the future financial performance and liquidity of the issuer and any collateral underlying the security, and other relevant factors which may be inaccurate.
•Our financial results depend on management’s selection of accounting methods and certain assumptions and estimates.
Our financial condition and results of operations are based on our consolidated financial statements, which are prepared in accordance with generally accepted accounting principles in the United States, or GAAP and with general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires•Derivative transactions expose us to make estimates and assumptions that have a possibility of producing results that could be materially different than originally reported.
For example, the Bank adopted new guidance for estimating credit losses on loans receivable, held-to-maturity debt securities, and unfunded loan commitments effective January 1, 2020. The current expected credit losses, or CECL, model significantly changed how entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses that occur over the life of the financial asset. This requires reserves over the life of the loan rather than the loss emergence period used in the prior model. The CECL guidance requires the implementation of new modeling to quantify this estimate by using principles of not only relevant historical experience and current conditions, but also reasonable and supportable forecasts of future events and circumstances, thus incorporating a broad range of estimates and assumptions in developing credit loss estimates, which could result in significant changes to both the timing and amount of credit loss expense and allowance. Adoption of, and efforts to implement this guidance has caused and may cause our ALL to change materially in the future, which could have a material adverse effect on our business, financial condition, results of operations and future prospects. Our company has very limited loss experience over its life. As a result, our implementation of CECL involved using general industry loss data to estimate historic loss experience. The availability and quality of relevant historical information under this estimation process, the accuracy of forecasts that are required under the CECL methodology, and the development of effective modeling to implement the CECL methodology can have material impacts on current and future provision reserve requirements.
By engaging in derivative transactions, we are exposed to additional credit and market risk in our banking business.
We use interest rate swaps to help manage our interest rate risk in our banking business from recorded financial assets and liabilities when they can be demonstrated to effectively hedge a designated asset or liability and the asset or liability exposes us to interest rate risk or risks inherent in customer related derivatives. We use other derivative financial instruments to help manage other economic risks, such as liquidity and credit risk and differences in the amount, timing, and duration•Failure of our known or expected cash receipts principally related to certain of our fixed-rate loan assets or certain of our variable-rate borrowings. We also have derivatives that result from a service we provide to certain qualifying customers approved through our credit process.
By engaging in derivative transactions, we are exposed to credit and market risk. Hedging interest rate risk is a complex process, requiring sophisticated models and routine monitoring, and is not a perfect science. As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in value. The effect of this unrealized appreciation or depreciation will generally be offset by income or loss on the derivative instruments. If the counterparty fails to perform, credit risk exists to the extent of the fair value gain in the derivative. Market risk exists to the extent that interest rates change in ways that are significantly different from what we expected when we entered into the derivative transaction. The existence of credit and market risk associated with our derivative instruments could adversely affect our net interest income and, therefore, could have an adverse effect on our business, financial condition, results of operations and future prospects.
We may be adversely affected by a decrease in the soundness of other financial services companies.
Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial services companies. The financial services industry is highly interrelated as a result of trading, clearing, servicing, custody arrangements, counterparty and other relationships. We have exposure to different industries and counterparties, including through transactions with counterparties and intermediaries in the financial services industry such as brokers and dealers, commercial banks, insurance companies, investment banks, mutual and hedge funds and other institutional clients. In addition, we participate in loans originated by other financial institutions (including shared national credits) and our private banking channel relies on relationships with other financial services companies for referrals. As a result, declines in the financial condition, defaults, or even rumors or questions about, one or more financial service companies or the financial services industry generally, may lead to market-wide liquidity, asset quality or other problems and could lead to losses or defaults by us or by other institutions. In addition, problems that arise in our relationships with financial services companies may result in a slow down or cessation in referrals that we receive from these financial services companies. These problems, losses or defaults could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We rely on third parties to provide key components of our business infrastructure including to monitor the value of and control marketable securities that collateralize our loans, and a failure of these parties to perform for any reason could disrupt our operations.
Third parties provide key components of our business infrastructure such as loan and account servicing, data processing, internet connections, network access, core application processing, statement production and account analysis. Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. In addition, we utilize the systems of these third parties to provide information to us so that we can quickly and accurately monitor changes in the value of marketable securities that serve as collateral. We also rely on these parties to provide control over marketable securities for purposes of perfecting our security interests and retaining the collateral in the applicable accounts.
The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions or impaired performance of our systems and technology due to malfunctions, programming inaccuracies or other circumstances or events. Replacing vendors or addressing other issues with our third-party service providers could entail significant delay and expense. If we are unable to efficiently replace ineffective service providers, or if we experience a significant, sustained or repeated, system failure or service denial, it could compromise our ability to effectively operate and assess and react to a risk in our loan portfolio, damage our reputation, result in a loss of customer business or financial damages from customer businesses, and subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
•We could be subject to losses, regulatory action and reputational harm due to fraudulent and negligent acts on the part of loan applicants, our borrowers, our clients, our employees and our vendors.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements, property appraisals, title information, income documentation, account information and other financial information. We may also rely on representations of counterparties as to the accuracy and completeness of such information and, with respect to financial statements, on reports of independent auditors. Any such misrepresentation or incorrect or incomplete information may not be detected prior to funding a loan or during our ongoing monitoring of outstanding loans. In addition, one or more of our employees or vendors could cause a significant operational breakdown or failure, either as a result of human error or fraud. Any of these developments could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our growth and expansion strategy may involve strategic investments or acquisitions, and we may not be able to overcome risks associated with such transactions.
Although we plan to continue to grow our business organically, we may seek opportunities to invest in or acquire investment management businesses or other businesses that we believe would complement our existing business model. Any potential future investment or acquisition activities could be material to our business and involve a number of risks, including significant time and expense required to identify, evaluate and negotiate potential transactions; an inability to attract acceptable funding; the limited experience of our management team in working together on acquisitions and integration activities; the time, expense and difficulty of integrating the combined businesses; an inability to realize expected synergies or returns on investment; potential disruption of our ongoing business; an inability to maintain adequate regulatory capital; and a loss of key employees or key customers. We may not be successful in overcoming these risks or any other problems. Our inability to overcome these risks could have an adverse effect on our ability to implement our business strategy and enhance shareholder value, which, in turn, could have a material adverse effect on our business, financial condition, results of operations and future prospects.
New lines of business or new or enhanced products and services may subject us to additional risks.
From time to time, we may develop, grow or acquire new lines of business or offer new products and services. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing, implementing and marketing new lines of business or new or enhanced products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business or new or enhanced product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks could have a material adverse effect on our business, financial condition, results of operations and future prospects.
•The value of our goodwill and other intangible assets may decline in the future.
In our prior acquisitions, we have generally recognized intangible assets, including customer relationship intangible assets•Cyber-crime and goodwill, in our consolidated statements of financial condition, but we may not realize the value of these assets. Management performs an annual review of the carrying values of goodwill and indefinite-lived intangible assets and periodically reviews the carrying values of all other intangible assets to determine whether events and circumstances indicate that an impairment in value may have occurred. Although we have determined that goodwill and other intangible assets were not impaired during 2019, a significant and sustained decline in our stock price and market capitalization, a significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates or other factors could result in impairment of goodwill or other intangible assets. Should a review indicate impairment, a write-down of the carrying value of the asset would occur, resulting in a non-cash charge which could result in a material charge to earnings and would adversely affect our results of operations.
Unauthorized access, cyber-crime and other threats to data security may require significant resources, harm our reputation, and adversely affect our business.
We necessarily collect, use and hold personal and financial information concerning individuals and businesses with which we have a relationship. In addition, we provide our clients with the ability to bank and make investment decisions remotely, including over the internet. Threats to data security, including unauthorized access and cyber-attacks, rapidly emerge and change, exposing us to additional costs related to protection or remediation and competing time constraints to secure our data in accordance with customer expectations, statutory and regulatory privacy regulations, and other requirements. It is difficult or impossible to defend against every risk being posed by changing technologies, as well as the intent•Any violation of criminals, terrorists or foreign governments or their agents with respect to committing cyber-crime. Because of the increasing sophistication of cyber-criminals and terrorists, data breaches could result despite our best efforts. These risks may increase in the future as we continue to increase our internet-based product offerings and expand our internal use of web-based products and applications, and controls employed by our information technology department and our other employees and vendors could prove inadequate to resolve or mitigate these risks.
We could also experience a breach due to intentional or negligent conduct on the part of employees, vendors or other internal sources, software bugs or other technical malfunctions, or other causes. As a result of any of these threats, our customer accounts and the personal and financial information of our customers and employees may become vulnerable to account takeover schemes, identity theft or cyber-fraud. In addition, our customers use their own electronic devices to do business with us and may provide their information to a third party in connection with obtaining services from such third party. Our ability to assure security is limited in these instances. Our systems and those of our third-party vendors may also become vulnerable to damage or disruption due to circumstances beyond our or their control, such as catastrophic events, power anomalies or outages, natural disasters, network failures, viruses and malware.
A breach of our security or the security of any of our third-party vendors that results in unauthorized access to our data, including personal and financial information of our customers, could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs, regulatory scrutiny and reputational damage. Maintaining our security measures may also create risks associated with implementing and integrating new systems. In addition, our investment management business could be harmed by cyber incidents affecting issuers in which its customers’ assets are invested, and our private banking business could be harmed by such incidents. Any such breaches of security or cyber incidents could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Beyond breaches of our security or the security of our third party vendors or their affiliates, as a result of financial entities and technology systems becoming more interdependent and complex, a cyber-incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us. We have taken measures to implement backup systems and other safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact.
We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our operations and financial condition.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third party service providers. •We also maintain important internal company data such as personally identifiable information about our employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). Various state and federal banking regulators and statesmay have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatoryinsufficient resources or law enforcement notification in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information comply with all applicable laws and regulations may increase our costs. Furthermore, we may not be able to ensure that all of our clients, suppliers,
counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us. If personal, confidential or proprietary information of our customers or others were to be mishandled or misused, we could be exposed to litigation or regulatory sanctions under personal information laws and regulations. Concerns regarding the effectiveness of our measures to safeguard personal information, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our business, financial condition, results of operations and future prospects.
We have a continuing need for technological change, and we may not have the resources to effectively implement new technology, or we may experienceface operational challenges when implementing new technology.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Although we are committed to keeping pace with technological advances and to investing in new technology, our competitors may, through the use of new technologies that we have not implemented, whether due to cost or otherwise, be able to offer additional or superior products, which would put us at a competitive disadvantage. •We also may not be able to effectively implement new technology-driven products and services, be successful in marketing such products and services or replace technologies that are out of date with new technologies, which could result in a loss of customers seeking new technology-driven products and services. In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may cause service interruptions, transaction processing errors and system conversion delays, may cause us to fail to comply with applicable laws, and may cause us to incur additional expenses, which may be substantial. Failure to successfully keep pace with technological change affecting the financial services industry and avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We may take tax filing positions or follow tax strategies that may be subject to challenge.
Risks Relating to Our Proposed Acquisition by Raymond James
•Because the market price of Raymond James common stock fluctuates, TriState Capital shareholders cannot be certain of the market value of the merger consideration they will receive.
•The amountmarket price of income taxes thatRaymond James common stock after the mergers may be affected by factors different from those currently affecting the shares of our common stock or Raymond James’s common stock.
•We and Raymond James are expected to incur incremental costs related to the mergers and integration.
•The mergers and integration may be more difficult, costly or time-consuming than expected, and we are requiredand Raymond James may fail to pay on our earnings is based on federal and state legislation and regulations. We provide for current and deferred taxes in our financial statements based on ourrealize the anticipated benefits of the mergers.
•The future results of operations, business activity, legal structurethe combined company may suffer if the company does not effectively manage its expanded operations.
•The combined company may be unable to retain our and interpretationRaymond James’s personnel after the completion of tax statutes. Wethe mergers.
•The Merger Agreement limits our ability to pursue alternatives to the Acquisition and may discourage other companies from trying to acquire us.
•Regulatory approvals for the Acquisition may not be received, may take filing positionslonger than expected or follow tax strategiesmay impose conditions that are subjectnot presently anticipated or cannot be met.
•Failure of the Acquisition to audit and maybe completed, the termination of the Merger Agreement or a significant delay in the consummation of the Acquisition could negatively impact us.
•We will be subject to challenge. Our net income may be reduced if a federal, statebusiness uncertainties and contractual restrictions while the Acquisition is pending.
•Litigation against us or local authority assesses charges for taxes that have not been provided for inRaymond James, or the members of our consolidated financial statements. Taxing authoritiesor Raymond James’ board of directors, could change applicable tax laws, challenge filing positionsprevent or assess taxes and interest charges. If taxing authorities take anydelay the completion of these actions, our business, financial condition, results of operations and future prospects could be adversely affected, perhaps materially.the Acquisition.
Risks Relating to Regulations
•We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, could subject us to regulatory action or penalties.
•Federal and state bank regulators periodically conduct examinations of our business and we may be required to remediate adverse examination findings or be subject to enforcement actions.
•The Bank’s FDIC deposit insurance premiums and assessments my increase.
•We are subject to numerous laws designed to protect customers, including fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
•We face a risk of noncompliance with and enforcement action under the Bank Secrecy Act and other anti-money laundering statutes and regulations.
•We are a holding company and we depend upon our subsidiaries for liquidity.
•Applicable laws and regulations, including capital and liquidity requirements, may restrict our ability to transfer funds from our subsidiaries to us or other subsidiaries.
•We are now subject to additional regulation because we have surpassed $10 billion in total consolidated assets.
•Our use of third-party service providers and other ongoing third-party business relationships may become subject to increasing regulatory requirements and attention.
Risks Relating to an Investment in our Common Stock and Preferred Stock
•Shares of our common stock, preferred stock and underlying depositary shares are not an insured deposit.
•An active, liquid market for our securities may not be sustained.
•Our preferred stock is thinly traded.
•The market price of our securities may be subject to substantial fluctuations, which may make it difficult for us to raise additional capital or for you to sell your shares at the volume, prices and times desired.
•The rights of holders of our common stock are generally subordinate to the rights of holders of our debt securities and preferred stock and may be subordinate to the rights of holders of any preferred stock or debt securities that we may issue in the future.
•Holders of our preferred stock and depositary shares have limited voting rights.
•We have not paid dividends on our common stock and are subject to regulatory restrictions on our ability to pay dividends.
•Our governance documents, and certain applicable federal and Pennsylvania laws, could make a takeover more difficult.
•There are substantial regulatory limitations on changes of control of bank holding companies.
General Risk Factors
•Climate change and societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.
•Severe weather, natural disasters, acts of war or terrorism or other external events could significantly impact our business.
Risks Relating to our Business
COVID-19 and the impact of actions to mitigate it could have a material adverse effect on our business, financial condition and results of operations, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.
Federal, state and local governments have enacted various restrictions in an attempt to limit the spread of COVID-19, including the declaration of a national emergency; multiple cities’ and states’ declarations of states of emergency; school and business closings; limitations on social or public gatherings and other social distancing measures, such as working remotely, travel restrictions, quarantines and stay-at-home orders. Such measures have disrupted economic activity and contributed to job losses and reduced levels of consumer and business spending. Although local jurisdictions have subsequently lifted stay-at-home orders and moved to phased opening of businesses, worker shortages, vaccine and testing requirements, new variants of COVID-19 and other health and safety recommendations have impacted the ability of businesses to return to pre-pandemic levels of activity and employment. In response to the economic and financial effects of COVID-19, the Federal Reserve sharply reduced interest rates and instituted quantitative easing measures, which the Federal Reserve began tapering in November 2021 by reducing the pace of its asset purchases, as well as domestic and global capital market support programs. In addition, the President’s Administration, Congress, various federal agencies and state governments have taken measures to address the economic and social consequences of the pandemic, including the passage of the CARES Act. The CARES Act, among other things, provides certain measures to support individuals and businesses in maintaining solvency through monetary relief, including in the form of financing, loan forgiveness and automatic forbearance. The full impact on our business activities as a result of new government and regulatory policies, programs and guidelines, as well as regulators’ reactions to such activities, remains uncertain.
The COVID-19 pandemic has had a destabilizing effect on financial markets, key market indices, and overall economic activity. The uncertainty regarding the duration of the pandemic and the resulting economic disruption caused increased market volatility and led to an economic recession. Uncertainty regarding the impacts of a resurgence of COVID-19 infections, including new strains of the virus, as well as a significant decrease in consumer confidence and business generally furthered economic concerns. The continuation of these conditions, the impacts of the CARES Act, and other federal and state measures, specifically with respect to loan forbearances, have adversely impacted our businesses, results of operations, and the business and operations of at least some of our borrowers, customers and business partners. These impacts may be material. In particular, even as COVID-19 vaccines have become widely available, these events have had, and/or can be expected to continue to have, the following effects, among other things:
•impair the ability of borrowers to repay outstanding loans or other obligations, resulting in increases in delinquencies;
•impair the value of collateral securing loans;
•impair the value of our securities portfolio;
•require an increase in our allowance for credit losses on loans and leases;
•adversely affect the stability of our deposit base, or otherwise impair our liquidity;
•reduce our asset management revenues and the demand for our products and services;
•impair the ability of loan guarantors to honor commitments;
•negatively impact our regulatory capital ratios;
•result in increased compliance risk as we become subject to new regulatory and other requirements associated with any government stimulus programs in which we participated;
•negatively impact the productivity and availability of key personnel and other employees necessary to conduct our business, and of third-party service providers who perform critical services for us, or otherwise cause operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions;
•increase cyber and payment fraud risk, and other operational risks, given increased online and remote activity;
•negatively impact revenue and income; and
•impede the success of the Acquisition, such as by delaying regulatory approvals or causing additional regulatory burdens prior to completion of the merger.
Prolonged measures by health or other governmental authorities encouraging or requiring significant restrictions on travel, assembly or other core business practices could further harm our business and those of our customers. Although we have business continuity plans and other safeguards in place, we can provide no assurance that they will continue to be effective.
The ultimate impact of these factors is highly uncertain at this time and we do not yet know the full extent of the impacts on our business, our operations or the national or global economies, nor the pace of the economic recovery when the COVID-19 pandemic subsides. The continuing impact of COVID-19 on economic conditions generally and on middle market businesses, in particular, may result in a material adverse effect to our business, financial condition and results of operations in future periods.
In addition, to the extent COVID-19 adversely affects our business, financial condition, and results of operations, and global economic conditions more generally, it may also have the effect of heightening many of the other risks described in the “Risk Factors” section of this report.
We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
Our business depends on our ability to successfully measure and manage credit risk and maintain disciplined and prudent underwriting standards. The business of lending is inherently risky, and includes the risk that the principal or interest on any loan will not be repaid timely or at all and that the value of any collateral supporting the loan will be insufficient to cover our outstanding exposure. In addition, we are exposed to risks with respect to the period of time over which loans may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual loans and borrowers. The creditworthiness of a borrower is affected by many factors, including local market conditions and general economic conditions, and many of our loans are made to middle-market businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers.
Our risk management practices, such as monitoring the concentration of our loans within specific industries, employing analytical and forecasting models and our credit approval, review and administrative practices may not adequately reduce credit risk. Additionally, our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of our loan portfolio. As a result, we may incur loan defaults, foreclosures and additional charge-offs, and may be required to significantly increase our ACL, each of which could adversely affect our net income. In addition, the weakening of our underwriting standards for any reason, such as to seek higher yielding loans, or a lack of discipline or diligence by our employees may result in loan defaults, foreclosures, additional charge-offs, or an increase in ACL. Any of these consequences could adversely affect our net income. As a result, our inability to successfully manage credit risk and our underwriting standards could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our allowance for credit losses on loans and leases may prove to be insufficient, which could have a material adverse effect on our financial condition and results of operations.
Our experience in the banking industry indicates that some portion of our loans will not be fully repaid in a timely manner or at all. Accordingly, we maintain an ACL that represents management’s judgment of probable losses in our loan portfolio. The level of the allowance reflects management’s continuing evaluation of past events, current conditions, and reasonable and supportable economic forecasts, including historical charge-offs and subsequent recoveries. Management also considers qualitative factors that influence our credit quality, including, but not limited to, delinquency and non-performing loan trends, changes in loan underwriting guidelines and credit policies, and the results of internal loan reviews. The determination of the ACL is inherently subjective and requires us to make significant assumptions, which may change or be incorrect. Inaccurate assumptions, deterioration of economic conditions, new information, the identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our ACL. In addition, our regulators, as an integral part of their periodic examination, review the adequacy of our ACL and may direct us to make additions to it. Further, if actual charge-offs in future periods exceed the amounts allocated to the ACL, we may need additional provision for loan losses to restore the adequacy of our ACL. While we believe that our ACL was adequate at December 31, 2021, we can provide no assurance that it will be sufficient to cover future loan losses, especially if there is a significant deterioration in economic conditions. If we are required to materially increase our level of ACL for any reason, such increase could materially decrease our net income and could have a material adverse effect on our business, financial condition, results of operations and future prospects.
A material portion of our loan portfolio is comprised of commercial loans secured by general business assets, the deterioration in value of which could expose us to credit losses.
Historically, a material portion of our loans held-for-investment have been comprised of commercial loans to businesses collateralized by business assets including, among other things, accounts receivable, inventory, equipment, cash value life insurance and owner-occupied real estate. These commercial loans are typically larger in amount than loans to individuals and, therefore, have the potential for larger losses on a single loan basis. Additionally, the repayment of commercial loans is subject to the ongoing business operations of the borrower. The collateral securing such loans generally includes movable property, such as equipment and inventory, which may decline in value more rapidly than we anticipate, exposing us to increased credit risk. In addition, a portion of our customer base may be exposed to volatile businesses or industries which are sensitive to commodity prices or market fluctuations, such as energy prices. Accordingly, negative changes in commodity prices, real estate values and liquidity could impair the value of the collateral securing these loans.
Historically, losses in our commercial credits have been higher than losses in other segments of our loan portfolio. Significant adverse changes in various industries could cause rapid declines in values and collectability resulting in inadequate collateral coverage that may expose us to credit losses. An increase in specific reserves and charge-offs related to our commercial and industrial loan portfolio could have a material adverse effect on our business, financial condition, results of operations and future prospects. As of December 31, 2021, we had commercial and industrial loans outstanding of $1.51 billion, or 14.1% of our loans held-for-investment, and owner-occupied commercial real estate loans outstanding of $212.6 million, or 2.0% of our loans held-for-investment.
Our business may be adversely affected by conditions in the financial markets and economic conditions generally, and in the states in which we operate in particular.
If the overall economic climate in the United States, generally, and our market areas, specifically, experiences material disruption, our borrowers may experience difficulties in repaying their loans, the collateral we hold may decrease in value or become illiquid, and the level of non-performing loans, charge-offs and delinquencies could rise and require significant additional provisions for credit losses.
Many of our customers are commercial enterprises whose business and financial condition are sensitive to changes in the general economy of the United States. Our businesses and operations are, in turn, sensitive to these same general economic conditions. If the United States experiences a deterioration or other significant volatility in economic conditions, our growth and profitability could be constrained. In addition, any future downgrade of the credit rating of the United States, failures to raise the U.S. statutory debt limit, or deterioration in the fiscal outlook of the United States federal government, could, among other things, materially adversely affect the market value of the U.S. and other government and governmental agency securities that we may hold, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable terms. In addition, any resulting decline in the financial markets could affect the value of marketable securities that serve as collateral for our loans and the ability of our customers to repay loans. In addition, economic conditions in foreign countries, including uncertainty over the stability of the euro currency and the withdrawal of the United Kingdom from the European Union, as well as concerns regarding terrorism, war and potential hostilities with various countries, could affect the stability of global financial markets, which could negatively affect U.S. economic conditions. Any of these developments could have a material adverse effect on our business, financial condition and future prospects.
Our commercial banking operations are concentrated in Pennsylvania, New Jersey, New York, and Ohio. As a result, our business is affected by changes in the economic conditions of those states and the regions of which they are a part. Our success depends to a significant extent upon the business activity, population, income levels, deposits and real estate activity in these markets, and we are vulnerable to a downturn in the local economies in these areas. For example, low energy prices have adversely impacted and may continue to adversely impact the economies of Western Pennsylvania and Northeastern Ohio, two of our significant commercial banking markets, which have industries focused on shale gas exploration and shale gas production. Although we do not make loans to companies directly engaged in oil and gas production, adverse conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans, affect the value of collateral underlying loans, impact our ability to attract deposits and generally affect our business and financial condition. Because of our geographic concentration, we may be less able than other financial institutions to diversify our credit risks across multiple markets.
Weak economic conditions can be characterized by deflation, fluctuations in debt and equity capital markets, lack of liquidity and depressed prices in the secondary market for loans, increased delinquencies on loans, real estate price declines, and lower commercial activity. All of these factors can be detrimental to the business and/or financial position of our customers and their ability to repay loans as well as the value of the collateral supporting our loans, which could adversely impact demand for our credit products as well as our credit quality. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our non-owner-occupied commercial real estate loan portfolio exposes us to credit risks that may be greater than the risks related to other types of loans.
Our loan portfolio includes non-owner-occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties, as well as real estate construction and development loans. As of December 31, 2021, we had outstanding loans secured by non-owner-occupied commercial properties of $2.15 billion, or 20.0%, of our loans held-for-investment. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the secured property. These loans typically expose a lender to greater credit risk than loans secured by other types of collateral due to a number of factors, including the concentration of principal in a limited number of loans and borrowers, the difficulty of liquidating the collateral securing these loans, and the relatively larger loan balances compared to single borrowers. In addition, the amount we may realize after a default is dependent upon factors outside of our control, including, but not limited to, economic conditions, environmental cleanup liabilities, assessments, interest rates, real estate tax rates, operating expenses of the mortgaged property, occupancy rates, zoning laws, regulatory rules, and natural disasters. Accordingly, charge-offs on non-owner-occupied commercial real estate loans may be larger on a per loan basis than those incurred with residential or consumer loan portfolios.
An unexpected deterioration in the credit quality of our non-owner-occupied commercial real estate loan portfolio or the inability of only a few of our largest borrowers to repay their loan obligations could result in us increasing our ACL, which would reduce our profitability and have a material adverse effect on our business, financial condition, and future prospects.
Our private banking business could be negatively impacted by rapid volatility or a prolonged downturn in the securities markets.
Marketable-securities-backed private banking loans represent a material portion of our business and constitute the fastest growing portion of our loan portfolio. As of December 31, 2021, we had outstanding marketable-securities-backed private banking loans of $6.82 billion, or 63.3% of our loans held-for-investment. We expect to continue to increase the percentage of our loan portfolio represented by marketable-securities-backed private banking loans in the future. A sharp or prolonged decline in the value of the collateral that secures these loans could materially adversely affect the growth prospects and loan performance in this segment of our loan portfolio and, as a result, could materially adversely affect our business, financial condition, results of operations and future prospects.
A downturn in the real estate market, especially in our primary markets, could result in losses and adversely affect our profitability.
A material portion of our loans are secured by real estate as a primary component of collateral. Real estate collateral provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value. A general decline in real estate values, particularly in our primary markets, could impair the value of our collateral and our ability to sell the collateral upon any foreclosure. As a result, our ability to recover the principal amount due on defaulted loans by selling the underlying real estate will be diminished, and we will be more likely to suffer losses on defaulted loans, in turn, which would likely require us to increase our ACL.
In the event of a default with respect to any of these loans, the amount we receive upon sale of the collateral may be insufficient to recover the outstanding principal and interest on the loan. If we are required to re-value the collateral securing a loan to satisfy the debt during a period of reduced real estate values or to increase our ACL, our profitability could be adversely affected, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We are subject to environmental liability risk associated with any real estate collateral we acquire upon foreclosure.
During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. The costs associated with investigation and remediation activities could be substantial. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage, including damages and costs resulting from environmental contamination emanating from the property. Although we have policies and procedures to perform an environmental review before initiating foreclosure, these actions may not be sufficient to detect all potential environmental hazards.
Our lending limit may restrict our growth and prevent us from effectively implementing our business strategy.
We are limited in the amount we can lend to a single borrower by the amount of our capital. Generally, under current law, TriState Capital Bank may lend up to 15.0% of the aggregate of its capital, surplus, undivided profits, capital securities, and reserve for loan losses to any one borrower. We have established an internal lending limit that is significantly lower than our legal lending limit and, based upon our current capital levels, the amount we may lend is significantly less than that of many of our competitors and may discourage potential borrowers who have credit needs in excess of our lending limit from doing business with us. We accommodate larger loans by selling participations in those loans to other financial institutions, but this strategy may not always be available. If we are unable to compete effectively for loans, we may not be able to effectively implement our business strategy, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We rely heavily on our executive management team and other key employees, and the loss of the services of any of these individuals could adversely impact our business and reputation.
Our success depends in large part on the performance of our key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees. Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to execute our business plan may be lengthy. We currently do not have any employment or non-compete agreements with any of our executive officers or key employees other than certain non-solicitation and restrictive agreements from certain key employees in connection with our investment management business. We may not be successful in retaining our key employees, and the loss of one or more of our key personnel could have a material adverse effect on our business because of their skills, knowledge of our markets, relationships, industry experience and the difficulty of finding qualified replacement personnel. If the services of any of our key personnel become unavailable for any reason, we may not be able to hire qualified persons on terms acceptable to us, or at all, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our business has grown rapidly, and we may not be able to maintain our historical rate of growth.
Continued growth in our banking business requires that we follow adequate loan underwriting standards and balance loan and deposit growth while managing interest rate risk and our net interest margin, maintaining adequate capital at all times, producing investment
performance results competitive with our peers and benchmarks, further diversifying our revenue sources, meeting the expectations of our clients, and hiring and retaining qualified employees.
We may not be able to sustain our historical rate of growth or continue to grow our business at all. Because of factors such as the uncertainty in the general economy and the possibility of government intervention in the credit markets, it may be difficult for us to repeat our historic earnings growth as we continue to expand. Failure to grow or failure to manage our growth effectively could have a material adverse effect on our business and future prospects, and could adversely affect the implementation our business strategy.
Our utilization of brokered deposits could adversely affect our liquidity and results of operations.
Since our inception, we have utilized both brokered and non-brokered deposits as a source of funds to support our growing loan demand and other liquidity needs. As a bank regulatory supervisory matter, reliance upon brokered deposits as a significant source of funding is discouraged because brokered deposits may not be as stable as other types of deposits and, in the future, those depositors may not renew their deposits, or we may have to pay a higher interest rate to keep those deposits or replace them with other deposits or with funds from other sources. Additionally, if TriState Capital Bank ceases to be categorized as “well capitalized” for bank regulatory purposes, it will not be able to accept, renew or roll over brokered deposits without a waiver from the FDIC. If we are unable to maintain or replace these brokered deposits as they mature, it could adversely affect our liquidity and results of operations. Further, paying higher interest rates to maintain or replace these deposits could adversely affect our net interest margin, net income and financial condition.
Liquidity risk could impair our ability to fund operations and meet our obligations as they become due.
Our ability to implement our business strategy will depend on our liquidity and ability to obtain funding for loan originations, working capital and other general purposes. Our preferred source of funds for our banking business consists of core customer deposits; however, we rely on other sources such as brokered deposits and Federal Home Loan Bank (“FHLB”) advances. In addition to our competition with other banks for deposits, such account and deposit balances can decrease when customers perceive alternative investments as providing a better risk/return trade off. If customers move money out of bank deposits and into other investments, we may increase our utilization of brokered deposits, FHLB advances and other wholesale funding sources necessary to fund desired growth levels.
We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities and other sources of liquidity, respectively, to ensure that we have adequate liquidity to fund our banking operations. Any decline in available funding could adversely impact our ability to fund new loan balances, invest in securities, meet our expenses or fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse effect on our liquidity, financial condition, results of operations and future prospects.
We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, we may not be able to maintain regulatory compliance.
We face significant capital and other regulatory requirements as a financial institution. We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the financing of acquisitions. In addition, we, on a consolidated basis, and TriState Capital Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity as required by regulators. Regulatory capital requirements could increase from current levels or our regulators could expect us to maintain capital levels that are in excess of such requirements, which could require us to raise additional capital or reduce our operations. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, as well as on our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain adequate levels of capital to meet regulatory requirements, we could be subject to enforcement actions or other regulatory consequences, which could have an adverse effect on our business, financial condition, results of operations and future prospects.
Any future reductions in our credit ratings may increase our funding costs or impair our ability to effectively compete for business.
Credit ratings or changes in ratings policies and practices are subject to change at any time, and it is possible that any rating agency will take action to downgrade us in the future. We have used and may in the future use debt as a funding source. One or more rating agencies regularly evaluate us and their ratings of our long-term debt are based on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix and level and quality of earnings, and we may not be able to maintain our current credit ratings.
Any future decrease in our credit ratings by one or more rating agencies could impact our access to the capital markets or short-term funding or increase our financing costs, and thereby adversely affect our financial condition and liquidity. In the event of a ratings downgrade, our clients and counterparties may terminate their relationships with us, be less likely to engage in transactions with us, or only engage in transactions with us on terms that are less favorable than those currently in place. We cannot predict whether client relationships or opportunities for future relationships could be adversely affected by clients who choose to do business with a higher-rated institution. The inability to maintain our credit ratings may have a material adverse effect on our business, financial condition, results of operations or future prospects.
Changes in interest rates could negatively impact the profitability of our banking business.
Our profitability depends to a significant extent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and investment securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates because different types of assets and liabilities may react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could reduce net interest income. These rates are highly sensitive to many factors beyond our control, including general economic conditions and policies of various governmental and regulatory agencies including, in particular, the Federal Reserve, which has suggested that it may take steps to raise interest rates in 2022. Changes in monetary policy, including changes in interest rates, could not only influence the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the average duration of our assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore our net income, could be adversely affected.
Our loans are predominantly variable rate loans, with the majority still being based on the London Interbank Offered Rate (“LIBOR”). A decline in interest rates could cause the spread between our loan yields and our deposit rates paid to compress our net interest margin, which would adversely affect our net interest income. Further, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our business, financial condition, results of operations and future prospects.
In addition, an increase in interest rates could also have a negative impact on our results of operations by reducing the market value of our investment securities and the ability of borrowers to repay their current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also necessitate increases to our ACL. Each of these factors could have a material adverse effect on our business, results of operations, financial condition, and future prospects.
The intention of the United Kingdom’s FCA to cease support of LIBOR by June 30, 2023, could negatively affect the fair value of our financial assets and liabilities, results of operations and net worth, and transition to an alternative reference interest rate could present operational problems and result in market disruption.
Although the publication of most LIBOR rates will cease on June 30, 2023 (excluding 1-week U.S. LIBOR and 2-month U.S. LIBOR, which ceased on December 31, 2021), U.S. banking regulators expected banks, subject to certain exceptions, to cease originating new products using LIBOR by December 31, 2021, and to ensure existing contracts have robust fallback language that includes a clearly defined alternative reference rate. We cannot predict exactly when the capital and debt markets will cease to use LIBOR as a benchmark, whether the Secured Overnight Financing Rate (“SOFR”) will become the market benchmark in its place, or what impact such a transition may have on our business, results of operations and financial condition.
The selection of SOFR as the alternative reference rate for these products currently presents certain market concerns because SOFR, unlike LIBOR, does not have an inherent term structure. A methodology has been developed to calculate SOFR-based term rates, and the Federal Reserve Bank of New York has published such rates daily since early 2020. However, the methodology has not been tested for an extended period of time, which may limit market acceptance of the use of SOFR. In addition, SOFR may not be a suitable alternative to LIBOR for all of our financial products, and it is uncertain what other rates or indices might be appropriate for that purpose. The replacement of LIBOR also may result in economic mismatches between different categories of instruments that now consistently rely on the LIBOR benchmark.
Inconsistent approaches to a transition from LIBOR to an alternative rate among different market participants and for different financial products may cause market disruption and operational problems, which could adversely affect us, including by exposing us to increased basis risk and resulting costs in connection with this risk, and by creating the possibility of disagreements with counterparties.
The transition has changed, and will continue to change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. We have organized an internal initiative to identify operational and contractual best practices, assess risks, manage the transition from LIBOR, facilitate communication with customers, and monitor the impacts of the transition.
Our investment management business may be negatively impacted by competition, changes in economic and market conditions, changes in interest rates and investment performance.
We derive a material portion of our earnings from Chartwell, our investment management business. Chartwell may be negatively impacted by competition, changes in economic and market conditions, changes in interest rates and investment performance. The investment management business is intensely competitive. There are over 1,000 firms which we consider to be primary competitors of Chartwell. In addition to competition from other institutional investment management firms, Chartwell competes with passive index funds, ETFs and investment alternatives such as hedge funds. Many competitors offer similar products to those offered by Chartwell and the performance of competitors’ products could lead to a loss of investment in similar Chartwell products, regardless of the performance of such products.
Our investment management contracts are typically terminable in nature and our ability to successfully attract and retain investment management clients will depend on, among other things, our ability to compete with our competitors’ investment products, our investment performance, fees, client services, and marketing and distribution capabilities. Most of our clients may withdraw funds from under our management at their discretion at any time for any reason, including as a result of competition or poor performance of our products. If we cannot effectively attract and retain customers, our business, financial condition, results of operations and future prospects may be adversely affected.
Additionally, it is possible our management fees could be reduced for a variety of reasons, including, among other things, pressure resulting from competition or regulatory changes, and we may from time to time reduce or waive investment management fees, or limit total expenses, on certain products or services offered for particular time periods in order to manage fund expenses, to help retain or increase managed assets or for other reasons. If our revenues decline without a commensurate reduction in our expenses, our net income from our investment management business would be reduced, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We cannot guarantee that our investment performance will be favorable in the future. The financial markets and businesses operating in the securities industry are highly volatile and affected by, among other factors, economic conditions and trends in business, all of which are beyond our control. Declines in the financial markets, changes in interest rates or a lack of sustained growth may result in declines in the performance of our investment management business and the assets under management. Because the revenues of our investment management business are, to a large extent, comprised of fees based on assets under management, such declines could adversely affect our business.
We face significant competitive pressures that could impair our growth, decrease our profitability, or reduce our market share.
We operate in the highly competitive financial services industry and face significant competition for customers from bank and non-bank competitors, particularly regional and nationwide institutions, in originating loans, attracting deposits, providing financial management products and services, and providing other financial services. Our competitors are generally larger and may have significantly more resources, greater name recognition, and more extensive and established branch networks or geographic footprints. Because of their scale, many of these competitors can be more aggressive than we can be on loan, deposit and financial services pricing. In addition, many of our non-bank and non-institutional financial management competitors have fewer regulatory constraints and may have lower cost structures. We expect competition to continue to intensify due to financial institution consolidation, legislative, regulatory and technological changes, and the emergence of alternative banking sources and investment management products and services. Additionally, technology has lowered barriers to entry.
Our ability to compete successfully will depend on a number of factors, including our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound business practices, the scope, relevance, performance and pricing of products and services that we offer, customer satisfaction with our products and services, industry and general economic trends, and our ability to keep pace with technological advances and to invest in new technology. Increased competition could require us to increase the rates we pay on deposits or lower the rates we offer on loans or the fees we charge on banking or investment management products and services, all of which could reduce our profitability. Our failure to compete effectively in our primary markets could cause us to lose market share and could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our ability to maintain our reputation is critical to the success of our business.
Our business plan emphasizes building and maintaining strong relationships with our clients. We have benefited from strong relationships with and among our customers, and also from our relationships with financial intermediaries. As a result, our reputation is one of the most valuable components of our business. If our reputation is negatively affected by the actions of our employees or otherwise, our existing relationships may be damaged. We could lose some of our existing customers, including groups of large
customers who have relationships with each other, and we may not be successful in attracting new customers from competing financial institutions. Any of these developments could have a material adverse effect on our business, financial condition, results of operations and future prospects.
The fair value of our investment securities can fluctuate due to factors outside of our control.
Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect to the securities, defaults by the issuer or with respect to the underlying securities, changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized or unrealized losses in future periods, which could have a material adverse effect on our business, financial condition, results of operations and future prospects. The process for determining whether impairment of a security is other-than-temporary often requires complex, subjective judgments about whether there has been a significant deterioration in the financial condition of the issuer, whether management has the intent or ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value, the future financial performance and liquidity of the issuer and any collateral underlying the security, and other relevant factors which may be inaccurate.
Our financial results depend on management’s selection of accounting methods and certain assumptions and estimates.
Our financial condition and results of operations are based on our consolidated financial statements, which are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and with general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that have a possibility of producing results that could be materially different than originally reported.
By engaging in derivative transactions, we are exposed to additional credit and market risk in our banking business.
We use interest rate swaps to help manage interest rate risk in our banking business with respect to recorded financial assets and liabilities when they can be demonstrated to effectively hedge a designated asset or liability and the asset or liability exposes us to interest rate risk or risks inherent in customer related derivatives. We use other derivative financial instruments to help manage other economic risks, such as liquidity and credit risk and risk arising from differences in the amount, timing, and duration of our known or expected cash receipts, which are principally related to certain of our fixed-rate loan assets or certain of our variable-rate borrowings. We also have derivatives that result from a service we provide to certain qualifying customers approved through our credit process.
By engaging in derivative transactions, we are exposed to credit and market risk. Hedging interest rate risk is a complex process, requiring sophisticated models and routine monitoring, and is not a perfect science. As a result of interest rate fluctuations, hedged assets and liabilities will appreciate or depreciate in value. The effect of this unrealized appreciation or depreciation will generally be offset by income or loss on the derivative instruments. If the counterparty fails to perform, credit risk exists to the extent of the fair value gain in the derivative. Market risk exists to the extent that interest rates change in ways that are significantly different from what we expected when we entered into the derivative transaction. The existence of credit and market risk associated with our derivative instruments could adversely affect our net interest income and, therefore, could have an adverse effect on our business, financial condition, results of operations and future prospects.
We may be adversely affected by a decrease in the soundness of other financial services companies.
Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial services companies. The financial services industry is highly interrelated as a result of trading, clearing, servicing, custody arrangements, counterparty relationships, and other relationships. We have exposure to different industries and counterparties, including through transactions with counterparties and intermediaries in the financial services industry such as brokers and dealers, commercial banks, insurance companies, investment banks, mutual and hedge funds, and other institutional clients. In addition, we participate in loans originated by other financial institutions (including shared national credits) and our private banking channel relies on relationships with other financial services companies for referrals. As a result, declines in the financial condition of, defaults of, or even rumors or questions about, one or more financial service companies or the financial services industry generally, may lead to market-wide liquidity, asset quality or other problems and could lead to losses or defaults by us or by other institutions. In addition, problems that arise in our relationships with financial services companies may result in a slow-down or cessation in referrals that we receive from these financial services companies. These problems, losses or defaults could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We rely on third parties to provide key components of our business infrastructure, including to monitor the value of and control marketable securities that collateralize our loans, and a failure of any of these parties to perform for any reason could disrupt our operations.
Third parties provide key components of our business infrastructure such as loan and account servicing, data processing, internet connections, network access, core application processing, statement production and account analysis. Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. In addition, we utilize the systems of these third parties to provide information to us so that we can quickly and accurately monitor changes in the value of marketable securities that serve as collateral. We also rely on these third parties to provide control over marketable securities for purposes of perfecting our security interests and retaining the collateral in the applicable accounts.
The failure of these systems or the termination of a third-party software license or service agreement on which any of these systems is based could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions or impaired performance of our systems and technology due to malfunctions, programming inaccuracies or other circumstances or events. Replacing vendors or addressing other issues with our third-party service providers could entail significant delay and expense. If we are unable to efficiently replace ineffective service providers, or if we experience a significant, sustained or repeated system failure or service denial, it could compromise our ability to effectively operate, assess and react to a risk in our loan portfolio, damage our reputation, result in a loss of customer business or financial damages from customer businesses, and subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We could be subject to losses, regulatory action and reputational harm due to fraudulent and negligent acts on the part of loan applicants, our borrowers, our clients, our employees and our vendors.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished by or on behalf of clients and counterparties, including financial statements, property appraisals, title information, income documentation, account information and other financial information. We may also rely on representations of counterparties as to the accuracy and completeness of such information and, with respect to financial statements, on reports of independent auditors. Any such misrepresentation or incorrect or incomplete information may not be detected prior to funding a loan or during our ongoing monitoring of outstanding loans. In addition, one or more of our employees or vendors could cause a significant operational breakdown or failure, either as a result of human error or fraud. Any of these developments could have a material adverse effect on our business, financial condition, results of operations and future prospects.
New lines of business or new or enhanced products and services may subject us to additional risks.
From time to time, we may develop, grow or acquire new lines of business or offer new products and services. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing, implementing, and marketing new lines of business or new or enhanced products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business or new or enhanced product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks could have a material adverse effect on our business, financial condition, results of operations and future prospects.
The value of our goodwill and other intangible assets may decline in the future.
In our prior asset management acquisitions, we have generally recognized intangible assets, including customer relationship intangible assets and goodwill, in our consolidated statements of financial condition, but we may not realize the value of these assets. Management performs an annual review of the carrying values of goodwill and indefinite-lived intangible assets and periodically reviews the carrying values of all other intangible assets to determine whether events and circumstances indicate that an impairment in value may have occurred. Although we have determined that goodwill and other intangible assets were not impaired during 2021, a significant and sustained decline in assets under management in our investment management business, a significant decline in our expected future cash flows, a significant adverse change in the business climate, slower growth rates, or other factors could result in impairment of goodwill or other intangible assets. Should a review indicate impairment, a write-down of the carrying value of the asset would occur, resulting in a non-cash charge which could result in a material charge to earnings and would adversely affect our results of operations.
Unauthorized access, cyber-crime, and other threats to data security may require significant resources, harm our reputation, and adversely affect our business.
We necessarily collect, use and hold personal and financial information concerning individuals and businesses with which we have a relationship. In addition, we provide our clients with the ability to bank and make investment decisions remotely, including over the internet. Threats to data security, including unauthorized access and cyber-attacks, rapidly emerge and change, exposing us to additional costs related to protection or remediation and competing time constraints to secure our data in accordance with customer expectations, statutory and regulatory privacy regulations, and other requirements. It is difficult or impossible to defend against every risk being posed by changing technologies, as well as the intent of criminals, terrorists or foreign governments or their agents with respect to committing cyber-crime. Because of the increasing sophistication of cyber-criminals and terrorists, data breaches could result despite our best efforts. These risks may increase in the future as we continue to increase our internet-based product offerings and expand our internal use of web-based products and applications, and controls employed by our information technology department and our other employees and vendors could prove inadequate to resolve or mitigate these risks.
We could also experience a breach due to intentional or negligent conduct on the part of employees, vendors or other internal sources, software bugs or other technical malfunctions, or other causes. As a result of any of these threats, our customer accounts and the personal and financial information of our customers and employees may become vulnerable to account takeover schemes, identity theft or cyber-fraud. In addition, our customers use their own electronic devices to do business with us and may provide their information to a third party in connection with obtaining services from such third party. Our ability to assure security is limited in these instances. Our systems and those of our third-party vendors may also become vulnerable to damage or disruption due to circumstances beyond our or their control, such as catastrophic events, power anomalies or outages, natural disasters, network failures, viruses and malware.
A breach of our security or the security of any of our third-party vendors that results in unauthorized access to our data, including personal and financial information of our customers, could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs, regulatory scrutiny and reputational damage. Maintaining our security measures may also create risks associated with implementing and integrating new systems. In addition, our investment management business could be harmed by cyber incidents affecting issuers in which its customers’ assets are invested, and our private banking business could be harmed by such incidents. Any such breaches of security or cyber-incidents could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Beyond breaches of our security or the security of our third-party vendors or their affiliates, as a result of financial entities and technology systems becoming more interdependent and complex, a cyber-incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including us. We have taken measures to implement backup systems and other safeguards to support our operations, but our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact.
We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our operations and financial condition.
Our business requires the collection and retention of large volumes of customer data, including personally identifiable information, in various information systems that we maintain and in those maintained by third-party service providers. We also maintain important internal company data such as personally identifiable information about our employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). Various state and federal banking regulators and other law enforcement bodies have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in the event of a security breach. For example, a final rule that the federal banking agencies issued in November 2021, for which the compliance date is May 1, 2022, requires banking organizations to notify their primary federal regulator of significant computer security incidents within 36 hours of determining that such an incident has occurred. Ensuring that our collection, use, transfer and storage of personal information comply with all applicable laws and regulations may increase our costs. Furthermore, we may not be able to ensure that all of our clients, suppliers, counterparties and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us. If personal, confidential or proprietary information of our customers or others were to be mishandled or misused, we could be exposed to litigation or regulatory sanctions under personal information laws and regulations. Concerns regarding the effectiveness of our measures to safeguard personal information, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our business, financial condition, results of operations, and future prospects.
We have a continuing need for technological change, and we may not have the resources to effectively implement new technology, or we may experience operational challenges when implementing new technology.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Although we are committed to keeping pace with technological advances and to investing in new technology, our competitors may, through the use of new technologies that we have not implemented, whether due to cost or otherwise, be able to offer additional or superior products, which would put us at a competitive disadvantage. We also may not be able to effectively implement new technology-driven products and services, be successful in marketing such products and services or replace technologies that are out of date with new technologies, which could result in a loss of customers seeking new technology-driven products and services. In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may cause service interruptions, transaction processing errors and system conversion delays, may cause us to fail to comply with applicable laws, and may cause us to incur additional expenses, which may be substantial. Failure to successfully keep pace with technological change affecting the financial services industry and avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We may take tax filing positions or follow tax strategies that may be subject to challenge.
The amount of income taxes that we are required to pay on our earnings is based on federal and state legislation and regulations. We provide for current and deferred taxes in our financial statements based on our results of operations, business activity, legal structure, and interpretation of tax statutes. We may take filing positions or follow tax strategies that are subject to audit and may be subject to challenge. Our net income may be reduced if a federal, state or local authority assesses charges for taxes that have not been provided for in our consolidated financial statements. Taxing authorities could change applicable tax laws, challenge filing positions or assess taxes and interest charges. If taxing authorities take any of these actions, our business, financial condition, results of operations and future prospects could be adversely affected, perhaps materially.
Risks Relating to Our Proposed Acquisition by Raymond James
Because the market price of Raymond James common stock fluctuates, TriState Capital shareholders cannot be certain of the market value of the merger consideration they will receive.
Under our pending Acquisition by Raymond James, each share of our common stock that is issued and outstanding immediately prior to the effective time of the merger, with certain limited additions and exceptions, will be converted into the right to receive (A) $6.00 in cash and (B) 0.25 shares of Raymond James common stock. The exchange ratio for the stock consideration is fixed and will not be adjusted for changes in the market price of either Raymond James common stock or our common stock. Changes in the price of Raymond James common stock between now and the time of the Acquisition will affect the value that holders of our common stock will receive in the merger. Neither we nor Raymond James are permitted to terminate the Merger Agreement as a result of, in and of itself, any increase or decrease in the market price of our common stock or Raymond James’ common stock. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in our and Raymond James’s businesses, operations and prospects, volatility in the prices of securities in global financial markets, including market prices of our common stock, Raymond James’s common stock and other banking companies, the effects of the COVID-19 pandemic and regulatory considerations and tax laws, many of which are beyond our and Raymond James’s control. Therefore, at the time of the special meeting, holders of our common stock will not know the market value of the consideration that they will receive at the effective time of the Acquisition. You should obtain current market quotations for shares of Raymond James common stock (NYSE: RJF) and shares of TriState Capital common stock (Nasdaq: TSC).
The market price of Raymond James common stock after the Acquisition may be affected by factors different from those currently affecting the shares of our common stock or Raymond James’s common stock.
Upon consummation of the Acquisition, holders of our common stock will become holders of Raymond James common stock. Raymond James’s business differs from ours and certain adjustments may be made to Raymond James’s and our business as a result of the Acquisition. Accordingly, the results of operations of the combined company and the market price of Raymond James common stock after the completion of the Acquisition may be affected by factors different from those currently affecting the independent results of operations of each of Raymond James and TriState Capital.
We and Raymond James are expected to incur incremental costs related to the Acquisition and integration.
We and Raymond James have incurred and expect to incur a number of incremental costs associated with the Acquisition, including legal, financial advisory, accounting, consulting and other advisory fees, employee benefit-related costs, public company filing fees
and other regulatory fees, financial printing and other printing costs and other related costs. Some of these costs are payable by us or Raymond James regardless of whether or not the Acquisition is completed.
In addition, the combined company will incur integration costs following the completion of the Acquisition and may also incur additional costs to maintain employee morale and to retain key employees. Integration costs may result in the combined company taking charges against earnings following the completion of the Acquisition, and the amount and timing of such charges are uncertain at present. There can be no assurances that the expected benefits related to the integration of the businesses will be realized to offset these transaction and integration costs over time.
The Acquisition and integration may be more difficult, costly or time-consuming than expected, and we and Raymond James may fail to realize the anticipated benefits of the Acquisition.
The success of the Acquisition will depend, in part, on the ability to realize the anticipated synergies from combining our and Raymond James’s businesses. The anticipated benefits of the Acquisition may not be realized fully or at all or may take longer to realize than expected, and could have an adverse effect upon the revenues, levels of expenses and operating results of the combined company following the completion of the Acquisition, which may adversely affect the value of the common stock of the combined company following the completion of the Acquisition.
We and Raymond James have operated and, until the completion of the Acquisition, must continue to and, after completion of the Acquisition, will continue to in some respects operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the Acquisition. Integration efforts between the two companies may also divert management attention and resources. These integration matters could have an adverse effect on each company during this transition period and on the combined company for an undetermined period after completion of the Acquisition.
The future results of the combined company following the Acquisition may suffer if the combined company does not effectively manage its expanded operations.
Following the Acquisition, the size of the business of the combined company will increase beyond the current size of either our or Raymond James’s current business. The combined company’s future results will depend, in part, upon its ability to manage this expanded business, which may pose challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. The combined company may also face increased scrutiny from governmental authorities as a result of the increased size of its business. There can be no assurances that the combined company will be successful or that it will realize the expected benefits currently anticipated from the Acquisition.
The combined company may be unable to retain our and Raymond James’s personnel after the completion of the Acquisition.
The success of the Acquisition will depend in part on the combined company’s ability to retain the talents and dedication of key employees currently employed by us and Raymond James. It is possible that these employees may decide not to remain with us or Raymond James, as applicable, while the Acquisition is pending or with the combined company after the Acquisition is consummated. If the combined company is unable to retain key employees, including management, who are critical to the successful integration and future operations of the companies, the combined company could face disruptions in its operations, loss of existing customers, loss of key information, expertise or know-how and unanticipated additional recruitment costs. In addition, following the Acquisition, if key employees terminate their employment, the combined company’s business activities may be adversely affected, and management’s attention may be diverted from successfully hiring suitable replacements, all of which may cause the combined company’s business to suffer. The combined company also may not be able to locate or retain suitable replacements for any of our key employees who leave the combined company.
The shares of Raymond James common stock to be received by our shareholders as a result of the Acquisition will have different rights from the shares of our common stock.
Upon consummation of the Acquisition, holders of our common stock will become holders of Raymond James common stock and their rights as holders of Raymond James common stock will be governed by Florida law and the governing documents of Raymond James following the Acquisition. The rights associated with Raymond James common stock are different from the rights associated with our common stock.
We will be subject to business uncertainties and contractual restrictions while the Acquisition is pending.
Uncertainty about the effects of the Acquisition on employees, customers (including depositors and borrowers), counterparties, suppliers and vendors may have an adverse effect on our business, financial condition and results of operations. These uncertainties may impair our ability to attract, retain and motivate key personnel and customers pending the consummation of the Acquisition, as such personnel and customers may experience uncertainty about their future roles and relationships following the consummation of the Acquisition. Additionally, these uncertainties could cause our customers, counterparties, suppliers, vendors and others with whom we
deal to seek to change, or fail to extend, existing business relationships with us. In addition, competitors may target our existing customers by highlighting potential uncertainties and integration difficulties that may result from the Acquisition.
In addition, the Merger Agreement restricts us from taking certain actions without Raymond James’ consent while the Acquisition is pending. In particular, we have agreed to operate our business in the ordinary course in all material respects and to refrain from taking certain actions that may adversely affect our ability to consummate the transactions contemplated by the Merger Agreement. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the Acquisition. If the Acquisition is not completed, these restrictions could have a material adverse effect on our business, financial condition and results of operations.
The Merger Agreement limits our ability to pursue alternatives to the Acquisition and may discourage other companies from trying to acquire us.
The Merger Agreement contains “no shop” covenants that restrict our ability to, directly or indirectly, among other things, initiate, solicit, knowingly encourage or knowingly facilitate inquiries or proposals with respect to or, subject to certain exceptions generally related to the exercise of fiduciary duties by our board of directors, engage in any negotiations concerning, or provide any confidential or non-public information or data relating to, any alternative acquisition proposals. These provisions, which include an approximately $42 million termination fee payable under certain circumstances, may discourage a potential third-party acquirer that might have an interest in acquiring all or a significant part of us from considering or proposing that acquisition.
Litigation against us or Raymond James, or the members of our or Raymond James’ board of directors, could prevent or delay the completion of the Acquisition.
The results of any potential legal claims that may be asserted by purported stockholder plaintiffs related to the Acquisition are difficult to predict and could delay or prevent the Acquisition from being completed in a timely manner. Moreover, any litigation could be time-consuming and expensive for the parties and could divert our and Raymond James’ management’s attention away from their regular business. Any lawsuit adversely resolved against us, Raymond James or members of our or Raymond James’ board of directors could have a material adverse effect on each party’s business, financial condition and results of operations.
One of the conditions to the consummation of the Acquisition is the absence of any order, injunction, law, regulation or other legal restraint preventing, prohibiting or making illegal the completion of the Acquisition or any other transactions contemplated by the Merger Agreement. Consequently, if a settlement or other resolution is not reached in any lawsuit that is filed or any regulatory proceeding and a claimant secures injunctive or other relief or a regulatory authority issues an order or other directive having the effect of making the Acquisition illegal or otherwise prohibiting consummation of the Acquisition, then such injunctive or other relief may prevent the Acquisition from becoming effective in a timely manner.
Regulatory approvals for the Acquisition may not be received, may take longer than expected or may impose conditions that are not presently anticipated or cannot be met.
Before the transactions contemplated by the Merger Agreement may be completed, various approvals, consents and non-objections must be obtained from the Federal Reserve, the PDBS, and other regulatory authorities in the United States. In determining whether to grant these approvals, the applicable regulatory authorities consider a variety of factors, including the competitive impact of the proposal in the relevant geographic markets; financial, managerial and other supervisory considerations of each party; convenience and needs of the communities to be served and the record of the insured depository institution subsidiaries under the CRA and the regulations promulgated thereunder; effectiveness of the parties in combating money laundering activities; and the extent to which the proposal would result in greater or more concentrated risks to the stability of the United States banking or financial system. These approvals could be delayed or not obtained at all, including due to either party’s regulatory standing or any other factors considered by regulators when granting such approvals; governmental, political or community group inquiries, investigations or opposition; or changes in legislation or the political environment generally.
The approvals that are granted may impose terms and conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined company’s business or require changes to the terms of the transactions contemplated by the Merger Agreement. There can be no assurance that regulators will not impose any such conditions, limitations, obligations or restrictions or that such conditions, limitations, obligations or restrictions will not have the effect of delaying the completion of any of the transactions contemplated by the Merger Agreement, imposing additional material costs on or materially limiting the revenues of the combined company following the Acquisition or otherwise reduce the anticipated benefits of the Acquisition if the Acquisition is consummated successfully within the expected timeframe. In addition, there can be no assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the Acquisition or termination of the Merger Agreement. Additionally, the completion of the Acquisition is conditioned on the absence of certain orders, injunctions or decrees by any court or regulatory agency of competent jurisdiction that would prohibit or make illegal the completion of any of the transactions contemplated by the Merger Agreement. Conditions that the regulatory authorities may impose in connection with the Acquisition could have the effect of delaying completion of the Acquisition or of imposing additional costs or limitations on the combined company following the Acquisition. Such conditions may constitute a burdensome condition that may allow Raymond James to terminate the Merger Agreement on or after June 30, 2022.
Failure to complete the Acquisition or a significant delay in the consummation of the Acquisition could negatively impact us.
The Merger Agreement is subject to a number of conditions that must be fulfilled in order to complete the Acquisition, including approval of the Acquisition by our shareholders. These conditions to the consummation of the Acquisition may not be fulfilled and, accordingly, the Acquisition may not be completed or may be significantly delayed. In addition, if the Acquisition is not completed by October 20, 2022, either we or Raymond James can choose to terminate the Merger Agreement. Furthermore, the consummation of the Acquisition may be significantly delayed due to various factors, including potential litigation related to the Acquisition.
If the Acquisition is not consummated or is significantly delayed, our ongoing business, financial condition and results of operations may be materially adversely affected, and the market price of our common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the Acquisition will be consummated. If the consummation of the Acquisition is delayed, including by the receipt of a competing acquisition proposal, our business, financial condition and results of operations may be materially adversely affected.
In addition, we have incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement and, under certain circumstances, we may be required to pay a termination fee of approximately $42 million to Raymond James. If the Acquisition is not completed or is significantly delayed, we would have to recognize these expenses without realizing the expected benefits of the Acquisition. Any of the foregoing, or other risks arising in connection with the failure of or delay in consummating the Acquisition, including the diversion of management attention from pursuing other opportunities and the constraints in the Merger Agreement on our ability to make significant changes to our ongoing business during the pendency of the Acquisition, could have a material adverse effect on our business, financial condition and results of operations.
Additionally, our business may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Acquisition, without realizing any of the anticipated benefits of completing the Acquisition, and the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the Acquisition will be completed. If the Merger Agreement is terminated and a party’s board of directors seeks another merger or business combination, our shareholders cannot be certain that we will be able to find a party willing to engage in a transaction on more attractive terms than the Acquisition.
The Merger Agreement may be terminated in accordance with its terms and the Acquisition may not be completed.
The Merger Agreement is subject to a number of conditions, which must be fulfilled in order to complete the Acquisition. Those conditions include: (i) approval of the Merger Agreement by our shareholders; (ii) the shares of Raymond James common stock that shall be issuable pursuant to the Merger Agreement shall have been authorized for listing on the NYSE, subject to official notice of issuance; (iii) the shares of Raymond James preferred stock that shall be issuable pursuant to the Merger Agreement shall have been authorized for listing on the NYSE, subject to official notice of issuance (this condition will be satisfied upon the authorization for listing of the Raymond James depositary shares); (iv) all regulatory approvals necessary to permit the parties to effect the Acquisition and the other transactions contemplated by the Merger Agreement shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired or been terminated; (v) no such regulatory approval nor the consummation of the Acquisition and the other transactions contemplated by the Merger Agreement shall have resulted in, or is reasonably likely to result in, a burdensome regulatory condition, or if a burdensome regulatory condition was imposed or existed, it is no longer existing or applicable; (vi) the Registration Statement on Form S-4 filed with the SEC by Raymond James in connection with the transactions contemplated by the Merger Agreement shall have become effective and no stop order suspending the effectiveness of such registration statement shall have been issued and no proceedings for such purpose shall have been initiated or threatened by the SEC and not withdrawn; and (vii) the absence of any order, injunction, law, regulation or other legal restraint preventing, prohibiting or making illegal the completion of the Acquisition or any other transactions contemplated by the Merger Agreement. Each party’s obligation to complete the Acquisition is also subject to the following additional conditions: (A) the accuracy of the representations and warranties of the other party, subject to specified materiality standards; (B) performance in all material respects by the other party of its obligations under the Merger Agreement and receipt of a certificate of specified officers of the other party to such effect; and (C) receipt by such party of an opinion from its specified counsel to the effect that the Acquisition will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. These conditions to the closing may not be fulfilled in a timely manner or at all, and, accordingly, the Acquisition may not be completed. In addition, the parties can mutually decide to terminate the Merger Agreement at any time, before or after the requisite shareholder approvals, or we or Raymond James may elect to terminate the Merger Agreement in certain other circumstances.
Risks Relating to Regulations
We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, could subject us to regulatory action or penalties.
Banking is highly regulated under federal and state law. We are subject to extensive regulation and supervision that governs almost all aspects of our operations. As a registered bank holding company, we are subject to supervision, regulation and examination by the Federal Reserve. As a commercial bank chartered under the laws of Pennsylvania with $10 billion or more assets, TriState Capital Bank is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and SecuritiesPDBS and the FDIC.FDIC, and by the CFPB with respect to consumer financial laws. Our investment management business is subject to extensive regulation in the United States. Chartwell and Chartwell TSC are subject to federal securities laws, principally the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, the Investment Advisers Act of 1940, as amended, and other regulations promulgated by various regulatory authorities, including the SEC, the Financial Industry Regulatory Authority, Inc., or FINRA, stock exchanges, and applicable state laws. Our investment management business also may be subject to regulation by the Commodity Futures Trading Commission and the National Futures Association. Our investment management business also is affected by various regulations governing banks and other financial institutions. Failure to appropriately comply with any such laws, regulations or regulatory policies could result in sanctions by regulatory agencies, civil monetary penalties or damage to our reputation, all of which could adversely affect our business, financial condition, results of operations and future prospects.
The banking agencies have broad enforcement power over bank holding companies and banks, including the authority, among other things, to enjoin “unsafe or unsound” practices, require affirmative action to correct any violation or practice, issue administrative orders that can be judicially enforced, direct increases in capital, direct the sale of subsidiaries or other assets, limit dividends and distributions,
restrict growth, assess civil monetary penalties, remove officers and directors and, with respect to banks, terminate a bank’s charter, terminate its deposit insuranceunsafe or place aunsound practices or violations of law. See “Federal and state bank into conservatorshipregulators periodically conduct examinations of our business and we may be required to remediate adverse examination findings or receivership.be subject to enforcement actions.”
In addition to the safety and soundness focus, there are significant banking regulations relating to other aspects of our business, including borrowerconsumer protection and community development. With respect to our community development obligations under the Community Reinvestment Act, or CRA, we have an approved CRA strategic plan for the years 20182021 through 2020.2023. While we currently believe we will succeed in obtaining approval from the FDIC for our CRA strategic plan commencing in 2021,2024, we cannot guarantyguarantee that we will obtain such an approval, in which case we would be subject to the CRA for traditional large banks, which could have material adverse effects on our business, financialresults of operation,operations, financial condition and future prospects. For additional information, see “Supervision and Regulation-CommunityRegulation—Community Reinvestment Act.”
Compliance with the myriad laws and regulations applicable to our organization can be difficult and costly. In addition, these laws, regulations and policies are subject to continual review by governmental authorities, and changes to these laws, regulations and policies, including changes in interpretation or implementation of these laws, regulations and policies, could affect us in substantial and unpredictable ways and often impose additional compliance costs. Further, any new laws, rules and regulations or policies could make compliance more difficult or expensive. Failure to comply with these laws, regulations and regulations,policies, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, which could have an adverse impact on our business, financial condition, results of operations and future prospects.
The ongoing implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, could require significant management attention and resources and subject us to more stringent regulatory requirements.
The Dodd-Frank Act comprehensively reformed the regulation of financial institutions, products and services. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. While a significant number of regulations have already been promulgated to implement the Dodd-Frank Act, many of the details and much of the impact of the Dodd-Frank Act may not be known for lengthy periods. We may be forced to invest significant management attention and resources to make any necessary changes related to the Dodd-Frank Act and regulations promulgated thereunder, which may adversely affect our business, financial condition, results of operations and future prospects.
Federal and state bank regulators periodically conduct examinations of our business and we may be required to remediate adverse examination findings.findingsor be subject to enforcement actions.
The Federal Reserve, the FDIC, the PDBS, and the Pennsylvania Department of Banking and SecuritiesCFPB periodically conduct examinations of our business, including our compliance with laws and regulations. If, as a result of an examination, a bank regulatory agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we or TriState Capital Bank were in violation of any law or regulation, it may take a number of different remedial actions. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against us, TriState Capital Bank or our respective officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate TriState Capital Bank’s charter or deposit insurance and place the Bank into receivership or conservatorship. Any regulatory action against us could have a material adverse effect on our business.
The Bank’s FDIC deposit insurance premiums and assessments may increase.
The deposits of TriState Capital Bank are insured by the FDIC up to legal limits and, accordingly, subject the Bank to the payment of FDIC deposit insurance assessments.assessments. The FDIC uses a risk-based assessment system that imposes insurance premiums as determined by multiplying an insured bank’s assessment base by its assessment rate. A bank’s deposit insurance assessment base is generally equal to its total assets minus its average tangible equity during the assessment period. The Bank’s regular assessments are
determined within a range of base assessment rates based in part on the Bank’s CAMELS composite rating, taking into account other factors and adjustments. The CAMELS rating system is a supervisory rating system developed to classify a bank’s overall condition by its risk category, which is based on a combination of its financial ratiostaking into account capital adequacy, assets, management capability, earnings, liquidity and supervisory ratings,sensitivity to market and which, among other things, generally demonstrates its regulatory capital levels and level of supervisory concern.interest rate risk. Moreover, the FDIC has the unilateral authority to change deposit insurance assessment rates and the manner in which deposit insurance is calculated, and also to charge special assessments to FDIC-insured institutions. High levelsSince the outbreak of bank failures since 2007 and increasesthe COVID-19 pandemic, the amount of total estimated insured deposits has grown very rapidly while the funds in the FDIC’s DIF have grown at a normal rate, causing the DIF reserve ratio to fall below the statutory deposit insurance limits have increased costsminimum of 1.35%. The FDIC adopted a restoration plan on September 15, 2020, to the FDIC to resolve bank failures and have put significant pressure on the Deposit Insurance Fund. In order to maintain a strong funding position and restore the DIF reserve ratios of the Deposit Insurance Fund, the FDIC increased deposit insurance assessment rates and charged a special assessmentratio to all FDIC-insured financial institutions. at least 1.35% by September 30, 2028. Further increases in assessment rates or special assessments may occur in the future, especially if there are significant additional financial institution failures. Additionally, the Bank has exceeded $10 billion in total assets for four consecutive quarters and has become subject to the FDIC’s large bank pricing methodology, which may result in the Bank paying different, and potentially higher, deposit assessment rates.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act, or the CRA, and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau,Federal Trade Commission Act prohibits unfair or deceptive acts or practices, and the Dodd-Frank Act prohibits unfair, deceptive, or abusive acts or practices by financial institutions. The CFPB, the Department of Justice and other federal and state banking agencies are responsible for enforcing these laws and regulations, and, because we have surpassed $10 billion in total consolidated assets for four consecutive quarters, the CFPB examines the Bank for compliance with federal consumer protection laws and regulations. The CFPB also promulgates regulations with respect to these federal consumer protection laws and, accordingly, CFPB rule-making has the potential to have a significant impact on our operations. See “We are now subject to additional regulation because we have surpassed $10 billion in total consolidated assets.”
A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergersmerger and acquisitionsacquisition activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private litigation, including through class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We face a risk of noncompliance with and enforcement action under the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The Bank Secrecy Act, the USA PATRIOT Act of 2001, and other federal and state laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports when appropriate. In addition to other bank regulatory agencies, the federal Financial Crimes Enforcement Network of the U.S. Department of the Treasury is authorized to impose significant civil money penalties for violations of those requirements and has recently engagedmay engage in coordinated enforcement efforts with state and federal banking regulators, as well as the Department of Justice, the CFPB, the Drug Enforcement Administration, the Office of Foreign Assets Control or OFAC,(“OFAC”), and the Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by OFAC regarding, among other things, the prohibition of transacting business with, and the need to freeze assets of, certain persons and organizations identified as a threat to the national security, foreign policy or economy of the United States. To comply with regulations, guidelines and examination procedures in these areas, we have dedicated significant resources to our anti-money laundering program and OFAC compliance. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, includingand an inability to obtain regulatory approvals for any acquisitions we desire to make. We could also incur increased costs and expenses to improve our anti-money laundering procedures and systems to comply with any regulatory requirements or actions. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We are a holding company and we depend upon our subsidiaries for liquidity. Applicable laws and regulations, including capital and liquidity requirements, may restrict our ability to transfer funds from our subsidiaries to us or other subsidiaries.
TriState Capital Holdings, Inc., as the parent company, is a separate and distinct legal entity from our banking and nonbank subsidiaries. We evaluate and manage liquidity on a legal entity basis. Legal entity liquidity is an important consideration as there are legal and other limitations on our ability to utilize liquidity from one legal entity to satisfy the liquidity requirements of another, including the parent company. For instance, the parent company depends on distributions and other payments from our banking and nonbank subsidiaries to fund all payments on our other obligations, including debt obligations. Our bank and investment management subsidiaries are subject to laws that restrict dividend payments or authorize regulatory bodies to blockprohibit or reducelimit the flow of funds from those subsidiaries to the parent company or other subsidiaries. In addition, our bank and investment management subsidiaries
are subject to restrictions on their ability to lend to or transact with affiliates and to minimum regulatory capital and liquidity requirements, as well as restrictions on their ability to use funds deposited with them in bank or brokerage accounts to fund their businesses. These limitations may hinder our ability to implement our business strategy which, in turn, could have a material adverse effect on our business, financial condition, results of operations and future prospects.
We are now subject to additional regulation because we have surpassed $10 billion in total consolidated assets.
As of December 31, 2021, we have exceeded $10 billion in total consolidated assets for four consecutive quarters. Federal law imposes heightened requirements on bank holding companies and depository institutions that exceed $10 billion in total consolidated assets. The Bank has become subject to supervision, examination, and enforcement with respect to consumer protection laws by the CFPB. Additionally, other regulatory requirements apply to insured depository institution holding companies and insured depository institutions with $10 billion or more in total consolidated assets, including the restrictions on proprietary trading and investment and sponsorship in hedge funds and private equity funds known as the Volcker Rule. Further, deposit insurance assessment rates are calculated differently, and may be higher, for insured depository institutions with $10 billion or more in total consolidated assets. These and other additional regulatory requirements could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our use of third-party service providers and other ongoing third-party business relationships may become subject to increasing regulatory requirements and attention.
We regularly use third-party service providers and subcontractors as part of our business. These types of third-party relationships are subject to increasingly demanding regulatory requirements and attention by regulators, including the Federal Reserve, FDIC, and CFPB. Under regulatory guidance, we are required to apply stringent due diligence, conduct ongoing monitoring and maintain effective control over third-party service providers and subcontractors and other ongoing third-party business relationships. These regulatory expectations may change, and potentially become more rigorous in certain ways, due to an interagency effort to replace existing guidance on the risk management of third-party relationships with new guidance. We expect that the regulators will hold us responsible for deficiencies in our oversight and control of our third-party relationships and in the performance of the parties with which we have these relationships. Any such supervisory criticism or regulatory enforcement action could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Risks Relating to an Investment in our Common Stock and Preferred Stock
Shares of our common stock, preferred stock and underlying depositary shares are not an insured deposit.
Shares of our common stock, preferred stock and underlying depositary shares are not bank deposits and are not insured or guaranteed by the FDIC or any other government agency. An investment in our common stock, preferred stock or underlying depositary shares has risks, and you may lose your entire investment.
An active, liquid market for our securities may not be sustained.
Our common stock and depositary shares underlying our 6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, no par value (“Series A Preferred StockStock”) and our 6.375% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, no par value (the “Series B Preferred Stock”) are listed on Nasdaq, but we may be unable to meet continued listing standards. In addition, an active, liquid trading market for such securities may not be sustained. A public trading market having depth, liquidity and orderliness depends upon the presence in the marketplace and independent decisions
of willing buyers and sellers of our common stock, over which we have no control. Without an active, liquid trading market for our common stock, shareholders may not be able to sell their shares at the volume, prices and times desired. The lack of an established market could adversely affect the value of our common stock.
Our preferred stock is thinly traded.
There is only a limited trading volume in our preferred stock due to the small size of the issue and its largely institutional holder base. Significant sales of our preferred stock, or the expectation of these sales, could cause the price of our preferred stock to fall substantially.
The market price of our securities may be subject to substantial fluctuations, which may make it difficult for you to sell your shares at the volume, prices and times desired.
The market price of our common stock and depositary shares underlying our Series A Preferred Stock and Series B Preferred Stock may be highly volatile, which may make it difficult to resell shares of our securities at the volume, prices and times desired. There are many factors that may impact the market price and trading volume of our securities, including, without limitation:
•actual or anticipated fluctuations in our operating results or financial condition or general changes in economic conditions;
•the effects of, and changes in, trade, monetary and fiscal policies, accounting standards, policies, interpretations or principles or in laws or regulations affecting us;
•public reaction to our press releases, our other public announcements or our filings with the SEC;
•publication of research reports about us, our competitors, or the financial services industry or changes in, or failure to meet, securities analysts’ estimates of our performance, or lack of research reports by industry analysts or ceasing of coverage;
•operating and stock price performance of companies that investors deemed comparable to us;
•additional or anticipated sales of our common stock or other securities by us or our existing shareholders;
•significant amounts of short selling of our common stock, or the perception that a significant amount of short sales could occur;
•additions or departures of key personnel;
•perceptions in the marketplace regarding our competitors and/or us;
•significant acquisitions or business combinations, partnerships, joint ventures or capital commitments by us or our competitors;
•other economic, competitive, governmental, regulatory and technological factors affecting our business; and
•other news, announcements or disclosures (whether by us or others) related to us, our competitors, our core market or the financial services industry.
The stock market has experienced substantial fluctuations in recent years, which in many cases have been unrelated to the operating performance and prospects of particular companies. In addition, significant fluctuations in the trading volume in our common stock may cause significant price variations. Increased market volatility may adversely affect the market price of our common stock, which could make it difficult to sell your shares at the volume, prices and times desired.
Actual or anticipated issuances or sales of our securities in the future could adversely affect the prevailing market price of our common stock, preferred stock and underlying depositary shares and could impair our ability to raise capital through future sales of equity securities.
Actual or anticipated issuances or sales of substantial amounts of our common stock, preferred stock or depositary shares could cause the market price of any of our securities to decline significantly and make it more difficult for us to sell equity or equity-related securities in the future at a time and on terms that we deem appropriate. The issuance of any shares of our securities also would, and the issuance of equity-related securities could, dilute the percentage ownership interest held by shareholders with respect to such security. We may issue additional equity securities, or debt securities convertible into or exercisable or exchangeable for equity securities, from time to time to raise additional capital, support growth or to make acquisitions. Further, we expect to issue stock options or other stock awards to retain and motivate our employees and directors. These issuances of securities could dilute the voting and economic interests of our existing shareholders, result in a significant decline in the market price of our common stock or other securities and make it more difficult for us to raise capital through future sales of equity securities.
Our current management and board of directors have significant control over our business.
Our directors, as well as their related parties, and executive officers beneficially own a material portion of our outstanding common stock. Consequently, our directors and executive officers, acting together, may be able to significantly affect the outcome of the election of directors and the potential outcome of other matters submitted to a vote of our shareholders, such as mergers, the sale of substantially all of our assets and other corporate matters. The interests of these insiders could conflict with the interest of our shareholders.
The rights of holders of our common stock are generally subordinate to the rights of holders of our debt securities and preferred stock and may be subordinate to the rights of holders of any class of preferred stock or any debt securities that we may issue in the future.
Our board of directors has the authority to issue debt securities as well as an aggregate of up to 150,000 shares of preferred stock on the terms it determines without shareholder approval. In 2018, we issued 40,250 shares of our 6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock in the form of $1.61.6 million depositary shares, each representing a 1/40th interest in a share of Series A Preferred Stock. In 2019, we issued 80,500 shares of our 6.375% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock in the form of $3.23.2 million depositary shares, each representing ownership of a 1/40th interest in a share of Series B Preferred Stock. In 2020, we issued 650 shares of Series C perpetual non-cumulative convertible non-voting preferred stock, no par value (“Series C Preferred Stock”). Any debtdebt or shares of preferred stock that we may issue in the future will be senior to our common stock. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, the amount, timing, nature or success of our future capital raising efforts is uncertain. Thus, holders of our common stock bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings may negatively affect the market price of our common stock.
Holders of our preferred stock and the depositary shares will have limited voting rights.
Holders of the Series A Preferred Stock and Series B Preferred Stock and,(and, accordingly, holders of the depositary shares underlying such stock), as well as holders of the Series C Preferred Stock, will have no voting rights with respect to matters that generally require the approval of our voting common shareholders. Holders of preferred stock have voting rights that are generally limited to, with respect to the series of preferred stock held, (i) authorizing, creating or issuing any capital stock ranking senior to the such preferred stock as to dividends or the distribution of assets upon liquidation and (ii) amending, altering or repealing any provision of our Articles of Incorporation, so as to adversely affect the powers, preferences or special rights of such series of preferred stock.stock; and with respect to the Series C Preferred Stock, holders have the right to vote on any voluntary liquidation, dissolution, or winding up of the Company.
We have not paid dividends on our common stock and are subject to regulatory restrictions on our ability to pay dividends.
We have not paid any dividends on our common stock since inception and have instead utilized our earnings to finance the growth and development of our business. In addition, if we decide to pay dividends on our common stock in the future (and we have not made such a decision), we are subject to certain restrictions as a result of banking laws, regulations and policies. Moreover, because
TriState Capital Bank is our most significant asset, our ability to pay dividends to our shareholders depends in large part on our receipt of dividends from the Bank, which is also subject to restrictions on dividends as a result of banking laws, regulations and policies. Finally, so long as any shares of our Series A Preferred Stock, Series B Preferred Stock, or Series BC Preferred Stock remain outstanding, unless we have paid in full (or declared and set aside funds sufficient for) applicable dividends on the Preferred Stock,preferred stock, we may not declare or pay any dividend on our common stock, other than a dividend payable solely in shares of common stock or in connection with a shareholder rights plan.
Our corporate governance documents, and certain applicable corporatefederal and bankingPennsylvania laws, could make a takeover more difficult.
Certain provisions of our amended and restated articles of incorporation, our bylaws, as amended, and federal and Pennsylvania corporate and federal banking laws, could make it more difficult for a third party to acquire control of our organization or conduct a proxy contest, even if those events were perceived by many of our shareholders as beneficial to their interests. These provisions, and the corporate and banking laws and regulations applicable to us:
•empower our board of directors, without shareholder approval, to issue preferred stock, the terms of which, including voting power, are set by our board of directors;
•divide our board of directors into four classes serving staggered four-year terms;
•eliminate cumulative voting in elections of directors;
•require the request of holders of at least 10% of the outstanding shares of our capital stock entitled to vote at a meeting to call a special shareholders’ meeting;
•require at least 60 days’ advance notice of nominations by shareholders for the election of directors and the presentation of shareholder proposals at meetings of shareholders; and
•require prior regulatory application and approval of any transaction involving control of our organization.
These provisions may discourage potential acquisition proposals and could delay or prevent a change in control, including circumstances in which our shareholders might otherwise receive a premium over the market price of our shares.
There are substantial regulatory limitations on changes of control of bank holding companies.
With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring 10% or more than 10% (5% or more if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve. Similarly, prior approval of the PDBS is required for a person to acquire more than 10% of any class of our outstanding shares. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. These provisions effectively inhibit certain takeovers, mergers or other business combinations, which, in turn, could adversely affect the market price of our common stock.
Climate change and societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.
Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior as a result of these concerns. We and our customers will need to respond to new laws, regulations and supervisory guidance as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions and operating process changes. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon-intensive activities. We could face reduced demand for our products and services and reductions in creditworthiness on the part of some of our customers or in the value of assets securing loans in response to efforts to mitigate climate change. Our efforts to take these risks into account in making lending and other decisions, including by increasing our business with climate-friendly companies, may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.
Severe weather, natural disasters, acts of war or terrorism or other external events could significantly impact our business.
Severe weather, natural disasters, widespread disease or new pandemics, acts of war or terrorism or other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. The occurrence of any of these events in the future could have a material adverse effect on our business, financial condition or results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our main office consists of leased office space located at One Oxford Centre, Suite 2700, 301 Grant Street, Pittsburgh, Pennsylvania. We also lease office space for each of our four representative bank offices in the metropolitan areas of Philadelphia, Pennsylvania; Cleveland, Ohio; Edison, New Jersey; and New York, New York; and we lease office space for Chartwell Investment Partners, LLC in Berwyn, Pennsylvania. The leases for our facilities have terms expiring at dates ranging from 20202022 and 2036, although certain of the leases contain options to extend beyond these dates. We believe that our current facilities are adequate for our current level of operations. During quarter ended September 30, 2021, we entered into a lease agreement for additional office space in Pittsburgh. This lease is expected to commence in mid-2022 when we begin to occupy the property.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is a party to various litigation matters incidental to the conduct of its business. During the year ended December 31, 2019,2021, the Company was not a party to any legal proceedings the resolution of which management believes will be material to the Company’s business, future prospects, financial condition, liquidity, results of operation, cash flows or capital levels.levels, except as set forth below:
Following the public announcement of the Merger Agreement among the Company, Raymond James, Macaroon One LLC (“Merger Sub 1”) and Macaroon 2 LLC (“Merger Sub 2”), six lawsuits have been filed in connection with the disclosures associated with the Acquisition. On January 5, 2022, a purported Company stockholder filed a lawsuit against the Company and members of the Company’s board of directors in the United States District Court for the Southern District of New York, captioned Stein v. TriState Capital Holdings, Inc. et al., No. 1:22-cv-00077 (the “Stein Complaint”). On January 7, 2022, a purported Company stockholder filed a lawsuit against the Company, members of the Company’s board of directors, Raymond James, Merger Sub 1 and Merger Sub 2 in the United States District Court for the Southern District of New York captioned Ciccotelli v. TriState Capital Holdings, Inc. et al., No. 1:22-cv- 00164 (the “Ciccotelli Complaint”). On February 1, 2022, a purported Company stockholder filed a lawsuit against the Company and members of the Company’s board of directors in the United States District Court for the District of New Jersey captioned Bushansky v. TriState Capital Holdings, Inc. et al., No. 2:22-cv-00509 (the “Bushansky Complaint”). On February 9, 2022, a purported Company stockholder filed a lawsuit against the Company and members of the Company’s board of directors in the United States District Court for the District of New Jersey captioned Wolfson v. TriState Capital Holdings, Inc. et al., No. 2:22-cv-00705 (the “Wolfson Complaint”). On February 11, 2022, a purported Company stockholder filed a lawsuit against the Company and members of the Company’s board of directors in the United States District Court for the Eastern District of Pennsylvania captioned Justice v. TriState Capital Holdings, Inc. et al., No. 2:22-cv-00562 (the “Justice Complaint”). On February 14, 2022, a purported Company stockholder filed a lawsuit against the Company and members of the Company’s board of directors in the United States District Court for the District of New Jersey captioned Rubin v. TriState Capital Holdings, Inc., No. 2:22-cv-00780 (the “Rubin Complaint” and, collectively with the Stein Complaint, the Ciccotelli Complaint, the Bushansky Complaint, the Wolfson Complaint and the Justice Complaint, the “Complaints”). The Complaints contain allegations contending, among other things, that the proxy statement/prospectus contained within the Registration Statement on Form S-4 filed in connection with the proposed Acquisition failed to disclose certain allegedly material information in violation of the federal securities laws. The Complaints seek injunctive relief enjoining the Acquisition, attorneys’ and experts’ fees, and other remedies.
The outcome of the Complaints and any additional litigation related to the Acquisition that is filed in the future is uncertain. If any case is not resolved, the lawsuit(s) could prevent or delay completion of the Acquisition and result in substantial costs to Raymond James and the Company, including any costs associated with the indemnification of directors and officers. One of the conditions to the closing of the Acquisition is the absence of any order, injunction, law, regulation or other legal restraints preventing, prohibiting or making illegal the completion of the Acquisition or any other transactions contemplated by the Merger Agreement. As such, if plaintiffs are successful in obtaining an injunction prohibiting the completion of the Acquisition on the agreed-upon terms, then such injunction may prevent the Acquisition from being completed, or from being completed within the expected timeframe. The defense or settlement of any lawsuit or claim that remains unresolved at the time the Acquisition is completed may adversely affect the combined company’s business, financial condition, results of operations and cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on The Nasdaq Global Select Market under the symbol “TSC.” On December 31, 2019,January 20, 2022, there were approximately 158175 holders of record of our common stock, listed with our registered agent.
No cash dividends have ever been paid by us on our common stock. Our principal source of funds to pay cash dividends on our common stock would be cash dividends from our Bank and Chartwell subsidiaries. The payment of dividends by our bank is subject to certain restrictions imposed by federal and state banking laws, regulations and authorities.
Stock Performance Graph
The following graph sets forth the cumulative total stockholder return for the Company’s common stock for the five-year period ending December 31, 2019,2021, compared to an overall stock market index (Russell 2000 Index) and the Company’s peer group index (Nasdaq Bank Index). The Russell 2000 Index and Nasdaq Bank Index are based on total returns assuming reinvestment of dividends. The graph assumes an investment of $100 on December 31, 2014.2016. The performance graph represents past performance and should not be considered to be an indication of future performance.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The table below sets forth information regarding the Company’s purchases of its common stock during its fiscal quarter ended December 31, 2019:2021:
| | | | | | | | | | | | | | | | | | | | |
| Total Number of Shares Purchased (1) | | Weighted Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
October 1, 2021 - October 31, 2021 | — | | | $ | — | | — | | | $ | 7,273,785 | |
November 1, 2021 - November 30, 2021 | 284 | | | 30.05 | | — | | | 7,273,785 | |
December 1, 2021 - December 31, 2021 | 2,381 | | | 29.86 | | — | | | 7,273,785 | |
Total | 2,665 | | | $ | 29.88 | | — | | | $ | 7,273,785 | |
|
| | | | | | | | | | | | |
| Total Number of Shares Purchased (1) | | Weighted Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
October 1, 2019 - October 31, 2019 | — |
| | $ | — |
| — |
| | $ | 10,428,804 |
|
November 1, 2019 - November 30, 2019 | 4,483 |
| | 23.44 |
| — |
| | 10,428,804 |
|
December 1, 2019 - December 31, 2019 | 8,647 |
| | 24.89 |
| — |
| | 10,428,804 |
|
Total | 13,130 |
| | $ | 24.39 |
| — |
| | $ | 10,428,804 |
|
(1)The 2,665 shares of treasury stock in the table above were acquired during the periods mentioned in connection with the exercise, net settlement, cancellation, or vesting of equity awards. These shares were not part of a publicly announced plan or program. | |
(1)
| The 13,130 shares of treasury stock in the table above were acquired in connection with the exercise, net settlement, cancellation, or vesting of equity awards. These shares were not part of a publicly announced plan or program. |
| |
(2)
| On October 16, 2018, the Board approved a share repurchase program of up to $5 million. On July 15, 2019, the Board approved an additional share repurchase program of up to $10 million. Under this authorization, purchases of shares may be made at the discretion of management from time to time in the open market or through negotiated transactions, as well as purchases of shares or the options to acquire shares subject to common stock incentive compensation award agreements from officers, directors or employees of the Company. |
(2)On July 15, 2019, the Board approved a share repurchase program of up to $10 million. Under this authorization, purchases of shares may be made at the discretion of management from time to time in the open market or through negotiated transactions, as well as purchases of shares or the options to acquire shares subject to common stock incentive compensation award agreements from officers, directors or employees of the Company.
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
You should read the selected financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the related notes included elsewhere in this Form 10-K. We have derived the selected statements of income data for the years ended December 31, 2019, 20182021, 2020 and 2017,2019, and the selected balance sheet data as of December 31, 20192021 and 2018,2020, from our audited consolidated financial statements included elsewhere in this Form 10-K. We have derived the selected statements of income data for the years ended December 31, 20162018 and 2015,2017, and the selected balance sheet data as of December 31, 2017, 20162019, 2018 and 2015,2017, from our audited consolidated financial statements not included in this Form 10-K. The performance, asset quality and capital ratios are unaudited and derived from the audited financial statements as of and for the years presented. Average balances have been computed using daily averages. Our historical results may not be indicative of our results for any future period.
| | | | | | | | | | | | | | | | | |
| As of and for the Years Ended December 31, |
(Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 |
Period-end balance sheet data: | | | | | |
Cash and cash equivalents | $ | 452,016 | | $ | 435,442 | | $ | 403,855 | | $ | 189,985 | | $ | 156,153 | |
Total investment securities, net | 1,405,678 | | 842,545 | | 469,150 | | 466,759 | | 220,552 | |
| | | | | |
Loans and leases held-for-investment | 10,763,324 | | 8,237,418 | | 6,577,559 | | 5,132,873 | | 4,184,244 | |
Allowance for credit losses on loans and leases | (28,563) | | (34,630) | | (14,108) | | (13,208) | | (14,417) | |
Loans and leases held-for-investment, net | 10,734,761 | | 8,202,788 | | 6,563,451 | | 5,119,665 | | 4,169,827 | |
Goodwill and other intangibles, net | 62,000 | | 63,911 | | 65,854 | | 67,863 | | 65,358 | |
Other assets | 350,397 | | 352,130 | | 263,500 | | 191,383 | | 166,007 | |
Total assets | $ | 13,004,852 | | $ | 9,896,816 | | $ | 7,765,810 | | $ | 6,035,655 | | $ | 4,777,897 | |
| | | | | |
Deposits | $ | 11,504,389 | | $ | 8,489,089 | | $ | 6,634,613 | | $ | 5,050,461 | | $ | 3,987,611 | |
Borrowings, net | 470,163 | | 400,493 | | 355,000 | | 404,166 | | 335,913 | |
Other liabilities | 193,578 | | 250,089 | | 154,916 | | 101,674 | | 65,302 | |
Total liabilities | 12,168,130 | | 9,139,671 | | 7,144,529 | | 5,556,301 | | 4,388,826 | |
Preferred stock | 181,544 | | 177,143 | | 116,079 | | 38,468 | | — | |
Common shareholders' equity | 655,178 | | 580,002 | | 505,202 | | 440,886 | | 389,071 | |
Total shareholders' equity | 836,722 | | 757,145 | | 621,281 | | 479,354 | | 389,071 | |
Total liabilities and shareholders' equity | $ | 13,004,852 | | $ | 9,896,816 | | $ | 7,765,810 | | $ | 6,035,655 | | $ | 4,777,897 | |
| | | | | |
Income statement data: | | | | | |
Interest income | $ | 231,297 | | $ | 217,095 | | $ | 262,447 | | $ | 199,786 | | $ | 134,295 | |
Interest expense | 51,938 | | 79,151 | | 135,390 | | 86,382 | | 42,942 | |
Net interest income | 179,359 | | 137,944 | | 127,057 | | 113,404 | | 91,353 | |
Provision (credit) for credit losses | 808 | | 19,400 | | (968) | | (205) | | (623) | |
Net interest income after provision for credit losses | 178,551 | | 118,544 | | 128,025 | | 113,609 | | 91,976 | |
Non-interest income: | | | | | |
Investment management fees | 37,454 | | 32,035 | | 36,442 | | 37,647 | | 37,100 | |
Net gain (loss) on the sale and call of debt securities | 242 | | 3,948 | | 416 | | (70) | | 310 | |
Other non-interest income | 20,950 | | 21,222 | | 15,924 | | 10,340 | | 9,556 | |
Total non-interest income | 58,646 | | 57,205 | | 52,782 | | 47,917 | | 46,966 | |
Non-interest expense: | | | | | |
Intangible amortization expense | 1,911 | | 1,944 | | 2,009 | | 1,968 | | 1,851 | |
Change in fair value of acquisition earn out | — | | — | | — | | (218) | | — | |
Other non-interest expense | 144,583 | | 121,159 | | 110,140 | | 99,407 | | 89,621 | |
Non-interest expense | 146,494 | | 123,103 | | 112,149 | | 101,157 | | 91,472 | |
Income before tax | 90,703 | | 52,646 | | 68,658 | | 60,369 | | 47,470 | |
Income tax expense | 12,643 | | 7,412 | | 8,465 | | 5,945 | | 9,482 | |
Net income | $ | 78,060 | | $ | 45,234 | | $ | 60,193 | | $ | 54,424 | | $ | 37,988 | |
Preferred stock dividends | 12,348 | | 7,873 | | 5,753 | | 2,120 | | — | |
Net income available to common shareholders | $ | 65,712 | | $ | 37,361 | | $ | 54,440 | | $ | 52,304 | | $ | 37,988 | |
|
| | | | | | | | | | | | | | | |
| As of and for the Years Ended December 31, |
(Dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 |
Period-end balance sheet data: | | | | | |
Cash and cash equivalents | $ | 403,855 |
| $ | 189,985 |
| $ | 156,153 |
| $ | 103,994 |
| $ | 96,676 |
|
Total investment securities | 469,150 |
| 466,759 |
| 220,552 |
| 238,473 |
| 225,411 |
|
Loans and leases held-for-investment | 6,577,559 |
| 5,132,873 |
| 4,184,244 |
| 3,401,054 |
| 2,841,284 |
|
Allowance for loan and lease losses | (14,108 | ) | (13,208 | ) | (14,417 | ) | (18,762 | ) | (17,974 | ) |
Loans and leases held-for-investment, net | 6,563,451 |
| 5,119,665 |
| 4,169,827 |
| 3,382,292 |
| 2,823,310 |
|
Goodwill and other intangibles, net | 65,854 |
| 67,863 |
| 65,358 |
| 67,209 |
| 50,816 |
|
Other assets | 263,500 |
| 191,383 |
| 166,007 |
| 138,489 |
| 105,958 |
|
Total assets | $ | 7,765,810 |
| $ | 6,035,655 |
| $ | 4,777,897 |
| $ | 3,930,457 |
| $ | 3,302,171 |
|
| | | | | |
Deposits | $ | 6,634,613 |
| $ | 5,050,461 |
| $ | 3,987,611 |
| $ | 3,286,779 |
| $ | 2,689,844 |
|
Borrowings, net | 355,000 |
| 404,166 |
| 335,913 |
| 239,510 |
| 254,308 |
|
Other liabilities | 154,916 |
| 101,674 |
| 65,302 |
| 52,361 |
| 32,042 |
|
Total liabilities | 7,144,529 |
| 5,556,301 |
| 4,388,826 |
| 3,578,650 |
| 2,976,194 |
|
Preferred stock | 116,079 |
| 38,468 |
| — |
| — |
| — |
|
Common shareholders' equity | 505,202 |
| 440,886 |
| 389,071 |
| 351,807 |
| 325,977 |
|
Total shareholders' equity | 621,281 |
| 479,354 |
| 389,071 |
| 351,807 |
| 325,977 |
|
Total liabilities and shareholders' equity | $ | 7,765,810 |
| $ | 6,035,655 |
| $ | 4,777,897 |
| $ | 3,930,457 |
| $ | 3,302,171 |
|
| | | | | |
Income statement data: | | | | | |
Interest income | $ | 262,447 |
| $ | 199,786 |
| $ | 134,295 |
| $ | 98,312 |
| $ | 83,596 |
|
Interest expense | 135,390 |
| 86,382 |
| 42,942 |
| 23,499 |
| 15,643 |
|
Net interest income | 127,057 |
| 113,404 |
| 91,353 |
| 74,813 |
| 67,953 |
|
Provision (credit) for loan and lease losses | (968 | ) | (205 | ) | (623 | ) | 838 |
| 13 |
|
Net interest income after provision for loan and lease losses | 128,025 |
| 113,609 |
| 91,976 |
| 73,975 |
| 67,940 |
|
Non-interest income: | | | | | |
Investment management fees | 36,442 |
| 37,647 |
| 37,100 |
| 37,035 |
| 29,618 |
|
Net gain (loss) on the sale and call of debt securities | 416 |
| (70 | ) | 310 |
| 77 |
| 33 |
|
Other non-interest income | 15,924 |
| 10,340 |
| 9,556 |
| 9,396 |
| 5,832 |
|
Total non-interest income | 52,782 |
| 47,917 |
| 46,966 |
| 46,508 |
| 35,483 |
|
Non-interest expense: | | | | | |
Intangible amortization expense | 2,009 |
| 1,968 |
| 1,851 |
| 1,753 |
| 1,558 |
|
Change in fair value of acquisition earn out | — |
| (218 | ) | — |
| (3,687 | ) | — |
|
Other non-interest expense | 110,140 |
| 99,407 |
| 89,621 |
| 80,728 |
| 68,485 |
|
Non-interest expense | 112,149 |
| 101,157 |
| 91,472 |
| 78,794 |
| 70,043 |
|
Income before tax | 68,658 |
| 60,369 |
| 47,470 |
| 41,689 |
| 33,380 |
|
Income tax expense | 8,465 |
| 5,945 |
| 9,482 |
| 13,048 |
| 10,892 |
|
Net income | $ | 60,193 |
| $ | 54,424 |
| $ | 37,988 |
| $ | 28,641 |
| $ | 22,488 |
|
Preferred stock dividends | 5,753 |
| 2,120 |
| — |
| — |
| — |
|
Net income available to common shareholders | $ | 54,440 |
| $ | 52,304 |
| $ | 37,988 |
| $ | 28,641 |
| $ | 22,488 |
|
| | | | | | | | | | | | | | | | | |
| As of and for the Years Ended December 31, |
(Dollars in thousands, except per share data) | 2021 | 2020 | 2019 | 2018 | 2017 |
Per share and share data: | | | | | |
Earnings per common share: | | | | | |
Basic | $ | 1.77 | | $ | 1.32 | | $ | 1.95 | | $ | 1.90 | | $ | 1.38 | |
Diluted | $ | 1.71 | | $ | 1.30 | | $ | 1.89 | | $ | 1.81 | | $ | 1.32 | |
Book value per common share | $ | 19.70 | | $ | 17.78 | | $ | 17.21 | | $ | 15.27 | | $ | 13.61 | |
Tangible book value per common share (1) | $ | 17.83 | | $ | 15.82 | | $ | 14.97 | | $ | 12.92 | | $ | 11.32 | |
Common shares outstanding, at end of period | 33,263,498 | | 32,620,150 | | 29,355,986 | | 28,878,674 | | 28,591,101 | |
Weighted average common shares outstanding: | | | | | |
Basic | 31,315,235 | | 28,267,512 | | 27,864,933 | | 27,583,519 | | 27,550,833 | |
Diluted | 32,459,948 | | 28,738,468 | | 28,833,335 | | 28,833,396 | | 28,711,322 | |
| | | | | |
Performance ratios: | | | | | |
Return on average assets | 0.69 | % | 0.50 | % | 0.89 | % | 1.04 | % | 0.89 | % |
Return on average common equity | 10.64 | % | 7.15 | % | 11.47 | % | 12.57 | % | 10.30 | % |
Net interest margin (2) | 1.64 | % | 1.58 | % | 1.97 | % | 2.26 | % | 2.25 | % |
Total revenue (1) | $ | 237,763 | | $ | 191,201 | | $ | 179,423 | | $ | 161,391 | | $ | 138,009 | |
Pre-tax, pre-provision net revenue (1) | $ | 91,269 | | $ | 68,098 | | $ | 67,274 | | $ | 60,234 | | $ | 46,537 | |
Bank efficiency ratio (1) | 52.03 | % | 55.57 | % | 54.49 | % | 53.09 | % | 57.39 | % |
| | | | | |
Non-interest expense to average assets | 1.30 | % | 1.35 | % | 1.66 | % | 1.93 | % | 2.15 | % |
| | | | | |
Asset quality: | | | | | |
Non-performing loans | $ | 4,313 | | $ | 9,680 | | $ | 184 | | $ | 2,237 | | $ | 3,183 | |
Non-performing assets | $ | 6,318 | | $ | 12,404 | | $ | 4,434 | | $ | 5,661 | | $ | 6,759 | |
Other real estate owned | $ | 2,005 | | $ | 2,724 | | $ | 4,250 | | $ | 3,424 | | $ | 3,576 | |
Non-performing assets to total assets | 0.05 | % | 0.13 | % | 0.06 | % | 0.09 | % | 0.14 | % |
Non-performing loans to total loans | 0.04 | % | 0.12 | % | — | % | 0.04 | % | 0.08 | % |
Allowance for credit losses on loans and leases to loans | 0.27 | % | 0.42 | % | 0.21 | % | 0.26 | % | 0.34 | % |
Allowance for credit losses on loans and leases to non-performing loans | 662.25 | % | 357.75 | % | 7,667.39 | % | 590.43 | % | 452.94 | % |
Net charge-offs (recoveries) | $ | 6,887 | | $ | (279) | | $ | (1,868) | | $ | 1,004 | | $ | 3,722 | |
Net charge-offs (recoveries) to average total loans | 0.07 | % | — | % | (0.03) | % | 0.02 | % | 0.10 | % |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Capital ratios: | | | | | |
Average equity to average assets | 7.05 | % | 7.00 | % | 8.29 | % | 8.49 | % | 8.65 | % |
Tier 1 leverage ratio | 6.36 | % | 7.29 | % | 7.54 | % | 7.28 | % | 7.25 | % |
Common equity tier 1 risk-based capital ratio | 8.96 | % | 8.99 | % | 9.32 | % | 9.64 | % | 11.14 | % |
Tier 1 risk-based capital ratio | 11.64 | % | 11.99 | % | 11.75 | % | 10.58 | % | 11.14 | % |
Total risk-based capital ratio | 13.43 | % | 14.12 | % | 12.05 | % | 10.86 | % | 11.72 | % |
Bank tier 1 leverage ratio | 7.76 | % | 7.83 | % | 7.22 | % | 7.49 | % | 7.55 | % |
Bank common equity tier 1 risk-based capital ratio | 14.22 | % | 12.89 | % | 11.26 | % | 10.90 | % | 11.62 | % |
Bank tier 1 risk-based capital ratio | 14.22 | % | 12.89 | % | 11.26 | % | 10.90 | % | 11.62 | % |
Bank total risk-based capital ratio | 14.60 | % | 13.41 | % | 11.57 | % | 11.25 | % | 11.99 | % |
| | | | | |
Investment Management Segment: | | | | | |
Assets under management | $ | 11,844,000 | | $ | 10,263,000 | | $ | 9,701,000 | | $ | 9,189,000 | | $ | 8,309,000 | |
EBITDA (1) | $ | 7,218 | | $ | 5,473 | | $ | 5,824 | | $ | 6,900 | | $ | 7,421 | |
| | | | | |
(1)These measures are not measures recognized under GAAP and are therefore considered to be non-GAAP financial measures. See “Non-GAAP Financial Measures” for a reconciliation of these measures to their most directly comparable GAAP measures.
(2)Net interest margin is calculated on a fully taxable equivalent basis.
|
| | | | | | | | | | | | | | | |
| As of and for the Years Ended December 31, |
(Dollars in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 |
Per share and share data: | | | | | |
Earnings per common share: | | | | | |
Basic | $ | 1.95 |
| $ | 1.90 |
| $ | 1.38 |
| $ | 1.04 |
| $ | 0.81 |
|
Diluted | $ | 1.89 |
| $ | 1.81 |
| $ | 1.32 |
| $ | 1.01 |
| $ | 0.80 |
|
Book value per common share | $ | 17.21 |
| $ | 15.27 |
| $ | 13.61 |
| $ | 12.38 |
| $ | 11.62 |
|
Tangible book value per common share (1) | $ | 14.97 |
| $ | 12.92 |
| $ | 11.32 |
| $ | 10.02 |
| $ | 9.81 |
|
Common shares outstanding, at end of period | 29,355,986 |
| 28,878,674 |
| 28,591,101 |
| 28,415,654 |
| 28,056,195 |
|
Weighted average common shares outstanding: | | | | | |
Basic | 27,864,933 |
| 27,583,519 |
| 27,550,833 |
| 27,593,725 |
| 27,771,345 |
|
Diluted | 28,833,335 |
| 28,833,396 |
| 28,711,322 |
| 28,359,152 |
| 28,237,453 |
|
| | | | | |
Performance ratios: | | | | | |
Return on average assets | 0.89 | % | 1.04 | % | 0.89 | % | 0.81 | % | 0.74 | % |
Return on average common equity | 11.47 | % | 12.57 | % | 10.30 | % | 8.48 | % | 7.13 | % |
Net interest margin (2) | 1.97 | % | 2.26 | % | 2.25 | % | 2.23 | % | 2.36 | % |
Total revenue (1) | $ | 179,423 |
| $ | 161,391 |
| $ | 138,009 |
| $ | 121,244 |
| $ | 103,403 |
|
Pre-tax, pre-provision net revenue (1) | $ | 67,274 |
| $ | 60,234 |
| $ | 46,537 |
| $ | 42,450 |
| $ | 33,360 |
|
Bank efficiency ratio (1) | 54.49 | % | 53.09 | % | 57.39 | % | 61.17 | % | 62.30 | % |
Non-interest expense to average assets | 1.66 | % | 1.93 | % | 2.15 | % | 2.23 | % | 2.32 | % |
| | | | | |
Asset quality: | | | | | |
Non-performing loans | $ | 184 |
| $ | 2,237 |
| $ | 3,183 |
| $ | 17,790 |
| $ | 16,660 |
|
Non-performing assets | $ | 4,434 |
| $ | 5,661 |
| $ | 6,759 |
| $ | 21,968 |
| $ | 18,390 |
|
Other real estate owned | $ | 4,250 |
| $ | 3,424 |
| $ | 3,576 |
| $ | 4,178 |
| $ | 1,730 |
|
Non-performing assets to total assets | 0.06 | % | 0.09 | % | 0.14 | % | 0.56 | % | 0.56 | % |
Non-performing loans to total loans | — | % | 0.04 | % | 0.08 | % | 0.52 | % | 0.59 | % |
Allowance for loan and lease losses to loans | 0.21 | % | 0.26 | % | 0.34 | % | 0.55 | % | 0.63 | % |
Allowance for loan and lease losses to non-performing loans | 7,667.39 | % | 590.43 | % | 452.94 | % | 105.46 | % | 107.89 | % |
Net charge-offs (recoveries) | $ | (1,868 | ) | $ | 1,004 |
| $ | 3,722 |
| $ | 50 |
| $ | 2,312 |
|
Net charge-offs (recoveries) to average total loans | (0.03 | )% | 0.02 | % | 0.10 | % | — | % | 0.09 | % |
| | | | | |
Capital ratios: | | | | | |
Average equity to average assets | 8.29 | % | 8.49 | % | 8.65 | % | 9.56 | % | 10.43 | % |
Tier 1 leverage ratio | 7.54 | % | 7.28 | % | 7.25 | % | 7.90 | % | 9.05 | % |
Common equity tier 1 risk-based capital ratio | 9.32 | % | 9.64 | % | 11.14 | % | 11.49 | % | 12.20 | % |
Tier 1 risk-based capital ratio | 11.75 | % | 10.58 | % | 11.14 | % | 11.49 | % | 12.20 | % |
Total risk-based capital ratio | 12.05 | % | 10.86 | % | 11.72 | % | 12.66 | % | 13.88 | % |
| | | | | |
Investment Management Segment: | | | | | |
Assets under management | $ | 9,701,000 |
| $ | 9,189,000 |
| $ | 8,309,000 |
| $ | 8,055,000 |
| $ | 8,005,000 |
|
EBITDA (1) | $ | 5,824 |
| $ | 6,900 |
| $ | 7,421 |
| $ | 13,208 |
| $ | 8,481 |
|
| | | | | |
| |
| These measures are not measures recognized under GAAP and are therefore considered to be non-GAAP financial measures. See “Non-GAAP Financial Measures” for a reconciliation of these measures to their most directly comparable GAAP measures.
|
| |
(2)
| Net interest margin is calculated on a fully taxable equivalent basis. |
Non-GAAP Financial Measures
This Annual Report on Form 10-K contains certain financial information determined by methods other than in accordance with GAAP. These non-GAAP financial measures are “tangible common equity,” “tangible book value per common share,” “total“total revenue,” “pre-tax, pre-provision net revenue,” “efficiency ratio”ratio,” and “EBITDA.” These non-GAAP financial measures are supplemental measures that we believe provide management and our investors with a more detailed understanding of our performance, although these measures are not necessarily comparable to similar measures that may be presented by other companies. These disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP.
The non-GAAP financial measures presented herein are calculated as follows:
“Tangible common equity” is defined as common shareholders’ equity reduced by intangible assets, including goodwill. We believe this measure is important to management and investors toso that they can better understand and assess changes from period to period in common shareholders’ equity exclusive of changes in intangible assets associated with prior acquisitions.acquisitions. Intangible assets are created when we buy businesses that add relationships and revenue to our Company. Intangible assets have the effect of increasing both equity and assets, while not increasing our tangible equity or tangible assets.
“Tangible book value per common share” is defineddefined as common shareholders’ equity reduced by intangible assets, including goodwill, divided by common shares outstanding. We believe this measure is important to many investors who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets.assets associated with prior acquisitions.
“Total revenue” is defined as net interest income and total non-interest income, excluding gains and losses on the sale and call of debt securities. We believe adjustments made to our operating revenue allow management and investors to better assess our core operating revenue by removing the volatility that is associated with certain items that are unrelated to our core business.
“Pre-tax, pre-provision net revenue” is defined as net interest income without giving effect to loan and lease loss provision andnon-interest income, taxes and excluding gains and losses on the sale and call of investment securities.debt securities and total non-interest expense. We believe this measure is important because it allows management and investors to better assess our performance in relation to our core operating revenue, excluding the volatility that is associated with provision for loan and leasecredit losses and changes in our tax rates and other items that are unrelated to our core business.
“Efficiency ratio” is defined as total non-interest expense divided by our total revenue. We believe this measure allows management and investors to better assess our operating expenses in relation to our core operating revenue, particularly at the Bank.Bank.
“EBITDA” is defined as net income before interest expense, income tax expense, depreciation expense and intangible amortization expense. We use EBITDA particularly to assess the strength of our investment management business. We believe this measure is important because it allows management and investors to better assess our investment management performance in relation to our core operating earnings by excluding certain non-cash items and the volatility that is associated with certain discrete items that are unrelated to our core business.
The following tables present the financial measures calculated and presented in accordance with GAAP that are most directly comparable to the non-GAAP financial measures and a reconciliation of the differences between the GAAP financial measures and the non-GAAP financial measures.
| | | | | | | | | | | | | | | | | |
| December 31, |
(Dollars in thousands, except per share data) | 2021 | 2020 | 2019 | 2018 | 2017 |
Tangible common equity and tangible book value per common share: | | | | | |
Common shareholders' equity | $ | 655,178 | | $ | 580,002 | | $ | 505,202 | | $ | 440,886 | | $ | 389,071 | |
Less: goodwill and intangible assets | 62,000 | | 63,911 | | 65,854 | | 67,863 | | 65,358 | |
Tangible common equity (numerator) | $ | 593,178 | | $ | 516,091 | | $ | 439,348 | | $ | 373,023 | | $ | 323,713 | |
Common shares outstanding (denominator) | 33,263,498 | | 32,620,150 | | 29,355,986 | | 28,878,674 | | 28,591,101 | |
Tangible book value per common share | $ | 17.83 | | $ | 15.82 | | $ | 14.97 | | $ | 12.92 | | $ | 11.32 | |
|
| | | | | | | | | | | | | | | |
| December 31, |
(Dollars in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 |
Tangible common equity and tangible book value per common share: | | | | | |
Common shareholders' equity | $ | 505,202 |
| $ | 440,886 |
| $ | 389,071 |
| $ | 351,807 |
| $ | 325,977 |
|
Less: goodwill and intangible assets | 65,854 |
| 67,863 |
| 65,358 |
| 67,209 |
| 50,816 |
|
Tangible common equity (numerator) | $ | 439,348 |
| $ | 373,023 |
| $ | 323,713 |
| $ | 284,598 |
| $ | 275,161 |
|
Common shares outstanding (denominator) | 29,355,986 |
| 28,878,674 |
| 28,591,101 |
| 28,415,654 |
| 28,056,195 |
|
Tangible book value per common share | $ | 14.97 |
| $ | 12.92 |
| $ | 11.32 |
| $ | 10.02 |
| $ | 9.81 |
|
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 |
Total revenue and pre-tax, pre-provision net revenue: | | | | | |
Net interest income | $ | 179,359 | | $ | 137,944 | | $ | 127,057 | | $ | 113,404 | | $ | 91,353 | |
Total non-interest income | 58,646 | | 57,205 | | 52,782 | | 47,917 | | 46,966 | |
Less: net gain (loss) on the sale and call of debt securities | 242 | | 3,948 | | 416 | | (70) | | 310 | |
Total revenue | $ | 237,763 | | $ | 191,201 | | $ | 179,423 | | $ | 161,391 | | $ | 138,009 | |
Less: total non-interest expense | 146,494 | | 123,103 | | 112,149 | | 101,157 | | 91,472 | |
Pre-tax, pre-provision net revenue | $ | 91,269 | | $ | 68,098 | | $ | 67,274 | | $ | 60,234 | | $ | 46,537 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | | | | | |
| Years Ended December 31, |
(Dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 |
Total revenue and pre-tax, pre-provision net revenue: | | | | | |
Net interest income | $ | 127,057 |
| $ | 113,404 |
| $ | 91,353 |
| $ | 74,813 |
| $ | 67,953 |
|
Total non-interest income | 52,782 |
| 47,917 |
| 46,966 |
| 46,508 |
| 35,483 |
|
Less: net gain (loss) on the sale and call of debt securities | 416 |
| (70 | ) | 310 |
| 77 |
| 33 |
|
Total revenue | $ | 179,423 |
| $ | 161,391 |
| $ | 138,009 |
| $ | 121,244 |
| $ | 103,403 |
|
Less: total non-interest expense | 112,149 |
| 101,157 |
| 91,472 |
| 78,794 |
| 70,043 |
|
Pre-tax, pre-provision net revenue | $ | 67,274 |
| $ | 60,234 |
| $ | 46,537 |
| $ | 42,450 |
| $ | 33,360 |
|
BANK SEGMENT
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 |
Bank total revenue: | | | | | |
Net interest income | $ | 185,408 | | $ | 141,756 | | $ | 127,996 | | $ | 115,455 | | $ | 93,380 | |
Total non-interest income | 21,183 | | 25,112 | | 15,467 | | 11,042 | | 9,864 | |
Less: net gain (loss) on the sale and call of debt securities | 242 | | 3,948 | | 416 | | (70) | | 310 | |
Bank total revenue | $ | 206,349 | | $ | 162,920 | | $ | 143,047 | | $ | 126,567 | | $ | 102,934 | |
| | | | | |
| | | | | |
| | | | | |
Bank efficiency ratio: | | | | | |
Total non-interest expense (numerator) | $ | 107,373 | | $ | 90,541 | | $ | 77,945 | | $ | 67,190 | | $ | 59,073 | |
| | | | | |
| | | | | |
Total revenue (denominator) | $ | 206,349 | | $ | 162,920 | | $ | 143,047 | | $ | 126,567 | | $ | 102,934 | |
Bank efficiency ratio | 52.03 | % | 55.57 | % | 54.49 | % | 53.09 | % | 57.39 | % |
|
| | | | | | | | | | | | | | | |
| Years Ended December 31, |
(Dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 |
Bank total revenue: | | | | | |
Net interest income | $ | 127,996 |
| $ | 115,455 |
| $ | 93,380 |
| $ | 76,727 |
| $ | 69,899 |
|
Total non-interest income | 15,467 |
| 11,042 |
| 9,864 |
| 9,470 |
| 5,873 |
|
Less: net gain (loss) on the sale and call of debt securities | 416 |
| (70 | ) | 310 |
| 77 |
| 33 |
|
Bank total revenue | $ | 143,047 |
| $ | 126,567 |
| $ | 102,934 |
| $ | 86,120 |
| $ | 75,739 |
|
| | | | | |
Bank efficiency ratio: | | | | | |
Total non-interest expense (numerator) | $ | 77,945 |
| $ | 67,190 |
| $ | 59,073 |
| $ | 52,676 |
| $ | 47,186 |
|
Total revenue (denominator) | $ | 143,047 |
| $ | 126,567 |
| $ | 102,934 |
| $ | 86,120 |
| $ | 75,739 |
|
Bank efficiency ratio | 54.49 | % | 53.09 | % | 57.39 | % | 61.17 | % | 62.30 | % |
INVESTMENT MANAGEMENT SEGMENT
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
(Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 |
Investment Management EBITDA: | | | | | |
Net income | $ | 3,786 | | $ | 2,798 | | $ | 2,433 | | $ | 3,851 | | $ | 4,551 | |
| | | | | |
Income tax expense | 1,100 | | 308 | | 918 | | 579 | | 522 | |
Depreciation expense | 421 | | 423 | | 465 | | 502 | | 497 | |
Intangible amortization expense | 1,911 | | 1,944 | | 2,009 | | 1,968 | | 1,851 | |
EBITDA | $ | 7,218 | | $ | 5,473 | | $ | 5,824 | | $ | 6,900 | | $ | 7,421 | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | | | | | |
| Years Ended December 31, |
(Dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 |
Investment Management EBITDA: | | | | | |
Net income | $ | 2,433 |
| $ | 3,851 |
| $ | 4,551 |
| $ | 6,933 |
| $ | 4,368 |
|
Income tax expense | 918 |
| 579 |
| 522 |
| 4,357 |
| 2,477 |
|
Depreciation expense | 464 |
| 502 |
| 497 |
| 165 |
| 78 |
|
Intangible amortization expense | 2,009 |
| 1,968 |
| 1,851 |
| 1,753 |
| 1,558 |
|
EBITDA | $ | 5,824 |
| $ | 6,900 |
| $ | 7,421 |
| $ | 13,208 |
| $ | 8,481 |
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section presents management’s perspective on our financial condition and results of operations and highlights material changes to our financial condition and results of operations as of and for the years ended December 31, 20192021 and 20182020. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes contained herein.
To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections titled “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this document and “Item 1A. Risk Factors.”
General
We are a bank holding company that operates through two reportable segments: Bank and Investment Management. Through TriState Capital Bank, a Pennsylvania chartered bank (the “Bank”), the Bank segment provides commercial banking services to middle-market businesses and private banking services to high-net-worth individuals and trusts. The Bank segment generates most of its revenue from interest on loans and investments, swap fees, loan fees, and liquidity and treasury management related fees. Its primary source of funding for loans is deposits and its secondary source of funding is borrowings. The Bank’s largest expenses are interest on these deposits and borrowings, and salaries and related employee benefits. Through Chartwell Investment Partners, LLC, an SEC registered investment adviser (“Chartwell”), the Investment Management segment provides advisory and sub-advisory investment management services primarily to institutional investors, mutual funds and individual investors. It also supports marketing efforts for Chartwell’s proprietary investment products through Chartwell TSC Securities Corp., our registered broker/dealerbroker-dealer subsidiary (“CTSC Securities”). The Investment Management segment generates its revenue from investment management fees earned on assets under management and its largest expenses are salaries and related employee benefits.
This discussion and analysis presentpresents our financial condition and results of operations on a consolidated basis, except where significant segment disclosures are necessary to better explain the operations of each segment and related variances. In particular, the discussion and analysis of non-interest income and non-interest expense is reported by segment.
We measure our performance primarily through our net income available to common shareholders, earnings per common share (“EPS”) and total revenue. Other salient metrics include the ratio of allowance for loancredit losses on loans and lease lossesleases to loans;loans and leases; net interest margin; the efficiency ratio of the Bank segment;segment (which is a non-GAAP financial measure); return on average assets; return on average common equity; regulatory leverage and risk-based capital ratios,ratios; and assets under management and EBITDA of the Investment Management segment.segment (which is a non-GAAP financial measure).
Executive Overview
TriState Capital Holdings, Inc. (“we,” “us,” “our,” the “holding company,” the “parent company,” or the “Company”) isWe are a bank holding company headquartered in Pittsburgh, Pennsylvania. The Company has three wholly owned subsidiaries: the Bank, Chartwell, and CTSC Securities. Through the Bank, we serve middle-market and financial services businesses in our primary markets throughout the states of Pennsylvania, Ohio, New Jersey and New York. We also serve high-net-worth individuals and trusts on a national basis through our private banking channel. We market and distribute our products and services through a scalable, branchless banking model, which creates significant operating leverage throughout our business as we continue to grow. Through Chartwell, our investment management subsidiary, we provide investment management services primarily to institutional investors, mutual funds and individual investors on a national basis. CTSC Securities, our broker/dealer subsidiary, supports marketing efforts for Chartwell’s proprietary investment products that requireand is regulated by the SEC or Financial Industry Regulatory Authority, Inc. (“FINRA”) licensing.and the FINRA.
20192021 Compared to 20182020 Operating Performance
For the year ended December 31, 20192021, our net income available to common shareholders was $54.4$65.7 million compared to $52.3$37.4 million in 20182020, an increase of $2.1$28.4 million, or 4.1%75.9%. ThisOur diluted EPS was $1.71 for the year ended December 31, 2021, compared to $1.30 in 2020. The increase in net income available to common shareholders and EPS was primarily due to the net impact of (1) a $13.7 million, or 12.0%, increase in our net interest income; (2) an increase in the credit tonet interest income of $41.4 million, or 30.0%, and a decrease in provision for loan and leasecredit losses of $763,000; (3)$18.6 million, which were partially offset by an increase of $4.9$23.4 million, or 10.2%, in non-interest income; offset by (4) an increase of $11.0 million, or 10.9%19.0%, in our non-interest expense; (5)expenses, a $2.5$5.2 million increase in income taxes;taxes, and (6) an increase in preferred stock dividends of $3.6$4.5 million. EPS is computed using the two-class method, which is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends accumulated or declared and participation rights in undistributed earnings. For more information on the Company’s calculation of EPS, refer to Note 1, Basis of
Our diluted earningsInformation and Summary of Significant Accounting Policies, and Note 15, Earnings per share (“EPS”) was $1.89Common Share, to our consolidated financial statements.
Net interest income and non-interest income, excluding net gains and losses on the sale of securities, combined to generate total revenue of $237.8 million for the year ended December 31, 2019, compared to $1.81 in 2018. The increase in diluted EPS was a result of the continued growth of our business lines, which was the driver of additional net income available to common shareholders.
For the year ended December 31, 2019, total revenue increased $18.02021, compared to $191.2 million in 2020. The increase of $46.6 million, or 11.2%, to $179.4 million from $161.4 million in 2018,24.4% was driven largely by higher net interest income and investment management fees offset by lower swap fees for the Bank.fees.
Our net interest margin was 1.97%1.64% for the year ended December 31, 2019,2021, as compared to 2.26%1.58% in 2018. 2020. The decreaseincrease in net interest margin for the year ended December 31, 2019,2021 was driven primarily by an increase of 41 basis points in thelower cost of interest-bearing liabilities,funds and higher average interest-earning balances, which were partially offset by an increase of 10 basis points in thea lower yield on loans.interest-earning assets.
The significant reduction in interest rates by the Federal Reserve in response to the COVID-19 pandemic has continued to impact our interest-earning assets and interest-bearing liabilities. Our loans are predominantly variable rate loans, of which many are indexed to 1-month LIBORone-month LIBOR. At the end of the first quarter 2020, we placed interest rate floors on the majority of our floating rate loans, particularly our private banking loans, and we have continued to implement floors on newly originated loans. As a result, approximately 50% of our total loans have floors that are currently benefiting the Bank compared to their contractual index. While we
continue our strategy to implement floors on most recently originated loans, we have modified our pricing strategy to balance wider spreads with lower floor rates to manage our interest rate sensitivity while managing overall yield. Our deposits are a combination ofinclude fixed-rate time deposits andbut are primarily comprised of variable rate deposits, somemany of which are indexed or otherwiselinked to an index such as the effective federal funds rate and others that are priced at the Bank’s discretion. While our deposit rates have declined during 2021 and 2020, the majority of the impact from repricing of floating rate deposits was achieved with the initial repricing in reference to the Effective Federal Funds Rate. When the financial markets anticipate an interest rate cut, LIBOR rates typically decreaseMarch 2020, in advance of action taken byline with the Federal Reserve which compresses and can invert the historical spread between 1-month LIBOR and the Effectiverate reduction. The Federal Funds Rate. This occurred at certain times during the year ended December 31, 2019. In addition, we intentionally increased our liquid assets as a component of our assets and our deposits as portion of our assets for the express purpose of carrying more on balance sheet liquidity. This increased the level of liquid assetsReserve has suggested that were generating lower returns based on theit may take steps to raise interest rate environment and interest rate term structure curve. Also, certain hedge arrangements that we hadrates in place which provided beneficial pricing on certain liquidity expired in 2019 and could not be replicated in the 2019 interest rate environment. All of this contributed to the compression of our net interest margin, impacted our net interest income and our rate of revenue growth, and affected profitability ratios such as the Bank’s efficiency ratio, return on average assets, and return on average common equity.2022.
Our non-interest income is largely comprised of investment management fees for Chartwell, which totaled $36.4$37.5 million for the year ended December 31, 2019,2021, as compared to $37.6$32.0 million in 2018.2020. The increase was due primarily due to higher levels of assets under management. Assets under management were $11.84 billion as of December 31, 2021, an increase of $1.58 billion from December 31, 2020, driven by market appreciation of $1.06 billion, and net inflows of $520.0 million. Chartwell’s annual run-rate revenue increased to $40.0 million as of December 31, 2021, compared to $35.6 million as of December 31, 2020. For the year ended December 31, 2021, investment fees grew $5.4 million, or 16.9%, while expenses grew $4.2 million, or 14.1%. Importantly, EBITDA improved 31.9% for the year ended December 31, 2021 from $5.5 million to $7.2 million.
Another large component of our non-interest income are swap fees at the Bank, which totaled $14.1 million for the year ended December 31, 2021, as compared to $16.3 millionfor the same period in 2020, due in part to the extremely low interest rate environment and very flat or negative term structure for interest rates that persisted for most of 2020 and to the opportunity for originating long duration loans that sought to lock in interest rates. This created strong demand and pricing structures from borrowers seeking fixed rates in 2020 that were not replicated in 2021. While swap fees decreased for the year ended December 31, 2021 from the year-ago period, we have continued to enhance our distribution and product strategies to drive consistent opportunities for interest rate protection through swaps in both our commercial banking and private banking clients. The number of swaps executed as well as the notional amount and term of each swap transaction impact the fee income from period to period.
We recorded a $242,000 net gain on the sale and call of debt securities during the year ended December 31, 2021, compared to $3.9 million during the year ended December 31, 2020, primarily attributable to the repositioning of a portion of the corporate bond portfolio into government agency securities that took place during 2020.
For the year ended December 31, 2021, the Bank’s efficiency ratio was 52.03%, as compared to 55.57% in 2020. The Bank’s efficiency ratio reflects improvement in operating leverage through growth in the Bank’s total revenue of 26.7%, partially offset by the growth in the Bank’s non-interest expense of 18.6% for the year ended December 31, 2021. The Bank’s efficiency ratio improved for the year ended December 31, 2021 despite the increase in non-interest expense of 18.6%, demonstrating that we are making worthwhile investments in the technology and people necessary to drive responsible growth.
The Company’s non-interest expense was $146.5 million for the year ended December 31, 2021 compared to $123.1 million in 2020. Our non-interest expense to average assets for the year ended December 31, 2021, was 1.30%, as compared to 1.35% in 2020.
Our return on average assets (net income to average total assets) was 0.69% for the year ended December 31, 2021, as compared to 0.50% in 2020. Our return on average common equity (net income available to common shareholders to average common equity) was 10.64% for the year ended December 31, 2021, as compared to 7.15% in 2020. Both ratios increased primarily due to increased earnings during the year ended December 31, 2021, as compared to the same period in 2020.
Total assets of $13 billion as of December 31, 2021, increased $3.11 billion, or 31.4%, from December 31, 2020. Loans and leases held-for-investment increased by $2.53 billion to $10.76 billion as of December 31, 2021, an increase of 30.7% from December 31,
2020, as a result of growth in our commercial and private banking loan and lease portfolios. Total investment securities, which were $1.41 billion as of December 31, 2021, increased $563.1 million from the prior period, an increase of 66.8%. Total deposits increased $3.02 billion, or 35.5%, to $11.50 billion as of December 31, 2021, from $8.49 billion as of December 31, 2020. We focus on high quality loan growth and correspondingly grow our investment portfolio at a similar pace as part of our strategy to continue building greater on-balance sheet liquidity, funded by our deposits. Our shareholders’ equity increased $79.6 million, or 10.5% primarily due to our earnings for the year ended December 31, 2021.
Our ratio of adverse-rated credits to total loans declined to 0.34% at December 31, 2021, from 0.62% at December 31, 2020. Our ratio of allowance for credit losses on loans and leases to loans decreased to 0.27% as of December 31, 2021, from 0.42% as of December 31, 2020. We recorded a provision for credit losses of $808,000 for the year ended December 31, 2021 compared to a provision of $19.4 million for the year ended December 31, 2020 primarily driven by an improving economic outlook.
Our book value per common share increased $1.92, or 10.8%, to $19.70 as of December 31, 2021, from $17.78 as of December 31, 2020, largely as a result of higher levels of retained earnings as of December 31, 2021, which was partially offset by increased common shares outstanding as of December 31, 2021.
2020 Compared to 2019 Operating Performance
For the year ended December 31, 2020, our net income available to common shareholders was $37.4 million compared to $54.4 million in 2019, a decrease of $17.1 million, or 31.4%. Our diluted EPS was $1.30 for the year ended December 31, 2020, compared to $1.89 in 2019. This decrease in net income and EPS was primarily due to an increase in provision for credit losses of $20.4 million, an increase of $11.0 million, or 9.8%, in our non-interest expense and an increase in preferred stock dividends of $2.1 million, partially offset by the net impact of $10.9 million, or 8.6%, increase in our net interest income, an increase of $4.4 million, or 8.4%, in non-interest income and a $1.1 million decrease in income taxes.
Net interest income and non-interest income, excluding net gains and losses on the sale of securities, combined to generate total revenue of $191.2 million for the year ended December 31, 2020, compared to $179.4 million in 2019. The increase of $11.8 million, or 6.6% was driven largely by higher net interest income and swap fees for the Bank as a result of loan growth, partially offset by lower investment management fees.
Our net interest margin was 1.58% for the year ended December 31, 2020, as compared to 1.97% in 2019. The decrease in net interest margin for the year ended December 31, 2020, resulted from the Federal Reserve interest rate cuts, contributing to lower net interest spread, and higher average balances of lower-earning assets. This included excess liquidity in interest-bearing cash deposits and investments during certain times of the year in anticipation of clients’ potential liquidity and credit needs during the COVID-19.
The significant reduction in interest rates by the Federal Reserve in response to the COVID-19 pandemic impacted our interest-earning assets and interest-bearing liabilities. Our loans are predominantly variable rate loans indexed to 1-month LIBOR. At the end of the first quarter of 2020, we placed interest rate floors on many of these floating rate loans, particularly our private banking loans. Our deposits are a combination of fixed-rate time deposits and variable rate deposits, many of which are indexed to the Effective Federal Funds Rate and others that are priced at the Bank’s discretion. The majority of the floating rate deposits were initially repriced in March 2020, in line with the Federal Reserve rate reduction. In addition, we intentionally increased our liquid assets for the express purpose of carrying more on balance sheet liquidity in anticipation of clients’ needs during the first six months of the COVID-19 pandemic. Even though we continued to reduce our cost of deposits, as well as excess deposit levels, throughout the year. These carrying costs resulted in marginally lower returns based on the interest rate environment.
Our non-interest income is largely comprised of investment management fees for Chartwell, which totaled $32.0 million for the year ended December 31, 2020, as compared to $36.4 million in 2019. The decrease was driven by a lower weighted average fee rate from the change in asset composition across investment products, partially offset by higher assets under management. Assets under management were $9.70$10.26 billion as of December 31, 2019,2020, an increase of $512.0$562.0 million from December 31, 2018,2019, driven by market appreciation of $1.3 billion, partially offset by$410.0 million, and net outflowsinflows of $771.0$152.0 million. The non-interest
Another large component of our non-interest income fromare swap fees at the Bank’s operations,Bank, which consisted of swap fee revenue, loan and service fees, and treasury management program fees, grew to $15.5totaled $16.3 million from $11.0 million in 2018.
Forfor the year ended December 31, 2020, as compared to $11.0 millionfor the same period in 2019, due to an increase in swap transactions from both new and existing customers.
We recorded a $3.9 million net gain on the sale and call of debt securities during the year ended December 31, 2020, compared to $416,000 during the year ended December 31, 2019, primarily attributable to the repositioning of a portion of the corporate bond portfolio into government agency securities to take advantage of market appreciation and enhance the overall credit quality of the investment portfolio.
For the year ended December 31, 2020, the Bank’s efficiency ratio was 54.49%55.57%, as compared to 53.09%54.49% in 2018.2019. The Bank’s efficiency ratio reflects growth in the Bank’s total revenue of 13.0%13.9% and growth in the Bank’s non-interest expense of 16.0%16.2%. Non-interest expense was $112.1$123.1 million for the year ended December 31, 2019, which included approximately $850,000 of expenses related to the due diligence with an investment management acquisition candidate, which concluded before the parties reached a definitive agreement. 2020. Our non-interest expense to average assets for the year ended December 31, 2019,2020, was 1.66%1.35%, as compared to 1.93%1.66% in 20182019.
Our return on average assets (net income to average total assets) was 0.89%0.50% for the year ended December 31, 20192020, as compared to 1.04%0.89% in 20182019. Our return on average common equity (net income available to common shareholders to average common equity) was 11.47%7.15% for the year ended December 31, 2019, 2020, as compared to 12.57%11.47% in 20182019. Both ratios declined due to a reduction in earnings during the year ended December 31, 2020, as compared to the same period in 2019.
Total assets of $7.77$9.90 billion as of December 31, 2020, increased $2.13 billion, or 27.4%, from December 31, 2019, increased $1.73 billion, or 28.7%, from December 31, 2018. Loans and leases held-for-investment grewincreased by $1.44$1.66 billion to $6.58$8.24 billion as of December 31, 20192020, an increase of 28.1%25.2% from December 31, 20182019, as a result of growth in our commercial and private banking loan and lease portfolios. Total investment securities, which were $842.5 million as of December 31, 2020, increased $373.4 million from the prior period, an increase of 79.6%. Total deposits increased $1.58 $1.85 billion, or 31.4%28.0%, to $8.49 billion as of December 31, 2020, from $6.63 billion as of December 31, 2019,. Our shareholder’s equity increased $135.9 million, or 21.9% primarily driven by the net proceeds from $5.05 billion asthe issuance of December 31, 2018.$100.0 million in capital and retained earnings of our operations.
Our ratio of adverse-rated credits to total loans increased to 0.62% at December 31, 2020, from 0.53% at December 31, 2019, from 0.48% at December 31, 2018.2019. Our ratio of allowance for loancredit losses on loans and lease lossesleases to loans decreasedincreased to 0.42% as of December 31, 2020, from 0.21% as of December 31, 2019, from 0.26% as2019. We recorded provision for credit losses of $19.4 million for the year ended December 31, 2018, reflecting growing history2020, primarily due to an increase in general reserves in response to the unprecedented speed of few credit losses, current low non-performingthe economic slowdown associated with the COVID-19 pandemic and an increase in specific reserves due to an addition of non-accrual loans, and lower levels of provision required for private banking loans. We hadcompared to a credit to provision for loan and lease losses of $968,000 for the year ended December 31, 2019, primarily due to recoveries2019. In addition, we implemented the Current Expected Credit Losses (“CECL”) model as of $2.0 million in the commercialJanuary 1, 2020, and industrial portfolio, partially offset byrecorded a net increase in general reservesdecrease to retained earnings of $1.2$1.7 million, duefor the cumulative effect (net of tax) of adopting CECL. For more information on our adoption of CECL, refer to growth Note 1, Summary of the loanSignificant Accounting Policies and lease portfolio.Note 5, Allowance for Credit Losses on Loans and Leases.
Our book value per common share increased $1.94,$0.57, or 12.7%3.3%, to $17.78 as of December 31, 2020, from $17.21 as of December 31, 2019, from $15.27 as of December 31, 2018, largely as a result of an increase in our net income available to common shareholders, partially offset by the issuance of restricted stock during year ended December 31, 2019.2020.
2018 Compared to 2017 Operating Performance
For the year ended December 31, 2018, our net income available to common shareholders was $52.3 million compared to $38.0 million in 2017, an increase of $14.3 million, or 37.7%. This increase was primarily due to the net impact of (1) a $22.1 million, or 24.1%, increase in our net interest income; (2) a decrease in the credit to provision for loan losses of $418,000; (3) an increase of $951,000, or 2.0%, in non-interest income; offset by (4) an increase of $9.7 million, or 10.6%, in our non-interest expense; (5) a $3.5 million decrease in income taxes; and (6) an increase in preferred stock dividends of $2.1 million.
Our diluted EPS was $1.81 for the year ended December 31, 2018, compared to $1.32 in 2017. The increase in diluted EPS was a result of our continued growth in net income available to common shareholders.
For the year ended December 31, 2018, total revenue increased $23.4 million, or 16.9%, to $161.4 million from $138.0 million in 2017, driven by higher net interest income and swap fees for the Bank, as well as higher investment management fees for Chartwell.
Our net interest margin was 2.26% for the year ended December 31, 2018, as compared to 2.25% in 2017. The increase in net interest margin for the year ended December 31, 2018, was driven by an increase in the yield on loans, largely offset by an increase in the cost of funds.
Our non-interest income is largely comprised of investment management fees for Chartwell, which totaled $37.6 million for the year ended December 31, 2018, as compared to $37.1 million in 2017. The increase was driven by higher assets under management related to the Columbia acquisition and net inflows, partially offset by market depreciation.
For the year ended December 31, 2018, the Bank’s efficiency ratio was 53.09%, as compared to 57.39% in 2017, primarily as a result of growth in total revenue, tempered by the growth in non-interest expense. Our non-interest expense to average assets for the year ended December 31, 2018, was 1.93%, as compared to 2.15% in 2017.
Our return on average assets was 1.00% for the year ended December 31, 2018, as compared to 0.89% in 2017. Our return on average common equity was 12.57% for the year ended December 31, 2018, as compared to 10.30% in 2017. The increase in these ratios is due to continued growth in earnings.
Total assets of $6.04 billion as of December 31, 2018, increased $1.26 billion, or 26.3%, from December 31, 2017. Loans held-for-investment grew by $948.6 million to $5.13 billion as of December 31, 2018, an increase of 22.7% from December 31, 2017, as a result of growth in our commercial and private banking loan portfolios. Total deposits increased $1.06 billion, or 26.7%, to $5.05 billion as of December 31, 2018, from $3.99 billion as of December 31, 2017.
Our ratio of adverse-rated credits to total loans declined to 0.48% at December 31, 2018, from 0.71% at December 31, 2017. Our ratio of allowance for loan losses to loans decreased to 0.26% as of December 31, 2018, from 0.34% as of December 31, 2017, reflecting low non-performing loans and lower levels of provision required for private banking loans.
Our book value per common share increased $1.66, or 12.2%, to $15.27 as of December 31, 2018, from $13.61 as of December 31, 2017, largely as a result of an increase in our net income available to common shareholders, partially offset by the issuance of restricted stock and the purchase of treasury shares during year ended December 31, 2018.
Results of Operations
Net Interest Income
Net interest income represents the difference between the interest received on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the volume of interest-earning assets and interest-bearing liabilities and changes in interest yields earned and interest rates paid. Net interest income comprised 70.8%75.4%, 70.3%72.1% and 66.2%70.8% of total revenue for the years ended December 31, 2021, 2020 and 2019, 2018 and 2017, respectively.
The table below reflects an analysis of net interest income, on a fully taxable equivalent basis, for the periods indicated. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the statutory federal income tax rate of 21% for 2019, 21% for 2018 and 35% for 2017..
| | | | | | | | | | | |
| Years Ended December 31, |
(Dollars in thousands) | 2021 | 2020 | 2019 |
Interest income | $ | 231,297 | | $ | 217,095 | | $ | 262,447 | |
Fully taxable equivalent adjustment | 30 | | 60 | | 101 | |
Interest income adjusted | 231,327 | | 217,155 | | 262,548 | |
Less: interest expense | 51,938 | | 79,151 | | 135,390 | |
Net interest income adjusted | $ | 179,389 | | $ | 138,004 | | $ | 127,158 | |
| | | |
Yield on earning assets (1) | 2.12 | % | 2.49 | % | 4.06 | % |
Cost of interest-bearing liabilities | 0.53 | % | 1.01 | % | 2.34 | % |
Net interest spread (1) | 1.59 | % | 1.48 | % | 1.72 | % |
Net interest margin (1) | 1.64 | % | 1.58 | % | 1.97 | % |
| | | |
(1)Calculated on a fully taxable equivalent basis.
|
| | | | | | | | | |
| Years Ended December 31, |
(Dollars in thousands) | 2019 | 2018 | 2017 |
Interest income | $ | 262,447 |
| $ | 199,786 |
| $ | 134,295 |
|
Fully taxable equivalent adjustment | 101 |
| 112 |
| 241 |
|
Interest income adjusted | 262,548 |
| 199,898 |
| 134,536 |
|
Less: interest expense | 135,390 |
| 86,382 |
| 42,942 |
|
Net interest income adjusted | $ | 127,158 |
| $ | 113,516 |
| $ | 91,594 |
|
| | | |
Yield on earning assets (1) | 4.06 | % | 3.98 | % | 3.30 | % |
Cost of interest-bearing liabilities | 2.34 | % | 1.93 | % | 1.18 | % |
Net interest spread (1) | 1.72 | % | 2.05 | % | 2.12 | % |
Net interest margin (1) | 1.97 | % | 2.26 | % | 2.25 | % |
| |
(1)
| Calculated on a fully taxable equivalent basis. |
The following table provides information regarding the average balances and yields earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities for each of the three years ended December 31, 2019, 20182021, 2020 and 2017.2019. Non-accrual loans are included in the calculation of average loan balances, while interest payments collected on non-accrual loans are recorded as a reduction to principal. Where applicable, interest income and yield are reflected on a fully taxable equivalent basis and have been adjusted based on the statutory federal income tax rate of 21% for 2019, 21% for 2018 and 35% for 2017..
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
(Dollars in thousands) | Average Balance | Interest Income (1)/ Expense | Average Yield/ Rate | | Average Balance | Interest Income (1)/ Expense | Average Yield/ Rate | | Average Balance | Interest Income (1)/ Expense | Average Yield/ Rate |
Assets | | | | | | | | | | | |
Interest-earning deposits | $ | 453,625 | | $ | 573 | | 0.13 | % | | $ | 775,276 | | $ | 2,199 | | 0.28 | % | | $ | 313,413 | | $ | 6,628 | | 2.11 | % |
Federal funds sold | 11,148 | | 9 | | 0.08 | % | | 8,076 | | 25 | | 0.31 | % | | 8,803 | | 167 | | 1.90 | % |
Debt securities available-for-sale | 402,391 | | 5,640 | | 1.40 | % | | 438,293 | | 6,550 | | 1.49 | % | | 250,064 | | 8,119 | | 3.25 | % |
Debt securities held-to-maturity, net | 866,245 | | 9,301 | | 1.07 | % | | 246,054 | | 6,439 | | 2.62 | % | | 193,443 | | 6,921 | | 3.58 | % |
Debt securities trading | 555 | | 5 | | 0.90 | % | | 592 | | 5 | | 0.84 | % | | — | | — | | — | % |
Equity securities | 1,298 | | — | | — | % | | — | | — | | — | % | | 6,733 | | 115 | | 1.71 | % |
FHLB stock | 11,766 | | 613 | | 5.21 | % | | 14,994 | | 1,098 | | 7.32 | % | | 18,043 | | 1,270 | | 7.04 | % |
Total loans and leases | 9,187,492 | | 215,186 | | 2.34 | % | | 7,255,035 | | 200,839 | | 2.77 | % | | 5,669,507 | | 239,328 | | 4.22 | % |
Total interest-earning assets | 10,934,520 | | 231,327 | | 2.12 | % | | 8,738,320 | | 217,155 | | 2.49 | % | | 6,460,006 | | 262,548 | | 4.06 | % |
Other assets | 371,876 | | | | | 387,080 | | | | | 281,171 | | | |
Total assets | $ | 11,306,396 | | | | | $ | 9,125,400 | | | | | $ | 6,741,177 | | | |
| | | | | | | | | | | |
Liabilities and Shareholders' Equity | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | |
Interest-bearing checking accounts | $ | 3,768,446 | | $ | 13,106 | | 0.35 | % | | $ | 2,407,087 | | $ | 14,493 | | 0.60 | % | | $ | 1,058,064 | | $ | 21,480 | | 2.03 | % |
Money market deposit accounts | 4,735,297 | | 23,299 | | 0.49 | % | | 3,812,942 | | 35,095 | | 0.92 | % | | 2,943,541 | | 69,336 | | 2.36 | % |
Certificates of deposit | 920,820 | | 5,099 | | 0.55 | % | | 1,223,631 | | 19,614 | | 1.60 | % | | 1,371,038 | | 34,776 | | 2.54 | % |
Borrowings: | | | | | | | | | | | |
FHLB borrowings | 251,164 | | 4,348 | | 1.73 | % | | 330,314 | | 6,095 | | 1.85 | % | | 394,480 | | 8,639 | | 2.19 | % |
Line of credit borrowings | 3,433 | | 148 | | 4.31 | % | | 6,243 | | 261 | | 4.18 | % | | 1,234 | | 68 | | 5.51 | % |
Senior & subordinated notes payable, net | 101,413 | | 5,938 | | 5.86 | % | | 59,078 | | 3,593 | | 6.08 | % | | 17,335 | | 1,091 | | 6.29 | % |
Total interest-bearing liabilities | 9,780,573 | | 51,938 | | 0.53 | % | | 7,839,295 | | 79,151 | | 1.01 | % | | 5,785,692 | | 135,390 | | 2.34 | % |
Noninterest-bearing deposits | 508,404 | | | | | 408,313 | | | | | 267,846 | | | |
Other liabilities | 220,303 | | | | | 239,137 | | | | | 128,618 | | | |
Shareholders' equity | 797,116 | | | | | 638,655 | | | | | 559,021 | | | |
Total liabilities and shareholders' equity | $ | 11,306,396 | | | | | $ | 9,125,400 | | | | | $ | 6,741,177 | | | |
| | | | | | | | | | | |
Net interest income (1) | | $ | 179,389 | | | | | $ | 138,004 | | | | | $ | 127,158 | | |
Net interest spread | | | 1.59 | % | | | | 1.48 | % | | | | 1.72 | % |
Net interest margin (1) | | | 1.64 | % | | | | 1.58 | % | | | | 1.97 | % |
| | | | | | | | | | | |
(1)Calculated on a fully taxable equivalent basis.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
(Dollars in thousands) | Average Balance | Interest Income (1)/ Expense | Average Yield/ Rate | | Average Balance | Interest Income (1)/ Expense | Average Yield/ Rate | | Average Balance | Interest Income (1)/ Expense | Average Yield/ Rate |
Assets | | | | | | | | | | | |
Interest-earning deposits | $ | 313,413 |
| $ | 6,628 |
| 2.11 | % | | $ | 188,921 |
| $ | 3,598 |
| 1.90 | % | | $ | 126,888 |
| $ | 1,466 |
| 1.16 | % |
Federal funds sold | 8,803 |
| 167 |
| 1.90 | % | | 8,315 |
| 156 |
| 1.88 | % | | 6,923 |
| 68 |
| 0.98 | % |
Debt securities available-for-sale | 250,064 |
| 8,119 |
| 3.25 | % | | 205,652 |
| 6,195 |
| 3.01 | % | | 144,735 |
| 3,122 |
| 2.16 | % |
Debt securities held-to-maturity | 193,443 |
| 6,921 |
| 3.58 | % | | 90,895 |
| 3,399 |
| 3.74 | % | | 58,635 |
| 2,463 |
| 4.20 | % |
Debt securities trading | — |
| — |
| — | % | | — |
| — |
| — | % | | 188 |
| 4 |
| 2.13 | % |
Equity securities | 6,733 |
| 115 |
| 1.71 | % | | 10,517 |
| 277 |
| 2.63 | % | | 8,539 |
| 266 |
| 3.12 | % |
FHLB stock | 18,043 |
| 1,270 |
| 7.04 | % | | 15,136 |
| 924 |
| 6.10 | % | | 13,286 |
| 603 |
| 4.54 | % |
Total loans and leases | 5,669,507 |
| 239,328 |
| 4.22 | % | | 4,500,117 |
| 185,349 |
| 4.12 | % | | 3,711,701 |
| 126,544 |
| 3.41 | % |
Total interest-earning assets | 6,460,006 |
| 262,548 |
| 4.06 | % | | 5,019,553 |
| 199,898 |
| 3.98 | % | | 4,070,895 |
| 134,536 |
| 3.30 | % |
Other assets | 281,171 |
| | | | 221,467 |
| | | | 193,532 |
| | |
Total assets | $ | 6,741,177 |
| | | | $ | 5,241,020 |
| | | | $ | 4,264,427 |
| | |
| | | | | | | | | | | |
Liabilities and Shareholders' Equity | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | |
Interest-bearing checking accounts | $ | 1,058,064 |
| $ | 21,480 |
| 2.03 | % | | $ | 612,921 |
| $ | 11,440 |
| 1.87 | % | | $ | 336,337 |
| $ | 3,706 |
| 1.10 | % |
Money market deposit accounts | 2,943,541 |
| 69,336 |
| 2.36 | % | | 2,429,203 |
| 45,106 |
| 1.86 | % | | 1,999,399 |
| 22,350 |
| 1.12 | % |
Certificates of deposit | 1,371,038 |
| 34,776 |
| 2.54 | % | | 1,071,556 |
| 21,947 |
| 2.05 | % | | 967,503 |
| 11,429 |
| 1.18 | % |
Borrowings: | | | | | | | | | | | |
FHLB borrowings | 394,480 |
| 8,639 |
| 2.19 | % | | 325,356 |
| 5,555 |
| 1.71 | % | | 295,315 |
| 3,152 |
| 1.07 | % |
Line of credit borrowings | 1,234 |
| 68 |
| 5.51 | % | | 2,568 |
| 119 |
| 4.63 | % | | 2,214 |
| 90 |
| 4.07 | % |
Subordinated notes payable, net | 17,335 |
| 1,091 |
| 6.29 | % | | 34,807 |
| 2,215 |
| 6.36 | % | | 34,605 |
| 2,215 |
| 6.40 | % |
Total interest-bearing liabilities | 5,785,692 |
| 135,390 |
| 2.34 | % | | 4,476,411 |
| 86,382 |
| 1.93 | % | | 3,635,373 |
| 42,942 |
| 1.18 | % |
Noninterest-bearing deposits | 267,846 |
| | | | 244,090 |
| | | | 210,860 |
| | |
Other liabilities | 128,618 |
| | | | 75,473 |
| | | | 49,279 |
| | |
Shareholders' equity | 559,021 |
| | | | 445,046 |
| | | | 368,915 |
| | |
Total liabilities and shareholders' equity | $ | 6,741,177 |
| | | | $ | 5,241,020 |
| | | | $ | 4,264,427 |
| | |
| | | | | | | | | | | |
Net interest income (1) | | $ | 127,158 |
| | | | $ | 113,516 |
| | | | $ | 91,594 |
| |
Net interest spread | | | 1.72 | % | | | | 2.05 | % | | | | 2.12 | % |
Net interest margin (1) | | | 1.97 | % | | | | 2.26 | % | | | | 2.25 | % |
| | | | | | | | | | | |
| |
(1)
| Calculated on a fully taxable equivalent basis. |
Net Interest Income for the Years Ended December 31, 20192021 and 20182020. Net interest income, calculated on a fully taxable equivalent basis, increased $13.6$41.4 million, or 12.0%30.0%, to $127.2$179.4 million for the year ended December 31, 20192021, from $113.5$138.0 million in 20182020. The increase in net interest income for the year ended December 31, 2019, was primarily attributable to a $1.44 billion, or 28.7%, increase
in average interest-earning assets driven primarily by loan growth. The increase in net interest income reflects an increase of $62.7$14.2 million, or 31.3%6.5%, in interest income partially offset by an increaseand a decrease of $49.0$27.2 million, or 56.7%34.4%, in interest expense. NetOur net interest margin decreased to 1.97%was 1.64% for the year ended December 31, 2019,2021, as compared to 2.26%1.58% in 2018,2020 driven higher costsprimarily by lower cost of funds and higher average interest-earning balances, which were partially offset by a higherlower yield on our loan portfolio.interest-earning assets.
The increase in interest income on interest-earning assets was primarily the result of an increase in average total loans, which are our primary earning assets, of $1.17$1.93 billion, or 26.0% and an increase26.6%, mostly offset by a decrease of 1043 basis points in yield on our loans. The yield on our loan portfolio was primarily driven byloans, for the direction and timing ofyear ended December 31, 2021 compared to the Federal Reserve’s target Federal Funds Rate changes, which impacted our floating-rate loans.same period in 2020. The change in yield is also attributable to an increased portion of our continuing gradual shift towardsportfolio being comprised of our lower-risk, marketable-securities-backedlower-yielding marketable-securities backed private banking loans and commercial loans. The overall yield on interest-earning assets increased 8declined 37 basis points to 4.06%2.12% for the year ended December 31, 2019,2021, as compared to 3.98%2.49% in 2018,2020, primarily fromdue to the higherlower loan yields. Our loans are predominantly variable rate loans indexed to one-month LIBOR.
The increasedecrease in interest expense on interest-bearing liabilities was primarily the result of an increasea decrease of 4148 basis points in the average rate paid on our average interest-bearing liabilities, as well aspartially offset by an increase of $1.31$1.94 billion, or 29.2%24.8%, in average interest-bearing liabilities for the year ended December 31, 20192021, compared to 20182020. The increasedecrease in the average rate paid was reflective of increasesreflected decreases in rates paid in all interest-bearing deposit categories, FHLB borrowings and line of credit borrowings, which was largely driven by the direction and timingrepricing of our deposits as a result of the Federal Reserve’s target Federal Funds Rate changes, which impacted our variable-rate liabilities.current interest rate environment. The increase in average interest-bearing liabilities was driven primarily by an increase of $514.3 million in average money market deposit accounts, an increase of $445.1 million$1.36 billion in average interest-bearing checking accounts and an increase of $299.5$922.4 million in average money market deposit accounts, partially offset by a decrease of $302.8 million in average certificates of deposit.
Net Interest Income for the Years Ended December 31, 20182020 and 20172019. Net interest income, calculated on a fully taxable equivalent basis, increased $21.9$10.8 million, or 23.9%8.5%, to $113.5$138.0 million for the year ended December 31, 20182020, from $91.6$127.2 million in 20172019. The increase in net interest income for the year ended December 31, 20182020, was primarily attributable to a $948.7 million,$2.28 billion, or 23.3%35.3%, increase in average interest-earning assets driven primarily by loan growth. The increase in net interest income reflects an increasea decrease of $65.4$45.4 million, or 48.6%17.3%, in interest income, partiallymore than offset by an increasea decrease of $43.4$56.2 million, or 101.2%41.5%, in interest expense. NetOur net interest margin increased to 2.26%was 1.58% for the year ended December 31, 2018,2020, as compared to 2.25%1.97% in 2017, driven by a2019. The decrease in net interest margin for the year ended December 31, 2020, resulted from the Federal Reserve interest rate cuts, contributing to lower net interest spread, and higher yield on our loan portfolio, largely offset by the higher costaverage balances of lower-earning assets. This included excess liquidity in interest-bearing cash deposits and FHLB borrowings.investments during certain times of the year in anticipation of clients’ potential liquidity and credit needs during the COVID-19 pandemic.
The increasedecrease in interest income on interest-earning assets was primarily the result of a decrease of 145 basis points in yield on our loans, partially offset byan increase in average total loans, which are our primary earning assets, of $788.4 million,$1.59 billion, or 21.2% and an increase of 71 basis points28.0% for the year ended December 31, 2020, compared to the same period in yield on our loans.2019. The most significant factor driving the yield on our loan portfolio was the effectimpact of fourthe decrease to the Federal Reserve’s increases in 2018 to the target federal funds rate on our floating-rate loans, which was partially offset by the shift toward lower-risk marketable-securities-backed private banking loans. The overall yield on interest-earning assets increased 68declined 157 basis points to 3.98%2.49% for the year ended December 31, 2018,2020, as compared to 3.30%4.06% in 2017,2019, primarily from the higherlower loan yields.Our loans are predominantly variable rate loans indexed to 1-month LIBOR. At the end of the first quarter of 2020, we placed interest rate floors on many of these floating rate loans, particularly for private banking loans.
The increasedecrease in interest expense on interest-bearing liabilities was primarily the result of an increasea decrease of 75133 basis points in the average rate paid on our average interest-bearing liabilities, as well aspartially offset by an increase of $841.0 million,$2.05 billion, or 23.1%35.5%, in average interest-bearing liabilities for the year ended December 31, 20182020, compared to 20172019. The increasedecrease in the average rate paid was reflective of increasesdecreases in rates paid inon all interest-bearing deposit categories and FHLB borrowings,liabilities, which was largely driven by the effectimpact of fourthe recent decrease to the Federal Reserve’s increases in 2018 to the target federal funds rate on our variable-rate liabilities.liabilities. The increase in average interest-bearing liabilities was driven primarily by an increase of $429.8 million in average money market deposit accounts, an increase of $276.6 million$1.35 billion in average interest-bearing checking accounts and an increase of $104.1$869.4 million in average money market deposit accounts, partially offset by a decrease of $147.4 million in average certificates of deposit.
The following tables analyze the dollar amount of the change in interest income and interest expense with respect to the primary components of interest-earning assets and interest-bearing liabilities. The tables show the amount of the change in interest income or interest expense caused by either changes in outstanding balances or changes in interest rates for the periods indicated. The effect of changes in balance is measured by applying the average rate during the first period to the balance (“volume”) change between the two periods. The effect of changes in rate is measured by applying the change in rate between the two periods to the average volume during the first period.
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2021 over 2020 |
(Dollars in thousands) | Yield/Rate | | Volume | | Change (1) |
Increase (decrease) in: | | | | | |
Interest income: | | | | | |
Interest-earning deposits | $ | (929) | | | $ | (697) | | | $ | (1,626) | |
Federal funds sold | (23) | | | 7 | | | (16) | |
Debt securities available-for-sale | (383) | | | (527) | | | (910) | |
Debt securities held-to-maturity | (5,586) | | | 8,448 | | | 2,862 | |
| | | | | |
| | | | | |
FHLB stock | (277) | | | (208) | | | (485) | |
Total loans and leases | (33,498) | | | 47,845 | | | 14,347 | |
Total increase (decrease) in interest income | (40,696) | | | 54,868 | | | 14,172 | |
Interest expense: | | | | | |
Interest-bearing deposits: | | | | | |
Interest-bearing checking accounts | (7,566) | | | 6,179 | | | (1,387) | |
Money market deposit accounts | (18,883) | | | 7,087 | | | (11,796) | |
Certificates of deposit | (10,529) | | | (3,986) | | | (14,515) | |
Borrowings: | | | | | |
FHLB borrowings | (346) | | | (1,401) | | | (1,747) | |
Line of credit borrowings | 9 | | | (122) | | | (113) | |
Subordinated notes payable, net | (129) | | | 2,474 | | | 2,345 | |
Total increase (decrease) in interest expense | (37,444) | | | 10,231 | | | (27,213) | |
Total increase (decrease) in net interest income | $ | (3,252) | | | $ | 44,637 | | | $ | 41,385 | |
(1)The change in interest income and expense due to changes in both composition and applicable yields/rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2019 over 2018 |
(Dollars in thousands) | Yield/Rate | | Volume | | Change (1) |
Increase (decrease) in: | | | | | |
Interest income: | | | | | |
Interest-earning deposits | $ | 435 |
| | $ | 2,595 |
| | $ | 3,030 |
|
Federal funds sold | 2 |
| | 9 |
| | 11 |
|
Debt securities available-for-sale | 510 |
| | 1,414 |
| | 1,924 |
|
Debt securities held-to-maturity | (153 | ) | | 3,675 |
| | 3,522 |
|
Equity securities | (80 | ) | | (82 | ) | | (162 | ) |
FHLB stock | 153 |
| | 193 |
| | 346 |
|
Total loans and leases | 4,720 |
| | 49,259 |
| | 53,979 |
|
Total increase in interest income | 5,587 |
| | 57,063 |
| | 62,650 |
|
Interest expense: | | | | | |
Interest-bearing deposits: | | | | | |
Interest-bearing checking accounts | 1,082 |
| | 8,958 |
| | 10,040 |
|
Money market deposit accounts | 13,549 |
| | 10,681 |
| | 24,230 |
|
Certificates of deposit | 5,906 |
| | 6,923 |
| | 12,829 |
|
Borrowings: | | | | | |
FHLB borrowings | 1,761 |
| | 1,323 |
| | 3,084 |
|
Line of credit borrowings | 19 |
| | (70 | ) | | (51 | ) |
Subordinated notes payable, net | (24 | ) | | (1,100 | ) | | (1,124 | ) |
Total increase in interest expense | 22,293 |
| | 26,715 |
| | 49,008 |
|
Total increase (decrease) in net interest income | $ | (16,706 | ) | | $ | 30,348 |
| | $ | 13,642 |
|
| |
(1)
| The change in interest income and expense due to changes in both composition and applicable yields/rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2020 over 2019 |
(Dollars in thousands) | Yield/Rate | | Volume | | Change (1) |
Increase (decrease) in: | | | | | |
Interest income: | | | | | |
Interest-earning deposits | $ | (8,891) | | | $ | 4,462 | | | $ | (4,429) | |
Federal funds sold | (129) | | | (13) | | | (142) | |
Debt securities available-for-sale | (5,781) | | | 4,212 | | | (1,569) | |
Debt securities held-to-maturity | (2,123) | | | 1,641 | | | (482) | |
Debt securities trading | — | | | 5 | | | 5 | |
Equity securities | — | | | (115) | | | (115) | |
FHLB stock | 47 | | | (219) | | | (172) | |
Total loans and leases | (95,516) | | | 57,027 | | | (38,489) | |
Total increase in interest income | (112,393) | | | 67,000 | | | (45,393) | |
Interest expense: | | | | | |
Interest-bearing deposits: | | | | | |
Interest-bearing checking accounts | (22,029) | | | 15,042 | | | (6,987) | |
Money market deposit accounts | (50,751) | | | 16,510 | | | (34,241) | |
Certificates of deposit | (11,747) | | | (3,415) | | | (15,162) | |
Borrowings: | | | | | |
FHLB borrowings | (1,260) | | | (1,284) | | | (2,544) | |
Line of credit borrowings | (20) | | | 213 | | | 193 | |
Subordinated notes payable, net | (41) | | | 2,543 | | | 2,502 | |
Total increase in (decrease) interest expense | (85,848) | | | 29,609 | | | (56,239) | |
Total increase (decrease) in net interest income | $ | (26,545) | | | $ | 37,391 | | | $ | 10,846 | |
(1)The change in interest income and expense due to changes in both composition and applicable yields/rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
|
| | | | | | | | | | | |
| Years Ended December 31, |
| 2018 over 2017 |
(Dollars in thousands) | Yield/Rate | | Volume | | Change (1) |
Increase (decrease) in: | | | | | |
Interest income: | | | | | |
Interest-earning deposits | $ | 1,216 |
| | $ | 916 |
| | $ | 2,132 |
|
Federal funds sold | 72 |
| | 16 |
| | 88 |
|
Debt securities available-for-sale | 1,491 |
| | 1,582 |
| | 3,073 |
|
Debt securities held-to-maturity | (295 | ) | | 1,231 |
| | 936 |
|
Debt securities trading | — |
| | (4 | ) | | (4 | ) |
Equity securities | (45 | ) | | 56 |
| | 11 |
|
FHLB stock | 229 |
| | 92 |
| | 321 |
|
Total loans and leases | 29,100 |
| | 29,705 |
| | 58,805 |
|
Total increase in interest income | 31,768 |
| | 33,594 |
| | 65,362 |
|
Interest expense: | | | | | |
Interest-bearing deposits: | | | | | |
Interest-bearing checking accounts | 3,539 |
| | 4,195 |
| | 7,734 |
|
Money market deposit accounts | 17,172 |
| | 5,584 |
| | 22,756 |
|
Certificates of deposit | 9,174 |
| | 1,344 |
| | 10,518 |
|
Borrowings: | | | | | |
FHLB borrowings | 2,054 |
| | 349 |
| | 2,403 |
|
Line of credit borrowings | 14 |
| | 15 |
| | 29 |
|
Subordinated notes payable, net | (13 | ) | | 13 |
| | — |
|
Total increase in interest expense | 31,940 |
| | 11,500 |
| | 43,440 |
|
Total increase (decrease) in net interest income | $ | (172 | ) | | $ | 22,094 |
| | $ | 21,922 |
|
| |
(1)
| The change in interest income and expense due to changes in both composition and applicable yields/rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. |
Provision for LoanCredit Losses on Loans and Lease LossesLeases
The provision for loancredit losses on loans and lease lossesleases represents our determination of the amount necessary to be recorded against the current period’s earnings to maintain the allowance for loan and leasecredit losses at a level that is considered adequate in relation to the estimatedconsistent with management’s assessment of credit losses inherent in the loan and lease portfolio. For additional information regardingportfolio at a specific point in time. We adopted CECL on December 31, 2020, which replaced the incurred loss methodology for determining our provision for credit losses and allowance for loan and lease losses, see “Allowance for Loan and Lease Losses.”
credit losses. We recorded a net decrease to retained earnings of $942,000 related to the allowance for credit tolosses on loans and leases as of January 1, 2020, for the cumulative effect of adopting CECL.
We recorded a provision for loancredit losses on loans and lease lossesleases of $968,000$820,000 for the year ended December 31, 2019,2021, compared to a credit to provision for loan losses of $205,000 $19.3 million for the year ended December 31, 20182020, and a credit to provision for loan losses of $623,000$968,000 for the year ended December 31, 2017.2019.
The provision for credit losses on loans and leases for the year ended December 31, 2021, was comprised of a decrease in net general reserves of approximately $9.0 million, largely due to improvement in the economic forecasts utilized in the qualitative management overlay, which was more than offset by an increase of $2.7 million in specific reserves on individually evaluated loans and $7.1 million in charge-offs.
The provision for credit losses on loans and leases for the year ended December 31, 2020, was comprised of an increase in general reserves of $18.7 million largely due to adjustments to the macro-economic forecast data such as gross domestic product (“GDP”) and unemployment in response to economic uncertainty around the COVID-19 pandemic and an increase of $1.8 million in specific reserves on non-performing loans, largely driven by non-accrual loans in our commercial and industrial and commercial real estate portfolios.
The credit to provision for loan and lease losses for the year ended December 31, 2019, was comprised of recoveries of $2.0 million related to commercial and industrial loans and a net decrease of $266,000 in specific reserves primarily due to paydowns of these non-performing
nonperforming loans and collateral related to an impaired loan that was transferred to OREO,other real estate owned (“OREO”), partially offset by a net increase of $1.2 million in general reserves due to growth of the loan and lease portfolio and charge-offs of $112,000.
The credit to provision for loan losses for the year ended December 31, 2018, was comprised of recoveries of $1.1 million related to commercial and industrial loans, partially offset by a net increase of $861,000 in general reserves due to growth of the loan portfolio.
The credit to provision for loan losses for the year ended December 31, 2017, was comprised of a net decrease of $130,000 in specific reserves on non-performing loans and recoveries of $580,000 predominately related to commercial and industrial loans, partially offset by a net increase of $87,000 in general reserves.
Non-Interest Income
Non-interest income is an important component of our revenue and is comprised primarilylargely of investment management fees from Chartwell coupled with fees generated from loan and deposit relationships with our Bank customers, including swap transactions. The information
provided under the caption “Parent and Other” represents general operating activity of the Company not considered to be a reportable segment, which includes parent company activity as well as eliminations and adjustments that are necessary for purposes of reconciliation to the consolidated amounts.
The following table presents the components of our non-interest income by operating segment for the years ended December 31, 20192021 and 20182020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | Investment | Parent | | | | Investment | Parent | |
(Dollars in thousands) | Bank | Management | and Other | Consolidated | | Bank | Management | and Other | Consolidated |
Investment management fees | $ | — | | $ | 38,702 | | $ | (1,248) | | $ | 37,454 | | | $ | — | | $ | 32,727 | | $ | (692) | | $ | 32,035 | |
Service charges on deposits | 1,407 | | — | | — | | 1,407 | | | 1,072 | | — | | — | | 1,072 | |
Net gain on the sale and call of debt securities | 242 | | — | | — | | 242 | | | 3,948 | | — | | — | | 3,948 | |
| | | | | | | | | |
Swap fees | 14,091 | | — | | — | | 14,091 | | | 16,274 | | — | | — | | 16,274 | |
Commitment and other loan fees | 2,448 | | — | | — | | 2,448 | | | 1,715 | | — | | — | | 1,715 | |
Bank owned life insurance income | 2,142 | | — | | — | | 2,142 | | | 1,742 | | — | | — | | 1,742 | |
Other income (loss) | 853 | | 34 | | (25) | | 862 | | | 361 | | 58 | | — | | 419 | |
Total non-interest income | $ | 21,183 | | $ | 38,736 | | $ | (1,273) | | $ | 58,646 | | | $ | 25,112 | | $ | 32,785 | | $ | (692) | | $ | 57,205 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | Year Ended December 31, 2018 |
| | Investment | Parent | | | | Investment | Parent | |
(Dollars in thousands) | Bank | Management | and Other | Consolidated | | Bank | Management | and Other | Consolidated |
Investment management fees | $ | — |
| $ | 36,889 |
| $ | (447 | ) | $ | 36,442 |
| | $ | — |
| $ | 37,939 |
| $ | (292 | ) | $ | 37,647 |
|
Service charges on deposits | 559 |
| — |
| — |
| 559 |
| | 570 |
| — |
| — |
| 570 |
|
Net gain (loss) on the sale and call of debt securities | 416 |
| — |
| — |
| 416 |
| | (70 | ) | — |
| — |
| (70 | ) |
Swap fees | 11,029 |
| — |
| — |
| 11,029 |
| | 7,311 |
| — |
| — |
| 7,311 |
|
Commitment and other loan fees | 1,788 |
| — |
| — |
| 1,788 |
| | 1,411 |
| — |
| — |
| 1,411 |
|
Bank owned life insurance income | 1,736 |
| — |
| — |
| 1,736 |
| | 1,716 |
| — |
| — |
| 1,716 |
|
Other income (loss) | (61 | ) | 31 |
| 842 |
| 812 |
| | 104 |
| 1 |
| (773 | ) | (668 | ) |
Total non-interest income | $ | 15,467 |
| $ | 36,920 |
| $ | 395 |
| $ | 52,782 |
| | $ | 11,042 |
| $ | 37,940 |
| $ | (1,065 | ) | $ | 47,917 |
|
(1)Other income largely includes items such as change in fair value on swaps and equity securities, gains on the sale of loans or OREO, and other general operating income.
Non-Interest Income for the Years Ended December 31, 20192021 and 20182020. Our non-interest income was $52.858.6 million for the year ended December 31, 20192021, an increase of $4.9$1.4 million, or 10.2%2.5%, from $47.957.2 million for 20182020. This increase was primarily related to increases in swaphigher investment management fees, and commitment and other loan fees, bank owned life insurance income, and other income largely offset by lower net gain on the sale and call of debt securities and swap fees, as follows:
Bank Segment:
•Net gain on the sale and call of debt securities decreased $3.7 million for the year ended December 31, 2021, as compared to 2020, due primarily to the repositioning of a portion of the corporate bond portfolio into government agency securities that took place during 2020.
•Swap fees decreased $2.2 million for the year ended December 31, 2021, as compared to 2020, due to changing demand from customers for interest rate protection through swaps given movement in the yield curve. The number of swaps executed as well as the notional amount and term of each swap transaction impact the fee income from period to period.
•Commitment and other loan fees for the year ended December 31, 2021, increased $733,000 as compared to 2020, primarily due to an increase in letter of credit fee income.
•Bank owned life insurance income for the year ended December 31, 2021, increased $400,000 as compared to 2020, primarily due to additional investments in bank owned life insurance during the second quarter of 2021.
•Other income increased $492,000 for year ended December 31, 2021, compared to 2020, primarily due to an early payoff of a customer’s equipment lease resulting in a gain, which was partially offset by lower income on trading securities.
Investment Management Segment:
•Investment management fees increased $6.0 million for the year ended December 31, 2021, as compared to 2020, primarily due to higher levels of assets under management. Assets under management were $11.84 billion as of December 31, 2021, an
increase of $1.58 billion from December 31, 2020. For additional information on assets under management, refer to Item 1, Business - Investment Management Products.
The following table presents the components of our non-interest income by operating segment for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| | Investment | Parent | | | | Investment | Parent | |
(Dollars in thousands) | Bank | Management | and Other | Consolidated | | Bank | Management | and Other | Consolidated |
Investment management fees | $ | — | | $ | 32,727 | | $ | (692) | | $ | 32,035 | | | $ | — | | $ | 36,889 | | $ | (447) | | $ | 36,442 | |
Service charges on deposits | 1,072 | | — | | — | | 1,072 | | | 559 | | — | | — | | 559 | |
Net gain on the sale and call of debt securities | 3,948 | | — | | — | | 3,948 | | | 416 | | — | | — | | 416 | |
| | | | | | | | | |
Swap fees | 16,274 | | — | | — | | 16,274 | | | 11,029 | | — | | — | | 11,029 | |
Commitment and other loan fees | 1,715 | | — | | — | | 1,715 | | | 1,788 | | — | | — | | 1,788 | |
Bank owned life insurance income | 1,742 | | — | | — | | 1,742 | | | 1,736 | | — | | — | | 1,736 | |
Other income (loss) | 361 | | 58 | | — | | 419 | | | (61) | | 31 | | 842 | | 812 | |
Total non-interest income | $ | 25,112 | | $ | 32,785 | | $ | (692) | | $ | 57,205 | | | $ | 15,467 | | $ | 36,920 | | $ | 395 | | $ | 52,782 | |
(1)Other income largely includes items such as change in fair value on swaps and equity securities, gains on the sale of loans or OREO, and other general operating income.
Non-Interest Income for the Years Ended December 31, 2020 and 2019. Our non-interest income was $57.2 million for the year ended December 31, 2020, an increase of $4.4 million, or 8.4%, from $52.8 million for 2019. This increase was primarily related to a higher net gain on the sale and call of debt securities and an increase in swap fees, partially offset by lower investment management fees, and other income (loss), as follows:
Bank Segment:
Swap fees increased $3.7•There was a net gain on the sale and call of debt securities of $3.9 million for the year ended December 31, 20192020, as compared to 2018 a net gain of $416,000 for the year ended December 31, 2019. The variance was primarily due to the repositioning of a portion of the corporate bond portfolio into government agency securities to take advantage of market appreciation and enhance the overall credit quality of our investment portfolio.
•Swap fees increased $5.2 million for the year ended December 31, 2020, as compared to 2019, due to an increase in the number of customer swap transactions that closed during the year.year, from both of our private and commercial banking portfolios. While level and frequency of income associated with swap transactions can vary materially from period to period based on customers’ expectations of market conditions and term loan originations, there iswas strong customer demand for long-term interest rate protection in the current interest rate environment and we continue to run the business to increase demand through targeted loan production, enhanced messaging of the opportunity, process optimization and refined emphasis on marketing swaps to a broader portion of our loan portfolio, including loans collateralized by marketable securities.
environment.
There was a net gain on the sale and call of debt securities of $416,000 for the year ended December 31, 2019, as compared to a net loss of $70,000 for the year ended December 31, 2018.
Commitment and other loan fees increased $377,000for the year ended December 31, 2019 primarily due to higher unused commitment fee income and other loan fee income due to the continued growth in our loan and lease portfolio.
Other income (loss) decreased $165,000 for the year ended December 31, 2019, as compared to 2018, primarily due to a loss on the sale of OREO and lower unrealized gains on swaps.
Investment Management Segment:
•Investment management fees decreased $1.1$4.2 million for the year ended December 31, 2019,2020, as compared to 2018,2019, primarily due to the effect of the COVID-19 pandemic on the equity markets resulting in a shift in the asset composition across investment products which resulted inand a lower weighted average fee rate of 0.35% for the year ended December 31, 2020, compared to 0.36% for the year ended December 31, 2019, compared to 0.39% for the year ended December 31, 2018, partially offset by higher assets under management of $512.0$562.0 million. For additional information on assets under management, refer to Item 1, Business - Investment Management Products.
Parent and Other
•Other income was comprised of a net gain on equity securities of $842,000 for the year ended December 31, 2019, as compared to a net lossreflected $842,000 of $773,000 for the year ended December 31, 2018. Theserealized gains on equity securities were related to our mutual funds invested in short-duration, corporate bonds and mid-cap value equities, which were sold by December 31,in 2019.
The following table presents the components of our non-interest income by operating segment for the years ended December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 | | Year Ended December 31, 2017 |
| | Investment | Parent | | | | Investment | Parent | |
(Dollars in thousands) | Bank | Management | and Other | Consolidated | | Bank | Management | and Other | Consolidated |
Investment management fees | $ | — |
| $ | 37,939 |
| $ | (292 | ) | $ | 37,647 |
| | $ | — |
| $ | 37,309 |
| $ | (209 | ) | $ | 37,100 |
|
Service charges on deposits | 570 |
| — |
| — |
| 570 |
| | 399 |
| — |
| — |
| 399 |
|
Net gain on the sale and call of debt securities | (70 | ) | — |
| — |
| (70 | ) | | 310 |
| — |
| — |
| 310 |
|
Swap fees | 7,311 |
| — |
| — |
| 7,311 |
| | 5,353 |
| — |
| — |
| 5,353 |
|
Commitment and other loan fees | 1,411 |
| — |
| — |
| 1,411 |
| | 1,462 |
| — |
| — |
| 1,462 |
|
Bank owned life insurance income | 1,716 |
| — |
| — |
| 1,716 |
| | 1,778 |
| — |
| — |
| 1,778 |
|
Other income | 104 |
| 1 |
| (773 | ) | (668 | ) | | 562 |
| 2 |
| — |
| 564 |
|
Total non-interest income | $ | 11,042 |
| $ | 37,940 |
| $ | (1,065 | ) | $ | 47,917 |
| | $ | 9,864 |
| $ | 37,311 |
| $ | (209 | ) | $ | 46,966 |
|
Non-Interest Income for the Years Ended December 31, 2018 and 2017. Our non-interest income was $47.9 million for the year ended December 31, 2018, an increase of $951,000, or 2.0%, from $47.0 million for 2017. This increase was primarily related to increases in swap fees and investment management fees, partially offset by decreases in net gain (loss) on debt securities and other income (loss), as follows:
Bank Segment:
Swap fees increased $2.0 million for the year ended December 31, 2018, as compared to 2017, driven by increases in customer demand for long-term interest rate protection. The level and frequency of income associated with swap transactions can vary materially from period to period based on customers’ expectations of market conditions and loan originations.
There was a net loss on the sale and call of debt securities of $70,000 for the year ended December 31, 2018, as compared to a net gain of $310,000 for the year ended December 31, 2017.
Other income (loss) decreased $458,000 for the year ended December 31, 2018, as compared to 2017, primarily due to lower gain on the sale of OREO and lower unrealized gains on swaps.
Investment Management Segment:
Investment management fees increased $630,000 for the year ended December 31, 2018, as compared to 2017, which included higher assets under management related to the Columbia acquisition, which closed on April 6, 2018, and net inflows, partially offset by market depreciation. Assets under management were $9.19 billion as of December 31, 2018, an increase of $880.0 million from December 31, 2017.
Parent and Other
Other income (loss) reflected $775,000 of unrealized losses on equity securities for the year ended December 31, 2018, related to our mutual funds invested in short-duration, corporate bonds and mid-cap value equities.
Non-Interest Expense
Our non-interest expense represents the operating cost of maintaining and growing our business. The largest portion of non-interest expense for each segment is compensation and employee benefits, which include employee payroll expense as well as the cost of incentive compensation, benefit plans, health insurance and payroll taxes, all of which are impacted by the growth in our employee
base, coupled with increases in the level of compensation and benefits of our existing employees. The information provided under the caption “Parent and Other” represents general operating activity of the Company not considered to be a reportable segment, which includes parent company activity as well as eliminations and adjustments that are necessary for purposes of reconciliation to the consolidated amounts.
The following table presents the components of our non-interest expense by operating segment for the years ended December 31, 20192021 and 20182020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
| | Investment | Parent | | | | Investment | Parent | |
(Dollars in thousands) | Bank | Management | and Other | Consolidated | | Bank | Management | and Other | Consolidated |
Compensation and employee benefits | $ | 59,687 | | $ | 23,527 | | $ | 1,385 | | $ | 84,599 | | | $ | 50,240 | | $ | 19,738 | | $ | 1,219 | | $ | 71,197 | |
Premises and equipment costs | 4,560 | | 1,277 | | — | | 5,837 | | | 4,318 | | 1,557 | | — | | 5,875 | |
Professional fees | 7,353 | | 766 | | 2,701 | | 10,820 | | | 4,773 | | 829 | | 599 | | 6,201 | |
FDIC insurance expense | 5,080 | | — | | — | | 5,080 | | | 9,680 | | — | | — | | 9,680 | |
General insurance expense | 1,076 | | 294 | | — | | 1,370 | | | 866 | | 276 | | — | | 1,142 | |
State capital shares tax | 2,911 | | — | | — | | 2,911 | | | 1,720 | | — | | — | | 1,720 | |
Travel and entertainment expense | 2,288 | | 346 | | — | | 2,634 | | | 2,093 | | 291 | | 39 | | 2,423 | |
Technology and data services | 11,549 | | 3,270 | | — | | 14,819 | | | 7,830 | | 2,973 | | — | | 10,803 | |
Intangible amortization expense | — | | 1,911 | | — | | 1,911 | | | — | | 1,944 | | — | | 1,944 | |
| | | | | | | | | |
Marketing and advertising | 2,260 | | 1,364 | | — | | 3,624 | | | 1,210 | | 1,192 | | — | | 2,402 | |
Other operating expenses (1) | 10,609 | | 1,095 | | 1,185 | | 12,889 | | | 7,811 | | 879 | | 1,026 | | 9,716 | |
Total non-interest expense | $ | 107,373 | | $ | 33,850 | | $ | 5,271 | | $ | 146,494 | | | $ | 90,541 | | $ | 29,679 | | $ | 2,883 | | $ | 123,103 | |
Full-time equivalent employees (2) | 308 | | 53 | | — | | 361 | | | 255 | | 53 | | — | | 308 | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | Year Ended December 31, 2018 |
| | Investment | Parent | | | | Investment | Parent | |
(Dollars in thousands) | Bank | Management | and Other | Consolidated | | Bank | Management | and Other | Consolidated |
Compensation and employee benefits | $ | 46,841 |
| $ | 22,335 |
| $ | — |
| $ | 69,176 |
| | $ | 41,226 |
| $ | 23,545 |
| $ | — |
| $ | 64,771 |
|
Premises and occupancy costs | 5,546 |
| 1,195 |
| — |
| 6,741 |
| | 4,444 |
| 1,136 |
| — |
| 5,580 |
|
Professional fees | 5,170 |
| 1,159 |
| (141 | ) | 6,188 |
| | 3,642 |
| 1,058 |
| 29 |
| 4,729 |
|
FDIC insurance expense | 5,292 |
| — |
| — |
| 5,292 |
| | 4,543 |
| — |
| — |
| 4,543 |
|
General insurance expense | 825 |
| 272 |
| — |
| 1,097 |
| | 762 |
| 268 |
| — |
| 1,030 |
|
State capital shares tax | 420 |
| — |
| — |
| 420 |
| | 1,521 |
| — |
| — |
| 1,521 |
|
Travel and entertainment expense | 3,481 |
| 1,139 |
| — |
| 4,620 |
| | 2,864 |
| 952 |
| — |
| 3,816 |
|
Data processing expense | 1,848 |
| — |
| — |
| 1,848 |
| | 1,565 |
| — |
| — |
| 1,565 |
|
Charitable contributions | 1,136 |
| 21 |
| — |
| 1,157 |
| | 1,028 |
| 11 |
| — |
| 1,039 |
|
Intangible amortization expense | — |
| 2,008 |
| — |
| 2,008 |
| | — |
| 1,968 |
| — |
| 1,968 |
|
Change in fair value of acquisition earn out | — |
| — |
| — |
| — |
| | — |
| (218 | ) | — |
| (218 | ) |
Other operating expenses (1) | 7,386 |
| 5,440 |
| 776 |
| 13,602 |
| | 5,595 |
| 4,790 |
| 428 |
| 10,813 |
|
Total non-interest expense | $ | 77,945 |
| $ | 33,569 |
| $ | 635 |
| $ | 112,149 |
| | $ | 67,190 |
| $ | 33,510 |
| $ | 457 |
| $ | 101,157 |
|
Full-time equivalent employees (2) | 219 |
| 57 |
| — |
| 276 |
| | 189 |
| 68 |
| — |
| 257 |
|
| |
(1)
| Other operating expenses largely include items such as organizational dues and subscriptions, investment research fees, sub-advisory fees, telephone, marketing, employee-related expenses and other general operating expenses. |
| |
(2)
| Full-time equivalent employees shown are as of the end of the period presented. |
(1)Other operating expenses include items such as organizational dues and subscriptions, charitable contributions, investor relations fees, sub-advisory fees, employee-related expenses, provision for unfunded commitments and other general operating expenses.
(2)Full-time equivalent employees shown are as of the end of the period presented.
Non-Interest Expense for the Years Ended December 31, 20192021 and 20182020. Our non-interest expense for the year ended December 31, 20192021, increased $11.0$23.4 million, or 10.9%19.0%, as compared to 20182020, of which $10.8$16.8 million relates to the increase in expenses of the Bank segment, and $59,000$4.2 million relates to the increase in expenses of the Investment Management segment.segment and $2.4 million relates to the increase in expenses of the Parent and Other. Notable changes in each segment’s expenses are as follows:
Bank Segment:
Compensation•The Bank’s compensation and employee benefits of the Bank segmentincreased by $9.4 million for the year ended December 31, 2019, increased by $5.6 million 2021, as compared to 2018,2020, primarily due to an increase in the number of full-time equivalent employees, increases in the overall annual wage and benefits costs of our existing employees, and increases in incentive and stock-basedstock-based compensation expenses.
The increases in the number of employees and related expenses in 2021 are a result of our investment in talent to support our risk management, scalable growth and client experience.
Premises and occupancy costs•Professional fees increased $2.6 million for the year ended December 31, 2019, increased by $1.1 million 2021, as compared to 20182020, primarily due to continued improvementshigher audit, accounting and legal fees related to our infrastructure,routine accounting and regulatory compliance, higher investment advisory fees and increases in other professional fees, including additional office space in our Pittsburgh headquarters and investments in technology.
consulting fees related to the workout of non-performing loans.
Professional fees•FDIC insurance expense decreased by $4.6 million for the year ended December 31, 20192021, as compared to 2020, as the Bank qualified for the lower assessment rates included in the FDIC’s large bank assessment methodology beginning in the fourth quarter of 2020.
•Technology and data services expense increased by $1.5$3.7 million for the year ended December 31, 2021, as compared to 20182020, primarily due to increased software depreciation expense, maintenance costs, and software licensing fees all as a result of our continued investments in technology and product innovation to support our risk management, scalable growth and client experience.
•Other operating expenses increased by $2.8 million for the year ended December 31, 2021, compared to 2020, primarily due to continued growth in loan production and certain routine accounting and regulatory matters.
higher impairment expense associated with historic tax credit investments, partially offset by lower expenses associated with the reserve for unfunded commitments.
FDIC insurance expense for the year ended December 31, 2019, increased by $749,000 compared to 2018, due to the increase in the Bank’s assets. This variance also included a bank assessment credit applicable to certain banks related to the deposit insurance fund reserve ratio exceeding a target threshold.
State capital shares tax for the year ended December 31, 2019, decreased by $1.1 million compared to 2018, due to a recent favorable tax ruling received by the Company.
Travel and entertainment expense for the year ended December 31, 2019, increased by $617,000 compared to 2018, primarily due to a higher level of officer and relationship manager business development efforts consistent with our continued growth.
Other operating expenses for the year ended December 31, 2019, increased by $1.8 million compared to 2018, primarily due to a valuation adjustment on OREO, an increase in organization dues and subscriptions, higher marketing expenses and higher loan related expenses due to the continued growth in our loan and lease portfolio.
Investment Management Segment:
•Chartwell’s compensation and employee benefits costs increased by $3.8 million for the year ended December 31, 2019, decreased by $1.2 million 2021, as compared to 20182020, primarily due to decreasesan increase in full-time equivalent employeesvariable incentive compensation expense as a result of increased revenue.
Parent and incentiveOther:
•Parent and stock-based compensation expenses.
ProfessionalOther professional fees increased $2.1 for the year ended December 31, 2019, increased by $101,000 2021, as compared to 2018, primarily related to costs for due diligence on and discussions with an investment management acquisition, which concluded before the parties reached a definitive agreement, partially offset by lower organizational costs associated with the mutual fund complex.
Travel and entertainment expense for the year ended December 31, 2019, increased by $187,000 compared to 2018, primarily related to the previous mentioned due diligence on an investment management acquisition candidate.
Other operating expenses for the year ended December 31, 2019, increased by $650,000 compared to 20182020, primarily due to higher investment research fees and marketing fees, partially offsetone-time costs incurred in 2021 associated with the previously announced agreement to be acquired by lower mutual fund platform distribution expense.
Raymond James.
The following table presents the components of our non-interest expense by operating segment for the years ended December 31, 20182020 and 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| | Investment | Parent | | | | Investment | Parent | |
(Dollars in thousands) | Bank | Management | and Other | Consolidated | | Bank | Management | and Other | Consolidated |
Compensation and employee benefits | $ | 50,240 | | $ | 19,738 | | $ | 1,219 | | $ | 71,197 | | | $ | 46,841 | | $ | 22,335 | | $ | — | | $ | 69,176 | |
Premises and equipment costs | 4,318 | | 1,557 | | — | | 5,875 | | | 3,911 | | 1,547 | | — | | 5,458 | |
Professional fees | 4,773 | | 829 | | 599 | | 6,201 | | | 5,170 | | 1,159 | | (141) | | 6,188 | |
FDIC insurance expense | 9,680 | | — | | — | | 9,680 | | | 5,292 | | — | | — | | 5,292 | |
General insurance expense | 866 | | 276 | | — | | 1,142 | | | 825 | | 272 | | — | | 1,097 | |
State capital shares tax | 1,720 | | — | | — | | 1,720 | | | 420 | | — | | — | | 420 | |
Travel and entertainment expense | 2,093 | | 291 | | 39 | | 2,423 | | | 3,481 | | 1,139 | | — | | 4,620 | |
Technology and data services | 7,830 | | 2,973 | | — | | 10,803 | | | 5,539 | | 2,981 | | — | | 8,520 | |
| | | | | | | | | |
Intangible amortization expense | — | | 1,944 | | — | | 1,944 | | | — | | 2,009 | | — | | 2,009 | |
| | | | | | | | | |
Marketing and advertising | 1,210 | | 1,192 | | — | | 2,402 | | | 1,461 | | 801 | | 1 | | 2,263 | |
Other operating expenses (1) | 7,811 | | 879 | | 1,026 | | 9,716 | | | 5,005 | | 1,326 | | 775 | | 7,106 | |
Total non-interest expense | $ | 90,541 | | $ | 29,679 | | $ | 2,883 | | $ | 123,103 | | | $ | 77,945 | | $ | 33,569 | | $ | 635 | | $ | 112,149 | |
Full-time equivalent employees (2) | 255 | | 53 | | — | | 308 | | | 219 | | 57 | | — | | 276 | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 | | Year Ended December 31, 2017 |
| | Investment | Parent | | | | Investment | Parent | |
(Dollars in thousands) | Bank | Management | and Other | Consolidated | | Bank | Management | and Other | Consolidated |
Compensation and employee benefits | $ | 41,226 |
| $ | 23,545 |
| $ | — |
| $ | 64,771 |
| | $ | 36,415 |
| $ | 22,901 |
| $ | — |
| $ | 59,316 |
|
Premises and occupancy costs | 4,444 |
| 1,136 |
| — |
| 5,580 |
| | 3,850 |
| 1,160 |
| — |
| 5,010 |
|
Professional fees | 3,642 |
| 1,058 |
| 29 |
| 4,729 |
| | 3,199 |
| 789 |
| (115 | ) | 3,873 |
|
FDIC insurance expense | 4,543 |
| — |
| — |
| 4,543 |
| | 4,238 |
| — |
| — |
| 4,238 |
|
General insurance expense | 762 |
| 268 |
| — |
| 1,030 |
| | 738 |
| 309 |
| — |
| 1,047 |
|
State capital shares tax | 1,521 |
| — |
| — |
| 1,521 |
| | 1,546 |
| — |
| — |
| 1,546 |
|
Travel and entertainment expense | 2,864 |
| 952 |
| — |
| 3,816 |
| | 2,212 |
| 906 |
| — |
| 3,118 |
|
Data processing expense | 1,565 |
| — |
| — |
| 1,565 |
| | 582 |
| — |
| — |
| 582 |
|
Charitable contributions | 1,028 |
| 11 |
| — |
| 1,039 |
| | 1,027 |
| 30 |
| — |
| 1,057 |
|
Intangible amortization expense | — |
| 1,968 |
| — |
| 1,968 |
| | — |
| 1,851 |
| — |
| 1,851 |
|
Change in fair value of acquisition earn out | — |
| (218 | ) | — |
| (218 | ) | | — |
| — |
| — |
| — |
|
Other operating expenses (1) | 5,595 |
| 4,790 |
| 428 |
| 10,813 |
| | 5,266 |
| 4,292 |
| 276 |
| 9,834 |
|
Total non-interest expense | $ | 67,190 |
| $ | 33,510 |
| $ | 457 |
| $ | 101,157 |
| | $ | 59,073 |
| $ | 32,238 |
| $ | 161 |
| $ | 91,472 |
|
Full-time equivalent employees (2) | 189 |
| 68 |
| — |
| 257 |
| | 167 |
| 63 |
| — |
| 230 |
|
| | | | | | | | | |
| |
(1)
| Other operating expenses largely include items such as organizational dues and subscriptions, investment research fees, sub-advisory fees, telephone, marketing, employee-related expenses and other general operating expenses. |
| |
(2)
| Full-time equivalent employees shown are as of the end of the period presented. |
(1)Other operating expenses include items such as organizational dues and subscriptions, charitable contributions, investor relations fees, sub-advisory fees, employee-related expenses, provision for unfunded commitments and other general operating expenses.
(2)Full-time equivalent employees shown are as of the end of the period presented.
Non-Interest Expense for the Years Ended December 31, 20182020 and 20172019. Our non-interest expense for the year ended December 31, 20182020, increased $9.7$11.0 million, or 10.6%9.8%, as compared to 20172019, of which $8.1$12.6 million relates to the increase in expenses of the Bank segment, $3.9 million relates to the decrease in expenses of the Investment Management segment and $1.3$2.2 million relates to the increase in expenses of the Investment Management segment.Parent and Other. Notable changes in each segment’s expenses are as follows:
Investment Management Segment:
•Chartwell’s compensation and employee benefits costs for the year ended December 31, 2020, decreased by $2.6 million compared to 2019, primarily due to decreases in full-time equivalent employees, targeted cuts to incentive programs to align Chartwell with industry peers and a decrease in revenue caused by lower assets under management as a result of lower pandemic related market valuations.
•Professional fees for the year ended December 31, 2020, decreased by $330,000 compared to 2019, primarily related to prior year costs for due diligence on a potential investment management acquisition, which concluded before the parties reached a definitive agreement.
•Travel and entertainment expense for the year ended December 31, 2020, decreased by $848,000 compared to 2019, primarily related to decreased travel as a result of the COVID-19 pandemic.
•Other operating expenses for the year ended December 31, 2020, decreased by $447,000 compared to 2019, primarily due to lower mutual fund platform distribution expense due to lower assets under management in the mutual funds, and decreased organizational dues and subscriptions.
Bank Segment:
•Compensation and employee benefits of the Bank segment for the year ended December 31, 20182020, increased by $4.8$3.4 million compared to 2017,2019, primarily due to an increase in the number of full-time equivalent employees, increases in the overall annual wage and benefitsbenefit costs of our existing employees, and increases in incentive and stock-basedstock-based compensation expenses.
These increases are a result of continued growth and investment in all areas of our company, in particular legal, compliance and private and commercial banking.
Premises and occupancy costs for the year ended December 31, 2018, increased by $594,000 compared to 2017, primarily due to continued improvements to our infrastructure.
Professional fees for the year ended December 31, 2018, increased by $443,000 compared to 2017, due to general growth in the business.
•FDIC insurance expense for the year ended December 31, 20182020, increased by $305,000$4.4 million compared to 20172019, due to the growthan increase in the Bank’s assets.
assets partially offset by a one-time bank assessment credit applicable to certain banks related to the deposit insurance fund reserve ratio exceeding a target threshold that was received in 2019.
•State capital shares tax for the year ended December 31, 2020, increased by $1.3 million compared to 2019, primarily due to a favorable ruling that the Company received in prior year that resulted in a tax benefit.
•Travel and entertainment expense for the year ended December 31, 20182020, increaseddecreased by $652,000$1.4 million compared to 20172019, primarily due to decreased travel and events as a higher level of officer and relationship manager business development activity consistent with our continued growth.
Data processing expense for the year ended December 31, 2018, increased by $983,000 compared to 2017. In 2017, we received certain one-time credits related to certain technology applications.
Other operating expenses for the year ended December 31, 2018, increased by $329,000 compared to 2017, primarily due to higher costs of information services of $337,000 associated with our private banking loans and higher provision for unfunded commitments of $184,000, partially offset by lower marketing expenses of $298,000.
Investment Management Segment:
Chartwell’s compensation and employee benefits costs for the year ended December 31, 2018, increased by $644,000 compared to 2017, primarily driven by normal increases in compensation expenses.
Professional fees for the year ended December 31, 2018, increased by $269,000 compared to 2017, which included costs related to the Columbia acquisition and general growth in the business.
There was a decrease in the fair valueresult of the Columbia acquisition earn out of $218,000COVID-19 pandemic.
•Technology and data services for the year ended December 31, 2018, based on management’s final determination2020, increased $2.3 million compared to the same period in 2019, primarily due to increased software licensing fees and software depreciation expense as a result of the annualized run-rate revenue of Columbia at December 31, 2018. For additionalour investments in technology, as well as increased information refer to Note 2, Investment Securities, to our consolidated financial statements.
and data services expense.
•Other operating expenses for the year ended December 31, 20182020, increased by $498,000$2.8 million compared to 20172019, primarily duedriven by an increase in reserve for unfunded commitments and amortization on our historic tax credits.
Parent and Other:
•Compensation and employee benefits, professional fees, travel and entertainment expenses and other operating expenses increased for the year ended December 31, 2020, compared to higher investment research fees.
the same period in 2019. Intercompany allocations vary based on individual segment business activities as well as where management spends their time and efforts.
Income Taxes
We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the tax effects of differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities with regard to a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate whether it is more likely than not that we will be able to realize the benefit of identified deferred tax assets.
Income Taxes for the Years Ended December 31, 20192021 and 20182020. For the year ended December 31, 20192021, we recognized income tax expense of $12.6 million, or 13.9% of income before tax, as compared to income tax expense of $7.4 million, or 14.1% of income before tax, for 2020.
Income Taxes for the Years Ended December 31, 2020 and 2019. For the year ended December 31, 2020, we recognized income tax expense of $7.4 million, or 14.1% of income before tax, as compared to income tax expense of $8.5 million, or 12.3% of income before tax, as compared to income tax expense of $5.9 million, or 9.8% of income before tax, for 20182019. Our effective tax rate for the year ended December 31, 20192020, increased to 12.3%14.1% as compared to the prior year largely due to the amount and timing of tax credits recognized during the year ended December 31, 20192020 compared to 20182019.
Income Taxes for the Years Ended December 31, 2018 and 2017. For the year ended December 31, 2018, we recognized income tax expense of $5.9 million, or 9.8% of income before tax, as compared to income tax expense of $9.5 million, or 20.0% of income before tax, for 2017. Our effective tax rate for the year ended December 31, 2018, decreased to 9.8% as compared to the prior year largely due to the decrease in the statutory federal income tax rate from 35% to 21% and additional tax credit investments made in the year ended December 31, 2018.
Financial Condition
Our total assets as of December 31, 20192021, were $7.7713 billion, an increase of $1.733.11 billion, or 28.7%31.4%, from December 31, 20182020, driven primarily by growth in our loan and lease portfolio and cash and cash equivalents.investment portfolio. As of December 31, 20192021, our loan portfolio was $6.58$10.76 billion, an increase of $1.442.53 billion, or 28.1%30.7%, from $5.13$8.24 billion, as of December 31, 20182020. Total investment securities increased $2.4$563.1 million, or 0.5%66.8%, to $469.2 million1.41 billion, as of December 31, 20192021, from $466.8842.5 million as of December 31, 20182020. CashWe focus on high
quality loan growth and cash equivalents increased$213.9 millioncorrespondingly grow our investment portfolio at a similar pace as part of our strategy to $403.9 million ascontinue building greater on-balance sheet liquidity, funded by our deposits.
As of December 31, 2019, from $190.0 million as of December 31, 2018. Our Asset and Liability Committee (“ALCO”) is responsible for managing the investment portfolio and liquidity of the Bank, among other responsibilities. Given the current overall interest rate environment and the strength of our loan growth, our ALCO has kept excess liquidity in interest-earning cash deposits.
As of December 31, 20192021, our total deposits were $6.6311.50 billion, an increase of $1.583.02 billion, or 31.4%35.5%, from December 31, 20182020, and such deposits were primarily used to fund loan growth. Net borrowings decreased $49.2increased $69.7 million, or 12.2%17.4%, to $355.0$470.2 million as of December 31, 20192021, compared to $404.2$400.5 million as of December 31, 20182020. Our shareholders’ equity increased$141.979.6 million to $621.3836.7 million as of December 31, 20192021, compared to $479.4757.1 million as of December 31, 20182020. This increase was primarily the result of the issuance of $77.6$78.1 million in preferred stock, $60.2 million in net income and the impact of $8.8$11.0 million in stock-based compensation, an increase of $2.5 million in other accumulated comprehensive income and $900,000 in proceeds from stock option exercises, partially offset by preferred stock cash dividends declared of $5.8 million$7.9, and the purchase of $2.3$2.1 million in treasury stock.
Our total assets as of December 31, 20182020, were $6.049.90 billion, an increase of $1.262.13 billion, or 26.3%27.4%, from December 31, 20172019, driven primarily by growth in our loan and lease portfolio, investment portfolios.portfolio and cash and cash equivalents. As of December 31, 20182020, our loan portfolio was $5.13$8.24 billion, an increase of $948.6 million1.66 billion, or 22.7%25.2%, from $4.18$6.58 billion, as of December 31, 20172019. Total investment securities increased $246.2$373.4 million, or 111.6%79.6%, to $466.8842.5 million, as of December 31, 20182020, from $220.6469.2 million as of December 31, 2017, largely as a result of securities purchases made to continue to strengthen the balance sheet and liquidity of the Bank.2019. Cash and cash equivalents increased$33.831.6 million to $190.0435.4 million as of December 31, 20182020, from $156.2403.9 million as of December 31, 20172019.
As of December 31, 20182020, our total deposits were $5.058.49 billion, an increase of $1.061.85 billion, or 26.7%28.0%, from December 31, 20172019, and were primarily used to fund loan growth. Net borrowings increased $68.3$45.5 million, or 20.3%12.8%, to $404.2$400.5 million as of December 31, 20182020, compared to $335.9$355.0 million as of December 31, 20172019. Our shareholders’ equity increased$90.3135.9 million to $479.4757.1 million as of December 31, 20182020, compared to $389.1621.3 million as of December 31, 20172019. This increase was primarily the result of the issuance of $38.5$100.0 million in preferred stock, net proceeds from our private placement, which closed December 30, 2020, $54.445.2 million in net income, and the impact of $8.2$9.5 million in stock-based compensation, and $1.7 million in proceeds from the stock option exercises, partially offset by the purchasepreferred stock dividends declared of $6.8$7.9 million, in treasury stock, a decrease of $3.1$3.8 million in other accumulated comprehensive income, (loss)the purchase of $3.6 million in treasury stock, $2.5 million in cancellation of stock options and preferred stock dividends declared$1.7 million related to our adoption of $2.1 million.CECL on December 31, 2020.
Loans and Leases
Our loan and lease portfolio, which represents our largest earning asset, primarily consists of loans to our private banking clients, commercial and industrial loans and leases, and real estate loans secured by commercial properties.
The following table presents the composition of our loan portfolio as of the dates indicated:
| | | | | | | | | | | | | |
| December 31, |
(Dollars in thousands) | 2021 | 2020 | 2019 | | |
Private banking loans | $ | 6,886,498 | | $ | 4,807,800 | | $ | 3,695,402 | | | |
Middle-market banking loans: | | | | | |
Commercial and industrial | 1,513,423 | | 1,274,152 | | 1,085,709 | | | |
Commercial real estate | 2,363,403 | | 2,155,466 | | 1,796,448 | | | |
Total middle-market banking loans | 3,876,826 | | 3,429,618 | | 2,882,157 | | | |
Loans and leases held-for-investment | $ | 10,763,324 | | $ | 8,237,418 | | $ | 6,577,559 | | | |
|
| | | | | | | | | | | | | | | |
| December 31, |
(Dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 |
Private banking loans | $ | 3,695,402 |
| $ | 2,869,543 |
| $ | 2,265,737 |
| $ | 1,735,928 |
| $ | 1,344,864 |
|
Middle-market banking loans: | | | | | |
Commercial and industrial | 1,085,709 |
| 785,320 |
| 667,684 |
| 587,423 |
| 634,232 |
|
Commercial real estate | 1,796,448 |
| 1,478,010 |
| 1,250,823 |
| 1,077,703 |
| 862,188 |
|
Total middle-market banking loans | 2,882,157 |
| 2,263,330 |
| 1,918,507 |
| 1,665,126 |
| 1,496,420 |
|
Loans and leases held-for-investment | $ | 6,577,559 |
| $ | 5,132,873 |
| $ | 4,184,244 |
| $ | 3,401,054 |
| $ | 2,841,284 |
|
Loans and Leases Held-for-Investment. Loans and leases held-for-investment increased by $1.442.53 billion, or 28.1%30.7%, to $6.5810.76 billion as of December 31, 20192021, as compared to December 31, 20182020. Our growth for the year ended December 31, 20192021, was comprised of an increase in private banking loans of $825.9 million2.08 billion, or 28.8%43.2%; an increase in commercial real estate loans of $318.4207.9 million, or 21.5%9.6%; and an increase in commercial and industrial loans and leases of $300.4239.3 million, or 38.3%18.8%.
Loans and leases held-for-investment increased by $948.6 million1.66 billion, or 22.7%25.2%, to $5.138.24 billion as of December 31, 20182020, as compared to December 31, 20172019. Our growth for the year ended December 31, 20182020, was comprised of an increase in private banking loans of $603.8 million1.11 billion, or 26.6%30.1%; an increase in commercial real estate loans of $227.2359.0 million, or 18.2%20.0%; and an increase in commercial and industrial loans and leases of $117.6188.4 million, or 17.6%17.4%.
Primary Loan Categories
Private Banking Loans. Our private banking loans include personal and commercial loans that are sourced through our private banking channel (which operates on a national basis), including referral relationships with financial intermediaries. These loans primarily consist of loans made to high-net-worth individuals, trusts and businesses that are secured by cash and marketable securities. We also originate loans that are secured by cash value life insurance and to a lessorlesser extent residential property or other financial assets.
The primary source of repayment for these loans is the income and assets of the borrower. We also have a limited number of unsecured loans and lines of credit in our private banking loan portfolio.
As of December 31, 20192021, private banking loans were approximately $3.70$6.89 billion, or 56.2%64.0% of loans held-for-investment, of which $3.606.82 billion, or 97.4%99.0%, were secured by cash, marketable securities and/or cash value life insurance. As of December 31, 20182020, private banking loans were approximately $2.87$4.81 billion, or 55.9%58.4% of loans held-for-investment, of which $2.774.74 billion, or 96.7%98.6%, were secured by cash, marketable securities and/or cash value life insurance. Our private banking lines of credit are typically due on demand. The growth in these loans is expected to increase, as a result of our continued focus on this portion of our private banking business. We believe we have strong competitive advantages in this line of business given our robust distribution channel relationships and proprietary technology and distribution channels.technology. These loans tend to have a lower risk profile and are an efficient use of capital because they typically are zero percent risk-weighted for regulatory capital purposes. On a daily basis, we monitor the collateral of loans secured by cash, marketable securities and/or cash value life insurance, which further reduces the risk profile of the private banking portfolio. Since inception, we have had no charge-offs related to our loans secured by cash, marketable securities and/or cash value life insurance.
Loans sourced through our private banking channel also include loans that are classified for regulatory purposes as commercial, most of which are also secured by cash, marketable securities or and/or cash value life insurance. The table below includes all loans made through our private banking channel, by collateral type, as of the dates indicated.
| | | | | | | | | | | |
| December 31, |
(Dollars in thousands) | 2021 | 2020 | 2019 |
Private banking loans: | | | |
Secured by cash, marketable securities and/or cash value life insurance | $ | 6,816,517 | | $ | 4,738,594 | | $ | 3,599,198 | |
Secured by real estate | 37,285 | | 45,014 | | 62,782 | |
Other | 32,696 | | 24,192 | | 33,422 | |
Total private banking loans | $ | 6,886,498 | | $ | 4,807,800 | | $ | 3,695,402 | |
|
| | | | | | | | | |
| December 31, |
(Dollars in thousands) | 2019 | 2018 | 2017 |
Private banking loans: | | | |
Secured by cash, marketable securities and/or cash value life insurance | $ | 3,599,198 |
| $ | 2,774,800 |
| $ | 2,142,384 |
|
Secured by real estate | 62,782 |
| 69,766 |
| 93,169 |
|
Other | 33,422 |
| 24,977 |
| 30,184 |
|
Total private banking loans | $ | 3,695,402 |
| $ | 2,869,543 |
| $ | 2,265,737 |
|
As of December 31, 2019,2021, there were $3.53$6.80 billion of total private banking loans with a floating interest rate and $169.4$84.4 million with a fixed interest rate, as compared to $2.75$4.73 billion and $122.6$77.1 million, respectively, as of December 31, 20182020.
Middle-MarketCommercial Banking: Commercial and Industrial Loans and Leases. Our commercial and industrial loan and lease portfolio primarily includes loans and equipment leases made to financial and other service companies or manufacturers generally for the purposes of financing production, operating capacity, accounts receivable, inventory, equipment, acquisitions and recapitalizations. Cash flow from the borrower’s operations is the primary source of repayment for these loans and leases, except for certain commercial loans that are secured by marketable securities.
As of December 31, 20192021, our commercial and industrial loans comprised $1.09$1.51 billion, or 16.5%14.1% of loans held-for-investment, as compared to $785.3 million,$1.27 billion, or 15.3%15.5%, as of December 31, 2018.2020. As of December 31, 2019,2021, there were $867.7 million$1.16 billion of total commercial and industrial loans with a floating interest rate and $218.0$350.4 million with a fixed interest rate, as compared to $645.5$966.6 million and $139.8$307.6 million, respectively, as of December 31, 20182020.
Middle-MarketCommercial Banking: Commercial Real Estate Loans. Our commercial real estate loan portfolio includes loans secured by commercial purpose real estate, including both owner-occupied properties and investment properties for various purposes, including office, industrial, multifamily, retail, hospitality, healthcare and self-storage. Also included are commercial construction loans to finance the construction or renovation of structures as well as to finance the acquisition and development of raw land for various purposes. Individual project cash flows, global cash flows and liquidity from the developer, or the sale of the property, are the primary sources of repayment for commercial real estate loans secured by investment properties. The primary source of repayment for commercial real estate loans secured by owner-occupied properties is cash flow from the borrower’s operations. There were $210.7$212.6 million and $183.7$220.8 million of owner-occupied commercial real estate loans as of December 31, 20192021 and December 31, 2018,2020, respectively.
Commercial real estate loans as of December 31, 2019,2021, totaled $1.80$2.36 billion, or 27.3%21.9% of loans held-for-investment, as compared to $1.48$2.16 billion, or 28.8%26.1%, as of December 31, 20182020. As of December 31, 20192021, $1.69$2.26 billion of total commercial real estate loans had a floating interest rate and $111.2$105.2 million had a fixed interest rate, as compared to $1.34$2.03 billion and $137.5$123.3 million, respectively, as of December 31, 20182020.
Loan and Lease Maturities and Interest Rate Sensitivity
The following table presents the contractual maturity ranges and the amount of such loans with fixed rates and adjustable rates in each maturity range as of the date indicated.
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
(Dollars in thousands) | Due on Demand | One Year or Less | One to Five Years | Five to Fifteen Years | Greater than Fifteen Years | Total |
Maturity: | | | | | | |
Private banking | $ | 6,637,934 | | $ | 51,898 | | $ | 100,579 | | $ | 89,971 | | $ | 6,116 | | $ | 6,886,498 | |
Commercial and industrial | 7,292 | | 484,219 | | 826,980 | | 193,150 | | 1,782 | | 1,513,423 | |
Commercial real estate | — | | 179,154 | | 880,492 | | 1,288,013 | | 15,744 | | 2,363,403 | |
Loans and leases held-for-investment | $ | 6,645,226 | | $ | 715,271 | | $ | 1,808,051 | | $ | 1,571,134 | | $ | 23,642 | | $ | 10,763,324 | |
| | | | | | |
Interest rate sensitivity: | | | | | | |
Fixed interest rates | $ | 64,820 | | $ | 32,158 | | $ | 250,647 | | $ | 186,287 | | $ | 6,116 | | $ | 540,028 | |
Floating or adjustable interest rates | 6,580,406 | | 683,113 | | 1,557,404 | | 1,384,847 | | 17,526 | | 10,223,296 | |
Loans and leases held-for-investment | $ | 6,645,226 | | $ | 715,271 | | $ | 1,808,051 | | $ | 1,571,134 | | $ | 23,642 | | $ | 10,763,324 | |
|
| | | | | | | | | | | | |
| December 31, 2019 |
(Dollars in thousands) | One Year or Less (1) | One to Five Years | Greater Than Five Years | Total |
Maturity: | | | | |
Private banking | $ | 3,507,874 |
| $ | 88,150 |
| $ | 99,378 |
| $ | 3,695,402 |
|
Commercial and industrial | 279,245 |
| 593,741 |
| 212,723 |
| 1,085,709 |
|
Commercial real estate | 212,140 |
| 812,693 |
| 771,615 |
| 1,796,448 |
|
Loans and leases held-for-investment | $ | 3,999,259 |
| $ | 1,494,584 |
| $ | 1,083,716 |
| $ | 6,577,559 |
|
| | | | |
Interest rate sensitivity: | | | | |
Fixed interest rates | $ | 156,733 |
| $ | 174,490 |
| $ | 167,345 |
| $ | 498,568 |
|
Floating or adjustable interest rates | 3,842,526 |
| 1,320,094 |
| 916,371 |
| 6,078,991 |
|
Loans and leases held-for-investment | $ | 3,999,259 |
| $ | 1,494,584 |
| $ | 1,083,716 |
| $ | 6,577,559 |
|
| |
(1)
| The amounts outstanding reflected in the One Year or Less category in the table above include $3.47 billion of loans that are due on demand with no stated maturity. |
Large Credit Relationships
We originate and maintain large credit relationships with numerous customers in the ordinary course of our business. We have established a preferred limit on loans that is significantly lower than our legal lending limit of approximately $82.1$148.0 million as of December 31, 2019.2021. Our present preferred lending limit is $10.0 million based upon our total credit exposure to any one borrowing relationship. However, exceptions to this limit may be made based on the strength of the underlying credit and sponsor, type and composition of the credit exposure, collateral support, including over-collateralization and liquidity nature of collateral, structure of the credit facilities as well as the presence of other potential positive credit factors. Additionally, we review this along with other aspects of our credit policy which can change from time to time. As of December 31, 2019,2021, our average commercial loan size was approximately $4.0$4.5 million and average private banking loan size was approximately $466,000.$435,000.
The following table summarizes the aggregate committed and outstanding balances of our larger credit relationships as of December 31, 20192021 and December 31, 2018.2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
(Dollars in thousands) | Number of Relationships | Commitment (based on availability) | Outstanding Balance | | Number of Relationships | Commitment (based on availability) | Outstanding Balance |
Large credit relationships: | | | | | | | |
>$25 million | 32 | $ | 1,275,596 | | $ | 729,628 | | | 23 | $ | 930,061 | | $ | 664,614 | |
>$20 million to $25 million | 29 | $ | 660,940 | | $ | 444,620 | | | 17 | $ | 381,275 | | $ | 236,085 | |
>$15 million to $20 million | 59 | $ | 1,032,736 | | $ | 607,144 | | | 46 | $ | 814,098 | | $ | 505,452 | |
>$10 million to $15 million | 170 | $ | 2,137,083 | | $ | 1,446,553 | | | 105 | $ | 1,302,010 | | $ | 958,840 | |
|
| | | | | | | | | | | | | | | |
| December 31, 2019 | | December 31, 2018 |
(Dollars in thousands) | Number of Relationships | Commitment (based on availability) | Outstanding Balance | | Number of Relationships | Commitment (based on availability) | Outstanding Balance |
Large credit relationships: | | | | | | | |
>$25 million | 17 | $ | 645,608 |
| $ | 442,437 |
| | 6 | $ | 211,908 |
| $ | 192,083 |
|
>$20 million to $25 million | 12 | $ | 273,908 |
| $ | 185,651 |
| | 13 | $ | 297,174 |
| $ | 217,061 |
|
>$15 million to $20 million | 38 | $ | 679,411 |
| $ | 423,893 |
| | 22 | $ | 389,673 |
| $ | 259,635 |
|
>$10 million to $15 million | 93 | $ | 1,138,966 |
| $ | 803,301 |
| | 65 | $ | 832,005 |
| $ | 569,071 |
|
Approximately $1.27$2.54 billion and $817.1 million$1.83 billion of commitments to large credit relationships were secured by cash, marketable securities and/or cash value life insurance as of December 31, 20192021 and December 31, 2018,2020, respectively.
Loan Pricing
We generally extend variable-rate loans on which the interest rate fluctuations are based upon a predetermined indicator, such as the LIBOR or United States prime rate. Our use of variable-rate loans is designed to mitigate our interest rate risk to the extent that the rates that we charge on our variable-rate loans will rise or fall in tandem with rates that we must pay to acquire deposits and vice versa. As of December 31, 2019,2021, approximately 92.4%95.0% of our loans had a floating rate. Consistent with regulatory guidance, the Bank has transitioned away from LIBOR for purposes of new transactions effective January 1, 2022.
Interest Reserve Loans
As of December 31, 20192021, loans with interest reserves totaled $348.0350.5 million, which represented 5.3%3.3% of loans held-for-investment, as compared to $255.4389.1 million, or 5.0%4.7%, as of December 31, 20182020, largely attributable to growth in the commercial real estate portfolio.
Certain loans reserve a portion of the proceeds to be used to pay interest due on the loan. These loans with interest reserves are common for construction and land development loans. The use of interest reserves is based on the feasibility of the project, the creditworthiness of the borrower and guarantors, and the loan to value coverage of the collateral. The interest reserve may be used by the borrower, when certain financial conditions are met, to draw loan funds to pay interest charges on the outstanding balance of the loan. When drawn, the interest is capitalized and added to the loan balance, subject to conditions specified during the initial underwriting and at the time the credit is approved. We have procedures and controls for monitoring compliance with loan covenants, advancing funds and determining default conditions. In addition, most of our construction lending is performed within our geographic footprint and our lenders are familiar with trends in the local real estate market.