UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________
FORM 10-K
_________
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number: 001-35913
_________
TRISTATE CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
_________
Pennsylvania
20-4929029
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
One Oxford Centre
301 Grant Street, Suite 2700
Pittsburgh, Pennsylvania 15219
(Address of principal executive offices and zip code)
(412) 304-0304
(Registrant’s telephone number, including area code)
_________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, no par value
TSC
The Nasdaq Stock Market
Depositary Shares, Each Representing a 1/40th Interest in a Share of
6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual
Preferred Stock
TSCAP
The Nasdaq Stock Market
Depositary Shares, Each Representing a 1/40th Interest in a Share of
6.375% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual
Preferred Stock
TSCBP
The Nasdaq Stock Market
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes ý No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes ý No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§ 232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
ý
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ý No
As of June 30, 2021, the aggregate market value of the shares of common stock held by non-affiliates, based on the closing price per share of the registrant’s
common stock as reported on The Nasdaq Global Select Market, was approximately $498,142,483.
As of January 31, 2022, there were 33,581,303 shares of the registrant’s common stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement to be mailed to shareholders in connection with our 2022 annual meeting of shareholders or, alternatively, in an amendment to this
Annual Report on Form 10-K, are incorporated by reference into Part III of this Annual Report on Form 10-K.
TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
4
PART I
ITEM 1. BUSINESS
6
ITEM 1A. RISK FACTORS
27
ITEM 1B. UNRESOLVED STAFF COMMENTS
48
ITEM 2. PROPERTIES
48
ITEM 3. LEGAL PROCEEDINGS
48
ITEM 4. MINE SAFETY DISCLOSURES
48
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
49
ITEM 6. SELECTED FINANCIAL DATA
51
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
55
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
89
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
90
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
146
ITEM 9A. CONTROLS AND PROCEDURES
146
ITEM 9B. OTHER INFORMATION
148
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
148
ITEM 11. EXECUTIVE COMPENSATION
148
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
149
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS INDEPENDENCE
149
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
149
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
149
ITEM 16. FORM 10-K SUMMARY
150
EXHIBIT INDEX
150
SIGNATURES
153
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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:
•
risks associated with COVID-19 and their expected impact and duration, including effects on our operations, our clients, economic conditions and the
demand for our products and services;
•
risks associated with the acquisition of our Company by Raymond James Financial, Inc. (“Raymond James”), including risks related to the failure of our
Company to satisfy conditions of the closing of the acquisition, which could result in the acquisition not closing which could have a material adverse
impact on the value of our stock;
•
deterioration of our asset quality;
•
our level of non-performing assets and the costs associated with resolving problem loans, including litigation and other costs;
•
possible additional loan and lease losses and impairment, changes in the value of collateral securing our loans and leases and the collectability of loans
and leases, particularly as a result of the COVID-19 pandemic and the programs implemented by the Coronavirus Aid, Relief, and Economic Security
(“CARES”) Act, including its automatic loan forbearance provisions;
•
our ability to prudently manage our growth and execute our strategy;
•
possible changes in the speed of loan prepayments by customers and loan origination or sales volumes;
•
business and economic conditions generally and in the financial services industry, nationally and within our local market areas, including the effects of an
increase in unemployment levels, slowdowns in economic growth and changes in demand for products or services or the value of assets under
management;
•
changes in management personnel;
•
our ability to recruit and retain key employees;
•
our ability to maintain important deposit customer relationships, our reputation and otherwise avoid liquidity risks;
•
our ability to provide investment management performance competitive with our peers and benchmarks;
•
operational risks associated with our business, including technology and cyber-security related risks;
•
risks related to the phasing out of London Interbank Offered Rate (“LIBOR”) and changes in the manner of calculating reference rates, as well as the
impact of the phase out of LIBOR and introduction of alternative reference rates on the value of loans and other financial instruments that are linked to
LIBOR;
•
volatility and direction of market interest rates;
•
increased competition in the financial services industry, particularly from regional and national institutions;
•
negative perceptions or publicity with respect to any products or services we offer;
•
adverse judgments or other resolution of pending and future legal proceedings, and cost incurred in defending such proceedings;
•
changes in accounting policies, accounting standards, or authoritative accounting guidance;
•
any impairment of our goodwill or other intangible assets;
•
our ability to develop and provide competitive products and services that appeal to our customers and target markets;
4
•
fluctuations in the carrying value of the assets under management held by our Chartwell Investment Partners, LLC (“Chartwell”) subsidiary, as well as the
relative and absolute investment performance of such subsidiary’s investment products;
•
changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters ,
including economic stimulus programs, and potential expenses associated with complying with such laws and regulations;
•
our ability to comply with applicable capital and liquidity requirements, including our ability to generate liquidity internally or raise capital on favorable
terms;
•
regulatory limits on our ability to receive dividends from our subsidiaries and pay dividends to shareholders;
•
changes and direction of government policy towards and intervention in the U.S. financial system;
•
natural disasters and adverse weather, acts of terrorism, regional or national civil unrest, cyber-attacks, an outbreak of hostilities or war, a public health
outbreak (such as COVID-19) or other international or domestic calamities, and other matters beyond our control;
•
the effects of any reputation, credit, interest rate, market, operational, legal, liquidity, regulatory or compliance risk resulting from developments related to
any of the risks discussed above; and
•
other factors that are discussed in the section entitled “Risk Factors,” in Part I - Item 1A.
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.
5
PART I
ITEM 1. BUSINESS
Overview
TriState Capital Holdings, Inc. (“we,” “us,” “our,” the “holding company,” the “parent company,” or the “Company”) is a bank holding company headquartered in
Pittsburgh, Pennsylvania. The Company has three wholly owned subsidiaries: TriState Capital Bank (the “Bank”), a Pennsylvania chartered bank; Chartwell, a
registered investment advisor; and Chartwell TSC Securities Corp. (“CTSC Securities”), a registered broker-dealer. Through our bank subsidiary we serve middle-
market businesses in our primary markets throughout the states of Pennsylvania, Ohio, New Jersey and New York and we also serve high-net-worth individuals on
a national basis through our private banking channel. We market and distribute our banking products and services through a scalable branchless banking model,
which creates significant operating leverage throughout our business as we continue to grow. Through our investment management subsidiary, we provide
investment management services primarily to institutional investors, mutual funds and individual investors on a national basis. Our broker-dealer subsidiary, CTSC
Securities, supports the marketing efforts for Chartwell’s proprietary investment products.
On October 20, 2021, the Company announced that it entered into a definitive agreement under which Raymond James will acquire the outstanding shares of stock
of the Company for consideration that is a combination of cash and Raymond James stock at a fixed exchange rate, valued in aggregate at approximately
$1.1 billion based on the trading value of Raymond James’ stock on the announcement date. The acquisition is subject to customary closing conditions, including
regulatory approvals, and is expected to close in 2022.
We operate two reportable segments: Bank and Investment Management.
•
The Bank segment provides commercial banking products and services to middle-market businesses and private banking products and services to high-
net-worth individuals through the Bank. Total assets of the Bank were $12.93 billion as of December 31, 2021.
•
The Investment Management segment provides investment management services primarily to institutional investors, mutual funds and individual
investors through Chartwell and also supports marketing efforts for Chartwell’s proprietary investment products through CTSC Securities. Assets under
management of Chartwell were $11.84 billion as of December 31, 2021.
For additional financial information by segment, refer to Note 23, Segments, to our consolidated financial statements.
Our Business Strategy
Our success has been built upon the vision and focus of our executive management team to combine the sophisticated products, services and risk management
efforts of a large financial institution with the personalized service of a community bank. We believe that our results-based culture, combined with a well-managed
middle-market and private banking business, and our targeted investment management business, will allow us to continue to grow and generate attractive returns
for shareholders. The key components of our business strategies are described below:
Our Sales and Distribution Culture. We focus on efficient and profitable sales and distribution of investment management services and banking products and
services to middle-market businesses and private banking clients. Our relationship managers and distribution professionals have significant experience in the
banking and financial services industries and are focused on client service. In our banking business, we monitor net interest income contribution, loan and deposit
growth, and asset quality by market and by relationship manager. Our compensation program is designed within our banking business to incentivize our regional
presidents and relationship managers to prudently grow their loans, deposits and profitability, while maintaining strong asset quality. In our investment
management business, our compensation program is designed to incentivize new assets under management while maximizing the retention of existing clients and
exceeding benchmark investment performance.
Disciplined Risk Management. We place a strong emphasis on effective risk management as an integral component of our organizational culture and responsible
growth strategy. We use our risk management infrastructure to establish risk appetite, monitor existing operations, support decision-making and improve the
success rate of existing products and services as well as new initiatives. A major part of our risk management effort is focused on our balanced, lower-risk loan
portfolio. This includes our focus on growing loans originated through our private banking channel. We believe these loans have lower credit risk because they are
typically secured by readily liquid collateral, such as marketable securities, and/or are personally guaranteed by high-net-worth borrowers. In addition, we mitigate
risk associated with these loans through active daily monitoring of the collateral, utilizing our proprietary technology. We
6
also focus on increasing non-interest income, including the expansion of our investment management business organically as well as through acquisitions.
Experienced Professionals. Having successful and high quality professionals is critical to continuing to drive prudent growth in our business. In addition to our
experienced executive management team and board of directors, we employ highly experienced personnel across our entire organization. Our commercial and
private banking presidents as well as our regional banking presidents have an average of more than 30 years of banking experience and our middle-market and
private banking relationship managers have an average of over 20 years of banking experience. Chartwell’s mission is successfully executed through the dedication
of investment professionals who 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.
Technology Enabled Efficient and Scalable Operating Model. With respect to our banking business, we believe our branchless banking model gives us a
competitive advantage by eliminating the overhead and management requirements of a traditional branch network. Moreover, we believe that we have a scalable
platform and organizational infrastructure that positions us to grow our revenue more rapidly than our operating expenses. We also believe that our investment
management business has an efficient and scalable business model that focuses on institutional direct clients and wholesale distribution channels to reach retail
investors. This enables us to invest in meaningful technology development that appeals to these sophisticated needs and competes with premier providers, while
having longer obsolescence cycles and better return on investment.
Lending Strategy. We generate loans through our middle-market banking and private banking channels. These channels provide diversification and offer
significant responsible growth opportunities in breadth and scale.
•
Middle-Market Banking Channel. Our middle-market banking channel primarily targets businesses with revenues between $5.0 million and $300.0
million located within our primary markets. To capitalize on this opportunity, each of our representative offices is led by an experienced regional
president so we can understand the unique borrowing needs of the middle-market businesses in their area. They are supported by highly experienced
relationship managers with reputations for success in targeting middle-market business customers and maintaining strong credit quality within their loan
portfolios.
•
Private Banking Channel. We provide loan products and services nationally to executives and high-net-worth individuals, most of whom we source
through referral relationships with independent broker-dealers, wealth managers, family offices, trust companies and other financial intermediaries. Our
private banking products primarily include loans secured by cash and/or marketable securities. The Company also originates loans secured by cash value
life insurance and other asset-based loans. Our relationship managers have cultivated referral arrangements with 351 financial intermediaries. Under these
arrangements, the financial intermediaries are able to refer their clients to us for responsive and sophisticated banking services. We believe many of our
referral relationships with these intermediaries also create cross-selling opportunities with respect to our deposit products and our investment management
business. Since inception, we have had no charge-offs related to our loans secured by cash, marketable securities and/or cash value life insurance.
As shown in the following table, we have continued to achieve loan growth through both of our banking channels. As of December 31, 2021, loans and leases
sourced through our middle-market banking channel were $3.88 billion, or 36.0% of our loans held-for-investment.
As of December 31, 2021, loans sourced through our private banking channel were $6.89 billion, or 64.0% of our loans held-for-investment, of which $6.82
billion, or 99.0%, were secured by cash, marketable securities and/or cash value life insurance. We expect continued strong loan and deposit growth in this
channel, in part because we added 102 new loan referral relationships during the year
7
ended December 31, 2021, for a total of 351 referral relationships at the end of 2021. We have also experienced continued growth in the number of customers
resulting from our existing referral relationships.
December 31,
2021 Change from 2020
(Dollars in thousands)
2021
2020
Amount
Percent
Middle-market banking offices:
Western Pennsylvania
$
979,660 $
884,860
$
94,800
10.7%
Eastern Pennsylvania
1,019,547
867,267
152,280
17.6%
New Jersey
661,099
572,607
88,492
15.5%
New York
592,573
572,265
20,308
3.5%
Ohio
623,947
532,619
91,328
17.1%
Total middle-market banking loans
3,876,826
3,429,618
447,208
13.0 %
Total private banking loans
6,886,498
4,807,800
2,078,698
43.2 %
Loans and leases held-for-investment
$
10,763,324 $
8,237,418
$
2,525,906
30.7 %
Deposit Funding Strategy. Since inception, we have focused on creating and growing a branchless, diversified, stable, and low cost deposit channels, both in our
primary markets and across the United States. As of December 31, 2021, we consider approximately 92% of our total deposits to be sourced from direct customer
relationships. We believe our sources of deposits continue to provide excellent opportunities for growth both within our primary markets and nationally.
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.
Investment Management Strategy. We will continue to execute on our investment management strategy of organically growing our business through innovative
distribution strategies, as well as selectively acquiring other investment management assets that complement Chartwell’s business, as evidenced by our acquisition
of Columbia Partners, L.L.C. in 2018. We believe that this segment has and will continue to enhance our recurring fee revenue, build robust institutional
relationships, provide new product offerings for our national network of financial intermediaries, and leverage our financial services distribution capabilities
through the financial intermediaries with which our banking business has worked and developed.
Our Markets
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, 2021, there were over 849,000 middle-market businesses in our primary markets with annual sales between $5.0 million and $300.0 million, which
represented approximately 10% of the national total of such businesses as of that date. The 2021 aggregate population of the four MSAs in which our headquarters
and four representative offices are located was approximately 30 million, which represented approximately 9% of the national population. We believe that the
population and business concentrations within our primary markets provide attractive opportunities to grow our business.
In addition to our commercial bank focus on middle-market businesses in our primary markets, our private banking business focuses on serving clients on a
national basis. We primarily source this business through referral relationships with independent broker-dealers, wealth managers, family offices, trust companies
and other financial intermediaries. We view our product offerings as being most appealing to those households with $500,000 or more in net worth (not including
their primary residence).
Through all of our distribution channels, we pursue and create deposit relationships, including treasury management relationships, with customers in our primary
markets and throughout the United States. Because our deposit operations are centralized in our Pittsburgh headquarters, all of our deposits are aggregated and
accounted for in that MSA. For these distribution and reporting reasons, we do not consider deposit market share in any MSA or any of our primary markets to be
relevant data. However, for
8
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 was
approximately $3.1 trillion as of December 31, 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, 2021, were as follows: institutional and sub-advisory (81%) and broker-dealers and registered investment advisors (19%).
Institutional and Sub-Advisory. Chartwell maintains a dedicated sales and client service staff to focus on the distribution of its products to a wide variety of
institutional and sub-advisory clients, including corporate pension and profit-sharing plans, public pension plans, Taft-Hartley plans, foundations, endowments
and registered investment companies. As of December 31, 2021, assets under management in the institutional and sub-advisory market included $3.41 billion
in equity products and $6.21 billion in fixed-income products.
Broker-Dealer and Independent Registered Investment Advisors. Chartwell maintains sales staff dedicated to calling on national, regional and independent
broker-dealers and registered investment advisors. Broker-dealers and registered investment advisors use Chartwell’s products to meet the needs of their
customers, who are typically retail and/or high-net-worth investors. As of December 31, 2021, assets under management in the broker-dealer and independent
registered investment advisor market included $1.56 billion in equity products and $661.0 million in fixed-income products.
Our Products and Services
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.
Our loan products include, among others, loans secured by cash, marketable securities, cash value life insurance, commercial and industrial loans, commercial real
estate loans, personal loans, asset-based loans, acquisition financing, and letters of credit. Our deposit products are designed for sophisticated client needs and
include, among others, checking accounts, money market deposit accounts, certificates of deposit, and Promontory’s Certificate of Deposit Account Registry
Service (“CDARS ”) and Insured Cash Sweep (“ICS ”) services. Our liquidity and treasury management services are built to support clients in sophisticated
and complex situations and include online balance reporting, online bill payment, remote deposit, liquidity services, wire and ACH services, foreign exchange and
controlled disbursement. Our investment management business provides equity and fixed income advisory and sub-advisory services to third party mutual funds,
series trust mutual funds, and to separately managed accounts for a spectrum of clients, but primarily focused on ultra-high-net-worth and institutional clients,
including corporations, ERISA plans, Taft-Hartley funds, municipalities, endowments and foundations. We expect to continue to develop and implement additional
products for our clients, including additional investment management product offerings to our financial intermediary referral sources.
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.
Loans and Leases
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, 2021.
(Dollars in thousands)
December 31, 2021
Percent of
Loans
Private banking loans
$
6,886,498
64.0 %
Middle-market banking loans:
Commercial and industrial
1,513,423
14.1 %
Commercial real estate
2,363,403
21.9 %
Total middle-market banking loans
3,876,826
36.0 %
Loans and leases held-for-investment
$
10,763,324
100.0 %
Private Banking Loans. Our private banking loans are comprised of both personal and commercial loans sourced through our private banking channel, which
operates on a national basis. These loans primarily consist of loans made to high-net-worth individuals, trusts and businesses that may be secured by cash,
marketable securities, cash value life insurance and/or other financial assets and to a
®
®
®
®
9
lesser degree, residential property. We also have a small number of unsecured loans and lines of credit in our private banking loans. The primary source of
repayment for these loans is the income and assets of the borrowers. Since a majority of our private banking loans are secured by cash, marketable securities and/or
cash value life insurance which is actively monitored on a daily basis utilizing our proprietary technology, we believe the credit risk inherent in this portfolio is
lower than the risk associated with other types of loans.
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 10 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.
(Dollars in thousands)
December 31, 2021
Percent of
Private Banking Loans
Percent of
Loans
Private banking loans:
Secured by cash, marketable securities and/or cash value life insurance
$
6,816,517
99.0 %
63.3 %
Secured by real estate
37,285
0.5 %
0.4 %
Other
32,696
0.5 %
0.3 %
Total private banking loans
$
6,886,498
100.0 %
64.0 %
Commercial and Industrial Loans and Leases. Our commercial and industrial loan and lease portfolio primarily includes loans and leases made to a variety of
commercial borrowers 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, 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 and/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 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.
Our commercial and industrial loans and leases include both lines of credit and term loans. Lines of credit generally have maturities ranging from one to five years.
Availability under our commercial lines of credit is typically limited to a percentage of the value of the assets securing the line. Those assets typically include
accounts receivable, inventory and equipment, or in the case of fund financing, the value of uncalled capital and/or the investments held by the borrowing funds.
Depending on the risk profile of the borrower, we require borrowing base certificates representing and supporting borrowing availability after applying appropriate
eligibility and advance percentage rates to the collateral. Our commercial and industrial term loans and leases generally have maturities between three to seven
years, and typically do not extend beyond 10 years. Our commercial and industrial lines of credit and term loans typically have floating interest rates.
10
The table below shows the composition of our commercial and industrial loan and lease portfolio by borrower industry as of December 31, 2021.
(Dollars in thousands)
December 31, 2021
Percent of
Commercial and Industrial
Loans
Percent of
Loans
Industry:
Finance and Insurance
$
573,215
37.9 %
5.3 %
Real Estate, Rental and Leasing
300,739
19.9 %
2.8 %
Service
195,977
12.9 %
1.8 %
Manufacturing
112,827
7.5 %
1.0 %
Transportation & Warehousing
72,519
4.8 %
0.7 %
Wholesale Trade
50,149
3.3 %
0.5 %
Information
49,155
3.2 %
0.5 %
Construction
29,680
2.0 %
0.3 %
Mining
22,029
1.5 %
0.2 %
Retail Trade
3,670
0.2 %
— %
All other
103,463
6.8 %
1.0 %
Total commercial and industrial loans and leases
$
1,513,423
100.0 %
14.1 %
Commercial Real Estate Loans. We concentrate on making commercial real estate loans to experienced borrowers that have an established history of successful
projects. The cash flow from income-producing properties or the sale of property from for-sale construction and development loans are generally the primary
sources of repayment for these loans. The equity sponsors of our borrowers generally provide a secondary source of repayment from their excess global cash flows
and liquidity. The primary risks associated with commercial real estate loans include credit risk arising from the dependency of repayment upon income generated
from the property securing the loan, the vulnerability of such income to changes in market conditions, and difficulty in liquidating collateral securing the loans. We
work throughout the lending process to manage and mitigate such risks within our commercial real estate loan portfolio. The commercial real estate portfolio also
includes loans secured by owner-occupied real estate and the primary source of repayment for these loans is cash flow from the borrower’s business.
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, 2021.
(Dollars in thousands)
December 31, 2021
Percent of
Commercial Real Estate
Loans
Percent of
Loans
Commercial real estate loans:
Multifamily
$
731,781
31.0 %
6.8 %
Office
540,765
22.9 %
5.0 %
Industrial
382,120
16.2 %
3.6 %
Retail
309,891
13.0 %
2.7 %
Educational/Other Centers
113,276
4.8 %
1.1 %
Developed Land
71,470
3.0 %
0.7 %
Self Storage
60,645
2.6 %
0.6 %
Senior Housing/Healthcare
48,013
2.0 %
0.4 %
Hotel
39,032
1.7 %
0.4 %
Residential
35,998
1.5 %
0.3 %
Raw Land
30,412
1.3 %
0.3 %
Total commercial real estate loans
$
2,363,403
100.0 %
21.9 %
Loan and Lease Underwriting
Our focus on maintaining strong asset quality is pervasive through all aspects of our lending activities, including our loan and lease underwriting function. We are
selective in targeting our lending to middle-market businesses, commercial real estate investors and
11
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, Chief Credit Officer, Senior Credit 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 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, 2021, we had $250.0 million of SNC loans compared to $273.6 million as of December 31,
2020.
Loan and Lease Portfolio Concentrations
Geographic criteria. We focus on developing client relationships with companies that have headquarters and/or significant operations within our primary markets.
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 83.0% of our total commercial loans outstanding as of December 31, 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 88.5% of our
commercial loan and lease portfolio.
12
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.
(Dollars in thousands)
December 31, 2021
Percent of Total
Commercial Loans
Geographic region of borrower:
Pennsylvania
$
1,368,082
35.3 %
New Jersey
634,324
16.4 %
New York
627,823
16.2 %
Ohio
585,009
15.1 %
Contiguous states
214,913
5.5 %
Other states
446,675
11.5 %
Total commercial loans and leases
$
3,876,826
100.0 %
Diversified lending approach. We are committed to maintaining a diversified loan and lease portfolio. We also concentrate on making loans and leases to
businesses where we have or can obtain the necessary expertise to understand the credit risks commonly associated with the borrower’s industry. We generally
avoid lending to businesses that would require a high level of specialized industry knowledge not present within the Bank.
Deposits
An important aspect of our business franchise is the ability to gather deposits and establish and grow meaningful relationships related to liquidity and treasury
management customers. Deposits provide the primary source of funding for our lending activities. We offer traditional depository products including checking
accounts, money market deposit accounts and certificates of deposit in addition to CDARS and ICS reciprocal products. We also offer cash management and
treasury management services, including online balance reporting, online bill payment, remote deposit, liquidity services, wire and automated clearing house
(“ACH”) services and collateral disbursement. Our deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to statutory limits.
As of December 31, 2021, non-brokered deposits represented approximately 91.7% of our total deposits. Our non-brokered deposit sources primarily include
deposits from financial institutions, high-net-worth individuals, family offices, trust companies, wealth management firms, and corporations and their executives.
We compete for deposits by offering a range of deposit products at competitive rates. We also attract deposits by offering customers a variety of cash management
services. We maintain direct customer relationships with nearly all of our depositors that participate in CDARS and ICS reciprocal deposits.
The table below shows the balances of our deposit portfolio by type as of the dates indicated.
December 31,
2021 Change from 2020
(Dollars in thousands)
2021
2020
Amount
Percent
Non-brokered deposits:
Non-interest bearing checking accounts
$
776,256
$
456,426
$
319,830
70.1 %
Interest bearing checking accounts
4,139,343
2,911,669
1,227,674
42.2 %
Money market deposit accounts
4,905,108
3,482,381
1,422,727
40.9 %
Certificates of deposit
728,163
885,310
(157,147)
(17.8)%
Total non-brokered deposits
10,548,870
7,735,786
2,813,084
36.4 %
Brokered deposits:
Interest bearing checking accounts
179,180
157,165
22,015
14.0 %
Money market deposit accounts
726,985
445,416
281,569
63.2 %
Certificates of deposit
49,354
150,722
(101,368)
(67.3)%
Total brokered deposits
955,519
753,303
202,216
26.8 %
Total deposits
$
11,504,389
$
8,489,089
$
3,015,300
35.5 %
Non-brokered deposits to total deposits
91.7 %
91.1 %
®
®
®
®
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Investment Management Products
Chartwell Investment Partners manages $11.84 billion in a variety of equity and fixed income investment styles, for over 250 institutional investors, mutual funds
and individual investors as of December 31, 2021. A description of each investment style is provided below.
Equity Investment Strategies:
•
Small Cap Value: Chartwell’s Small Cap Value portfolio employs a traditional value style supplemented with both deep and relative value stocks. Our
opportunity set is selected using multiple valuation yardsticks and focuses heavily on company valuation relative to history. Portfolio decisions result
from business reviews assessing the prospects of erasing these valuation discounts with a focus on fundamental and event-driven catalysts which we
believe the market should recognize. The portfolio aims to be well diversified across all economic sectors and exhibit better growth, profitability and
financial strength characteristics than the small cap value benchmark. Our objective is to outperform small cap value benchmarks over the long term while
producing lower risk scores versus peers.
•
Mid Cap Value: Chartwell’s Mid Cap Value portfolio employs a traditional value style supplemented with both deep and relative value stocks, similar to
Chartwell’s Small Cap Value strategy. Our objective is to outperform mid cap value benchmarks over the long term while producing lower risk scores
versus peers.
•
SMID Cap Value: For clients in our SMID Cap Value portfolio, we invest in a select set of value oriented companies with small to mid-market caps
focused on securities held in Chartwell’s Small Cap Value and Mid Cap Value portfolios.
•
Small Cap Growth: Our Small Cap Growth portfolio invests in a select set of small growth oriented companies that have demonstrated strong increases in
earnings per share. More significantly, we look to invest in companies that have historically continued to broaden, deepen and enhance their fundamental
capabilities, competitive positions, product and service offerings and customer bases. Our plan is to invest in these companies for an intermediate time
horizon. Our portfolios focus on a narrow set of such investments.
•
Dividend Value: The objective of our Dividend Value strategy is to deliver investment returns that exceed the Russell 1000 Value index over a full market
cycle by focusing on stocks with above-average dividend yields. We invest in the highest 40% of dividend-yielding stocks to take advantage of the
attractive risk-return characteristics of this subset. A secondary consideration is the inclusion of companies that raise their dividends on a consistent basis.
Finally, we employ a valuation overlay that we believe enhances total returns and aids in downside protection.
•
Covered Call: The objective of our Covered Call strategy is to provide market-like returns in rising equity markets while earning superior returns in flat or
down equity markets. We combine a portfolio of higher yielding stocks with a disciplined covered call strategy to provide a lower volatility total return
solution for clients. Our focus is on creating a well-diversified portfolio of stocks that we believe are undervalued relative to their strong and/or improving
fundamentals. The addition of a tactical and flexible call overwriting strategy seeks to provide additional cash flow and reduced volatility of returns.
•
Large Cap Growth: The objective of our Large Cap Growth strategy is to help clients outperform benchmarks by owning a diversified portfolio of
Premier Growth companies. These are businesses that possess some or all of the following characteristics: large and growing total addressable markets,
superior products or services, and sustainable competitive advantages. We seek to hold positions in these companies when doing so is likely to generate
significant long term capital appreciation.
Fixed Income Investment Strategies:
•
Intermediate/Core/Short Duration Fixed Income: Chartwell’s philosophy of investment grade fixed income management stresses security selection,
preservation of principal, and compounding of the income stream as keys to consistently add value in the bond market. We focus our research efforts in
the corporate sector of the market. Because the return potential of any bond tends to be asymmetric, with limited capital appreciation potential but
considerably greater capital loss potential, Chartwell targets high quality credits with stable-to improving profiles.
•
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.
14
•
High Yield Fixed Income: 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 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
Chartwell 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.
Our total assets under management of $11.84 billion increased $1.58 billion, or 15.4%, as of December 31, 2021, from $10.26 billion as of December 31, 2020. We
reported new business and new flows from existing accounts and acquired assets of $2.11 billion and market appreciation of $1.06 billion, partially offset by
outflows of $1.59 billion during the year ended December 31, 2021.
The following table shows the changes of our assets under management by investment style for the year ended December 31, 2021.
Year Ended December 31, 2021
(Dollars in thousands)
Beginning
Balance
Inflows
Outflows
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
Inflows consist of new business and contributions to existing accounts.
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 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 length and depth of relationship, comfort with the 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 63% of our entire loan portfolio as of
(1)
(2)
(1)
(2)
15
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, 2021, we had 361 full-time employees with 308 in our bank segment and 53 in our investment management 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.
16
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 federal 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”), state
regulators and stock exchanges. With 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, but extended the effective date, and the U.S. Court of Appeals for the Tenth Circuit effectively vacated the rule in
2018. In December 2020, the DOL finalized a new fiduciary regulation that becomes fully effective in February 2022. A similar rule, issued by the SEC, popularly
known as Regulation BI, for best interest took effect in June 2020. These regulations will affect our investment advisory business, but we cannot predict 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 PDBS 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.
17
The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banking 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 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 credit losses,
subject to limitations. Total risk-based capital is the total of all three categories. The resulting capital ratios represent capital as a percentage of average assets or
total risk-weighted assets, including off-balance sheet items.
The Basel III Capital Rules 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, the Basel III Capital Rules provide that higher capital may be required to take adequate account of, among
other things, a bank’s or bank holding company’s credit, market, operational, or 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, and the full 2.5% requirement took effect on January
1, 2019. As a result, the Company and the Bank must meet or exceed the following 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:
•
tier 1 leverage ratio of 4.0%;
•
CET1 risk-based capital ratio of 7.0%;
•
tier 1 risk-based capital ratio of 8.5%; and
•
total risk-based capital ratio of 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 Basel III Capital Rules that have 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;
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•
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).
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,
inclusive of the capital conservation 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 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:
“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.
“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%
“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 lines 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.
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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 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, 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.
Source of Strength Doctrine for Bank Holding Companies
Under longstanding Federal Reserve policy which has been codified by the Dodd-Frank Act, we are required 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 elect
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.
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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
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.
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, what the final requirements will
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, 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 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.
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FDIC Deposit Insurance Assessments
FDIC-insured banks are required to pay deposit insurance assessments to the FDIC, which fund the DIF. An institution’s assessment rate is determined by a
number of factors and metrics, including the weighted average of the institution’s CAMELS composite 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 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 DIF 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. Since 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, 2028. Under the restoration plan, the FDIC will continue to closely monitor
the factors that affect the DIF reserve ratio and 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 what 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 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
TriState Capital Bank is permitted to establish branch offices within Pennsylvania, subject to the approval of the PDBS and 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 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 supervision of TriState Capital Bank, the FDIC is required to assess the Bank’s record of compliance with the
CRA. The Bank’s failure to maintain a satisfactory record of 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. The Bank has operated under FDIC approved CRA 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 engage in an interagency rulemaking process to modernize the CRA 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
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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 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 PDBS 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 concludes 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 deems 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.
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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 or 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 CFPB 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 CFPB 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. Because TriState Capital Bank has 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 these federal consumer protection laws also has the potential to 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 12-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
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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 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, and implementing regulations, and the rules of various
U.S. exchanges and self-regulatory organizations. These laws, regulations, and rules govern trading on inside information and, market manipulation, and include a
broad number of technical requirements and market regulation policies.
CTSC Securities, our broker-dealer subsidiary, is subject to regulations that cover all aspects of the securities business. Much of the regulation of broker-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-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, 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. The principal purpose of regulation and discipline of broker-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. In December 2020, the DOL finalized a new fiduciary regulation that becomes fully effective in February 2022. A comparable
rule issued by the SEC, popularly known as Regulation BI, for best interest, took effect in June 2020. Further actions that the DOL, SEC or other applicable
regulatory or legislative bodies take to alter duties to clients may impact our business activities and increase our costs.
In addition, Chartwell also may be subject to ERISA and related regulations, particularly insofar as it 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.
Net Capital Requirements
CTSC Securities is a non-clearing broker-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 adds significantly to the cost of our operations and may reduce revenue opportunities, and thus has 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. In this regard, these providers may have a competitive advantage over us and may successfully compete
against traditional banking institutions, with a continuing adverse effect on the banking industry in general.
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Future Legislation and Regulatory Reform
New statutes, regulations and policies 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 statute, regulation or policy will be proposed or
adopted or the extent to which our business may be affected by any new statue or 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 having such effects.
Available Information
All of our reports filed electronically with the SEC, including this Annual Report on Form 10-K for the fiscal year ended December 31, 2021, Quarterly Reports on
Form 10-Q, Current 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.
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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 allowance for credit losses on loans and leases may prove to be insufficient.
•
Our business may be adversely affected by competition, changes in interest rates, and market conditions.
•
Our private banking business could be negatively impacted by volatility or a prolonged downturn in the securities markets.
•
A real estate market downturn could result in losses and adversely affect our profitability.
•
Our lending limit may restrict our growth and prevent us from effectively implementing our business strategy.
•
The loss of executive team members and other key employees could adversely impact our business and reputation.
•
Liquidity risk could impair our ability to fund operations and meet our obligations as they become due.
•
If we fail to maintain sufficient capital, we may not be able to maintain regulatory compliance.
•
Reductions to our credit ratings may increase funding costs or impair our ability to effectively compete for business.
•
A transition away from LIBOR to an alternative reference interest rate could negatively affect the value of our financial assets and liabilities and present
operational problems due to market disruption.
•
Our ability to maintain our reputation is critical to the success of our business.
•
Our financial results depend on management’s selection of accounting methods and certain assumptions and estimates.
•
Derivative transactions expose us to additional credit and market risk in our banking business.
•
Failure of third parties to provide key components of our business infrastructure could disrupt our operations.
•
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.
•
The value of our goodwill and other intangible assets may decline in the future.
•
Cyber-crime and threats to data security may harm our reputation, and adversely affect our business.
•
Any violation of laws regarding the privacy, information security and protection of personal information or another incident involving personal,
confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our operations and financial condition.
•
We may have insufficient resources or face operational challenges when implementing new technology.
•
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.
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•
The market price of Raymond 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 and Raymond James may fail to realize the
anticipated benefits of the mergers.
•
The future results of the combined company may suffer if the company does not effectively manage its expanded operations.
•
The combined company may be unable to retain our and Raymond James’s personnel after the completion of the 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 longer than expected or may impose conditions that are not presently anticipated
or cannot be met.
•
Failure of the Acquisition to be 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 business uncertainties and contractual restrictions while the Acquisition is pending.
•
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.
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.
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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.
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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.
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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.
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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
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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.
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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.
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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
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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.
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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.
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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.
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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
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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
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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.
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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.
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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 PDBS and the 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, the Investment Company Act of 1940, the Investment Advisers Act
of 1940, and other regulations promulgated by various regulatory authorities, including the SEC, the Financial Industry Regulatory Authority, Inc., 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 with respect to unsafe or unsound practices or violations
of law. See “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.”
In addition to the safety and soundness focus, there are significant banking regulations relating to other aspects of our business, including consumer protection and
community development. With respect to our community development obligations under the CRA, we have an approved CRA strategic plan for the years 2021
through 2023. While we currently believe we will succeed in obtaining approval from the FDIC for our CRA strategic plan commencing in 2024, we cannot
guarantee 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, results of operations, financial condition and future prospects. For additional information, see “Supervision and Regulation—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 impose additional compliance costs. Further, any new laws,
regulations or policies could make compliance more difficult or expensive. Failure to comply with these laws, regulations and 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.
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 Federal Reserve, the FDIC, the PDBS, and the CFPB 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. 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
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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 taking into account capital adequacy, assets,
management capability, earnings, liquidity and sensitivity to market and 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. Since the
outbreak of the 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 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, 2028. Further increases in assessment rates or special assessments may occur in the future, especially if
there are significant 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 fair lending laws, and failure to comply with these laws could lead to a wide variety
of sanctions.
The Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial
institutions. The 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 fair lending laws and regulations could result in a wide variety of sanctions, including
damages and civil money penalties, injunctive relief, restrictions on merger and acquisition 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 may 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 (“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, and 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 prohibit or limit the flow of funds from those
subsidiaries to the parent company or other subsidiaries. In addition, our bank and investment management subsidiaries
44
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 Stock”) 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.
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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.
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 Series A Preferred Stock in the form of 1.6 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 Series B Preferred Stock in the form of 3.2 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 debt 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 depositary shares have limited voting rights.
Holders of the Series A Preferred Stock and Series B Preferred Stock (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 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; 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
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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 C Preferred Stock remain outstanding, unless we have paid in full (or declared and set aside funds sufficient
for) applicable dividends on the 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 federal and Pennsylvania 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 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 (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.
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.
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.
47
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 2022 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, 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, 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.
48
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 January 20, 2022, there were approximately 175 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, 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, 2016. The performance
graph represents past performance and should not be considered to be an indication of future performance.
49
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, 2021:
Total Number
of Shares
Purchased
Weighted
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
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
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.
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.
(1)
(2)
(1)
(2)
50
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, 2021, 2020 and 2019, and the selected balance sheet data as of December 31, 2021 and 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, 2018 and 2017, and the selected balance sheet data as of
December 31, 2019, 2018 and 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
51
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
$
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
1.64 %
1.58 %
1.97 %
2.26 %
2.25 %
Total revenue
$
237,763
$
191,201
$
179,423
$
161,391
$
138,009
Pre-tax, pre-provision net revenue
$
91,269
$
68,098
$
67,274
$
60,234
$
46,537
Bank efficiency ratio
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
$
7,218
$
5,473
$
5,824
$
6,900
$
7,421
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.
Net interest margin is calculated on a fully taxable equivalent basis.
(1)
(2)
(1)
(1)
(1)
(1)
(1)
(2)
52
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 revenue,” “pre-tax, pre-provision net revenue,” “efficiency ratio,” and
“EBITDA.” These non-GAAP financial measures are supplemental measures that we believe provide management and our investors with a more detailed
understanding of our performance, although these measures are not necessarily comparable to similar measures that may be presented by other companies. These
disclosures should not be viewed as a substitute for financial measures 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 so that they can better understand and assess changes from period to period in common shareholders’ equity exclusive of changes in
intangible assets associated with prior acquisitions. Intangible assets are created when we buy businesses that add relationships and revenue to our Company.
Intangible assets have the effect of increasing both equity and assets, while not increasing our tangible equity or tangible assets.
“Tangible book value per common share” is defined as common shareholders’ equity reduced by intangible assets, including goodwill, divided by common shares
outstanding. We believe this measure is important to many investors who are interested in changes from period to period in book value per common share
exclusive of changes in intangible assets associated with prior acquisitions.
“Total revenue” is defined as net interest income and total non-interest income, excluding gains and losses on the sale and call of debt securities. We believe
adjustments made to our operating revenue allow management and investors to better assess our core operating revenue by removing the volatility that is
associated with certain items that are unrelated to our core business.
“Pre-tax, pre-provision net revenue” is defined as net interest income and non-interest income, excluding gains and losses on the sale and call of debt securities and
total non-interest expense. We believe this measure is important because it allows management and investors to better assess our performance in relation to our
core operating revenue, excluding the volatility that is associated with provision for credit losses and changes in our tax rates and other items that are unrelated to
our core business.
“Efficiency ratio” is defined as total non-interest expense divided by our total revenue. We believe this measure allows management and investors to better assess
our operating expenses in relation to our core operating revenue, particularly at the Bank.
“EBITDA” is defined as net income before interest expense, income tax expense, depreciation expense and intangible amortization expense. We use EBITDA
particularly to assess the strength of our investment management business. We believe this measure is important because it allows management and investors to
better assess our investment management performance in relation to our core operating earnings by excluding certain non-cash items and the volatility that is
associated with certain discrete items that are unrelated to our core business.
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
53
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
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 %
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
54
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, 2021 and 2020. 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-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 presents 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 credit losses on loans and leases to loans and leases; net interest margin; the efficiency ratio of the Bank segment
(which is a non-GAAP financial measure); return on average assets; return on average common equity; regulatory leverage and risk-based capital ratios; and assets
under management and EBITDA of the Investment Management segment (which is a non-GAAP financial measure).
Executive Overview
We are a bank holding company headquartered in Pittsburgh, Pennsylvania. The Company has three wholly owned subsidiaries: the Bank, Chartwell, and CTSC
Securities. Through the Bank, we serve middle-market and financial services businesses in our primary markets throughout the states of Pennsylvania, Ohio, New
Jersey and New York. We also serve high-net-worth individuals and trusts on a national basis through our private banking channel. We market and distribute our
products and services through a scalable, branchless banking model, which creates significant operating leverage throughout our business as we continue to grow.
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
and is regulated by the SEC and the FINRA.
2021 Compared to 2020 Operating Performance
For the year ended December 31, 2021, our net income available to common shareholders was $65.7 million compared to $37.4 million in 2020, an increase of
$28.4 million, or 75.9%. Our 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 an increase in net interest income of $41.4 million, or 30.0%, and a decrease in provision for credit losses of
$18.6 million, which were partially offset by an increase of $23.4 million, or 19.0%, in our non-interest expenses, a $5.2 million increase in income taxes, and an
increase in preferred stock dividends of $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
55
Information and Summary of Significant Accounting Policies, and Note 15, Earnings per Common 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, 2021, compared to $191.2 million in 2020. The increase of $46.6 million, or 24.4% was driven largely by higher net interest income and
investment management fees offset by lower swap fees.
Our net interest margin was 1.64% for the year ended December 31, 2021, as compared to 1.58% in 2020. The increase in net interest margin for the year ended
December 31, 2021 was driven primarily by lower cost of funds and higher average interest-earning balances, which were partially offset by a lower yield on
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 one-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 include fixed-rate time deposits but are primarily comprised of variable rate
deposits, many of which are linked to an index such as the effective federal funds rate and others that are priced at the Bank’s discretion. 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 March 2020, in
line with the Federal Reserve rate reduction. The Federal Reserve has suggested that it may take steps to raise interest rates in 2022.
Our non-interest income is largely comprised of investment management fees for Chartwell, which totaled $37.5 million for the year ended December 31, 2021, as
compared to $32.0 million in 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 million for 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,
56
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 $10.26 billion as of December 31, 2020, an increase of $562.0
million from December 31, 2019, driven by market appreciation of $410.0 million, and net inflows of $152.0 million.
Another large component of our non-interest income are swap fees at the Bank, which totaled $16.3 million for the year ended December 31, 2020, as compared to
$11.0 million for 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.
57
For the year ended December 31, 2020, the Bank’s efficiency ratio was 55.57%, as compared to 54.49% in 2019. The Bank’s efficiency ratio reflects growth in the
Bank’s total revenue of 13.9% and growth in the Bank’s non-interest expense of 16.2%. Non-interest expense was $123.1 million for the year ended December 31,
2020. Our non-interest expense to average assets for the year ended December 31, 2020, was 1.35%, as compared to 1.66% in 2019.
Our return on average assets (net income to average total assets) was 0.50% for the year ended December 31, 2020, as compared to 0.89% in 2019. Our return on
average common equity (net income available to common shareholders to average common equity) was 7.15% for the year ended December 31, 2020, as compared
to 11.47% in 2019. 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 $9.90 billion as of December 31, 2020, increased $2.13 billion, or 27.4%, from December 31, 2019. Loans and leases held-for-investment increased
by $1.66 billion to $8.24 billion as of December 31, 2020, an increase of 25.2% from December 31, 2019, 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 $1.85 billion, or 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 the issuance of $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. Our ratio of allowance for credit
losses on loans and leases to loans increased to 0.42% as of December 31, 2020, from 0.21% as of December 31, 2019. We recorded provision for credit losses of
$19.4 million for the year ended December 31, 2020, primarily due to an increase in general reserves in response to the unprecedented speed of the economic
slowdown associated with the COVID-19 pandemic and an increase in specific reserves due to an addition of non-accrual loans, compared to a credit to provision
of $968,000 for the year ended December 31, 2019. In addition, we implemented the Current Expected Credit Losses (“CECL”) model as of January 1, 2020, and
recorded a net decrease to retained earnings of $1.7 million, for the cumulative effect (net of tax) of adopting CECL. For more information on our adoption of
CECL, refer to Note 1, Summary of Significant Accounting Policies and Note 5, Allowance for Credit Losses on Loans and Leases.
Our book value per common share increased $0.57, or 3.3%, to $17.78 as of December 31, 2020, from $17.21 as of December 31, 2019, 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, 2020.
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 75.4%, 72.1% and 70.8% of total revenue for the years ended December 31, 2021, 2020 and 2019, 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%.
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
2.12 %
2.49 %
4.06 %
Cost of interest-bearing liabilities
0.53 %
1.01 %
2.34 %
Net interest spread
1.59 %
1.48 %
1.72 %
Net interest margin
1.64 %
1.58 %
1.97 %
Calculated on a fully taxable equivalent basis.
(1)
(1)
(1)
(1)
58
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, 2021, 2020 and 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%.
Years Ended December 31,
2021
2020
2019
(Dollars in thousands)
Average
Balance
Interest
Income /
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income /
Expense
Average
Yield/
Rate
Average
Balance
Interest
Income /
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
$
179,389
$
138,004
$
127,158
Net interest spread
1.59 %
1.48 %
1.72 %
Net interest margin
1.64 %
1.58 %
1.97 %
(1)
Calculated on a fully taxable equivalent basis.
(1)
(1)
(1)
(1)
(1)
59
Net Interest Income for the Years Ended December 31, 2021 and 2020. Net interest income, calculated on a fully taxable equivalent basis, increased $41.4 million,
or 30.0%, to $179.4 million for the year ended December 31, 2021, from $138.0 million in 2020. The increase in net interest income reflects an increase of $14.2
million, or 6.5%, in interest income and a decrease of $27.2 million, or 34.4%, in interest expense. Our net interest margin was 1.64% for the year ended December
31, 2021, as compared to 1.58% in 2020 driven primarily by lower cost of funds and higher average interest-earning balances, which were partially offset by a
lower yield on 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
$1.93 billion, or 26.6%, mostly offset by a decrease of 43 basis points in yield on our loans, for the year ended December 31, 2021 compared to the same period in
2020. The change in yield is attributable to an increased portion of our portfolio being comprised of our lower-risk, lower-yielding marketable-securities backed
private banking loans. The overall yield on interest-earning assets declined 37 basis points to 2.12% for the year ended December 31, 2021, as compared to 2.49%
in 2020, primarily due to the lower loan yields. Our loans are predominantly variable rate loans indexed to one-month LIBOR.
The decrease in interest expense on interest-bearing liabilities was primarily the result of a decrease of 48 basis points in the average rate paid on our average
interest-bearing liabilities, partially offset by an increase of $1.94 billion, or 24.8%, in average interest-bearing liabilities for the year ended December 31, 2021,
compared to 2020. The decrease in the average rate paid reflected decreases in rates paid in all deposit categories, which was largely driven by the repricing of our
deposits as a result of the current interest rate environment. The increase in average interest-bearing liabilities was driven primarily by an increase of $1.36 billion
in average interest-bearing checking accounts and an increase of $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, 2020 and 2019. Net interest income, calculated on a fully taxable equivalent basis, increased $10.8 million,
or 8.5%, to $138.0 million for the year ended December 31, 2020, from $127.2 million in 2019. The increase in net interest income for the year ended December
31, 2020, was primarily attributable to a $2.28 billion, or 35.3%, increase in average interest-earning assets driven primarily by loan growth. The increase in net
interest income reflects a decrease of $45.4 million, or 17.3%, in interest income, more than offset by a decrease of $56.2 million, or 41.5%, in interest expense.
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 pandemic.
The decrease 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 by an
increase in average total loans, which are our primary earning assets, of $1.59 billion, or 28.0% for the year ended December 31, 2020, compared to the same
period in 2019. The most significant factor driving the yield on our loan portfolio was the impact of the decrease to the Federal Reserve’s target federal funds rate
on our floating-rate loans. The overall yield on interest-earning assets declined 157 basis points to 2.49% for the year ended December 31, 2020, as compared to
4.06% in 2019, primarily from the lower 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 decrease in interest expense on interest-bearing liabilities was primarily the result of a decrease of 133 basis points in the average rate paid on our average
interest-bearing liabilities, partially offset by an increase of $2.05 billion, or 35.5%, in average interest-bearing liabilities for the year ended December 31, 2020,
compared to 2019. The decrease in the average rate paid was reflective of decreases in rates paid on all interest-bearing liabilities, which was largely driven by the
impact of the recent decrease to the Federal Reserve’s target federal funds rate on our variable-rate liabilities. The increase in average interest-bearing liabilities
was driven primarily by an increase of $1.35 billion in average interest-bearing checking accounts and an increase of $869.4 million in average money market
deposit accounts, partially offset by a decrease of $147.4 million in average certificates of deposit.
60
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
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.
(1)
61
Years Ended December 31,
2020 over 2019
(Dollars in thousands)
Yield/Rate
Volume
Change
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.
Provision for Credit Losses on Loans and Leases
The provision for credit losses on loans and leases represents our determination of the amount necessary to be recorded against the current period’s earnings to
maintain the allowance for credit losses at a level that is consistent with management’s assessment of credit losses in the loan and lease portfolio at a specific point
in time. We adopted CECL on December 31, 2020, which replaced the incurred loss methodology for determining our provision for credit losses and allowance for
credit losses. We recorded a net decrease to retained earnings of $942,000 related to the allowance for credit losses on loans and leases as of January 1, 2020, for
the cumulative effect of adopting CECL.
We recorded a provision for credit losses on loans and leases of $820,000 for the year ended December 31, 2021, compared to a provision for loan losses of
$19.3 million for the year ended December 31, 2020, and a credit to provision for loan losses of $968,000 for the year ended December 31, 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
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nonperforming loans and collateral related to an impaired loan that was transferred to 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.
Non-Interest Income
Non-interest income is an important component of our revenue and is comprised largely of investment management fees from Chartwell coupled with fees
generated from loan and deposit relationships with our Bank customers, including swap transactions. The information provided 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, 2021 and 2020:
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
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, 2021 and 2020. Our non-interest income was $58.6 million for the year ended December 31, 2021, an
increase of $1.4 million, or 2.5%, from $57.2 million for 2020. This increase was primarily related to higher investment management fees, 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
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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
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, as follows:
Bank Segment:
•
There was a net gain on the sale and call of debt securities of $3.9 million for the year ended December 31, 2020, as compared to 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, 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 was
strong customer demand for long-term interest rate protection in the current interest rate environment.
Investment Management Segment:
•
Investment management fees decreased $4.2 million for the year ended December 31, 2020, as compared to 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 and 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, partially offset by higher assets under
management of $562.0 million. For additional information on assets under management, refer to Item 1, Business - Investment Management Products.
Parent and Other
•
Other income for the year ended December 31, 2019, reflected $842,000 of realized gains on equity securities related to our mutual funds invested in
short-duration, corporate bonds and mid-cap value equities, which were sold in 2019.
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
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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, 2021 and 2020:
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
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
308
53
—
361
255
53
—
308
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.
Full-time equivalent employees shown are as of the end of the period presented.
Non-Interest Expense for the Years Ended December 31, 2021 and 2020. Our non-interest expense for the year ended December 31, 2021, increased $23.4 million,
or 19.0%, as compared to 2020, of which $16.8 million relates to the increase in expenses of the Bank segment, $4.2 million relates to the increase in expenses of
the Investment Management 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:
•
The Bank’s compensation and employee benefits increased by $9.4 million for the year ended December 31, 2021, as compared to 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-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.
•
Professional fees increased $2.6 million for the year ended December 31, 2021, as compared to 2020, primarily due to higher audit, accounting and legal
fees related to routine accounting and regulatory compliance, higher investment advisory fees and increases in other professional fees, including
consulting fees related to the workout of non-performing loans.
•
FDIC insurance expense decreased by $4.6 million for the year ended December 31, 2021, 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 $3.7 million for the year ended December 31, 2021, as compared to 2020, 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.
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(2)
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•
Other operating expenses increased by $2.8 million for the year ended December 31, 2021, compared to 2020, primarily due to higher impairment
expense associated with historic tax credit investments, partially offset by lower expenses associated with the reserve for unfunded commitments.
Investment Management Segment:
•
Chartwell’s compensation and employee benefits costs increased by $3.8 million for the year ended December 31, 2021, as compared to 2020, primarily
due to an increase in variable incentive compensation expense as a result of increased revenue.
Parent and Other:
•
Parent and Other professional fees increased $2.1 for the year ended December 31, 2021, as compared to 2020, primarily due to one-time costs incurred in
2021 associated with the previously announced agreement to be acquired by Raymond James.
The following table presents the components of our non-interest expense 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
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
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
255
53
—
308
219
57
—
276
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.
Full-time equivalent employees shown are as of the end of the period presented.
Non-Interest Expense for the Years Ended December 31, 2020 and 2019. Our non-interest expense for the year ended December 31, 2020, increased $11.0 million,
or 9.8%, as compared to 2019, of which $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 $2.2 million relates to the increase in expenses of the 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.
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(2)
(1)
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66
•
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, 2020, increased by $3.4 million compared to 2019, primarily
due to an increase in the number of full-time equivalent employees, increases in the overall annual wage and benefit costs of our existing employees, and
increases in incentive and stock-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.
•
FDIC insurance expense for the year ended December 31, 2020, increased by $4.4 million compared to 2019, due to an increase in the Bank’s 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, 2020, decreased by $1.4 million compared to 2019, primarily due to decreased travel
and events as a result of the COVID-19 pandemic.
•
Technology and data services for the year ended December 31, 2020, 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 our investments in technology, as well as increased information and
data services expense.
•
Other operating expenses for the year ended December 31, 2020, increased by $2.8 million compared to 2019, primarily driven 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 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, 2021 and 2020. For the year ended December 31, 2021, 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, for 2019. Our effective tax rate for the year ended
December 31, 2020, increased to 14.1% as compared to the prior year largely due to the amount of tax credits recognized during the year ended December 31,
2020 compared to 2019.
Financial Condition
Our total assets as of December 31, 2021, were $13 billion, an increase of $3.11 billion, or 31.4%, from December 31, 2020, driven primarily by growth in our
loan and lease portfolio and investment portfolio. As of December 31, 2021, our loan portfolio was $10.76 billion, an increase of $2.53 billion, or 30.7%, from
$8.24 billion, as of December 31, 2020. Total investment securities increased $563.1 million, or 66.8%, to $1.41 billion, as of December 31, 2021, from $842.5
million as of December 31, 2020. We focus on high
67
quality loan growth and correspondingly grow our investment portfolio at a similar pace as part of our strategy to continue building greater on-balance sheet
liquidity, funded by our deposits.
As of December 31, 2021, our total deposits were $11.50 billion, an increase of $3.02 billion, or 35.5%, from December 31, 2020, and such deposits were
primarily used to fund loan growth. Net borrowings increased $69.7 million, or 17.4%, to $470.2 million as of December 31, 2021, compared to $400.5 million as
of December 31, 2020. Our shareholders’ equity increased $79.6 million to $836.7 million as of December 31, 2021, compared to $757.1 million as of
December 31, 2020. This increase was primarily the result of $78.1 million in net income and the impact of $11.0 million in stock-based compensation, partially
offset by preferred stock cash dividends declared of $7.9, and the purchase of $2.1 million in treasury stock.
Our total assets as of December 31, 2020, were $9.90 billion, an increase of $2.13 billion, or 27.4%, from December 31, 2019, driven primarily by growth in our
loan and lease portfolio, investment portfolio and cash and cash equivalents. As of December 31, 2020, our loan portfolio was $8.24 billion, an increase of $1.66
billion, or 25.2%, from $6.58 billion, as of December 31, 2019. Total investment securities increased $373.4 million, or 79.6%, to $842.5 million, as of December
31, 2020, from $469.2 million as of December 31, 2019. Cash and cash equivalents increased $31.6 million to $435.4 million as of December 31, 2020, from
$403.9 million as of December 31, 2019.
As of December 31, 2020, our total deposits were $8.49 billion, an increase of $1.85 billion, or 28.0%, from December 31, 2019, and were primarily used to fund
loan growth. Net borrowings increased $45.5 million, or 12.8%, to $400.5 million as of December 31, 2020, compared to $355.0 million as of December 31, 2019.
Our shareholders’ equity increased $135.9 million to $757.1 million as of December 31, 2020, compared to $621.3 million as of December 31, 2019. This increase
was primarily the result of the issuance of $100.0 million in net proceeds from our private placement, which closed December 30, 2020, $45.2 million in net
income, and the impact of $9.5 million in stock-based compensation, partially offset by preferred stock dividends declared of $7.9 million, a decrease of $3.8
million in other accumulated comprehensive income, the purchase of $3.6 million in treasury stock, $2.5 million in cancellation of stock options and $1.7 million
related to our adoption of 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
Loans and Leases Held-for-Investment. Loans and leases held-for-investment increased by $2.53 billion, or 30.7%, to $10.76 billion as of December 31, 2021,
compared to December 31, 2020. Our growth for the year ended December 31, 2021, was comprised of an increase in private banking loans of $2.08 billion, or
43.2%; an increase in commercial real estate loans of $207.9 million, or 9.6%; and an increase in commercial and industrial loans and leases of $239.3 million, or
18.8%.
Loans and leases held-for-investment increased by $1.66 billion, or 25.2%, to $8.24 billion as of December 31, 2020, as compared to December 31, 2019. Our
growth for the year ended December 31, 2020, was comprised of an increase in private banking loans of $1.11 billion, or 30.1%; an increase in commercial real
estate loans of $359.0 million, or 20.0%; and an increase in commercial and industrial loans and leases of $188.4 million, or 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 lesser extent residential
property or other financial assets.
68
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, 2021, private banking loans were approximately $6.89 billion, or 64.0% of loans held-for-investment, of which $6.82
billion, or 99.0%, were secured by cash, marketable securities and/or cash value life insurance. As of December 31, 2020, private banking loans
were approximately $4.81 billion, or 58.4% of loans held-for-investment, of which $4.74 billion, or 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 banking business. We believe we have strong competitive
advantages in this line of business given our robust distribution channel relationships and proprietary technology. These loans 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
As of December 31, 2021, there were $6.80 billion of total private banking loans with a floating interest rate and $84.4 million with a fixed
interest rate, as compared to $4.73 billion and $77.1 million, respectively, as of December 31, 2020.
Commercial Banking: Commercial and Industrial Loans and Leases. Our commercial and industrial loan and lease portfolio primarily includes
loans and equipment leases made to financial and other service companies or manufacturers generally for the purposes of financing production,
operating capacity, accounts receivable, inventory, equipment, acquisitions and recapitalizations. Cash flow from the borrower’s operations is
the primary source of repayment for these loans and leases, except for certain commercial loans that are secured by marketable securities.
As of December 31, 2021, our commercial and industrial loans comprised $1.51 billion, or 14.1% of loans held-for-investment, as compared to
$1.27 billion, or 15.5%, as of December 31, 2020. As of December 31, 2021, there were $1.16 billion of total commercial and industrial loans
with a floating interest rate and $350.4 million with a fixed interest rate, as compared to $966.6 million and $307.6 million, respectively, as of
December 31, 2020.
Commercial Banking: Commercial Real Estate Loans. Our commercial real estate loan portfolio includes loans secured by commercial purpose
real estate, including both owner-occupied properties and investment properties for various purposes, including office, industrial, multifamily,
retail, hospitality, healthcare and self-storage. Also included are commercial construction loans to finance the construction or renovation of
structures as well as to finance the acquisition and development of raw land for various purposes. Individual project cash flows, global cash
flows and liquidity from the developer, or the sale of the property, are the primary sources of repayment for commercial real estate loans secured
by investment properties. The primary source of repayment for commercial real estate loans secured by owner-occupied properties is cash flow
from the borrower’s operations. There were $212.6 million and $220.8 million of owner-occupied commercial real estate loans as of
December 31, 2021 and December 31, 2020, respectively.
Commercial real estate loans as of December 31, 2021, totaled $2.36 billion, or 21.9% of loans held-for-investment, as compared to $2.16
billion, or 26.1%, as of December 31, 2020. As of December 31, 2021, $2.26 billion of total commercial real estate loans had a floating interest
rate and $105.2 million had a fixed interest rate, as compared to $2.03 billion and $123.3 million, respectively, as of December 31, 2020.
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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
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 $148.0 million as of December 31, 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, 2021, our average commercial loan size was approximately $4.5 million and average private banking loan size was
approximately $435,000.
The following table summarizes the aggregate committed and outstanding balances of our larger credit relationships as of December 31, 2021
and December 31, 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
Approximately $2.54 billion and $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, 2021 and December 31, 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, 2021,
approximately 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, 2021, loans with interest reserves totaled $350.5 million, which represented 3.3% of loans held-for-investment, as
compared to $389.1 million, or 4.7%, as of December 31, 2020, largely attributable to growth in the commercial real estate portfolio.
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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.
Allowance for Credit Losses on Loans and Leases
Our allowance for credit losses on loans and leases represent our current estimate of expected credit losses in the portfolio at a specific point in
time. This estimate includes credit losses associated with loans and leases evaluated on a collective or pool basis, as well as expected credit
losses of the individually evaluated loans and leases that do not share similar risk characteristics. Additions are made to the allowance through
both periodic provisions recorded in the consolidated statements of income and recoveries of losses previously incurred. Reductions to the
allowance occur as loans are charged off or when the current estimate of expected credit losses in any of the three loan portfolios decreases.
The following table summarizes the allowance for credit losses on loans and leases, as of the dates indicated:
December 31,
(Dollars in thousands)
2021
2020
2019
General reserves
$
23,880
$
32,642
$
13,937
Specific reserves
4,683
1,988
171
Total allowance for credit losses on loans and leases
$
28,563
$
34,630
$
14,108
Allowance for credit losses on loans and leases to loans and leases
0.27 %
0.42 %
0.21 %
As of December 31, 2021, we had specific reserves totaling $4.7 million related to individually evaluated loans with an aggregated total
outstanding balance of $16.8 million, $4.3 million of which were on non-accrual status. As of December 31, 2020, we had specific reserves
totaling $2.0 million related to individually evaluated loans with an aggregated total outstanding balance of $9.7 million. All loans with specific
reserves were on non-accrual status as of December 31, 2020.
The following tables summarize allowance for credit losses on loans and leases and the percentage of loans by loan category, as of the dates
indicated:
December 31,
2021
2020
2019
(Dollars in thousands)
Reserve
Percent of
Loans
Reserve
Percent of
Loans
Reserve
Percent of
Loans
Private banking
$
1,891
64.0 % $
2,047
58.4 % $
1,973
56.2 %
Commercial and industrial
8,453
14.1 %
5,254
15.5 %
5,262
16.5 %
Commercial real estate
18,219
21.9 %
27,329
26.1 %
6,873
27.3 %
Total allowance for credit losses on loans and leases
$
28,563
100.0 % $
34,630
100.0 % $
14,108
100.0 %
Allowance for Credit Losses on Loans and Leases as of December 31, 2021 and 2020. Our allowance for credit losses on loans and leases was
$28.6 million, or 0.27% of loans, as of December 31, 2021, as compared to $34.6 million, or 0.42% of loans, as of December 31, 2020. Our
allowance for credit losses related to private banking loans decreased $156,000 from December 31, 2020 to December 31, 2021 as the increase
attributable to the growth of the marketable securities portfolio was more than offset by the improvement in the economic factors. Our
allowance for credit losses related to commercial and industrial loans and leases increased $3.2 million from December 31, 2020 to
December 31, 2021, due to decreased general reserves more than offset by increasing specific reserves on individually evaluated loans. Our
allowance for credit losses related to commercial real estate loans decreased $9.1 million from December 31, 2020 to December 31, 2021, due to
decreased general reserves as well as decreased specific reserves on individually evaluated loans. The decrease in general reserves in our
commercial loan portfolio was primarily driven by improvement in economic forecasts related to assumptions utilized in the qualitative
management overlay. We applied a management overlay to our allowance for credit loss model to provide a reserve level that supports
management’s best estimate of current expected credit losses within the loan portfolio. The management overlay includes scenarios with both
near-term economic stress and a next-cycle recession as well as other factors based upon management judgement. The consensus forecast within
our model provided for a greater reserve release based on optimism around the economic environment and loss forecasts, which we believe may
be an overreaction to the early onset of historically high level and rate of changes in the forecast and transactional values within commercial
asset types. We would
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release reserves to the extent suggested by our model if we believe that there is a sustained trend in the economic recovery data and continued progress overcoming
the COVID-19 pandemic and associated supply chain issues.
Allowance for Credit Losses on Loans and Leases as of December 31, 2020 and 2019. Our allowance for credit losses on loans and leases was $34.6 million, or
0.42% of loans, as of December 31, 2020, as compared to $14.1 million, or 0.21% of loans, as of December 31, 2019. The increase is primarily due to adjustments
to the macro-economic forecast data such as GDP and unemployment in response to the economic uncertainty around the COVID-19 pandemic as well as an
increase to our specific reserves related to the addition of non-performing loans. In addition, our adoption of CECL on December 31, 2020 resulted in an
immediate increase of $942,000 in our allowance, which was unrelated to the COVID-19 pandemic. Our allowance for credit losses on loans and leases related to
private banking loans increased $74,000 from December 31, 2019 to December 31, 2020, which was primarily attributable to growth in this portfolio. Our
allowance for credit losses on loans and leases related to commercial real estate loans increased $20.5 million from December 31, 2019 to December 31, 2020, due
to increased general reserves from growth and macro-economic forecast adjustments as well as increased specific reserves related to the addition of non-
performing loans. The implementation of the CECL methodology also added an immediate increase of $3.6 million of reserves to our commercial real estate
portfolio.
Charge-Offs and Recoveries
Our charge-off policy for commercial and private banking loans and leases requires that obligations that are not collectible be promptly charged off in the month
the loss becomes probable, regardless of the delinquency status of the loan or lease. We recognize a partial charge-off when we have determined that the value of
the collateral is less than the remaining ledger balance at the time of the evaluation. An obligation is not required to be charged off, regardless of delinquency
status, if we have determined there exists sufficient collateral to protect the remaining loan or lease balance and there exists a strategy to liquidate the collateral.
We may also consider a number of other factors to determine when a charge-off is appropriate, including: the status of a bankruptcy proceeding, the value of
collateral and probability of successful liquidation; and the status of adverse proceedings or litigation that may result in collection.
The following table provides an analysis of the net charge-offs and average total loans and leases by channel for the years indicated:
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Net charge-offs (recoveries):
Commercial and industrial
$
4,405
$
(450)
$
(1,980)
Commercial real estate
2,482
—
—
Private banking
—
171
112
Total
$
6,887
$
(279)
$
(1,868)
Average total loans and leases:
Commercial and industrial
$
1,236,279
$
1,130,565
$
903,501
Commercial real estate
2,270,019
1,959,401
1,579,530
Private banking
5,681,194
4,165,069
3,186,476
Total
$
9,187,492
$
7,255,035
$
5,669,507
Net loan charge-offs (recoveries) to average total loans and leases:
Commercial and industrial
0.36 %
(0.04)%
(0.22)%
Commercial real estate
0.11 %
— %
— %
Private banking
— %
— %
— %
Total
0.07 %
— %
(0.03)%
Non-Performing Assets
Non-performing assets consist of non-performing loans and OREO. Non-performing loans are loans that are on non-accrual status. OREO is real property acquired
through foreclosure on the collateral underlying defaulted loans and including in-substance foreclosures. We record OREO at fair value, less estimated costs to sell
the assets.
Our policy is to place loans in all categories on non-accrual status when collection of interest or principal is doubtful, or when interest or principal payments are 90
days or more past due. There were no loans 90 days or more past due and still accruing interest as of December 31, 2021, 2020 and 2019, and there was no interest
income recognized on loans while on non-accrual status for the years
72
ended December 31, 2021, 2020 and 2019. As of December 31, 2021, non-performing loans were $4.3 million, or 0.04% of total loans, compared to $9.7 million,
or 0.12%, and $184,000, or 0.00%, as of December 31, 2020 and 2019, respectively. We had specific reserves of $4.3 million, $2.0 million and $171,000 as of
December 31, 2021, 2020 and 2019, respectively, on these non-performing loans. The net loan balance of our non-performing loans was 0.0%, 79.2% and 6.3% of
the customer’s outstanding balance after payments, charge-offs and specific reserves as of December 31, 2021, 2020 and 2019, respectively.
For additional information on our non-performing loans as of December 31, 2021, 2020 and 2019, refer to Note 5, Allowance for Credit Losses on Loans and
Leases, to our consolidated financial statements.
Once the determination is made that a foreclosure is necessary, the loan is reclassified as “in-substance foreclosure” until a sale date and title to the property is
finalized. Once we own the property, it is maintained, marketed, rented and/or sold to repay the original loan. Historically, foreclosure trends in our loan portfolio
have been low due to the seasoning of our portfolio. Any loans that are modified or extended are reviewed for potential classification as a TDR loan. For borrowers
that are experiencing financial difficulty, we complete a process that outlines the terms of the modification, the reasons for the proposed modification and
documents the current status of the borrower.
We had non-performing assets of $6.3 million, or 0.05% of total assets, as of December 31, 2021, as compared to $12.4 million, or 0.13% of total assets, as of
December 31, 2020. The decrease in non-performing assets was due to reductions of $5.4 million in non-performing loans and $719,000 in OREO. This decrease
was considered within the assessment of the determination of the allowance for credit losses on loans and leases. As of December 31, 2021, we had OREO
properties totaling $2.0 million as compared to $2.7 million as of December 31, 2020. During the year ended December 31, 2021, a property was sold from OREO
for $351,000 with a net loss of $39,000. There were no residential mortgage loans in the process of foreclosure as of December 31, 2021.
We had non-performing assets of $12.4 million, or 0.13% of total assets, as of December 31, 2020, as compared to $4.4 million, or 0.06% of total assets, as of
December 31, 2019. The increase in non-performing assets was due to the addition of new non-performing loans of $9.7 million, partially offset by a decrease in
our OREO balance of $1.6 million. This increase was considered within the assessment of the determination of the allowance for credit losses on loans and leases.
As of December 31, 2020, we had OREO properties totaling $2.7 million as compared to $4.3 million as of December 31, 2019. During the year ended, December
31, 2020, a property was sold from OREO for $1.5 million with a net gain of $65,000. There were no residential mortgage loans in the process of foreclosure as of
December 31, 2020.
The following table summarizes our non-performing assets as of the dates indicated:
December 31,
(Dollars in thousands)
2021
2020
2019
Non-performing loans:
Private banking
$
—
$
—
$
184
Commercial and industrial
4,313
458
—
Commercial real estate
—
9,222
—
Total non-performing loans
4,313
9,680
184
Other real estate owned
2,005
2,724
4,250
Total non-performing assets
$
6,318
$
12,404
$
4,434
Non-performing troubled debt restructured loans
$
—
$
2,926
$
171
Performing troubled debt restructured loans
$
12,499
$
—
$
—
Non-performing loans to total loans
0.04 %
0.12 %
— %
Allowance for credit losses on loans and leases to non-performing loans
662.25 %
357.75 %
7,667.39 %
Non-performing assets to total assets
0.05 %
0.13 %
0.06 %
Potential Problem Loans
Potential problem loans are those loans that are not categorized as non-performing loans, but where current information indicates that the borrower may not be able
to comply with repayment terms in the future. Among other factors, we monitor past due status as an indicator of credit deterioration and potential problem loans.
A loan is considered past due when the contractual principal and/or interest due in accordance with the terms of the loan agreement remains unpaid after the due
date of the scheduled payment. To the extent that loans become past due, we assess the potential for loss on such loans individually as we would with other
problem loans and consider the effect of any potential loss in determining any additional provision for credit losses on loans and leases. We also
73
assess alternatives to maximize collection of any past due loans, including and without limitation, restructuring loan terms, requiring additional loan guarantee(s)
or collateral, or other planned action.
For additional information on the age analysis of past due loans segregated by class of loan for December 31, 2021 and 2020, refer to Note 5, Allowance for Credit
Losses on Loans and Leases, to our consolidated financial statements.
On a monthly basis, we monitor various credit quality indicators for our loan portfolio, including delinquency, non-performing status, changes in risk ratings,
changes in the underlying performance of the borrowers and other relevant factors. On a daily basis, we monitor the collateral of loans secured by cash, marketable
securities and/or cash value life insurance within the private banking portfolio, which further reduces the risk profile of that portfolio.
Loan risk ratings are assigned based on the creditworthiness of the borrower and the quality of the collateral for loans secured by marketable securities. Loan risk
ratings are reviewed on an ongoing basis according to internal policies. Loans within the pass rating are believed to have a lower risk of loss than loans that are risk
rated as special mention, substandard or doubtful, which are believed to have an increasing risk of loss. Our internal risk ratings are consistent with regulatory
guidance. We also monitor the loan portfolio through a formal periodic review process. All non-pass rated loans are reviewed monthly and higher risk-rated loans
within the pass category are reviewed three times a year.
For additional information on the definitions of our internal risk rating and the amortized cost basis of loans by credit quality indicator for December 31, 2021 and
2020, refer to Note 5, Allowance for Credit Losses on Loans and Leases, to our consolidated financial statements.
Investment Securities
We utilize investment activities to enhance net interest income while supporting liquidity management and interest rate risk management. Our securities portfolio
consists of available-for-sale debt securities, held-to-maturity debt securities, equity securities and, from time to time, debt securities held for trading purposes and
equity securities. Also included in our investment securities are FHLB Stock. For additional information on FHLB stock, refer to Note 2, Investment Securities, to
our consolidated financial statements. Debt securities purchased with the intent to sell under trading activity and equity securities are recorded at fair value and
changes to fair value are recognized in non-interest income in the consolidated statements of income. Debt securities categorized as available-for-sale are recorded
at fair value and changes in the fair value of these securities are recognized as a component of total shareholders’ equity, within accumulated other comprehensive
income (loss), net of deferred taxes. Debt securities categorized as held-to-maturity are debt securities that the Company intends to hold until maturity and are
recorded at amortized cost, net of allowance for credit losses.
The Bank has engaged Chartwell to provide securities portfolio advisory services, subject to the investment parameters set forth in our investment policy.
As of December 31, 2021, we reported debt securities in available-for-sale and held-to-maturity categories as well as equity securities. In general, fair value is
based upon quoted market prices of identical assets, when available. Where sufficient data is not available to produce a fair valuation, fair value is based on broker
quotes for similar assets. We validate the prices received from these third parties by comparing them to prices provided by a different independent pricing service.
We have also reviewed the valuation methodologies provided to us by our pricing services. Broker quotes may be adjusted to ensure that financial instruments are
recorded at fair value. Adjustments may include unobservable parameters, among other things. Securities, like loans, are subject to interest rate risk and credit risk.
In addition, by their nature, securities classified as available-for-sale and trading as well as equity securities are also subject to fair value risks that could negatively
affect the level of liquidity available to us, as well as shareholders’ equity.
As of December 31, 2021, our available-for-sale debt securities portfolio consists of U.S. government agency obligations, mortgage-backed securities, corporate
bonds, single-issuer trust preferred securities and certain municipal bonds, all with varying contractual maturities. Our held-to-maturity debt securities portfolio
consists of certain municipal bonds, agency obligations, mortgage-backed securities and corporate bonds while our trading portfolio, when active, typically
consists of U.S. treasury notes, also with varying contractual maturities. However, these maturities do not necessarily represent the expected life of the securities as
certain securities may be called or paid down without penalty prior to their stated maturities. The effective duration of our debt securities portfolio as of
December 31, 2021, was approximately 4.4, where duration is defined as the approximate percentage change in price for a 100 basis point change in rates. No
investment in any of these securities exceeds any applicable limitation imposed by law or regulation. The Asset and Liability Committee (“ALCO”) reviews the
investment portfolio on an ongoing basis to ensure that the investments conform to our investment policy.
Available-for-Sale Debt Securities. We held $586.3 million and $617.6 million in debt securities available-for-sale as of December 31, 2021 and December 31,
2020, respectively. The decrease of $31.2 million was primarily attributable to purchases of
74
$652.8 million more than offset by the transfer of $480.8 million of agency mortgage-backed securities to held-to-maturity, repayments of $67.8 million and sales
of $126.6 million during the year ended December 31, 2021.
On a fair value basis, 23.1% of our available-for-sale debt securities as of December 31, 2021, were floating-rate securities for which yields increase or decrease
based on changes in market interest rates. As of December 31, 2020, floating-rate securities comprised 23.8% of our available-for-sale debt securities.
On a fair value basis, 24.6% of our available-for-sale debt securities as of December 31, 2021, were U.S. agency securities, which tend to have a lower risk profile,
than certain corporate bonds and single-issuer trust preferred securities, which comprised the remainder of the portfolio. As of December 31, 2020, agency
securities comprised 71.4% of our available-for-sale debt securities.
Held-to-Maturity Debt Securities. We held $802.7 million and $211.8 million in debt securities held-to-maturity as of December 31, 2021 and December 31, 2020,
respectively. The increase was primarily attributable to the transfer of $480.8 million of previously designated available-for-sale agency mortgage-backed
securities to held-to-maturity and purchases of $496.5 million, net of calls and maturities of $374.5 million, of certain securities during the year ended December
31, 2021. As part of our asset and liability management strategy, we determined that we have the intent and ability to hold these bonds until maturity, and these
securities were reported at amortized cost, net of allowance for credit losses, as of December 31, 2021.
Trading Debt Securities. We held no trading debt securities as of December 31, 2021 and December 31, 2020. From time to time, we may identify opportunities in
the marketplace to generate supplemental income from trading activity, principally based on the volatility of U.S. treasury notes with maturities up to 10 years.
Equity Securities. Chartwell launched a new mutual fund in 2021. The Chartwell Short Duration Bond Fund is a short duration, fixed income fund that invests at
least 75% of its net assets in investment grade short duration bonds and can allocate up to 25% of the fund to short duration high yield bonds. The fund is managed
by a team of seven investment professionals that brings an average of 18 years of investment experience to the fund. TriState Capital Holdings, Inc. was one of the
initial investors at the inception of the fund in the amount of $5 million. As of December 31, 2021, equity securities, which are recorded at fair value, included only
the investment in the Chartwell Short Duration Bond Fund which was valued at $4.98 million. The Company held no equity securities as of December 31, 2020.
The following tables summarize the amortized cost and fair value of debt securities available-for-sale and held-to-maturity, as of the dates indicated:
December 31, 2021
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Allowance for Credit
Losses
Estimated
Fair Value
Debt securities available-for-sale:
Corporate bonds
$
145,568 $
897 $
273 $
— $
146,192
Trust preferred securities
13,610
200
183
—
13,627
Non-agency residential mortgage-backed securities
281,282
—
4,164
—
277,118
Agency collateralized mortgage obligations
16,458
42
2
—
16,498
Agency mortgage-backed securities
122,044
32
1,599
—
120,477
Agency debentures
6,732
496
—
—
7,228
Municipal bonds
$
5,189 $
— $
4 $
— $
5,185
Total debt securities available-for-sale
$
590,883 $
1,667 $
6,225 $
— $
586,325
Available-for-sale debt securities are recorded on the statement of financial condition at estimated fair value, which includes allowance for credit losses, if applicable.
(1)
(1)
75
December 31, 2021
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Allowance for Credit
Losses
Debt securities held-to-maturity:
U.S. treasury notes
$
39,097 $
12 $
443 $
38,666
$
—
Corporate bonds
25,167
827
16
25,978
71
Agency debentures
36,794
534
395
36,933
—
Municipal bonds
890
1
—
891
—
Non-agency residential mortgage-backed securities
184,731
1
3,088
181,644
65
Agency mortgage-backed securities
516,033
570
8,753
507,850
—
Total debt securities held-to-maturity
$
802,712 $
1,945 $
12,695 $
791,962
$
136
Held-to-maturity debt securities are recorded on the statement of financial condition at amortized cost, net of allowance for credit losses.
December 31, 2020
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Allowance for Credit
Losses
Estimated
Fair Value
Debt securities available-for-sale:
Corporate bonds
$
157,452 $
1,538 $
526 $
— $
158,464
Trust preferred securities
18,228
57
198
—
18,087
Agency collateralized mortgage obligations
22,058
36
5
—
22,089
Agency mortgage-backed securities
406,741
3,595
209
—
410,127
Agency debentures
8,013
790
—
—
8,803
Total debt securities available-for-sale
$
612,492 $
6,016 $
938 $
— $
617,570
Available-for-sale debt securities are recorded on the statement of financial condition at estimated fair value, which includes allowance for credit losses, if applicable.
December 31, 2020
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Allowance for Credit
Losses (1)
Debt securities held-to-maturity:
Corporate bonds
$
28,672 $
566 $
1 $
29,237
$
79
Agency debentures
48,130
1,051
—
49,181
—
Municipal bonds
6,577
45
—
6,622
—
Non-agency residential mortgage-backed securities
124,152
237
217
124,172
70
Agency mortgage-backed securities
4,309
778
—
5,087
—
Total debt securities held-to-maturity
$
211,840 $
2,677 $
218 $
214,299
$
149
Held-to-maturity debt securities are recorded on the statement of financial condition at amortized cost, net of allowance for credit losses.
The changes in the fair values of our municipal bonds, agency debentures, agency collateralized mortgage obligations and agency mortgage-backed securities are
primarily the result of interest rate fluctuations. To assess for credit impairment on debt securities available-for-sale, management evaluates the underlying issuer’s
financial performance and related credit rating information through a review of publicly available financial statements and other publicly available information.
This most recent assessment for credit impairment did not identify any issues related to the ultimate repayment of principal and interest on these debt securities. In
addition, the Company has the ability and intent to hold debt securities in an unrealized loss position until recovery of their amortized cost. Based on this, no
allowance for credit losses has been recognized on debt securities available-for-sale in an unrealized loss position.
There were $38.7 million of debt securities held-to-maturity that were pledged as collateral for certain deposit relationships as of December 31, 2021.
(1)
(1)
(1)
(1)
(1)
76
The following table sets forth the fair value, contractual maturities and approximated weighted average yield, calculated on a fully taxable equivalent basis, of our
available-for-sale and held-to-maturity debt securities portfolios as of December 31, 2021, based on estimated annual income divided by the average amortized
cost of these securities. Contractual maturities may differ from expected maturities because issuers and/or borrowers may have the right to call or prepay
obligations with or without penalties, which would also impact the corresponding yield.
December 31, 2021
Less Than
One Year
One to
Five Years
Five to
10 Years
Greater Than
10 Years
Total
(Dollars in thousands)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Debt securities available-for-sale:
Corporate bonds
27,536
0.73 %
60,675
1.20 %
57,981
1.60 %
—
— %
146,192
1.27 %
Trust preferred securities
—
— %
—
— %
4,838
1.76 %
8,789
1.90 %
13,627
1.85 %
Non-agency residential mortgage-
backed securities
—
— %
—
— %
—
— %
277,118
2.47 %
277,118
2.47 %
Agency collateralized mortgage
obligations
—
— %
—
— %
—
— %
16,498
0.50 %
16,498
0.50 %
Agency mortgage-backed securities
—
— %
—
— %
—
— %
120,477
2.03 %
120,477
2.03 %
Agency debentures
—
— %
—
— %
—
— %
7,228
3.01 %
7,228
3.01 %
Municipal bonds
—
— %
—
— %
—
— %
5,185
1.71 %
5,185
1.71 %
Total debt securities available-for-sale $
27,536
$
60,675
$
62,819
$
435,295
$
586,325
Weighted average yield
0.73 %
1.20 %
1.62 %
2.26 %
2.02 %
Debt securities held-to-maturity:
U.S. treasury notes
—
— %
—
— %
38,666
1.33 %
—
— %
38,666
1.33 %
Corporate bonds
—
— %
15,556
5.56 %
10,422
4.87 %
—
— %
25,978
5.28 %
Agency debentures
—
— %
—
— %
29,605
1.25 %
7,328
3.09 %
36,933
1.59 %
Municipal bonds
891
2.65 %
—
— %
—
— %
—
— %
891
2.65 %
Non-agency residential mortgage-
backed securities
—
— %
—
— %
—
— %
181,644
2.02 %
181,644
2.02 %
Agency mortgage-backed securities
—
— %
—
— %
15,881
1.90 %
491,969
1.71 %
507,850
1.72 %
Total debt securities held-to-maturity
$
891
$
15,556
$
94,574
$
680,941
$
791,962
Weighted average yield
2.65 %
5.56 %
1.77 %
1.81 %
1.88 %
Total debt securities
$
28,427
$
76,231
$ 157,393
$ 1,116,236
$ 1,378,287
Weighted average yield
0.79 %
2.08 %
1.71 %
1.99 %
1.93 %
The table above excludes equity securities because they have an indefinite life. For additional information regarding our investment securities portfolios, refer to
Note 2, Investment Securities, to our consolidated financial statements.
Deposits
Deposits are our primary source of funds to support our earning assets. We have focused on creating and growing diversified, stable, and lower all-in cost deposit
channels without operating through a traditional branch network. We market liquidity and treasury management products, payment processing products, and other
deposit products to high-net-worth individuals, family offices, trust companies, wealth management firms, municipalities, endowments and foundations, broker-
dealers, futures commission merchants, investment management firms, property management firms, payroll providers and other financial institutions. We believe
that our deposit base is stable and diversified. We further believe we have the ability to attract new deposits, which is the primary source of funding our projected
loan growth. With respect to our treasury management business, we utilize hybrid interest-bearing accounts that provide our clients with certainty around their fee
structures and returns for their total cash position while enhancing our ability to obtain their full liquidity relationship and still meeting our cost of funds
expectations, rather than the more traditional combination of separate non-interest bearing and interest-bearing accounts, that have reduced transparency and
increased client burden.
77
We continue to enhance our liquidity and treasury management capabilities and team to support our efforts to grow this source of funding. Treasury management
deposit accounts totaled $2.86 billion as of December 31, 2021, an increase of $1.40 billion, or 96%, from December 31, 2020.
The table below depicts average balances of, and rates paid on our deposit portfolio broken out by deposit type, for the years ended December 31, 2021, 2020 and
2019.
Years Ended December 31,
2021
2020
2019
(Dollars in thousands)
Average Amount Average Rate Paid
Average Amount Average Rate Paid
Average Amount Average Rate Paid
Interest-bearing checking accounts
$
3,768,446
0.35 %
$
2,407,087
0.60 %
$
1,058,064
2.03 %
Money market deposit accounts
4,735,297
0.49 %
3,812,942
0.92 %
2,943,541
2.36 %
Certificates of deposit
920,820
0.55 %
1,223,631
1.60 %
1,371,038
2.54 %
Total average interest-bearing deposits
9,424,563
0.44 %
7,443,660
0.93 %
5,372,643
2.34 %
Noninterest-bearing deposits
508,404
—
408,313
—
267,846
—
Total average deposits
$
9,932,967
0.42 %
$
7,851,973
0.88 %
$
5,640,489
2.23 %
Average Deposits for the Years Ended December 31, 2021 and 2020. For the year ended December 31, 2021, our average total deposits were $9.93 billion,
representing an increase of $2.08 billion, or 26.5%, from 2020. The average deposit growth was driven by increases in our interest-bearing checking accounts,
money market deposit accounts and our noninterest-bearing deposits. Our average cost of interest-bearing deposits decreased 49 basis points to 0.44% for the year
ended December 31, 2021, from 0.93% in 2020, as average rates paid were lower in all interest-bearing deposit categories, which was largely driven by the
repricing of our deposits as a result of the current interest rate environment. Average money market deposits decreased to 50.2% of total average interest-bearing
deposits for the year ended December 31, 2021, from 51.3% in 2020. Average certificates of deposit decreased to 9.8% of total average interest-bearing deposits
for the year ended December 31, 2021, compared to 16.4% in 2020. Average interest-bearing checking accounts increased to 40.0% of total average interest-
bearing deposits for the year ended December 31, 2021, compared to 32.3% in 2020. Average noninterest-bearing deposits increased 24.5% for the year ended
December 31, 2021, from 2020, and the average cost of total deposits decreased 46 basis points to 0.42% for the year ended December 31, 2021, from 0.88% for
the year ended December 31, 2020.
Average Deposits for the Years Ended December 31, 2020 and 2019. For the year ended December 31, 2020, our average total deposits were $7.85 billion,
representing an increase of $2.21 billion, or 39.2%, from 2019. The average deposit growth was driven by increases in our interest-bearing checking accounts,
money market deposit accounts and our noninterest-bearing deposits. Our average cost of interest-bearing deposits decreased 141 basis points to 0.93% for the year
ended December 31, 2020, from 2.34% in 2019, as average rates paid were lower in all interest-bearing deposit categories, which was driven by the decrease in the
Federal Reserve’s target federal funds rate, which impacted our variable-rate deposits. Average money market deposits decreased to 51.3% of total average
interest-bearing deposits for the year ended December 31, 2020, from 54.8% in 2019. Average certificates of deposit decreased to 16.4% of total average interest-
bearing deposits for the year ended December 31, 2020, compared to 25.5% in 2019. Average interest-bearing checking accounts increased to 32.3% of total
average interest-bearing deposits for the year ended December 31, 2020, compared to 19.7% in 2019. Average noninterest-bearing deposits increased 52.4% for the
year ended December 31, 2020, from 2019, and the average cost of total deposits decreased 135 basis points to 0.88% for the year ended December 31, 2020, from
2.23% for the year ended December 31, 2019.
Uninsured Deposits and Related Information
As of December 31, 2021, we estimate the total value of uninsured deposits to be approximately $5.10 billion.
78
The following table summarizes the aggregate amount of individual certificates of deposit exceeding $250,000 by remaining months to maturity.
December 31,
(Dollars in thousands)
2021
Months to maturity:
Three months or less
$
8,332
Over three to six months
8,557
Over six to 12 months
12,980
Over 12 months
9,519
Total
$
39,388
Reciprocal and Brokered Deposits
As of December 31, 2021, we consider approximately 92% of our total deposits to be relationship-based deposits, which include reciprocal certificates of deposit
placed through CDARS service and reciprocal demand deposits placed through ICS . As of December 31, 2021, the Bank had CDARS and ICS reciprocal
deposits totaling $2.06 billion, which are classified as non-brokered deposits as a result of current legislation. We continue to utilize brokered deposits as a tool for
us to manage our cost of funds and to efficiently match changes in our liquidity needs based on our loan growth with our deposit balances and origination activity.
As of December 31, 2021, brokered deposits were approximately 8% of total deposits. For additional information on our deposits, refer to Note 9, Deposits, to our
consolidated financial statements.
Borrowings
Deposits are the primary source of funds for our lending and investment activities, as well as general business purposes. As an alternative source of liquidity, we
may obtain advances from the Federal Home Loan Bank of Pittsburgh, sell investment securities subject to our obligation to repurchase them, purchase federal
funds or engage in overnight borrowings from the FHLB or our correspondent banks.
On December 15, 2021, the Company issued a senior unsecured fixed-to-floating rate note (the “Senior Note”) to Raymond James in the amount of $125 million.
The Senior Note, which matures on December 15, 2024, bears interest at a fixed annual rate of 2.25% from the date of issuance to December 15, 2022, and
thereafter until maturity at a floating annual rate, reset quarterly, equal to the then current three-month Secured Overnight Financing Rate (SOFR). The Senior Note
is not redeemable prior to December 15, 2022. On and after December 15, 2022, the Senior Note is redeemable on any interest payment date at 100% of the
principal amount thereof, plus accrued and unpaid interest to the redemption date.
In 2020, the Company completed underwritten public offerings of subordinated notes due 2030, raising aggregate proceeds of $97.5 million. The subordinated
notes have a term of 10 years at a fixed-to-floating interest rate of 5.75%. The subordinated notes qualify under federal regulatory rules as Tier 2 capital for the
holding company.
The Company may enter into cash flow hedge transactions to hedge the interest paid on its FHLB borrowings at varying rates and maturities. For additional
information on cash flow hedges, refer to Note 17, Derivatives and Hedging Activity, to our consolidated financial statements.
Liquidity
We evaluate liquidity both at the holding company level and at the Bank level. As of December 31, 2021, the Bank and Chartwell represent our only material
assets. Our primary sources of funds at the parent company level are cash on hand, dividends paid to us from Chartwell, availability on our line of credit, and the
net proceeds from the issuance of our debt and/or equity securities. As of December 31, 2021, our primary liquidity needs at the parent company level were the
semi-annual interest payments on our subordinated notes payable, quarterly dividends on our preferred stock, interest payments on our other borrowings and share
repurchases related to the net settlement of equity awards exercised or vested. All other liquidity needs were minimal and related solely to reimbursing the Bank for
management, accounting and financial reporting services provided by Bank personnel. During the year ended December 31, 2021, the parent company paid $7.9
million in dividends on outstanding shares of preferred stock, $2.1 million in connection with our share repurchase and stock cancellation program and $5.8 million
in interest payments on our subordinated notes and other borrowings. During the year ended December 31, 2020, the parent company paid $7.9 million in
dividends on outstanding shares of preferred stock, $6.0 million in connection with shares repurchases and $3.1 million in interest payments on subordinated notes
and other borrowings. We believe that our cash on hand at the parent company level, coupled with the dividend paying capacity of the Bank and Chartwell, were
adequate to fund all foreseeable short-term and long-term parent
®
®
®
®
79
company obligations as of December 31, 2021. In addition, at December 31, 2021, the holding company maintained an unsecured line of credit of $75.0 million
with The Huntington National Bank, of which $75.0 million was available as of that date. On February 18, 2022, the Company renewed its $75 million unsecured
line of credit with The Huntington National Bank which matures on February 18, 2023.
Our primary goal in liquidity management at the Bank level is to satisfy the cash flow requirements of depositors and borrowers, as well as our operating cash
needs. These requirements include the payment of deposits on demand at their contractual maturity, the repayment of borrowings as they mature, the payment of
our ordinary business obligations, the ability to fund new and existing loans and other funding commitments, and the ability to take advantage of new business
opportunities. The ALCO has established an asset/liability management policy designed to achieve and maintain earnings performance consistent with long-term
goals while maintaining acceptable levels of interest rate risk, well capitalized regulatory status and adequate levels of liquidity. The ALCO has also established a
contingency funding plan to address liquidity stress conditions. The ALCO is designated as the body responsible for the monitoring and implementation of these
policies. The ALCO reviews liquidity on a frequent basis and approves significant changes in strategies that affect balance sheet or cash flow positions.
Sources of asset liquidity are cash, interest-earning deposits with other banks, federal funds sold, certain unpledged debt securities, loan repayments (scheduled and
unscheduled), and future earnings. Sources of liability liquidity include a stable deposit base, the ability to renew maturing certificates of deposit, borrowing
availability at the FHLB of Pittsburgh, unsecured lines with other financial institutions, access to reciprocal CDARS and ICS deposits and brokered deposits,
and the ability to raise debt and equity. Customer deposits, which are an important source of liquidity, depend on the confidence of customers in us. Deposits are
supported by our capital position and, up to applicable limits, the protection provided by FDIC insurance.
We measure and monitor liquidity on an ongoing basis, which allows us to more effectively understand and react to trends in our balance sheet. In addition, the
ALCO uses a variety of methods to monitor our liquidity position, including a liquidity gap, which measures potential sources and uses of funds over future
periods. We have established policy guidelines for a variety of liquidity-related performance metrics, such as net loans to deposits, brokered funding composition,
cash to total loans and duration of certificates of deposit, among others, all of which are utilized in measuring and managing our liquidity position. The ALCO also
performs contingency funding and capital stress analyses at least annually to determine our ability to meet potential liquidity and capital needs under various stress
scenarios.
Our strong liquidity position is due to our ability to generate strong growth in deposits, which is evidenced by our ratio of total deposits to total assets of 88.5%,
85.8% and 85.4% as of December 31, 2021, 2020 and 2019, respectively, during a period when our total assets grew from $7.77 billion to $13 billion. Our ratio of
average deposits to total average assets increased to 87.9% for the year ended December 31, 2021, from 86.0% from the same period in 2020. As of December 31,
2021, we had available liquidity of $2.58 billion, or 19.9% of total assets. These sources consisted of available cash and cash equivalents totaling $380.5 million, or
2.9% of total assets, certain unpledged investment securities of $1.32 billion, or 10.1% of total assets, and the ability to borrow from the FHLB and correspondent
bank lines totaling $885.7 million, or 6.8% of total assets. Available cash excludes pledged accounts for derivative and letter of credit transactions and the reserve
balance requirement at the Federal Reserve.
The following table shows our available liquidity, by source, as of the dates indicated:
December 31,
(Dollars in thousands)
2021
2020
2019
Available cash
$
380,489 $
271,090 $
167,695
Certain unpledged investment securities
1,317,727
793,658
400,222
Net borrowing capacity
885,652
704,082
569,132
Total liquidity
$
2,583,868 $
1,768,830 $
1,137,049
For the year ended December 31, 2021, we generated $105.7 million in cash from operating activities, compared to $87.2 million in 2020. This change in cash flow
was primarily the result of an increase in net income of $32.8 million for the year ended December 31, 2021, partially offset by changes in working capital items
largely related to timing.
Investing activities resulted in a net cash outflow of $3.17 billion for the year ended December 31, 2021, as compared to a net cash outflow of $2.04 billion in
2020. The outflows for the year ended December 31, 2021, were primarily due to $2.54 billion in net loan growth and $1.15 billion for the purchase of investment
securities, partially offset by proceeds from the sale, principal repayments and maturities of investments securities of $568.9 million. The outflows for the year
ended December 31, 2020, were primarily due to $1.67 billion in net loan growth and the purchase of investment securities of $1.02 billion, partially offset by
proceeds from the sale, principal repayments and maturities of investments securities of $635.8 million.
®
®
80
Financing activities resulted in a net inflow of $3.08 billion for the year ended December 31, 2021, compared to a net inflow of $1.99 billion in 2020, primarily as
a result of the net growth in deposits of $3.02 billion, and net proceeds from the issuance senior notes payable of $124.5 million partially offset by a net decrease of
$50.0 million in FHLB advances. The net inflow for the year ended December 31, 2020 consisted of net growth of $1.85 billion in deposits and the net proceeds
from the issuance of stock of $100.0 million from our private placement, and $95.3 million in net proceeds from the issuance of subordinated notes payable,
partially offset by a decrease in FHLB advances of $55 million.
We believe that the Bank’s sources of liquidity are adequate to fund all foreseeable short-term and long-term obligations as of December 31, 2021. We continue to
evaluate the potential impact on liquidity management of various regulatory proposals, including those being established under the Dodd-Frank Wall Street Reform
and Consumer Protection Act, as government regulators continue the final rule-making process.
Capital Resources
The access to and cost of funding for new business initiatives, the ability to engage in expanded business activities, the ability to pay dividends, the level of deposit
insurance costs and the level and nature of regulatory oversight depend, in part, on our capital position.
The assessment of capital adequacy depends on a number of factors, including asset quality, liquidity, earnings performance, changing competitive conditions and
economic forces. We seek to maintain a strong capital base to support our growth and expansion activities, to provide stability to current operations and to promote
public confidence in our Company.
Shareholders’ Equity. Shareholders’ equity increased to $836.7 million as of December 31, 2021, compared to $757.1 million as of December 31, 2020. The $79.6
million increase during the year ended December 31, 2021, was primarily attributable to net income of $78.1 million and the impact of $11.0 million in stock-
based compensation, partially offset by preferred stock cash dividends declared of $7.9, and the purchase of $2.1 million in treasury stock.
Shareholders’ equity increased to $757.1 million as of December 31, 2020, compared to $621.3 million as of December 31, 2019. The $135.9 million increase
during the year ended December 31, 2020, was primarily attributable to the issuance of $100.0 million in stock, net income of $45.2 million and the impact of $9.5
million in stock-based compensation, partially offset by preferred stock dividends declared of $7.9 million, a decrease of $3.8 million in accumulated other
comprehensive income, the purchase of $3.6 million in treasury stock, $2.5 million in cancellation of stock options and $1.7 million related to our adoption of
CECL on December 31, 2020.
On December 30, 2020, the Company completed the private placement of securities pursuant to an Investment Agreement, dated October 10, 2020 and amended
December 9, 2020, with T-VIII PubOpps LP (“T-VIII PubOpps”), an affiliate of investment funds managed by Stone Point Capital LLC. Pursuant to the
Investment Agreement, the Company sold to T-VIII PubOpps (i) 2,770,083 shares of voting common stock for $40.0 million, (ii) 650 shares of Series C Preferred
Stock for $65.0 million, and (iii) warrants to purchase up to 922,438 shares of voting common stock, or a future series of non-voting common stock at an exercise
price of $17.50 per share. After two years, the Series C Preferred Stock is convertible into shares of a future series of non-voting common stock or, when
transferred under certain limited circumstances to a holder other than an affiliate of Stone Point Capital LLC, voting common stock, at a price of $13.75 per share.
The Series C Preferred Stock has a liquidation preference of $100,000 per share, and is entitled to receive, when, as and if declared by the board of directors of the
Company, dividends at a rate of 6.75% per annum for each quarterly dividend period, payable in arrears in cash or additional shares of Series C Preferred Stock.
The Company has the right to effect a mandatory conversion of the Series C Preferred Stock held by T-VIII PubOpps into shares of non-voting common stock
following the three year anniversary of the closing of the investment subject to certain conditions.
The Company received gross proceeds of $105.0 million at the closing of the private placement, and may receive up to an additional $16.1 million if the warrants
are exercised in full. The net proceeds have been recorded to shareholders’ equity at December 31, 2020, and allocated to the three equity instruments issued using
the relative fair value method applied to the common stock, preferred stock, and the warrants issued, which were recorded to additional paid-in capital. The net
proceeds provide Tier 1 capital for the holding company under federal regulatory capital rules.
In May 2019, the Company completed a registered, underwritten public offering of 3.2 million depositary shares, each representing a 1/40th interest in a share of
Series B Preferred Stock, with a liquidation preference of $1,000 per share (equivalent to $25 per depository share). The Company received net proceeds of $77.6
million from the sale of 80,500 shares of its Series B Preferred Stock (equivalent to 3.2 million depositary shares), after deducting underwriting discounts,
commissions and direct offering expenses. Our Series B Preferred Stock constitutes Tier 1 capital for the holding company under federal regulatory capital rules.
When, as, and if declared by the board of directors of the Company, dividends will be payable on the Series B Preferred Stock from the date of issuance to, but
excluding July 1, 2026, at a rate of 6.375% per annum, payable quarterly, in arrears, and from and including July 1, 2026, dividends will accrue and be payable at a
floating rate equal to three-month LIBOR plus a spread of 408.8 basis points per annum (subject to potential adjustment as provided in the definition of three-
month LIBOR), payable quarterly, in
81
arrears. The Company may redeem the Series B Preferred Stock at its option, subject to regulatory approval, on or after July 1, 2024, as described in the prospectus
supplement relating to the offering filed with the SEC on May 23, 2019.
In March 2018, the Company completed the issuance and sale of a registered, underwritten public offering of 1.6 million depositary shares, each representing a
1/40th interest in a share of Series A Preferred Stock, with a liquidation preference of $1,000 per share (equivalent to $25 per depository share). The Company
received net proceeds of $38.5 million from the sale of 40,250 shares of its Series A Preferred Stock (equivalent to 1.6 million depositary shares), after deducting
underwriting discounts, commissions and direct offering expenses. The preferred stock provides Tier 1 capital for the holding company under federal regulatory
capital rules.
When, as, and if declared by the board of directors of the Company, dividends will be payable on the Series A Preferred Stock from the date of issuance to, but
excluding April 1, 2023, at a rate of 6.75% per annum, payable quarterly, in arrears, and from and including April 1, 2023, dividends will accrue and be payable at
a floating rate equal to three-month LIBOR plus a spread of 398.5 basis points per annum, payable quarterly, in arrears. The Company may redeem the Series A
Preferred Stock at its option, subject to regulatory approval, on or after April 1, 2023, as described in the prospectus supplement relating to the offering filed with
the SEC on March 19, 2018.
Regulatory Capital. As of December 31, 2021 and 2020, TriState Capital Holdings, Inc. and TriState Capital Bank were in compliance with all applicable
regulatory capital requirements, and TriState Capital Bank was categorized as well capitalized for purposes of the FDIC’s prompt corrective action regulations. As
we employ our capital and continue to grow our operations, our regulatory capital levels may decrease. However, we will monitor our capital in order to remain
categorized as well capitalized under the applicable regulatory guidelines and in compliance with all regulatory capital standards applicable to us. As of
December 31, 2021 and 2020, the capital conservation buffer requirement was 2.5%, in addition to the minimum risk based capital adequacy levels shown in the
tables below. Both the Company and the Bank were above the levels required to avoid limitations on capital distributions and discretionary bonus payments.
In 2020, U.S. federal regulatory authorities issued a final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option
to delay the impact of CECL on regulatory capital for up to two years, beginning January 1, 2020, followed by a three-year transition period. As the Company
adopted CECL on December 31, 2020, the Company elected to utilize the remainder of the two-year delay of CECL’s impact on its regulatory capital, from
December 31, 2020 through December 31, 2021, followed by the three-year transition period of CECL impact on regulatory capital, from January 1, 2022 through
December 31, 2024.
The following tables present the actual capital amounts and regulatory capital ratios for the Company and the Bank as of the dates indicated:
December 31, 2021
Actual
For Capital Adequacy Purposes
To be Well Capitalized Under
Prompt Corrective Action
Provisions
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital ratio
Company
$
910,320
13.43 %
$
542,409
8.00 %
N/A
N/A
Bank
$
986,657
14.60 %
$
540,639
8.00 %
$
675,798
10.00 %
Tier 1 risk-based capital ratio
Company
$
788,910
11.64 %
$
406,807
6.00 %
N/A
N/A
Bank
$
960,955
14.22 %
$
405,479
6.00 %
$
540,639
8.00 %
Common equity tier 1 risk-based capital ratio
Company
$
607,367
8.96 %
$
305,105
4.50 %
N/A
N/A
Bank
$
960,955
14.22 %
$
304,109
4.50 %
$
439,269
6.50 %
Tier 1 leverage ratio
Company
$
788,910
6.36 %
$
496,431
4.00 %
N/A
N/A
Bank
$
960,955
7.76 %
$
495,417
4.00 %
$
619,271
5.00 %
82
December 31, 2020
Actual
For Capital Adequacy Purposes
To be Well Capitalized Under
Prompt Corrective Action
Provisions
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital ratio
Company
$
833,819
14.12 %
$
472,267
8.00 %
N/A
N/A
Bank
$
789,273
13.41 %
$
470,820
8.00 %
$
588,525
10.00 %
Tier 1 risk-based capital ratio
Company
$
707,711
11.99 %
$
354,200
6.00 %
N/A
N/A
Bank
$
758,658
12.89 %
$
353,115
6.00 %
$
470,820
8.00 %
Common equity tier 1 risk-based capital ratio
Company
$
530,568
8.99 %
$
265,650
4.50 %
N/A
N/A
Bank
$
758,658
12.89 %
$
264,836
4.50 %
$
382,542
6.50 %
Tier 1 leverage ratio
Company
$
707,711
7.29 %
$
388,408
4.00 %
N/A
N/A
Bank
$
758,658
7.83 %
$
387,626
4.00 %
$
484,533
5.00 %
Contractual Obligations and Commitments
The following table presents significant fixed and determinable contractual obligations that may require future cash payments as of the date indicated.
December 31, 2021
(Dollars in thousands)
One Year
or Less
One to
Three Years
Three to
Five Years
Greater than
Five Years
Total
Transaction deposits
$
10,651,872 $
75,000 $
— $
— $
10,726,872
Certificates of deposit
693,339
84,178
—
—
777,517
Borrowings outstanding
250,000
125,000
—
97,500
472,500
Total contractual obligations
$
11,595,211 $
284,178 $
— $
97,500 $
11,976,889
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various transactions that are not included in our consolidated balance sheet in accordance with GAAP. These
transactions include commitments to extend credit in the ordinary course of business to approved customers.
Unfunded loan commitments and demand line of credit availability, including standby letters of credit, are recorded on our statement of financial condition as they
are funded. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Our measure of unfunded loan
commitments and demand line of credit availability include unused availability under demand loans for our private banking lines secured by cash, marketable
securities and/or cash value life insurance, as well as commitments to fund loans secured by residential properties, commercial real estate, construction loans,
business lines of credit and other unused commitments of loans in various stages of funding. Not all commitments will fund or fully fund as customers often only
draw on a portion of their available credit and we continuously monitor utilization of our unfunded lines of credit and on both commercial and private banking
loans. We believe that we maintain sufficient liquidity or otherwise have the ability to generate the liquidity necessary to fund anticipated draws under unused loan
commitments and demand lines of credit.
Standby letters of credit are written conditional commitments issued by us to guarantee the performance of our customer to a third party. In the event our customer
does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential
amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be
entitled to seek recovery from the customer.
We minimize our exposure to loss under loan commitments and standby letters of credit and unfunded demand lines of credit by subjecting them to credit approval
and monitoring procedures. The effect on our revenues, expenses, cash flows and liquidity of the unused portions of these commitments cannot be reasonably
predicted because, while the borrower has the ability to draw upon these
83
commitments at any time under certain contractual agreements, these commitments often expire without being drawn. There is no guarantee that the lines of credit
will be used.
The following table is a summary of the total notional amount of unused loan commitments and demand lines of credit availability as well as standby letters of
credit commitments, based on the availability of eligible collateral or other terms under the loan agreement, by contractual maturities as of the date indicated.
December 31, 2021
(Dollars in thousands)
Due on Demand
One Year
or Less
One to
Three Years
Three to
Five Years
Greater than
Five Years
Total
Unused loan commitments and demand lines of credit
$
9,205,062 $
664,226 $
562,230 $
227,921 $
23,207 $
10,682,646
Standby letters of credit
700
37,398
20,180
2,559
—
60,837
Total off-balance sheet arrangements
$
9,205,762 $
701,624 $
582,410 $
230,480 $
23,207 $
10,743,483
Market Risk
Market risk refers to potential losses arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices. Our primary component of
market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact the level of both income and expense recorded on most of our assets and
liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those that have a short term to maturity. Because of the
nature of our operations, we are not subject to foreign exchange or commodity price risk. From time to time we hold market risk sensitive instruments for trading
purposes. The summary information provided in this section should be read in conjunction with our consolidated financial statements and related notes.
Interest rate risk is comprised of re-pricing risk, basis risk, yield curve risk and option risk. Re-pricing risk arises from differences in the cash flow or re-pricing
between asset and liability portfolios. Basis risk arises when asset and liability portfolios are related to different market rate indexes, which do not always change
by the same amount or at the same time. Yield curve risk arises when asset and liability portfolios are related to different maturities on a given yield curve; when
the yield curve changes shape, the risk position is altered. Option risk arises from embedded options within asset and liability products as certain borrowers may
prepay their loans and certain depositors may redeem their certificates when rates change.
Our ALCO actively measures and manages interest rate risk. The ALCO is responsible for the formulation and implementation of strategies to improve balance
sheet positioning and earnings, and for reviewing our interest rate sensitivity position. This involves devising policy guidelines, risk measures and limits, and
managing the amount of interest rate risk and its effect on net interest income and capital.
We utilize an asset/liability model to measure and manage interest rate risk. The specific measurement tools used by management on at least a quarterly basis
include net interest income (“NII”) simulation, economic value of equity (“EVE”) and gap analysis. All are static measures that do not incorporate assumptions
regarding future business. All are also measures of interest rate sensitivity used to help us develop strategies for managing exposure to interest rate risk rather than
projecting future earnings.
In our view, all three measures also have specific benefits and shortcomings. NII simulation explicitly measures exposure to earnings from changes in market rates
of interest but does not provide a long-term view of value. EVE helps identify changes in optionality and price over a longer-term horizon, but its liquidation
perspective does not convey the earnings-based measures that are typically the focus of managing and valuing a going concern. Gap analysis compares the
difference between the amount of interest-earning assets and interest-bearing liabilities subject to re-pricing over a period of time but only captures a single rate
environment. Reviewing these various measures collectively helps management obtain a comprehensive view of our interest risk rate profile.
The following NII simulation and EVE analysis metrics were calculated using rate shocks that represent immediate rate changes that move all market rates by the
same amount instantaneously. The variance percentages represent the change between the NII simulation
84
and EVE calculated under the particular rate scenario versus the NII simulation and EVE analysis calculated assuming market rates deemed appropriate as of the
date of this filing. For the purpose of this exercise, it is assumed that rates do not fall below zero.
December 31, 2021
December 31, 2020
(Dollars in thousands)
Amount Change
from
Base Case
Percent Change from
Base Case
Amount Change
from
Base Case
Percent Change from
Base Case
Net interest income (loss):
+300
$
22,018
9.89 %
$
31,178
18.47 %
+200
$
5,305
2.38 %
$
13,176
7.81 %
+100
$
(11,011)
(4.94)%
$
(4,648)
(2.75)%
–100
$
(3,091)
(1.39)%
$
(3,041)
(1.80)%
Economic value of equity:
+300
$
(150,086)
(18.84)%
$
(56,573)
(7.66)%
+200
$
(99,276)
(12.46)%
$
(42,325)
(5.73)%
+100
$
(52,222)
(6.56)%
$
(31,120)
(4.22)%
–100
$
85,641
10.75 %
$
14,471
1.96 %
Our means of managing interest rate risk over the longer term include our focus on growing the low-cost deposit balances associated with our treasury management
services, controlled adjustments within our discretionary priced accounts to respond to rising rates, and our future ability to extend duration in liabilities.
Additionally, while we will continue to implement floors on most new loan originations, our pricing strategy has transitioned to emphasizing loan spread as the
primary tool to achieve yield and implementing lower levels of floors, which will reduce our liability sensitivity over time. Given the longer-term nature of the
EVE analysis and the absolute low level of interest rates, we have migrated to a more liability sensitive interest rate risk position when it comes to economic value
of equity. In 2021, we began to incorporate the impact of a pricing lag to certain components of our deposit portfolio as interest rates rise. This methodology
revision was replicated in and applied to our December 31, 2020, interest rate risk analysis to provide a consistent comparison between the two periods. In past
periods, we had incorporated no lag to deposit pricing in rising rate scenarios. The liability sensitivity demonstrated in our NII scenarios extends from the inclusion
of floors in our loans and from the duration in our securities portfolio. We have pursued this strategy because of the material benefit provided by those floors and
that duration in the base case.
85
The following gap analysis presents the amounts of interest-earning assets and interest-bearing liabilities and related cash flow hedging instruments that are subject
to re-pricing within the periods indicated.
December 31, 2021
(Dollars in thousands)
Less Than
90 Days
91 to 180
Days
181 to 365
Days
One to Three
Years
Three to Five
Years
Greater Than
Five Years
Non-Sensitive
Total Balance
Assets:
Interest-earning deposits
$
449,302
$
—
$
—
$
—
$
—
$
—
$
—
$
449,302
Federal funds sold
2,374
—
—
—
—
—
—
2,374
Total investment securities
218,494
64,219
74,993
282,579
205,656
562,970
(3,233)
1,405,678
Total loans
10,259,460
71,198
88,167
236,721
70,080
25,359
12,339
10,763,324
Other assets
—
—
—
—
—
—
384,174
384,174
Total assets
$
10,929,630
$
135,417
$
163,160
$
519,300
$
275,736
$
588,329
$
393,280
$
13,004,852
Liabilities:
Transaction deposits
$
9,500,772
$
40,938
$
333,906
$
75,000
$
—
$
—
$
776,256
$
10,726,872
Certificates of deposit
321,072
136,968
235,299
84,178
—
—
—
777,517
Borrowings, net
—
50,000
124,455
100,000
195,708
—
—
470,163
Other liabilities
—
—
—
—
—
—
193,578
193,578
Total liabilities
9,821,844
227,906
693,660
259,178
195,708
—
969,834
12,168,130
Equity
—
—
—
—
—
—
836,722
836,722
Total liabilities and equity
$
9,821,844
$
227,906
$
693,660
$
259,178
$
195,708
$
—
$
1,806,556
$
13,004,852
Interest rate sensitivity gap
$
1,107,786
$
(92,489)
$
(530,500)
$
260,122
$
80,028
$
588,329
$
(1,413,276)
Cumulative interest rate
sensitivity gap
$
1,107,786
$
1,015,297
$
484,797
$
744,919
$
824,947
$
1,413,276
Cumulative interest rate
sensitive assets to rate
sensitive liabilities
111.3 %
110.1 %
104.5 %
106.8 %
107.4 %
112.6 %
106.9 %
Cumulative gap to total assets
8.5 %
7.8 %
3.7 %
5.7 %
6.3 %
10.9 %
The cumulative 12-month ratio of interest rate sensitive assets to interest rate sensitive liabilities decreased to 104.5% as of December 31, 2021, as compared to
116.9% as of December 31, 2020.
In 2020 and 2019, the Company entered into cash flow hedge transactions to fix the interest rate on certain of the Company’s borrowings for varying periods of
time. During the life of these transactions, they have the effect on our gap analysis of moving $250.0 million of borrowings from the less than 90 days re-pricing
category to the three months and longer re-pricing categories. Of the $250.0 million, $50.0 million was moved to the 181 to 365 days re-pricing category, $100.0
million was moved to the one to three years re-pricing category and $100.0 million to the three to five years re-pricing category. For additional information on cash
flow hedges, refer to Note 17, Derivatives and Hedging Activity, to our consolidated financial statements. In our gap analysis, the allocation of non-maturity,
interest-bearing deposits is fully reflected in the less than 90 days re-pricing category. The allocation of non-maturity, noninterest-bearing deposits is fully reflected
in the non-sensitive category.
Application of Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in
accordance with 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 affect the reported amounts of certain assets and liabilities, disclosure of contingent assets and liabilities and the
reported amount of related revenues and expenses. Although our current estimates contemplate current conditions and how we expect them to change in the future,
it is reasonably possible that actual conditions could be worse than anticipated in those estimates, which could materially affect the financial results of our
operations and financial condition.
86
Our most significant accounting policies are presented in Part II, Item 8, Note 1, Summary of Significant Accounting Policies, in this Report. These policies, along
with the disclosures presented in the Notes to Consolidated Financial Statements, provide information on how significant assets and liabilities are valued in the
Consolidated Financial Statements and how those values are determined.
Certain accounting policies are based inherently to a greater extent on estimates, assumptions and judgments of management and, as such, have a greater possibility
of producing results that could be materially different than originally reported. Management views critical accounting estimates to be those which are highly
dependent on subjective or complex judgments, and assumptions and where changes in those estimates and assumptions could have a significant impact on our
consolidated financial statements. Management currently views the following accounting policies as involving critical accounting estimates: allowance for credit
losses on loans and leases and income taxes.
Allowance for Credit Losses on Loans and Leases. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans
and leases to present management’s best estimate of the net amount expected to be collected. Adjustments to the allowance for credit losses are established through
provisions for credit losses that are recorded in the consolidated statements of income. Loans and leases are charged off against the allowance for credit losses
when management believes that the principal is uncollectible. If, at a later time, amounts are recovered with respect to loans and leases previously charged off, the
recovered amount is credited to allowance for credit losses. Accrued interest receivable is excluded from the estimate of expected credit losses.
The allowance for credit losses represent estimates of expected credit losses for homogeneous loan pools that share similar risk characteristics such as commercial
and industrial loans and leases, commercial real estate loans, and private banking loans which include consumer lines of credit and residential mortgages. The
Company periodically reassesses each loan pool to ensure that the loans within the pool continue to share similar risk characteristics. Non-accrual loans and loans
designated as TDRs, are assessed individually using a discounted cash flows method or, where a loan is collateral dependent, based upon the fair value of the
collateral less estimated selling costs.
The collateral on our private banking loans that are secured by cash, marketable securities and/or cash value life insurance are monitored daily and requires
borrowers to continually replenish collateral as a result of fair value changes. Therefore, it is expected that the fair value of the collateral value securing each loan
will exceed the loan’s amortized cost basis and no allowance for the off-balance sheet exposure would be required under Accounting Standard Codification
(“ASC”) ASC 326-20-35-6 “Financial Assets Secured by Collateral Maintenance Provisions.”
In estimating the general allowance for credit losses on loans and leases evaluated on a collective or pool basis, management considers past events, current
conditions, and reasonable and supportable economic forecasts including historical charge-offs and subsequent recoveries. Management also considers qualitative
factors that influence our credit quality, including, but not limited to, delinquency and non-performing loan trends, changes in loan underwriting guidelines and
credit policies, and the results of internal loan reviews. Finally, management considers the impact of changes in current and forecasted local and regional economic
conditions in the markets that we serve.
Management bases the computation of the general allowance for credit losses on two factors: the primary factor and the secondary factor. The primary factor is
based on the inherent risk identified by management within each of the Company’s three loan portfolios based on the historical loss experience of each loan
portfolio. Management has developed a methodology that is applied to each of the three primary loan portfolios: commercial and industrial loans and leases,
commercial real estate loans and private banking loans (other than those secured by cash, marketable securities and/or cash value life insurance).
For each portfolio, management estimates expected credit losses over the life of each loan utilizing lifetime or cumulative loss rate methodology, which identifies
macroeconomic factors and asset-specific characteristics that are correlated with credit loss experience including loan age, loan type, and leverage. The lifetime
loss rate is applied to the amortized cost of the loan. This methodology builds on default and recovery probabilities by utilizing pool-specific historical loss rates to
calculate expected credit losses. These pool-specific historical loss rates may be adjusted for a forecast of certain macroeconomic variables, as further discussed
below, and other factors such as differences in underwriting standards, portfolio mix, or when historical asset terms do not reflect the contractual terms of the
financial assets being evaluated as of the measurement date. Each time the Company measures expected credit losses, the Company assesses the relevancy of
historical loss information and considers any necessary adjustments to address any differences in asset-specific characteristics.
The allowance represents management’s current estimate of expected credit losses in the loan and lease portfolio. Expected credit losses are estimated over the
contractual term of the loans, which includes extension or renewal options that are not unconditionally cancellable by the Company and are adjusted for expected
prepayments when appropriate. Management’s judgment takes into consideration past events, current conditions and reasonable and supportable economic
forecasts including general economic conditions, diversification and seasoning of the loan portfolio, historic loss experience, identified credit problems,
delinquency levels
87
and adequacy of collateral. Although management believes it has used the best information available in making such determinations, and that the present allowance
for credit losses represents management’s best estimate of current expected credit losses, future adjustments to the allowance may be necessary, and net income
may be adversely affected if circumstances differ substantially from the assumptions used in determining the level of the allowance.
The lifetime loss rates are estimated by analyzing a combination of internal and external data related to historical performance of each loan pool over a complete
economic cycle. Loss rates are based on historical averages for each loan pool, adjusted to reflect the impact of a single, forward-looking forecast of certain
macroeconomic variables such as gross domestic product (“GDP”), unemployment rates, corporate bond credit spreads and commercial property values, which
management considers to be both reasonable and supportable. The single, forward-looking forecast of these macroeconomic variables is applied over the remaining
life of the loan pools. The development of the reasonable and supportable forecast incorporates an assumption that each macroeconomic variable will revert to a
long-term expectation starting in years two to four of the forecast and largely completing within the first five years of the forecast.
The secondary factor is intended to capture additional risks related to events and circumstances that management believes have an impact on the performance of
the loan portfolio that are not considered as part of the primary factor. Although this factor is more subjective in nature, the methodology focuses on internal and
external trends in pre-specified categories, or risk factors, and applies a quantitative percentage that drives the secondary factor. Nine risk factors have been
identified and each risk factor is assigned an allowance level based on management’s judgment as to the expected impact of each risk factor on each loan portfolio
and is monitored on a quarterly basis. As the trend in any risk factor changes, management evaluates the need for a corresponding change to occur in the allowance
associated with each respective risk factor to provide the most appropriate estimate of allowance for credit losses on loan and lease losses.
The Company also maintains an allowance for credit losses on off-balance sheet credit exposures for unfunded loan commitments. This allowance is reflected as a
component of other liabilities which represents management’s current estimate of expected losses in the unfunded loan commitments. The estimate includes
consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life
based on management’s consideration of past events, current conditions and reasonable and supportable economic forecasts. Management tracks the level and
trends in unused commitments and takes into consideration the same factors as those considered for purposes of the allowance for credit losses on outstanding
loans. Unconditionally cancellable loans are excluded from the calculation of allowance for credit losses on off-balance sheet credit exposures.
In 2020, the Company adopted CECL via cumulative effect adjustment (net of tax) by recording a net decrease to retained earnings of $1.7 million as of January 1,
2020. Results for the years ended December 31, 2021 and 2020 are presented under CECL methodology while amounts prior to January 1, 2020 continue to be
reported in accordance with ASC Topic 450, Contingencies; and specific reserves based upon ASC Topic 310, Receivables. ASC Topic 450 applies to
homogeneous loan pools such as commercial loans, consumer lines of credit and residential mortgages that are not individually evaluated for impairment. ASC
Topic 310 is applied to commercial and consumer loans that are individually evaluated for impairment.
Income Taxes. The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the tax effects of differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured
using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities with regard to a change in tax rates is recognized in income in the period that includes the enactment date. Management
assesses all available evidence to determine the amount of deferred tax assets that are more likely than not to be realized. The available evidence used in
connection with the assessments includes taxable income in prior periods, projected taxable income, potential tax planning strategies and projected reversals of
deferred tax items. These assessments involve a degree of subjectivity and may undergo significant change. Changes to the evidence used in the assessments could
have a material adverse effect on the Company’s results of operations in the period in which they occur. The Company considers uncertain tax positions that it has
taken or expects to take on a tax return. Any interest and penalties related to unrecognized tax benefits would be recognized in income tax expense in the
consolidated statements of income.
Recent Accounting Pronouncements and Developments for Adoption
We do not believe the adoption of any recent accounting pronouncements will have a material impact on the Company. Please see Note 1, Summary of
Significant Accounting Policies, in the Notes to the Consolidated Financial Statements, which is included in Part II, Item 8 of this Report, for additional
information.
88
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are presented under the caption “Market Risk” in Part II, Item 7, of this Annual Report on Form 10-K.
89
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm (KPMG LLP, Pittsburgh, PA, Auditor Firm ID: 185)
91
Consolidated Statements of Financial Condition
94
Consolidated Statements of Income
95
Consolidated Statements of Comprehensive Income
96
Consolidated Statements of Changes in Shareholders' Equity
97
Consolidated Statements of Cash Flows
98
Notes to Consolidated Financial Statements
100
90
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
TriState Capital Holdings, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of TriState Capital Holdings, Inc and subsidiaries (the Company) as of
December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of
the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results
of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal
control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2022 expressed an unqualified opinion on the effectiveness
of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit
losses as of December 31, 2020 and has applied it retroactively to January 1, 2020 due to the adoption of ASU 2016-13, Measurement of Credit Losses on
Financial Instruments.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical
audit matter or on the accounts or disclosures to which it relates.
Allowance for credit losses for loans evaluated on a collective basis
As discussed in notes 1 and 5 to the consolidated financial statements, the Company’s allowance for credit losses on loans and leases was $28.6 million as of
December 31, 2021, a portion of which includes the commercial real estate and commercial and industrial loan portfolios. The allowance for credit losses for these
loan portfolios includes the estimate of expected credit losses on a collective basis for those homogeneous loans that share similar risk characteristics (the
collective ACL). The Company estimated the collective ACL
91
using a current expected credit losses methodology which is based on past events, current conditions, and a reasonable and supportable economic forecast. For each
portfolio, the Company uses lifetime loss rate models which identify macroeconomic factors and asset-specific characteristics that are correlated with credit loss
experience including loan age, loan type, leverage, risk rating, interest rate spread and industry. The lifetime loss rate is applied to the amortized cost of the loan to
estimate the collective ACL over the contractual term of the loan, which includes extension or renewal options that are not unconditionally cancellable by the
Company and are adjusted for expected prepayments when appropriate. The lifetime loss rates are estimated by analyzing a combination of internal and external
data related to historical performance over a complete economic cycle that is adjusted to reflect the impact of a forward-looking forecast of certain macroeconomic
variables. The forward-looking forecast of these macroeconomic variables is applied over the remaining life of the loan segments. The development of the
reasonable and supportable forecast incorporates an assumption that each macroeconomic variable will revert to a long-term expectation starting in years two to
four of the forecast and largely completing within the first five years of the forecast. A portion of the collective ACL is comprised of adjustments to historical loss
rates for asset-specific risk characteristics and to reflect the extent to which the Company expects current or expected conditions to differ from the conditions that
existed in the historical loss information evaluated. These adjustments are based on qualitative factors not reflected in the lifetime loss rate models but which
impact the measurement of estimated credit losses.
We identified the assessment of the collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and
subjective and complex auditor judgment was involved in the assessment of the estimation of the collective ACL due to the significant measurement uncertainty.
Specifically, the assessment encompassed the evaluation of the collective ACL methodology, including the models used to estimate: (1) the lifetime loss rates, and
their significant assumptions, including the selection of the forward-looking forecast of certain macroeconomic variables, the reasonable and supportable forecast
period, and the internal and external historical loss data; and (2) the qualitative factors and their significant assumptions, including adjustments to account for
current and expected conditions. The assessment also included an evaluation of the conceptual soundness and performance of the lifetime loss rate models. In
addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of
certain internal controls related to the Company’s measurement of the collective ACL estimate, including controls over the:
–
Development of the collective ACL methodology
–
Continued use and conceptual soundness of the loss rate models
–
Performance monitoring of the loss rate models
–
Determination and measurement of the significant assumptions used in the loss rate models
–
Determination of the qualitative factors, including the significant assumptions used in the measurement of the qualitative factors
–
Analysis of the collective ACL results, trends, and ratios.
We evaluated the Company’s process to develop the collective ACL estimate by testing certain sources of data, factors, and assumptions that the Company used
and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and
knowledge, who assisted in:
–
Evaluating the Company’s collective ACL methodology for compliance with U.S. generally accepted accounting principles
–
Evaluating judgments made by the Company relative to the assessment and performance testing of the loss rate models by comparing them to relevant
Company-specific metrics and trends and the applicable industry and regulatory practices
–
Assessing the conceptual soundness and performance testing of the loss rate models by inspecting the model documentation to determine whether the
models are suitable for their intended use
–
Evaluating the methodology used to develop the forward-looking forecast of certain macroeconomic variables and underlying assumptions by comparing
it to the Company’s business environment and relevant industry practices
–
Testing the historical loss rate information and reasonable and supportable forecast periods to evaluate the length of each period by comparing to specific
portfolio risk characteristics, trends, and macroeconomic forecast trends
–
Evaluating the methodology used to develop the qualitative factors and the effect of those factors on the collective ACL compared with relevant credit
risk factors and consistency with credit trends.
92
We also evaluated the sufficiency of the audit evidence obtained related to the collective ACL estimate by evaluating the cumulative results of the audit
procedures, qualitative aspects of the Company’s accounting practices, and potential bias in the accounting estimates.
/s/ KPMG LLP
We have served as the Company’s auditor since 2007.
Pittsburgh, Pennsylvania
March 1, 2022
93
TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
December 31,
2021
December 31,
2020
ASSETS
Cash
$
340 $
341
Interest-earning deposits with other institutions
449,302
429,639
Federal funds sold
2,374
5,462
Cash and cash equivalents
452,016
435,442
Debt securities available-for-sale, at fair value
586,325
617,570
Debt securities held-to-maturity, at amortized cost, net
802,576
211,691
Equity securities, at fair value
4,975
—
Federal Home Loan Bank stock
11,802
13,284
Total investment securities
1,405,678
842,545
Loans and leases held-for-investment
10,763,324
8,237,418
Allowance for credit losses on loans and leases
(28,563)
(34,630)
Loans and leases held-for-investment, net
10,734,761
8,202,788
Accrued interest receivable
25,060
18,783
Investment management fees receivable, net
8,641
7,935
Goodwill and other intangibles, net of accumulated amortization
62,000
63,911
Office properties and equipment, net of accumulated depreciation
19,833
12,369
Operating lease right-of-use asset
35,116
21,294
Bank owned life insurance
98,928
71,787
Prepaid expenses and other assets
162,819
219,962
Total assets
$
13,004,852 $
9,896,816
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits
$
11,504,389 $
8,489,089
Borrowings, net
470,163
400,493
Accrued interest payable on deposits and borrowings
1,841
3,057
Deferred tax liability, net
6,326
5,676
Operating lease liability
36,937
22,958
Other accrued expenses and other liabilities
148,474
218,398
Total liabilities
12,168,130
9,139,671
Shareholders’ Equity:
Preferred stock, no par value; Shares authorized - 150,000;
Series A Shares issued and outstanding - 40,250 and 40,250, respectively
38,468
38,468
Series B Shares issued and outstanding - 80,500 and 80,500, respectively
77,611
77,611
Series C Shares issued and outstanding - 683 and 650, respectively
65,465
61,064
Common stock, voting, no par value; Shares authorized - 51,653,347;
Shares issued - 35,665,531 and 34,919,572, respectively;
Shares outstanding - 33,263,498 and 32,620,150, respectively
334,566
331,098
Common stock non-voting, no par value; Shares authorized - 6,653,347;
Shares issued - none
—
—
Additional paid-in capital
42,655
33,824
Retained earnings
319,766
254,054
Accumulated other comprehensive income (loss), net
(3,424)
(2,697)
Treasury stock (2,402,033 and 2,299,422 shares, respectively)
(38,385)
(36,277)
Total shareholders’ equity
836,722
757,145
Total liabilities and shareholders’ equity
$
13,004,852 $
9,896,816
See accompanying notes to consolidated financial statements.
94
TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(Dollars in thousands, except per share data)
2021
2020
2019
Interest income:
Loans and leases
$
215,186 $
200,839 $
239,328
Investments
15,529
14,032
16,324
Interest-earning deposits
582
2,224
6,795
Total interest income
231,297
217,095
262,447
Interest expense:
Deposits
41,504
69,202
125,592
Borrowings
10,434
9,949
9,798
Total interest expense
51,938
79,151
135,390
Net interest income
179,359
137,944
127,057
Provision:
Provision (credit) for credit losses
808
19,400
(968)
Net interest income after provision for credit losses
178,551
118,544
128,025
Non-interest income:
Investment management fees
37,454
32,035
36,442
Service charges on deposits
1,407
1,072
559
Net gain on the sale and call of debt securities
242
3,948
416
Swap fees
14,091
16,274
11,029
Commitment and other loan fees
2,448
1,715
1,788
Bank owned life insurance income
2,142
1,742
1,736
Other income
862
419
812
Total non-interest income
58,646
57,205
52,782
Non-interest expense:
Compensation and employee benefits
84,599
71,197
69,176
Premises and equipment expense
5,837
5,875
5,458
Professional fees
10,820
6,201
6,188
FDIC insurance expense
5,080
9,680
5,292
General insurance expense
1,370
1,142
1,097
State capital shares tax
2,911
1,720
420
Travel and entertainment expense
2,634
2,423
4,620
Technology and data services
14,819
10,803
8,520
Intangible amortization expense
1,911
1,944
2,009
Marketing and advertising
3,624
2,402
2,263
Other operating expenses
12,889
9,716
7,106
Total non-interest expense
146,494
123,103
112,149
Income before tax
90,703
52,646
68,658
Income tax expense
12,643
7,412
8,465
Net income
$
78,060 $
45,234 $
60,193
Preferred stock dividends
12,348
7,873
5,753
Net income available to common shareholders
$
65,712 $
37,361 $
54,440
Earnings per common share:
Basic
$
1.77 $
1.32 $
1.95
Diluted
$
1.71 $
1.30 $
1.89
See accompanying notes to consolidated financial statements.
95
TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Net income
$
78,060 $
45,234 $
60,193
Other comprehensive income (loss):
Unrealized holding gains (losses) on debt securities, net of tax expense (benefit) of $(1,874), $1,267,
and $1,696, respectively
(6,041)
3,997
5,356
Reclassification adjustment for gains included in net income on debt securities, net of tax expense of
$(56), $(927), and $(76), respectively
(178)
(2,919)
(237)
Unrealized holding gains (losses) on derivatives, net of tax expense (benefit) of $928, $(2,216), and
$(538) , respectively
2,826
(6,981)
(1,701)
Reclassification adjustment for losses (gains) included in net income on derivatives, net of tax benefit
(expense) of $847, $658, and $(304), respectively
2,666
2,074
(955)
Other comprehensive income (loss), net of tax
(727)
(3,829)
2,463
Total comprehensive income
$
77,333 $
41,405 $
62,656
See accompanying notes to consolidated financial statements.
96
TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands)
Preferred
Stock
Common
Stock
Additional
Paid-in-Capital
Retained
Earnings
Accumulated Other
Comprehensive
Income (Loss), Net
Treasury
Stock
Total
Shareholders'
Equity
Balance, December 31, 2018
$
38,468 $
293,355 $
15,364 $
164,009 $
(1,331) $
(30,511) $
479,354
Net income
—
—
—
60,193
—
—
60,193
Other comprehensive income
—
—
—
—
2,463
—
2,463
Issuance of stock (net of offering costs of $2,889)
77,611
—
—
—
—
—
77,611
Preferred stock dividends
—
—
—
(5,753)
—
—
(5,753)
Exercise of stock options
—
1,994
(1,094)
—
—
—
900
Purchase of treasury stock
—
—
—
—
—
(2,312)
(2,312)
Stock-based compensation
—
—
8,825
—
—
—
8,825
Balance, December 31, 2019
$
116,079 $
295,349 $
23,095 $
218,449 $
1,132 $
(32,823) $
621,281
Net income
—
—
—
45,234
—
—
45,234
Impact of adoption of ASU 2014-09
—
—
—
(1,731)
—
—
(1,731)
Other comprehensive loss
—
—
—
—
(3,829)
—
(3,829)
Issuance of stock (net of offering costs of $4,998)
61,064
34,720
4,218
—
—
—
100,002
Preferred stock dividends
—
—
—
(7,873)
—
—
(7,873)
Exercise of stock options
—
1,029
(523)
—
—
—
506
Purchase of treasury stock
—
—
—
—
—
(3,589)
(3,589)
Reissuance of treasury stock
—
—
—
(25)
—
135
110
Cancellation of stock options
—
—
(2,484)
—
—
—
(2,484)
Stock-based compensation
—
—
9,518
—
—
—
9,518
Balance, December 31, 2020
$
177,143 $
331,098 $
33,824 $
254,054 $
(2,697) $
(36,277) $
757,145
Net income
—
—
—
78,060
—
—
78,060
Other comprehensive loss
—
—
—
—
(727)
—
(727)
Preferred stock dividend
4,401
—
—
(12,348)
—
—
(7,947)
Exercise of stock options
—
3,468
(2,195)
—
—
—
1,273
Purchase of treasury stock
—
—
—
—
(2,108)
(2,108)
Stock-based compensation
—
—
11,026
—
—
—
11,026
Balance, December 31, 2021
$
181,544 $
334,566 $
42,655 $
319,766 $
(3,424) $
(38,385) $
836,722
Valuation of the warrants related to the issuance of stock was recorded as a component of additional paid-in capital. For additional information on the issuance of stock, refer to Note 12,
Stock Transactions, to our consolidated financial statements.
See accompanying notes to consolidated financial statements.
(1)
(1)
97
TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Cash flows from operating activities:
Net income
$
78,060 $
45,234 $
60,193
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and intangible amortization expense
4,886
4,209
3,646
Amortization of deferred financing costs
215
143
84
Impairment on historic tax credit investments
5,623
1,801
—
Provision (credit) for credit losses
808
19,400
(968)
Net loss (gain) on the sale of loans and leases
(619)
50
—
Stock-based compensation expense
11,026
9,518
8,825
Net gain on the sale or call of debt securities available-for-sale
(234)
(3,846)
(312)
Net gain on the call of debt securities held-to-maturity
(8)
(102)
(104)
Net loss (gain) from equity securities
25
—
(842)
Income from debt securities trading
(112)
(352)
—
Purchase of debt securities trading
(34,341)
(40,477)
—
Proceeds from the sale of debt securities trading
34,453
40,792
—
Net amortization (accretion) of premiums and discounts on debt securities
12,929
3,960
16
Increase in investment management fees receivable, net
(706)
(375)
(261)
Decrease (increase) in accrued interest receivable
(6,277)
3,543
(1,624)
Increase (decrease) in accrued interest payable
(1,216)
(2,433)
286
Bank owned life insurance income
(2,142)
(1,742)
(1,736)
Increase (decrease) in income taxes payable
1,064
188
(156)
Decrease in prepaid income taxes
(33)
2,755
5,189
Deferred tax provision
805
506
2,640
Increase (decrease) in accounts payable and other accrued expenses
(715)
2,752
(6,361)
Cash received for reimbursement of leasehold improvements
—
2,196
—
Other, net
2,255
(512)
(322)
Net cash provided by operating activities
105,746
87,208
68,193
Cash flows from investing activities:
Purchase of debt securities available-for-sale
(652,836)
(571,837)
(59,110)
Purchase of debt securities held-to-maturity
(496,533)
(447,077)
(258,428)
Purchase of equity securities
(5,000)
—
—
Proceeds from the sale of debt securities available-for-sale
126,577
120,400
6,993
Proceeds from the sale of equity securities
—
—
13,679
Principal repayments and maturities of debt securities available-for-sale
67,846
85,282
43,704
Principal repayments and maturities of debt securities held-to-maturity
374,480
430,090
258,581
Purchase of bank owned life insurance
(25,000)
—
—
Investment in low-income housing and historic tax credits
(12,205)
(6,020)
(12,505)
Investment in small business investment companies
(1,695)
(850)
(1,283)
Net redemption of Federal Home Loan Bank stock
1,482
11,040
347
Net increase in loans and leases, net
(2,540,423)
(1,665,788)
(1,442,818)
Proceeds from the sale of loans and leased equipment
8,250
6,158
—
Proceeds from the sale of other real estate owned
351
1,527
169
Additions to office properties and equipment
(10,439)
(5,067)
(6,080)
Net cash used in investing activities
(3,165,145)
(2,042,142)
(1,456,751)
98
Cash flows from financing activities:
Net increase in deposit accounts
3,015,300
1,854,476
1,584,152
Net increase (decrease) in Federal Home Loan Bank advances
(50,000)
(55,000)
(10,000)
Proceeds from line of credit advances
15,200
40,000
—
Repayment of line of credit advances
(20,200)
(35,000)
(4,250)
Net proceeds from issuance of senior and subordinated notes payable
124,455
95,349
—
Net proceeds from issuance of stock
—
100,002
77,611
Repayment of subordinated debt
—
—
(35,000)
Proceeds from exercise of stock options
1,273
506
900
Cancellation of stock options
—
(2,484)
—
Payment of contingent consideration
—
—
(2,920)
Purchase of treasury stock, net of reissuance
(2,108)
(3,479)
(2,312)
Dividends paid on preferred stock
(7,947)
(7,849)
(5,753)
Net cash provided by financing activities
3,075,973
1,986,521
1,602,428
Net change in cash and cash equivalents during the period
16,574
31,587
213,870
Cash and cash equivalents at beginning of the period
435,442
403,855
189,985
Cash and cash equivalents at end of the period
$
452,016 $
435,442 $
403,855
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest expense
$
52,939 $
81,572 $
135,021
Income taxes
$
6,872 $
693 $
(2,035)
Other non-cash activity:
Operating lease right-of-use asset
$
13,980 $
— $
22,589
Loan foreclosures and repossessions
$
— $
— $
1,492
Transfer of debt securities available-for-sale to held-to-maturity
$
480,769 $
— $
—
Series C dividend paid in kind
$
4,401 $
— $
—
See accompanying notes to consolidated financial statements.
99
TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[1] BASIS OF INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATION
TriState Capital Holdings, Inc. (“we,” “us,” “our,” the “holding company,” the “parent company,” or the “Company”) is a registered bank holding company
pursuant to the Bank Holding Company Act of 1956, as amended. The Company has three wholly owned subsidiaries: TriState Capital Bank, a Pennsylvania-
chartered state bank (the “Bank”); Chartwell Investment Partners, LLC, a registered investment adviser (“Chartwell”); and Chartwell TSC Securities Corp., a
registered broker-dealer (“CTSC Securities”).
The Bank was established to serve the commercial banking needs of middle-market businesses and financial services providers and focused private banking
needs of high-net-worth individuals nation-wide. The Bank has two wholly owned subsidiaries: TSC Equipment Finance LLC (“TSC Equipment Finance”),
established to hold and manage loans and leases of our equipment finance business, and Meadowood Asset Management, LLC (“Meadowood”), established to
hold and manage other real estate owned by the Bank and/or foreclosed properties for the Bank.
Chartwell provides investment management services primarily to institutional investors, mutual funds and individual investors. CTSC Securities supports
marketing efforts for the proprietary investment products provided by Chartwell, including shares of mutual funds advised and/or administered by Chartwell.
The Company and the Bank are subject to regulatory examination and supervision by the Federal Deposit Insurance Corporation (“FDIC”), the Pennsylvania
Department of Banking and Securities and the Board of Governors of the Federal Reserve System (“Federal Reserve”). Since the Bank’s consolidated total
assets exceeded $10 billion for four consecutive quarters as of December 31, 2021, the Company and the Bank are subject to the regulatory examination and
supervision of the Consumer Financial Protection Bureau (“CFPB”) with respect to certain consumer protection laws. Chartwell is a registered investment
adviser regulated by the Securities and Exchange Commission (“SEC”). CTSC Securities is regulated by the SEC and the Financial Industry Regulatory
Authority, Inc. (“FINRA”).
The Bank conducts business through its main office located in Pittsburgh, Pennsylvania, as well as its four additional representative offices in Cleveland,
Ohio; Philadelphia, Pennsylvania; Edison, New Jersey; and New York, New York. Chartwell conducts business through its office located in Berwyn,
Pennsylvania, and CTSC Securities conducts business through its office located in Pittsburgh, Pennsylvania.
On October 20, 2021, the Company announced that it entered into a definitive agreement under which Raymond James Financial, Inc. (“Raymond James”)
will acquire the outstanding shares of stock of the Company for consideration that is a combination of cash and Raymond James stock at a fixed exchange rate,
valued in aggregate at approximately $1.10 billion based on the trading value of Raymond James’ stock on the announcement date. The acquisition is subject
to customary closing conditions, including regulatory approvals, and is expected to close in 2022.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to
make estimates and assumptions that affect the reported amounts of certain assets and liabilities, disclosure of contingent assets and liabilities as of the date of
the financial statements, and the reported amounts of related revenues and expenses during the reporting period. Although our current estimates contemplate
current conditions and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than those anticipated in
the estimates, which could materially affect the financial results of our operations and financial condition.
Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for credit losses on loans and leases,
valuation of goodwill and other intangible assets and their evaluation for impairment, fair value measurements and deferred income taxes and their related
recoverability, each of which is discussed later in this section.
CONSOLIDATION
Our consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, the Bank, Chartwell and CTSC Securities, after
elimination of inter-company accounts and transactions. The accounts of the Bank, in turn, include its wholly owned subsidiaries, TSC Equipment Finance and
Meadowood, after elimination of inter-company accounts and transactions. In the opinion of management, all adjustments (consisting of normal, recurring
adjustments) and disclosures, considered necessary for the fair presentation of the accompanying consolidated financial statements, have been included.
100
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company has defined cash and cash equivalents as cash, interest-earning deposits with other institutions, federal
funds sold and short-term investments that have an original maturity of 90 days or less. Under agreements with certain of its derivative counterparties, the
Company is required to maintain minimum cash collateral posting thresholds with such counterparties. The cash subject to these agreements is considered
restricted for these purposes.
BUSINESS COMBINATIONS
The Company accounts for business combinations using the acquisition method of accounting. Under this method of accounting, the acquired company’s net
assets are recorded at fair value as of the date of acquisition, and the results of operations of the acquired company are combined with our results from that
date forward. Acquisition costs are expensed when incurred. The difference between the purchase price, which includes an initial measurement of any
contingent earn out, and the fair value of the net assets acquired (including identified intangibles) is recorded as goodwill in the consolidated statements of
financial condition. A change in the initial estimate of any contingent earn out amount is recorded to non-interest expense in the consolidated statements of
income.
INVESTMENT SECURITIES
The Company’s investments are classified as either: (1) held-to-maturity, which are debt securities that the Company intends to hold until maturity and are
reported at amortized cost, net of allowance for credit losses; (2) trading, which are debt securities bought and held principally for the purpose of selling them
in the near term and are reported at fair value, with unrealized gains and losses included in non-interest income; (3) available-for-sale, which are debt
securities not classified as either held-to-maturity or trading securities and are reported at fair value, with unrealized gains and losses reported as a component
of accumulated other comprehensive income (loss), on an after-tax basis; or (4) equity securities, which are reported at fair value, with unrealized gains and
losses included in non-interest income.
The cost of securities sold is determined on a specific identification basis. Amortization of premiums and accretion of discounts are recorded to interest
income on investments over the estimated life of the security utilizing the level yield method. Management evaluates expected credit losses on held-to-
maturity debt securities on a collective or pool basis, by investment category and credit rating. The Company measures credit losses by comparing the present
value of cash flows expected to be collected to the amortized cost of the security considering historical credit loss information, adjusted for current conditions
and reasonable and supportable economic forecasts. The Company’s investment securities can be classified into the following pools based on similar risk
characteristics: (1) U.S. government agencies, (2) state and local municipalities, (3) domestic corporations, including trust preferred securities, and (4) non-
agency securitizations. The Company’s U.S. government agency securities are issued by U.S. government entities and agencies and are either explicitly or
implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. For the remaining pools of
securities, the credit rating of the issuers, the investment’s cash flow characteristics and the underlying instruments securitizing certain bonds are the most
relevant risk characteristics of the investment portfolio. The Company’s investment policy only allows for purchases of investments with investment grade
credit ratings and the Company continuously monitors for changes in credit ratings. Probability of default and loss given default rates are based on historical
averages for each investment pool, adjusted to reflect the impact of a single, forward-looking forecast of certain macroeconomic variables, such as
unemployment rates and interest rate spreads, which management considers to be both reasonable and supportable. The forecast of these macroeconomic
variables is applied over a period of three years and reverts to historical averages over a two-year reversion period.
Management evaluates available-for-sale debt securities in an unrealized loss position quarterly for expected credit losses. Management first determines
whether it intends to sell or if it is more likely than not that it will be required to sell the impaired securities. This determination considers current and
forecasted liquidity requirements, regulatory and capital requirements, and securities portfolio management. If the Company intends to sell an available-for-
sale security with a fair value below amortized cost or if it is more likely than not that it will be required to sell such a security before recovery, the security’s
amortized cost is written down to fair value through current period earnings. For available-for-sale debt securities that the Company does not intend to sell or
it is more likely than not that it will not be required to sell before recovery, a provision for credit losses is recorded through current period earnings for the
amount of the valuation decline below amortized cost that is attributable to credit losses. Management considers the extent to which fair value is less than
amortized cost, credit ratings and other factors related to the security in assessing whether credit loss exists. The Company measures credit loss by comparing
the present value of cash flows expected to be collected to the amortized cost of the security. An allowance for credit losses is measured by the difference that
the present value of cash flows expected to be collected is less than the amortized cost basis, limited by the amount that the fair value is less than the amortized
cost. The remaining difference between the security’s fair value and amortized cost (that is, the decline in fair value not attributable to credit losses) is
recognized in other comprehensive income (loss), in the consolidated statements of comprehensive income and the shareholders’ equity section of the
consolidated statements of financial condition, on an after-tax basis. Changes in the allowance for credit losses are recorded as provision for credit losses.
Losses are charged
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against the allowance when management believes the security is uncollectible or management intends to sell or is required to sell the security.
The recognition of interest income on a debt security is discontinued when any principal or interest payment becomes 90 days past due, at which time the debt
security is placed on non-accrual status. All accrued and unpaid interest on such debt security is then reversed. Accrued interest receivable is excluded from
the estimate of expected credit losses.
For additional detail regarding investment securities, see Note 2.
FEDERAL HOME LOAN BANK STOCK
The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh. Member institutions are required to invest in FHLB stock. The stock is
carried at cost, which approximates its liquidation value, and it is evaluated for impairment based on the ultimate recoverability of the par value. The following
matters are considered by management when evaluating the FHLB stock for impairment: the ability of the FHLB to make payments required by law or
regulation and the level of such payments in relation to the operating performance of the FHLB; the impact of legislative and regulatory changes on the
institution and its customer base; and the Company’s intent and ability to hold its FHLB stock for the foreseeable future. Management believes the Company’s
holdings in the FHLB stock were recoverable at par value as of December 31, 2021 and 2020. Cash and stock dividends are reported as interest income on
investments in the consolidated statements of income.
For additional detail regarding Federal Home Loan Bank stock, see Note 3.
LOANS AND LEASES
Loans and leases held-for-investment are stated at amortized cost. Amortized cost is the unpaid principal balance, net of deferred loan fees and costs. Loans
held-for-sale are stated at the lower of cost or fair value. Interest income on loans is accrued at the contractual rate on the principal amount outstanding.
Deferred loan fees and costs are amortized to interest income over the estimated life of the loan, taking into consideration scheduled payments and
prepayments.
The Company considers a loan to be a troubled debt restructuring (“TDR”) when there is a concession made to a financially troubled borrower without
adequate consideration provided to the Company. The Company evaluates any loan reasonably expected to become a TDR, regardless of whether the loan is
on accrual or non-accrual status. Once a loan is deemed to be a TDR, the Company considers whether the loan should be placed on non-accrual status. In
assessing accrual status, the Company considers the likelihood that repayment and performance according to the original contractual terms will be achieved, as
well as the borrower’s historical payment performance. A loan is designated and reported as a TDR until such loan is either paid off or sold unless the
restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with
comparable risk and it is fully expected that the remaining principal and interest will be collected according to the restructured agreement.
The recognition of interest income on a loan is discontinued when, in management’s opinion, it is probable the borrower is unable to meet payments as they
become due or when the loan becomes 90 days past due, whichever occurs first, at which time the loan is placed on non-accrual status. All accrued and unpaid
interest on such loans is then reversed. The interest ultimately collected is applied to reduce principal if there is doubt about the collectability of principal. If a
borrower brings a loan current for which accrued interest has been reversed, then the recognition of interest income on the loan is resumed once the loan has
been current for a period of six consecutive months or greater.
The Company is a party to financial instruments with off-balance sheet risk, such as commitments to extend credit, in the normal course of business to meet
the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition
established in the lending agreement with such customer. Commitments generally have fixed expiration dates or other termination clauses (e.g., loans due on
demand) and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the unfunded commitment
amount does not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis using the
same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if
deemed necessary by the Company upon extension of a commitment, is based on management’s credit evaluation of the borrower.
For additional detail regarding loans and leases, see Note 4.
OTHER REAL ESTATE OWNED
Real estate owned, other than bank premises, is recorded at fair value less estimated selling costs. Fair value is determined based on an independent appraisal.
Expenses related to holding the property are charged against earnings when incurred. Depreciation is not recorded on other real estate owned (“OREO”)
properties.
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ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES
The allowance for credit losses is a valuation account that is deducted from the amortized cost of loans and leases to present management’s best estimate of
the net amount expected to be collected. Adjustments to the allowance for credit losses are established through provisions for credit losses that are recorded in
the consolidated statements of income. Loans and leases are charged off against the allowance for credit losses when management believes that the principal is
uncollectible. If, at a later time, amounts are recovered with respect to loans and leases previously charged off, the recovered amount is credited to allowance
for credit losses. Accrued interest receivable is excluded from the estimate of expected credit losses.
The allowance for credit losses represents estimates of expected credit losses for homogeneous loan pools that share similar risk characteristics such as
commercial and industrial (“C&I”) loans and leases, commercial real estate (“CRE”) loans, and private banking loans which include consumer lines of credit
and residential mortgages. The Company periodically reassesses each loan pool to ensure that the loans within the pool continue to share similar risk
characteristics. Non-accrual loans and loans designated as TDRs, are assessed individually using a discounted cash flows method or, where a loan is collateral
dependent, based upon the fair value of the collateral less estimated selling costs.
The collateral on our private banking loans that are secured by cash, marketable securities and/or cash value life insurance are monitored daily and requires
borrowers to continually replenish such collateral as a result of changes in its fair value. Therefore, it is expected that the fair value of the collateral value
securing each loan will exceed the loan’s amortized cost and no allowance for credit losses would be required under Accounting Standard Codification
(“ASC”) 326-20-35-6 “Financial Assets Secured by Collateral Maintenance Provisions.”
In estimating the general allowance for credit losses for loans evaluated on a collective or pool basis, management considers past events, current conditions,
and reasonable and supportable economic forecasts, including historical charge-offs and subsequent recoveries. Management also considers qualitative factors
that influence our credit quality, including, but not limited to, delinquency and non-performing loan trends, changes in loan underwriting guidelines and credit
policies, and the results of internal loan reviews. Finally, management considers the impact of changes in current and forecasted local and regional economic
conditions in the markets that we serve.
Management bases the computation of the general allowance for credit losses on two factors: the primary factor and the secondary factor. The primary factor
is based on the inherent risk identified by management within each of the Company’s three loan portfolios based on the historical loss experience of each loan
portfolio. Management has developed a methodology that is applied to each of the three primary loan portfolios: C&I loans and leases, CRE loans and private
banking loans (other than those secured by cash, marketable securities and/or cash value life insurance).
For each portfolio, management estimates expected credit losses over the life of each loan utilizing lifetime or cumulative loss rate methodology, which
identifies macroeconomic factors and asset-specific characteristics that are correlated with credit loss experience, including loan age, loan type, leverage, risk
rating, interest rate spread and industry. The lifetime loss rate is applied to the amortized cost of the loan. This methodology builds on default and recovery
probabilities by utilizing pool-specific historical loss rates to calculate expected credit losses. These pool-specific historical loss rates may be adjusted for a
forecast of certain macroeconomic variables, as further discussed below, and other factors such as differences in underwriting standards, portfolio mix, or
when historical asset terms do not reflect the contractual terms of the financial assets being evaluated as of the measurement date. Each time the Company
measures expected credit losses, the Company assesses the relevancy of historical loss information and considers any necessary adjustments to address any
differences in asset-specific characteristics.
The allowance represents management’s current estimate of expected credit losses in the loan and lease portfolio. Expected credit losses are estimated over the
contractual term of the loans, which includes extension or renewal options that are not unconditionally cancellable by the Company and are adjusted for
expected prepayments when appropriate. Management’s judgment takes into consideration past events, current conditions and reasonable and supportable
economic forecasts including general economic conditions, diversification and seasoning of the loan portfolio, historic loss experience, identified credit
problems, delinquency levels and adequacy of collateral. Although management believes it has used the best information available in making such
determinations, and that the present allowance for credit losses represents management’s best estimate of current expected credit losses, future adjustments to
the allowance may be necessary, and net income may be adversely affected if circumstances differ substantially from the assumptions used in determining the
level of the allowance.
The lifetime loss rates are estimated by analyzing a combination of internal and external data related to historical performance of each loan pool over a
complete economic cycle. Loss rates are based on historical averages for each loan pool, adjusted to reflect the impact of a single, forward-looking forecast of
certain macroeconomic variables such as gross domestic product, unemployment rates, corporate bond credit spreads and commercial property values, which
management considers to be both reasonable and supportable. The single, forward-looking forecast of these macroeconomic variables is applied over the
remaining
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life of the loan pools. The development of the reasonable and supportable forecast incorporates an assumption that each macroeconomic variable will revert to
a long-term expectation starting in years two to four of the forecast and largely completing within the first five years of the forecast.
The secondary factor is intended to capture additional risks related to events and circumstances that management believes have an impact on the performance
of the loan portfolio that are not considered as part of the primary factor. Although this factor is more subjective in nature, the methodology focuses on
internal and external trends in pre-specified categories, or risk factors, and applies a quantitative percentage that drives the secondary factor. Nine risk factors
have been identified and each risk factor is assigned an allowance level based on management’s judgment as to the expected impact of each risk factor on each
loan portfolio and is monitored on a quarterly basis. As the trend in any risk factor changes, management evaluates the need for a corresponding change to
occur in the allowance associated with each respective risk factor to provide the most appropriate estimate of allowance for credit losses on loans and leases.
The Company also maintains an allowance for credit losses on off-balance sheet credit exposures for unfunded loan commitments. This allowance is reflected
as a component of other liabilities which represents management’s current estimate of expected losses in the unfunded loan commitments. The estimate
includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its
estimated life based on management’s consideration of past events, current conditions and reasonable and supportable economic forecasts. Management tracks
the level and trends in unused commitments and takes into consideration the same factors as those considered for purposes of the allowance for credit losses
on outstanding loans. Unconditionally cancellable loans are excluded from the calculation of allowance for credit losses on off-balance sheet credit exposures.
In 2020, the Company adopted CECL via cumulative effect adjustment (net of tax) by recording a net decrease to retained earnings of $1.7 million as of
January 1, 2020. Results for the years ended December 31, 2021 and 2020 are presented under CECL methodology while amounts prior to January 1, 2020
continue to be reported in accordance with ASC Topic 450, Contingencies; and specific reserves based upon ASC Topic 310, Receivables. ASC Topic 450
applies to homogeneous loan pools such as commercial loans, consumer lines of credit and residential mortgages that are not individually evaluated for
impairment. ASC Topic 310 is applied to commercial and consumer loans that are individually evaluated for impairment.
For additional detail regarding allowance for credit losses on loans and leases, see Note 5.
INVESTMENT MANAGEMENT FEES
Revenue from contracts with customers is recognized when promised services are delivered to our customers in an amount we expect to receive in exchange
for those services (i.e., the transaction price). Payment for the majority of our services is considered to be variable consideration, as the amount of revenue we
expect to receive is subject to factors outside of our control, including market conditions. Variable consideration is only included in revenue when amounts are
not subject to significant reversal, which is generally when uncertainty around the amount of revenue to be received is resolved. We record deferred revenue
from contracts with customers when payment is received prior to the performance of our obligation to the customer.
We earn investment management fees for performing portfolio management for retail and institutional clients. Such fees are generally calculated as a
percentage of the value of client assets or, for certain pooled assets such as mutual funds, on the net asset value of assets managed. The value of these assets is
impacted by market fluctuations and net inflows or outflows of assets. Fees are generally collected quarterly and are based on balances either at the beginning
of the quarter or the end of the quarter, or on average balances throughout the quarter. Asset management fees are recognized on a monthly basis (i.e., over
time) as the services are performed.
Investment management fees receivable represent amounts due for contractual investment management services provided to the Company’s clients, primarily
institutional investors, mutual funds and individual investors. Management performs credit evaluations of its customers’ financial condition when it is deemed
to be necessary and does not require collateral. The Company provides an allowance for uncollectible accounts based on specifically identified receivables.
The Company has not experienced any losses on receivables for asset management fees for the years ended December 31, 2021, 2020 and 2019. The Company
had no allowance for credit losses on investment management fees as of December 31, 2021 and 2020.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is not amortized and is subject to at least
annual assessments for impairment by applying a fair value-based test. The Company reviews goodwill annually and again at any quarter-end if a material
event occurs during the quarter that may affect goodwill. If goodwill testing is required, an assessment of qualitative factors can be completed before
performing a goodwill impairment test. If an assessment of qualitative factors determines it is more likely than not that the fair value of a reporting unit
exceeds its carrying amount, then the goodwill impairment test is not required.
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Other intangible assets represent purchased assets that may lack physical substance but can be distinguished from goodwill because of contractual or other
legal rights. The Company has determined that certain of its acquired mutual fund client relationships meet the criteria to be considered indefinite-lived assets
because the Company expects both the renewal of these contracts and the cash flows generated by these assets to continue indefinitely. Accordingly, the
Company does not amortize these intangible assets, but instead reviews these assets annually or more frequently whenever events or circumstances occur
indicating that the recorded indefinite-lived assets may be impaired. Each reporting period, the Company assesses whether events or circumstances have
occurred which indicate that the indefinite life criteria are no longer met. If the indefinite life criteria are no longer met, the Company assesses whether the
carrying value of these assets exceeds its fair value. If the carrying value exceeds the fair value of the assets, an impairment loss is recorded in an amount
equal to any such excess and the assets are reclassified to finite-lived. Other intangible assets that the Company has determined to have finite lives, such as its
trade names, client lists and non-compete agreements are amortized over their estimated useful lives. These finite-lived intangible assets are amortized on a
straight-line basis over their estimated useful lives, which range from four to 25 years. Finite-lived intangibles are evaluated for impairment on an annual basis
or more frequently whenever events or circumstances occur indicating that the carrying amount may not be recoverable.
For additional detail regarding goodwill and other intangible assets, see Note 6.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated depreciation. Office properties include furniture, fixtures and leasehold improvements.
Equipment includes computer equipment and internal use software. Depreciation is computed utilizing the straight-line method over the estimated useful lives
of the related assets, except for leasehold improvements, which are amortized over the terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter. Estimated useful lives are dependent upon the nature and condition of the asset and range from three to 10 years. Repairs
and maintenance are charged to expense as incurred, while improvements that extend the useful life of the assets are capitalized and depreciated to non-
interest expense over the estimated remaining life of the asset.
For additional detail regarding office properties and equipment, see Note 7.
OPERATING LEASES
The Company is a lessee in noncancellable operating leases, primarily for its office spaces and other office equipment. The Company records operating leases
as a right-of-use asset and an offsetting lease liability in the consolidated statements of financial condition at the present value of the unpaid lease payments.
The Company generally uses its incremental borrowing rate as the discount rate for operating leases. The right-of-use asset is initially measured at cost, which
comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs
incurred less any lease incentives received. For operating leases, the right-of-use asset is subsequently measured throughout the lease term at the carrying
amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives
received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
For additional detail regarding operating leases, see Note 8.
BANK OWNED LIFE INSURANCE
Bank owned life insurance (“BOLI”) policies on certain officers and employees are recorded at net cash surrender value on the consolidated statements of
financial condition. Upon termination of a BOLI policy the Company receives the cash surrender value. BOLI benefits are payable to the Company upon the
death of the insured. Changes in net cash surrender value are recognized as non-interest income in the consolidated statements of income.
DEPOSITS
Deposits are stated at principal outstanding. Interest on deposits is accrued and charged to interest expense daily and is paid or credited in accordance with the
terms of the respective accounts.
For additional detail regarding deposits, see Note 9.
BORROWINGS
The Company records FHLB advances, line of credit borrowings, senior notes payable and subordinated notes payable at their principal amount, net of debt
issuance costs. Interest expense is recognized based on the coupon rate of the obligations. Costs associated with the acquisition of subordinated notes payable
are amortized to interest expense over the expected term of the borrowing.
For additional detail regarding borrowings, see Note 10.
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INCOME TAXES
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for
the tax effects of differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities with regard to a change in tax rates is recognized in income in the period that includes the enactment date. Management
assesses all available evidence to determine the amount of deferred tax assets that are more likely than not to be realized. The available evidence used in
connection with the assessments includes taxable income in prior periods, projected taxable income, potential tax planning strategies and projected reversals of
deferred tax items. These assessments involve a degree of subjectivity and may undergo significant change. Changes to the evidence used in the assessments
could have a material adverse effect on the Company’s results of operations in the period in which they occur. The Company considers uncertain tax positions
that it has taken or expects to take on a tax return. Any interest and penalties related to unrecognized tax benefits would be recognized in income tax expense
in the consolidated statements of income.
For additional detail regarding income taxes, see Note 11.
EARNINGS PER COMMON SHARE
Earnings per common share (“EPS”) is computed using the two-class method. The two-class method is an earnings allocation formula that determines
earnings per share for common stock and participating securities, according to dividends and participation rights in undistributed earnings. Under this method,
net earnings is reduced by the amount of dividends declared in the current period for common shareholders and participating security holders. The remaining
earnings or “undistributed earnings” are allocated between common stock and participating securities to the extent that each security may share in earnings as
if all the earnings for the period had been distributed.
The two-class method requires the Company’s Series C perpetual non-cumulative convertible non-voting preferred stock (the “Series C Preferred Stock”) and
outstanding warrants to be treated as participating classes of securities in the computation of EPS. In addition, net income is reduced by dividends declared on
all series of preferred stock to derive net income available to common shareholders. Basic EPS is computed by dividing net income allocable to common
shareholders by the weighted average number of the Company’s common shares outstanding for the period, excluding non-vested restricted stock. Diluted
EPS reflects the potential dilution upon the exercise of stock options and warrants, and the vesting of restricted stock awards granted utilizing the treasury
stock method.
For additional detail regarding earnings per common share, see Note 15.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation awards based on estimated fair values of stock-based awards made to employees and directors.
Compensation cost for all stock-based payments is based on the estimated grant-date fair value. The value of the portion of the award that is ultimately
expected to vest is included in compensation and employee benefits expense in the consolidated statements of income and recorded as a component of
additional paid-in capital. Compensation expense for all awards is recognized on a straight-line basis over the requisite service period for the entire grant.
For additional detail regarding stock-based compensation, see Note 16.
DERIVATIVES AND HEDGING ACTIVITIES
All derivatives are evaluated at inception as to whether or not they are hedging or non-hedging activities. All derivatives are recognized as either assets or
liabilities on the consolidated statements of financial condition and measured at fair value. For derivatives designated as fair value hedges, changes in the fair
value of the derivative and the hedged item related to the hedged risk are recognized in earnings. Any hedge ineffectiveness would be recognized in the
income statement line item pertaining to the hedged item. For derivatives designated as cash flow hedges, changes in fair value of the effective portion of the
cash flow hedges are reported in accumulated other comprehensive income (loss). When the cash flows associated with the hedged item are realized, the gain
or loss included in accumulated other comprehensive income (loss) is recognized in the consolidated statements of income. The Company also has interest rate
derivative positions that are not designated as hedging instruments. Changes in the fair value of derivatives not designated in hedging relationships are
recorded directly in earnings. The Company is required to have minimum collateral posting thresholds with certain of its derivative counterparties and this
collateral is considered restricted cash.
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The Company executes interest rate derivatives with its commercial banking customers to facilitate their respective risk management strategies. The Company
generates swap fee income through these transactions. These derivatives are simultaneously and economically hedged by offsetting derivatives that the
Company executes with a third party, such that the Company generally eliminates its interest rate exposure resulting from such transactions and these
derivatives are not designated as hedging instruments. Swap fees are based on the notional amount and weighted maturity of each individual transaction and
are collected and recorded to non-interest income in the consolidated statements of income when the transaction is executed.
For additional detail regarding derivatives and hedging activities, see Note 17.
FAIR VALUE MEASUREMENT
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in a principal or most advantageous market for
the asset or liability in an orderly transaction between market participants as of the measurement date, using assumptions market participants would use when
pricing such an asset or liability. An orderly transaction assumes exposure to the market for a customary period for marketing activities prior to the
measurement date and not a forced liquidation or distressed sale. Fair value measurement and disclosure guidance provides a three-level hierarchy that
prioritizes the inputs of valuation techniques used to measure fair value into three broad categories:
•
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities.
•
Level 2 – Observable inputs such as quoted prices for similar assets and liabilities in active markets, quoted prices for similar assets and liabilities in
markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
•
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This
includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.
Fair value must be recorded for certain assets and liabilities every reporting period on a recurring basis or, under certain circumstances, on a non-recurring
basis.
For additional detail regarding fair value measurement, see Note 18.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized holding gains and the non-credit component of unrealized losses on the Company’s debt securities available-for-sale are included in accumulated
other comprehensive income (loss), net of applicable income taxes. Also included in accumulated other comprehensive income (loss) is the remaining
unamortized balance of the unrealized holding gains (non-credit losses), net of applicable income taxes, that existed on the transfer date for debt securities
reclassified into the held-to-maturity category from the available-for-sale category.
Unrealized holding gains (losses) on the effective portion of the Company’s cash flow hedge derivatives are included in accumulated other comprehensive
income (loss), net of applicable income taxes, which will be reclassified to interest expense as interest payments are made on the Company’s debt.
Income tax effects in accumulated other comprehensive income (loss) are released as investments are sold or mature and as liabilities are extinguished.
For additional detail regarding accumulated other comprehensive income (loss), see Note 19.
TREASURY STOCK
The repurchase of the Company’s common stock is recorded at cost. At the time of reissuance, the treasury stock account is reduced using the average cost
method. Gains and losses on the reissuance of common stock are recorded in additional paid-in capital, to the extent additional paid-in capital from any
previous net gains on treasury share transactions exists. Any net deficiency is charged to retained earnings.
RECLASSIFICATION
Certain items previously reported have been reclassified to conform with the current year’s reporting presentation and are considered immaterial.
RECENT ACCOUNTING DEVELOPMENTS
On October 28, 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2021-08, Business Combinations
(Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with
107
Customers. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2022 and provides an exception to fair value
measurement for revenue contracts acquired in business combinations. Early adoption is permitted. for both interim and annual financial statements that have
not yet been issued(or made available for issuance). The Company is currently evaluating the impact of adopting ASU 2021-05 on its consolidated financial
statements.
In July 2021, the FASB issued ASU 2021-5, Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments. The amendments are effective for
fiscal years beginning after December 15, 2021, for all entities, and for interim periods within those fiscal years for public business entities and interim periods
within fiscal years beginning after December 15, 2022, for all other entities. The amendments in this update address stakeholders’ concerns by amending the
lease classification requirements for lessors to align them with practice under Topic 840. Lessors should classify and account for a lease with variable lease
payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: (1) the lease would have been
classified as a sales-type lease or a direct financing lease in accordance with the classification criteria in paragraphs 842-10-25-2 through 25-3; and (2) the
lessor would have otherwise recognized a day-one loss. The adoption of this ASU on January 1, 2022 did not have a material impact on the Company’s
consolidated financial statements.
In April 2021, the FASB issued ASU 2021-04, which included Topic 260: Earnings Per Share. This guidance clarifies and reduces diversity in an issuer’s
accounting for modifications or exchanges of freestanding equity-classified written call options (“warrants”) due to a lack of explicit guidance in the FASB
Codification. ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021. Early adoption is permitted. The adoption of this
ASU on January 1, 2022 did not have a material impact on the Company’s consolidated financial statements.
In January 2021, the FASB issued ASU 2021-01 - Reference Rate Reform (Topic 848): Scope. This ASU clarifies the scope of Topic 848 so that derivatives
affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848. The amendments in this ASU are
elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is
modified as a result of reference rate reform. The amendments in this ASU are effective immediately for all entities. The adoption of this guidance did not
have a material impact on the Company's consolidated financial statements, but the Company will consider this guidance as contracts are transitioned from
LIBOR to another reference rate.
[2] INVESTMENT SECURITIES
Debt securities available-for-sale and held-to-maturity were comprised of the following:
December 31, 2021
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Allowance for Credit
Losses
Estimated
Fair Value
Debt securities available-for-sale:
Corporate bonds
$
145,568 $
897 $
273 $
— $
146,192
Trust preferred securities
13,610
200
183
—
13,627
Non-agency residential mortgage-backed securities
281,282
—
4,164
—
277,118
Agency collateralized mortgage obligations
16,458
42
2
—
16,498
Agency mortgage-backed securities
122,044
32
1,599
—
120,477
Agency debentures
6,732
496
—
—
7,228
Municipal bonds
5,189
—
4
—
5,185
Total debt securities available-for-sale
$
590,883 $
1,667 $
6,225 $
— $
586,325
Available-for-sale debt securities are recorded on the statement of financial condition at estimated fair value, which includes allowance for credit losses, if applicable.
(1)
(1)
108
December 31, 2021
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Allowance for Credit
Losses
Debt securities held-to-maturity:
U.S. treasury notes
$
39,097 $
12 $
443 $
38,666
$
—
Corporate bonds
25,167
827
16
25,978
71
Agency debentures
36,794
534
395
36,933
—
Municipal bonds
890
1
—
891
—
Non-agency residential mortgage-backed securities
184,731
1
3,088
181,644
65
Agency mortgage-backed securities
516,033
570
8,753
507,850
—
Total debt securities held-to-maturity
$
802,712 $
1,945 $
12,695 $
791,962
$
136
Held-to-maturity debt securities are recorded on the statement of financial condition at amortized cost, net of allowance for credit losses.
During the first quarter of 2021, the Company transferred $480.8 million in fair value of previously designated available-for-sale agency mortgage-backed
securities to held-to-maturity.
December 31, 2020
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Allowance for
Credit Losses
Estimated
Fair Value
Debt securities available-for-sale:
Corporate bonds
$
157,452 $
1,538 $
526 $
— $
158,464
Trust preferred securities
18,228
57
198
—
18,087
Agency collateralized mortgage obligations
22,058
36
5
—
22,089
Agency mortgage-backed securities
406,741
3,595
209
—
410,127
Agency debentures
8,013
790
—
—
8,803
Total debt securities available-for-sale
$
612,492 $
6,016 $
938 $
— $
617,570
Available-for-sale debt securities are recorded on the statement of financial condition at estimated fair value, which includes allowance for credit losses, if applicable.
December 31, 2020
(Dollars in thousands)
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Allowance for
Credit Losses
Debt securities held-to-maturity:
Corporate bonds
$
28,672 $
566 $
1 $
29,237
$
79
Agency debentures
48,130
1,051
—
49,181
—
Municipal bonds
6,577
45
—
6,622
—
Non-agency residential mortgage-backed securities
124,152
237
217
124,172
70
Agency mortgage-backed securities
4,309
778
—
5,087
—
Total debt securities held-to-maturity
$
211,840 $
2,677 $
218 $
214,299
$
149
Held-to-maturity debt securities are recorded on the statement of financial condition at amortized cost, net of allowance for credit losses.
Interest income on investment securities was as follows:
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Taxable interest income
$
14,801 $
12,707 $
14,558
Non-taxable interest income
115
227
381
Dividend income
613
1,098
1,385
Total interest income on investments
$
15,529 $
14,032 $
16,324
(1)
(1)
(1)
(1)
(1)
(1)
109
As of December 31, 2021, the contractual maturities of the debt securities were:
December 31, 2021
Available-for-Sale
Held-to-Maturity
(Dollars in thousands)
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
Due in less than one year
$
27,500 $
27,536
$
890 $
891
Due from one to five years
60,144
60,675
15,167
15,556
Due from five to 10 years
62,680
62,819
94,514
94,574
Due after 10 years
440,559
435,295
692,141
680,941
Total debt securities
$
590,883 $
586,325
$
802,712 $
791,962
Prepayments may shorten the contractual lives of the collateralized mortgage obligations, mortgage-backed securities and collateralized loan obligations.
Proceeds from the sale and call of debt securities available-for-sale and held-to-maturity and related gross realized gains and losses were:
Available-for-Sale
Held-to-Maturity
Years Ended December 31,
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
2021
2020
2019
Proceeds from sales
$
126,577 $
120,400 $
6,993
$
— $
— $
—
Proceeds from calls
13,000
11,426
17,336
147,757
398,248
255,538
Total proceeds
$
139,577 $
131,826 $
24,329
$
147,757 $
398,248 $
255,538
Gross realized gains
$
235 $
3,846 $
312
$
27 $
102 $
104
Gross realized losses
1
—
—
19
—
—
Net realized gains (losses)
$
234 $
3,846 $
312
$
8 $
102 $
104
There were $38.7 million of debt securities held-to-maturity that were pledged as collateral for certain deposit relationships as of December 31, 2021.
Changes in the allowance for credit losses on held-to-maturity securities were as follows for the years ended December 31, 2021 and 2020:
Year Ended December 31, 2021
(Dollars in thousands)
Corporate
Bonds
Non-agency
Securitizations
Municipal
Bonds
Agency Debentures
and
Securitizations
U.S. Treasury
Notes
Total
Balance, beginning of period
$
79 $
70 $
— $
— $
— $
149
Provision (credit) for credit losses
(8)
(5)
—
—
—
(13)
Charge-offs
—
—
—
—
—
—
Recoveries
—
—
—
—
—
—
Balance, end of period
$
71 $
65 $
— $
— $
— $
136
Year Ended December 31, 2020
(Dollars in thousands)
Corporate
Bonds
Non-agency
Securitizations
Municipal
Bonds
Agency Debentures and
Securitizations
U.S. Treasury Notes
Total
Balance, beginning of period
$
— $
— $
— $
— $
— $
—
Impact of adopting CECL
49
—
—
—
—
49
Provision for credit losses
30
70
—
—
—
100
Charge-offs
—
—
—
—
—
—
Recoveries
—
—
—
—
—
—
Balance, end of period
79
70
—
—
—
149
110
The following tables show the fair value and gross unrealized losses debt securities available-for-sale, by investment category and length of time that the individual
securities have been in a continuous unrealized loss position as of December 31, 2021 and 2020:
December 31, 2021
Less than 12 Months
12 Months or More
Total
(Dollars in thousands)
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Debt securities available-for-sale:
Corporate bonds
20,191
118
11,808
155
31,999
273
Trust preferred securities
2,046
76
2,270
107
4,316
183
Non-agency residential mortgage-backed securities
277,118
4,164
—
—
277,118
4,164
Agency collateralized mortgage obligations
1,600
2
—
—
1,600
2
Agency mortgage-backed securities
119,320
1,599
89
—
119,409
1,599
Municipal bonds
5,185
4
—
—
5,185
4
Temporarily impaired debt securities available-for-sale
$
425,460 $
5,963
$
14,167 $
262
$
439,627 $
6,225
The number of investment positions with unrealized losses totaled 39 for available-for-sale securities.
December 31, 2020
Less than 12 Months
12 Months or More
Total
(Dollars in thousands)
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Debt securities available-for-sale:
Corporate bonds
$
28,796 $
277
$
9,751 $
249
$
38,547 $
526
Trust preferred securities
13,313
198
—
—
13,313
198
Agency collateralized mortgage obligations
—
—
9,863
5
9,863
5
Agency mortgage-backed securities
89,931
209
—
—
89,931
209
Temporarily impaired debt securities available-for-sale
$
132,040 $
684
$
19,614 $
254
$
151,654 $
938
The number of investment positions with unrealized losses totaled 33 for available-for-sale securities.
The changes in the fair values of our agency collateralized mortgage obligations and agency mortgage-backed securities are primarily the result of interest rate
fluctuations. These agency securities are either explicitly or implicitly guaranteed by the U.S. government, highly rated, and have a long history of no credit losses.
To assess for credit losses on debt securities available-for-sale in unrealized loss position, management evaluates the underlying issuer’s financial performance and
the related credit rating information through a review of publicly available financial statements and other publicly available information. The most recent
assessment for credit losses did not identify any issues related to the ultimate repayment of principal and interest on these debt securities. In addition, the Company
has the ability and intent to hold debt securities in an unrealized loss position until recovery of their amortized cost. Based on this, no allowance for credit losses
has been recognized on debt securities available-for-sale in an unrealized loss position.
The Company monitors the credit quality of debt securities held-to-maturity including credit ratings quarterly. The following tables present the amortized costs
basis of debt securities held-to-maturity by Moody’s bond credit rating.
December 31, 2021
(Dollars in thousands)
Aaa
Aa
A
Baa
Ba
Total
Debt securities held-to-maturity:
U.S. treasury notes
$
39,097 $
— $
— $
— $
— $
39,097
Corporate Bonds
—
—
—
25,167
—
25,167
Agency debentures
36,794
—
—
—
—
36,794
Municipal bonds
—
480
410
—
—
890
Non-agency residential mortgage-backed securities
184,731
—
—
—
—
184,731
Agency mortgage-backed securities
516,033
—
—
—
—
516,033
Total debt securities held-to-maturity
$
776,655 $
480 $
410 $
25,167 $
— $
802,712
(1)
(1)
(1)
(1)
111
Accrued interest receivable of $1.6 million and $697,000 on debt securities held-to-maturity as of December 31, 2021 and 2020, respectively, was excluded from
the amortized cost used in the calculation of allowance for credit losses. The Company had no debt securities held-to-maturity that were past due as of
December 31, 2021.
There were no outstanding debt securities classified as trading as of December 31, 2021 and December 31, 2020.
Equity securities consisted of mutual funds investing in short-duration, investment grade corporate bonds. The investments in these securities were $5.0 million
and $0 as of December 31, 2021 and 2020, respectively.
[3] FEDERAL HOME LOAN BANK STOCK
The Company is a member of the FHLB system. As a member of the FHLB of Pittsburgh, the Company must maintain a minimum investment in the capital stock
of the FHLB in an amount equal to 4.00% of its outstanding advances, 0.75% of its issued letters of credits, and 0.10% of its membership asset value, as defined,
with the FHLB. The FHLB has the ability to change the calculation of the required stock investment at any time. At December 31, 2021, $11.8 million of stock
was required based on $250.0 million in outstanding advances, $4.0 million in issued letters of credit and the Bank’s membership asset value of approximately
$1.77 billion. The Company held FHLB stock totaling $11.8 million and $13.3 million at December 31, 2021 and 2020, respectively. The Company received
dividends from its holdings in FHLB capital stock of $613,000, $1.1 million and $1.3 million for the years ended December 31, 2021, 2020 and 2019, respectively.
[4] LOANS AND LEASES
The Company generates loans through the private banking and middle-market banking channels. The private banking channel primarily includes loans made to
high-net-worth individuals, trusts and businesses that are typically secured by cash, marketable securities and/or cash value life insurance. The middle-market
banking channel consists of the Company’s C&I loan and lease portfolio and CRE loan portfolio, which serve middle-market businesses and real estate developers
in our primary markets.
Loans and leases held-for-investment were comprised of the following:
December 31, 2021
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Loans and leases held-for-investment, before deferred fees and costs
$
6,870,961 $
1,509,418 $
2,369,335 $
10,749,714
Net deferred loan costs (fees)
15,537
4,005
(5,932)
13,610
Loans and leases held-for-investment, net of deferred fees and costs
6,886,498
1,513,423
2,363,403
10,763,324
Allowance for credit losses on loans and leases
(1,891)
(8,453)
(18,219)
(28,563)
Loans and leases held-for-investment, net
$
6,884,607 $
1,504,970 $
2,345,184 $
10,734,761
December 31, 2020
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Loans and leases held-for-investment, before deferred fees and costs
$
4,797,881 $
1,269,248 $
2,160,784 $
8,227,913
Net deferred loan costs (fees)
9,919
4,904
(5,318)
9,505
Loans and leases held-for-investment, net of deferred fees and costs
4,807,800
1,274,152
2,155,466
8,237,418
Allowance for credit losses on loans and leases
(2,047)
(5,254)
(27,329)
(34,630)
Loans and leases held-for-investment, net
$
4,805,753 $
1,268,898 $
2,128,137 $
8,202,788
The Company’s customers have unused loan commitments based on the availability of eligible collateral or other terms and conditions under their loan agreements.
Included in unused loan commitments are unused availability under demand loans for our private banking lines secured by cash, marketable securities and/or cash
value life insurance, as well as commitments to fund loans secured by residential properties, commercial real estate, construction loans, business lines of credit and
other unused commitments of loans in various stages of funding. Not all commitments will fund or fully fund as customers often only draw on a portion of their
available credit. The amount of unfunded commitments, including standby letters of credit, as of December 31, 2021 and 2020, was $10.74
112
billion and $6.73 billion, respectively. The interest rate for each commitment is based on the prevailing market conditions at the time of funding. The total
unfunded commitments above included loans in the process of origination totaling approximately $162.0 million and $39.6 million as of December 31, 2021 and
2020, respectively, which extend over varying periods of time.
The Company issues standby letters of credit in the normal course of business. Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of
the underlying contract with the third party. The Company would be required to perform under a standby letter of credit when drawn upon by the guaranteed party
in the case of non-performance by the Company’s customer. Collateral may be obtained based on management’s credit assessment of the customer. The amount of
unfunded commitments related to standby letters of credit as of December 31, 2021 and 2020, included in the total unfunded commitments above, was $60.8
million and $82.0 million, respectively. Should the Company be obligated to perform under any standby letters of credit, the Company will seek repayment from
the customer for amounts paid. During the years ended December 31, 2021 and 2020, there were draws on letters of credit totaling $4.2 million and $383,000,
respectively, which were immediately repaid by the borrowers or converted to an outstanding loan based on the contractual terms and subsequently repaid. Most of
these commitments are expected to expire without being drawn upon and the total amount does not necessarily represent future cash requirements.
The allowance for credit losses on off-balance sheet credit exposures was $2.9 million and $3.4 million as of December 31, 2021 and December 31, 2020,
respectively, which includes allowance for credit losses on unfunded loan commitments and standby letters of credit.
As of December 31, 2021 and 2020, 88.5% and 90.3%, respectively, of the Company’s commercial loan portfolio was comprised of loans to customers within the
Company’s primary market areas of Pennsylvania, Ohio, New Jersey, New York and contiguous states. As a result, the commercial loan and lease portfolio is
subject to the general economic conditions within those areas. The Company evaluates each customer’s creditworthiness on an individual basis. The amount of
collateral obtained by the Company upon extension of credit is based on management’s credit evaluation of the borrower. The Company does not believe it has
significant concentrations of credit risk in any one group of borrowers given its underwriting and collateral requirements.
The Company’s loan and lease portfolio is comprised of amortizing loans, where scheduled principal and interest payments are applied according to the terms of
the loan agreement, as well as interest-only loans. As of December 31, 2021 and 2020, interest-only loans represented 79.7% and 76.1%, respectively, of the loans
held-for-investment, the majority of which were lines of credit.
There were $6.65 billion in loans that are due on demand with no stated maturity and $4.12 billion in loans with stated maturities which have an expected average
remaining maturity of approximately four years as of December 31, 2021, compared to $4.57 billion in loans that are due on demand with no stated maturity and
$3.67 billion in loans with stated maturities which have an expected average remaining maturity of approximately four years as of December 31, 2020. As of
December 31, 2021 and 2020, 95.0% and 93.8%, respectively, of the Company’s portfolio was comprised of variable rate loans.
[5] ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES
Our allowance for credit losses represents our current estimate of expected credit losses in the portfolio at a specific point in time. This estimate includes credit
losses associated with loans and leases evaluated on a collective or pool basis, as well as expected credit losses of the individually evaluated loans and leases that
do not share similar risk characteristics. Management evaluates the adequacy of the allowance at least quarterly, and in doing so relies on various factors including,
but not limited to, assessment of historical loss experience, delinquency and non-accrual trends, portfolio growth, underlying collateral coverage and current
economic conditions, and economic forecasts over a reasonable and supportable period of time. This evaluation is subjective and requires material estimates that
may change over time. The calculation of the allowance for credit losses on loans and leases takes into consideration the inherent risk identified within each of the
Company’s three primary loan portfolios. The lifetime loss rates are estimated by analyzing a combination of internal and external data related to historical
performance of each loan pool over a complete economic cycle. Results for the years ended December 31, 2021 and 2020 are presented under CECL methodology
while amounts prior to January 1, 2020 continue to be reported in accordance with previously applicable GAAP. Refer to Note 1, Summary of Significant
Accounting Policies, for more details on the Company’s policy on allowance for credit losses on loans and leases.
The following discusses key characteristics and risks within each primary loan portfolio:
Private Banking Loans
Our private banking lending business is conducted on a national basis. This loan portfolio primarily includes loans made to high-net-worth individuals, trusts
and businesses that are typically secured by marketable securities, cash, and/or cash value life insurance. The Company actively monitors the value of the
collateral securing these loans on a daily basis and requires borrowers to continually replenish such collateral as a result of changes in its fair value. Therefore,
it is expected that the fair value of the
113
collateral value securing each loan will exceed the loan’s amortized cost and no allowance for credit loss would be required under ASC 326-20-35-6,
“Financial Assets Secured by Collateral Maintenance Provisions.”
This portfolio also has some loans that are secured by residential real estate or other financial assets and unsecured loans. The primary sources of repayment
for these loans are the income and/or assets of the borrower. The underlying collateral is the most important indicator of risk for this loan portfolio. The
overall lower risk profile of this portfolio is driven by loans secured by cash, marketable securities and/or cash value life insurance, which were 99.0% and
98.6% of total private banking loans as of December 31, 2021 and 2020, respectively.
Commercial Banking: Commercial and Industrial Loans and Leases
This loan portfolio primarily includes loans and leases made to financial services and other service and/or manufacturing companies generally for the purposes
of financing production, operating capacity, accounts receivable, inventory, equipment, acquisitions and/or recapitalizations. Cash flow from the borrower’s
operations is the primary source of repayment for these loans and leases; however, most loans are collateralized by commercial assets.
The borrower’s industry and local and regional economic conditions are important indicators of risk for this loan portfolio. Collateral for these types of loans
at times does not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. C&I loans collateralized by marketable securities
are treated the same as private banking loans for purposes of the calculation of the allowance for credit losses on loans and leases.
Commercial Banking: Commercial Real Estate Loans
This loan portfolio includes loans secured by commercial purpose real estate, including both owner-occupied properties and investment properties for various
purposes including office, industrial, multifamily, retail, hospitality, healthcare and self-storage. The primary source of repayment for CRE loans secured by
owner-occupied properties is cash flow from the borrower’s operations. Individual project cash flows, global cash flows and liquidity from the developer, or
the sale of the property, are the primary sources of repayment for CRE loans secured by investment properties. Also included in this portfolio are commercial
construction loans to finance the construction or renovation of structures as well as to finance the acquisition and development of raw land for various
purposes. The increased level of risk for these loans is generally confined to the construction period. If problems arise, the project may not be completed and
as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal.
The underlying purpose and collateral of the loans are important indicators of risk for this loan portfolio. Additional risks exist and are dependent on several
factors such as the condition of the local and regional economies, whether or not the project is owner-occupied, the type of project, and the experience and
resources of the developer.
On a monthly basis, management monitors various credit quality indicators for the loan portfolio, including delinquency, non-performing status, changes in risk
ratings, changes in the underlying performance of the borrowers and other relevant factors. On a daily basis, the Company monitors the collateral of loans secured
by cash, marketable securities and/or cash value life insurance within the private banking portfolio which further reduces the risk profile of that portfolio. Refer to
Note 1, Summary of Significant Accounting Policies, for the Company’s policy for determining past due status of loans.
Loan risk ratings are assigned based upon the creditworthiness of the borrower and the quality of the collateral for loans secured by marketable securities. Loan
risk ratings are reviewed on an ongoing basis according to internal policies and applicable regulatory guidance. Loans within the pass rating are believed to have a
lower risk of loss than loans that are risk rated as special mention, substandard or doubtful, which are believed to have an increasing risk of loss. Management also
monitors the loan portfolio through a formal periodic review process. All non-pass rated loans are reviewed monthly and higher risk-rated loans within the pass
category are reviewed three times a year.
The Company’s risk ratings are consistent with regulatory guidance and are as follows:
Pass – A pass loan is currently performing in accordance with its contractual terms.
Special Mention – A special mention loan has potential weaknesses that warrant management’s close attention. If left uncorrected, these potential weaknesses may
result in deterioration of the repayment prospects or in our credit position at some future date. Economic and market conditions beyond the customer’s control may
in the future necessitate this classification.
Substandard – A substandard loan is not adequately protected by the net worth and/or paying capacity of the obligor or by the collateral pledged, if any.
Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility
that the Company will sustain some loss if the deficiencies are not corrected.
114
Doubtful – A doubtful loan has all the weaknesses inherent in a loan categorized as substandard with the added characteristic that the weaknesses make collection
or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
The following table presents the amortized cost of loans by portfolio, risk rating and year of origination:
As of December 31, 2021
(Dollars in thousands)
2021
2020
2019
2018
2017
Prior
Revolving Loans
Total
Private Banking:
Pass
$
21,365 $
57,722 $
29,935 $
54,082 $
7,121 $
50,545 $
6,665,728 $
6,886,498
Special mention
—
—
—
—
—
—
—
—
Substandard
—
—
—
—
—
—
—
—
Doubtful
—
—
—
—
—
—
—
—
Total private banking loans
21,365
57,722
29,935
54,082
7,121
50,545
6,665,728
6,886,498
Commercial and Industrial:
Pass
240,980
156,216
186,879
55,729
39,523
25,328
787,778
1,492,433
Special mention
—
1,353
—
—
—
138
3,826
5,317
Substandard
—
—
1,757
—
578
41
8,984
11,360
Doubtful
—
375
—
3,938
—
—
—
4,313
Total commercial and industrial
loans
240,980
157,944
188,636
59,667
40,101
25,507
800,588
1,513,423
Commercial Real Estate:
Pass
572,630
512,139
454,762
333,477
187,090
251,809
35,617
2,347,524
Special mention
—
—
—
—
—
2,288
—
2,288
Substandard
—
261
5,395
621
—
7,314
—
13,591
Doubtful
—
—
—
—
—
—
—
—
Total commercial real estate loans
572,630
512,400
460,157
334,098
187,090
261,411
35,617
2,363,403
Loans and leases held-for-
investment
$
834,975 $
728,066 $
678,728 $
447,847 $
234,312 $
337,463 $
7,501,933 $
10,763,324
The Company had no revolving loans which were converted to term loans included in loans and leases held-for-investment at December 31, 2021.
Accrued interest receivable of $21.8 million and $16.4 million on loans and leases as of December 31, 2021 and December 31, 2020, respectively, was excluded
from the amortized cost used in the allowance for credit losses.
Changes in the allowance for credit losses on loans and leases were as follows for the years ended December 31, 2021, 2020 and 2019:
Year Ended December 31, 2021
(Dollars in thousands)
Commercial
and
Industrial
Commercial
Real Estate
Private
Banking
Total
Balance, beginning of period
$
5,254 $
27,329 $
2,047 $
34,630
Provision (credit) for credit losses
7,604
(6,628)
(156)
820
Charge-offs
(4,633)
(2,482)
—
(7,115)
Recoveries
228
—
—
228
Balance, end of period
$
8,453 $
18,219 $
1,891 $
28,563
(1)
(1)
115
Year Ended December 31, 2020
(Dollars in thousands)
Commercial
and
Industrial
Commercial
Real Estate
Private
Banking
Total
Balance, beginning of period
$
5,262 $
6,873 $
1,973 $
14,108
Impact of adopting CECL
(2,431)
3,560
(187)
942
Provision for credit losses
1,973
16,896
432
19,301
Charge-offs
—
—
(171)
(171)
Recoveries
450
—
—
450
Balance, end of period
$
5,254 $
27,329 $
2,047 $
34,630
Year Ended December 31, 2019
(Dollars in thousands)
Commercial
and
Industrial
Commercial
Real Estate
Private
Banking
Total
Balance, beginning of period
$
5,764 $
5,502 $
1,942 $
13,208
Provision (credit) for credit losses
(2,482)
1,371
143
(968)
Charge-offs
—
—
(112)
(112)
Recoveries
1,980
—
—
1,980
Balance, end of period
$
5,262 $
6,873 $
1,973 $
14,108
The following tables present the age analysis of past due loans segregated by class of loan:
December 31, 2021
(Dollars in thousands)
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or More
Past Due
Total
Past Due
Current
Total
Private banking
$
678 $
— $
— $
678 $
6,885,820 $
6,886,498
Commercial and industrial
—
—
4,313
4,313
1,509,110
1,513,423
Commercial real estate
—
—
—
—
2,363,403
2,363,403
Loans and leases held-for-investment
$
678 $
— $
4,313 $
4,991 $
10,758,333 $
10,763,324
December 31, 2020
(Dollars in thousands)
30-59 Days
Past Due
60-89 Days
Past Due
90 Days or More
Past Due
Total
Past Due
Current
Total
Private banking
$
250 $
— $
— $
250 $
4,807,550 $
4,807,800
Commercial and industrial
—
—
458
458
1,273,694
1,274,152
Commercial real estate
2,926
—
6,296
9,222
2,146,244
2,155,466
Loans and leases held-for-investment
$
3,176 $
— $
6,754 $
9,930 $
8,227,488 $
8,237,418
Individually Evaluated Loans
Management monitors the delinquency status of the Company’s loan portfolio on a monthly basis. Loans are considered non-performing when interest and
principal are 90 days or more past due or management has determined that it is probable the borrower is unable to meet payments as they become due. The risk of
loss is generally highest for non-performing loans.
116
The following tables present the Company’s amortized cost of individually evaluated loans and related information on those loans as of and for the years ended
December 31, 2021, 2020 and 2019:
As of and for the Year Ended December 31, 2021
(Dollars in thousands)
Amortized
Cost
Unpaid Principal
Balance
Related Allowance
Average Recorded
Investment
Interest Income
Recognized
With a related allowance recorded:
Private banking
$
— $
— $
— $
— $
—
Commercial and industrial
15,673
19,989
4,646
19,553
786
Commercial real estate
1,139
1,139
37
1,139
56
Total with a related allowance recorded
16,812
21,128
4,683
20,692
842
Without a related allowance recorded:
Private banking
—
—
—
—
—
Commercial and industrial
—
—
—
—
—
Commercial real estate
—
—
—
—
—
Total without a related allowance recorded
—
—
—
—
—
Total:
Private banking
—
—
—
—
—
Commercial and industrial
15,673
19,989
4,646
19,553
786
Commercial real estate
1,139
1,139
37
1,139
56
Total
$
16,812 $
21,128 $
4,683 $
20,692 $
842
As of and for the Year Ended December 31, 2020
(Dollars in thousands)
Amortized
Cost
Unpaid Principal
Balance
Related Allowance
Average Recorded
Investment
Interest Income
Recognized
With a related allowance recorded:
Private banking
$
— $
— $
— $
— $
—
Commercial and industrial
458
457
103
458
—
Commercial real estate
9,222
9,251
1,885
9,222
—
Total with a related allowance recorded
9,680
9,708
1,988
9,680
—
Without a related allowance recorded:
Private banking
—
—
—
—
—
Commercial and industrial
—
—
—
—
—
Commercial real estate
—
—
—
—
—
Total without a related allowance recorded
—
—
—
—
—
Total:
Private banking
—
—
—
—
—
Commercial and industrial
458
457
103
458
—
Commercial real estate
9,222
9,251
1,885
9,222
—
Total
$
9,680 $
9,708 $
1,988 $
9,680 $
—
117
As of and for the Year Ended December 31, 2019
(Dollars in thousands)
Amortized
Cost
Unpaid Principal
Balance
Related Allowance
Average Recorded
Investment
Interest Income
Recognized
With a related allowance recorded:
Private banking
$
171 $
193 $
171 $
171 $
—
Commercial and industrial
—
—
—
—
—
Commercial real estate
—
—
—
—
—
Total with a related allowance recorded
171
193
171
171
—
Without a related allowance recorded:
Private banking
13
13
—
13
—
Commercial and industrial
—
—
—
—
—
Commercial real estate
—
—
—
—
—
Total without a related allowance recorded
13
13
—
13
—
Total:
Private banking
184
206
171
184
—
Commercial and industrial
—
—
—
—
—
Commercial real estate
—
—
—
—
—
Total
$
184 $
206 $
171 $
184 $
—
Individually evaluated loans were $16.8 million and $9.7 million as of December 31, 2021 and 2020, respectively. There was no interest income recognized on
individually evaluated loans that were also on non-accrual status for the years ended December 31, 2021, 2020 and 2019. As of December 31, 2021 and 2020, there
were no loans 90 days or more past due and still accruing interest income.
The Company estimates allowance for credit losses individually for loans that do not share similar risk characteristics, including non-accrual loans and loans
designated as a TDR, using a discounted cash flow method or based on the fair value of the collateral less estimated selling costs. Based on those evaluations there
were specific reserves totaling $4.7 million and $2.0 million as of December 31, 2021 and 2020, respectively. Refer to Note 1, Summary of Significant Accounting
Policies, for the Company’s policy on evaluating loans for expected credit losses and interest income.
The following tables present the allowance for credit losses on loans and leases and amortized cost of individually evaluated loans:
December 31, 2021
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Allowance for credit losses on loans and leases:
Individually evaluated for impairment
$
— $
4,646 $
37 $
4,683
Collectively evaluated for impairment
1,891
3,807
18,182
23,880
Total allowance for credit losses on loans and leases
$
1,891 $
8,453 $
18,219 $
28,563
Loans and leases held-for-investment:
Individually evaluated for impairment
$
— $
15,673 $
1,139 $
16,812
Collectively evaluated for impairment
6,886,498
1,497,750
2,362,264
10,746,512
Loans and leases held-for-investment
$
6,886,498 $
1,513,423 $
2,363,403 $
10,763,324
118
December 31, 2020
(Dollars in thousands)
Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Allowance for credit losses on loans and leases:
Individually evaluated for impairment
$
— $
103 $
1,885 $
1,988
Collectively evaluated for impairment
2,047
5,151
25,444
32,642
Total allowance for credit losses on loans and leases
$
2,047 $
5,254 $
27,329 $
34,630
Loans and leases held-for-investment:
Individually evaluated for impairment
$
— $
458 $
9,222 $
9,680
Collectively evaluated for impairment
4,807,800
1,273,694
2,146,244
8,227,738
Loans and leases held-for-investment
$
4,807,800 $
1,274,152 $
2,155,466 $
8,237,418
Troubled Debt Restructuring
The aggregate recorded investment in individually evaluated loans with terms modified through a TDR on non-accrual was $0 and $2.9 million as of December 31,
2021 and 2020, respectively. The aggregate recorded investment in individually evaluated loans with terms modified through a TDR also accruing interest was
$12.5 million and $0 as of December 31, 2021 and 2020, respectively. There were no unused commitments on loans designated as TDR as of December 31, 2021
and 2020.
The modifications made to restructured loans typically consist of an extension of the payment terms or the deferral of principal payments. There were no loans
modified as TDRs within 12 months of the corresponding balance sheet date with payment defaults during the years ended December 31, 2021, 2020 or 2019.
The financial effects of our modifications made to loans newly designated as TDRs during the year ended December 31, 2021 and 2020, were as follows:
Year Ended December 31, 2021
(Dollars in thousands)
Count
Recorded
Investment at the
time of
Modification
Current Recorded
Investment
Allowance for Credit
Losses at the time of
Modification
Current Allowance
for Credit Losses
Commercial & Industrial:
Extended term, deferred principal and increased advance rates
1
$
11,360 $
11,360 $
334 $
334
Commercial Real Estate:
Extended term, deferred principal and increased advance rates
1
$
1,139 $
1,139 $
37 $
37
Total
2
$
12,499 $
12,499 $
371 $
371
Year Ended December 31, 2020
(Dollars in thousands)
Count
Recorded
Investment at the
time of Modification
Current Recorded
Investment
Allowance for Loan
Losses at the time of
Modification
Current Allowance
for Loan Losses
Commercial Real Estate:
Extended term, forgave principal and change in interest terms
1
$
2,926 $
2,926 $
468 $
468
Total
1
$
2,926 $
2,926 $
468 $
468
Other Real Estate Owned
As of December 31, 2021 and 2020, the balance of OREO was $2.0 million and $2.7 million, respectively. During the year ended December 31, 2021, a property
was sold from OREO for $351,000 with a net loss of $39,000. During the year ended December 31, 2020, a property was sold from OREO for $1.5 million with a
net gain of $65,000. There were no residential mortgage loans that were in the process of foreclosure as of December 31, 2021 and 2020.
119
[6] GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value of net assets acquired.
The following table presents the change in goodwill for the years ended December 31, 2021 and 2020:
(Dollars in thousands)
2021
2020
Balance, beginning of period
$
41,660 $
41,660
Additions
—
—
Balance, end of period
$
41,660 $
41,660
The Company determined the amount of identifiable intangible assets based upon an independent valuation. The following table presents the change in intangible
assets for the years ended December 31, 2021 and 2020:
(Dollars in thousands)
2021
2020
Balance, beginning of period
$
22,251 $
24,194
Additions
—
—
Amortization
(1,911)
(1,943)
Balance, end of period
$
20,340 $
22,251
The following table presents the gross amount of intangible assets and total accumulated amortization by class:
December 31, 2021
December 31, 2020
(Dollars in thousands)
Gross Amount
Accumulated
Amortization
Net Carrying
Amount
Gross Amount
Accumulated
Amortization
Net Carrying
Amount
Trade name
$
4,040 $
(1,112) $
2,928
$
4,040 $
(939) $
3,101
Client Relationships:
Sub-advisory client list
11,645
(6,708)
4,937
11,645
(5,838)
5,807
Separate managed accounts client list
3,175
(1,716)
1,459
3,175
(1,404)
1,771
Other institutional client list
5,950
(4,237)
1,713
5,950
(3,696)
2,254
Non-compete agreements
522
(519)
3
522
(504)
18
Total finite-lived intangibles
25,332
(14,292)
11,040
25,332
(12,381)
12,951
Client Relationships:
Mutual fund client relationships
(indefinite-lived)
9,300
—
9,300
9,300
—
9,300
Total intangible assets
$
34,632 $
(14,292) $
20,340
$
34,632 $
(12,381) $
22,251
Intangible amortization expense on finite-lived intangible assets totaled $1.9 million, $1.9 million and $2.0 million for the years ended December 31, 2021, 2020
and 2019, respectively.
The following is a summary of the expected intangible amortization expense for finite-lived intangibles assets, assuming no new additions, for each of the five
years following December 31, 2021:
(Dollars in thousands)
Amount
2022
$
1,900
2023
1,897
2024
1,806
2025
1,336
2026
1,246
Thereafter
2,855
Total finite-lived intangibles
$
11,040
120
[7] OFFICE PROPERTIES AND EQUIPMENT
The following is a summary of office properties and equipment by major classification as of December 31, 2021 and 2020:
December 31,
(Dollars in thousands)
2021
2020
Furniture, fixtures and equipment
$
26,695 $
20,244
Leasehold improvements
12,355
8,366
Total, at cost
39,050
28,610
Accumulated depreciation
(19,217)
(16,241)
Net office properties and equipment
$
19,833 $
12,369
Depreciation expense was $3.0 million, $2.3 million and $1.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.
[8] OPERATING LEASES
The Company has noncancellable operating leases primarily for its six office spaces and other office equipment that expire between 2022 and 2036. These leases
generally contain renewal options for periods ranging from one to five years. Because the Company is not reasonably certain that it will exercise these renewal
options, the options are not considered in determining the lease terms and associated potential option payments are excluded from lease payments. The Company’s
leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. Payments due under the lease contracts
include fixed payments and, for many of the Company’s leases, variable payments. Variable payments for office space leases include the Company’s proportionate
share of the building’s property taxes, insurance and common area maintenance. For office equipment leases for which the Company has elected not to separate
lease and non-lease components, maintenance services are provided by the lessor at a fixed cost and are included in the fixed lease payments for the single,
combined lease component.
The Company rents office space in its six office locations which are accounted for as operating leases. The remaining lease terms have expirations from 2022 to
2036 and provide for one or more renewal options. These leases provide for annual rent escalations and payment of certain operating expenses applicable to the
leased space. The Company records rent expense on a straight-line basis over the term of the lease. Operating lease cost was $3.2 million, $3.1 million and $2.8
million for the years ended December 31, 2021, 2020 and 2019, respectively. The net deferred rent liability was $1.8 million and $1.7 million as of December 31,
2021 and 2020, respectively. As of December 31, 2021, the weighted average remaining lease term was 13 years and the weighted average discount rate as 3.80%.
Maturities of lease liabilities under noncancellable leases as of December 31, 2021, are as follows:
(Dollars in thousands)
Amount
December 31,
2022
$
3,112
2023
3,678
2024
3,612
2025
3,756
2026
3,672
Thereafter
29,452
Total undiscounted lease payments
$
47,282
Imputed interest
10,345
Operating lease liability
$
36,937
During quarter ended September 30, 2021, the Company 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.
121
[9] DEPOSITS
As of December 31, 2021 and 2020, deposits were comprised of the following:
Interest Rate Range
Weighted Average
Interest Rate
Balance
(Dollars in thousands)
December 31,
2021
December 31,
2021
December 31,
2020
December 31,
2021
December 31,
2020
Demand and savings accounts:
Noninterest-bearing checking accounts
—
—
—
$
776,256 $
456,426
Interest-bearing checking accounts
0.05% to 1.70%
0.35%
0.38%
4,318,523
3,068,834
Money market deposit accounts
0.10% to 3.25%
0.40%
0.56%
5,632,093
3,927,797
Total demand and savings accounts
10,726,872
7,453,057
Certificates of deposit
0.04% to 3.15%
0.41%
1.08%
777,517
1,036,032
Total deposits
$
11,504,389 $
8,489,089
Weighted average rate on interest-bearing accounts
0.38%
0.56%
As of December 31, 2021 and 2020, the Bank had total brokered deposits of $955.5 million and $753.3 million, respectively. Reciprocal deposits through
Certificate of Deposit Account Registry Service (“CDARS ”) and Insured Cash Sweep (“ICS ”) totaled $2.06 billion and $1.72 billion as of December 31, 2021
and 2020, respectively, and were not considered brokered deposits.
As of December 31, 2021 and 2020, certificates of deposit with balances of $100,000 or more, excluding brokered and reciprocal deposits, totaled $477.0 million
and $534.3 million, respectively. As of December 31, 2021 and 2020, certificates of deposit with balances of $250,000 or more, excluding brokered and reciprocal
deposits, totaled $126.4 million and $159.6 million.
The contractual maturity of certificates of deposit was as follows:
(Dollars in thousands)
December 31,
2021
December 31,
2020
12 months or less
$
693,339 $
892,427
12 months to 24 months
72,735
132,443
24 months to 36 months
11,443
11,162
Total
$
777,517 $
1,036,032
Interest expense on deposits for the years ended December 31, 2021, 2020 and 2019, was as follows:
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Interest-bearing checking accounts
$
13,106 $
14,493 $
21,480
Money market deposit accounts
23,299
35,095
69,336
Certificates of deposit
5,099
19,614
34,776
Total interest expense on deposits
$
41,504 $
69,202 $
125,592
®
®
®
®
122
[10] BORROWINGS
As of December 31, 2021 and 2020, borrowings were comprised of the following:
December 31, 2021
December 31, 2020
(Dollars in thousands)
Interest Rate
Ending Balance
Maturity Date
Interest Rate
Ending Balance
Maturity Date
FHLB borrowings:
Issued 12/20/2021
0.30%
50,000
3/21/2022
Issued 12/2/2021
0.27%
50,000
3/2/2022
Issued 12/1/2021
0.27%
150,000
3/1/2022
Issued 12/21/2020
0.39%
50,000
3/22/2021
Issued 12/2/2020
0.33%
50,000
3/2/2021
Issued 12/1/2020
0.33%
150,000
3/1/2021
Issued 10/8/2020
0.39%
50,000
1/8/2021
Line of credit borrowings
—
2/18/2022
4.25%
5,000
10/17/2021
Subordinated notes payable (net of debt issuance costs of
$1,792 and $2,007, respectively)
5.75%
95,708
5/15/2030
5.75%
95,493
5/15/2030
Senior notes payable (net of debt issuance costs of $545 and
$0, respectively)
2.25%
124,455
12/15/2024
Total borrowings, net
$
470,163
$
400,493
On December 15, 2021, the Company issued a senior unsecured fixed-to-floating rate note (the “Senior Note”) to Raymond James in the amount of $125 million.
The Senior Note, which matures on December 15, 2024, bears interest at a fixed annual rate of 2.25% from the date of issuance to December 15, 2022, and
thereafter until maturity at a floating annual rate, reset quarterly, equal to the then current three-month Secured Overnight Financing Rate (SOFR). The Senior Note
is not redeemable prior to December 15, 2022. On and after December 15, 2022, the Senior Note is redeemable on any interest payment date at 100% of the
principal amount thereof, plus accrued and unpaid interest to the redemption date.
In 2020, the Company completed an underwritten public offering of subordinated notes due 2030, raising aggregate proceeds of $97.5 million. The subordinated
notes have a term of 10 years at a fixed-to-floating rate of 5.75%. The subordinated notes constitute Tier 2 capital for the Company under federal regulatory capital
rules.
The Bank’s FHLB borrowing capacity is based on the collateral value of certain securities held in safekeeping at the FHLB and loans pledged to the FHLB. The
Bank submits a quarterly Qualifying Collateral Report (“QCR”) to the FHLB to update the value of the loans pledged. As of December 31, 2021, the Bank’s
borrowing capacity is based on the information provided in the September 30, 2021, QCR filing. As of December 31, 2021, the Bank had pledged loans of $1.45
billion, for a gross borrowing capacity of $1.03 billion, of which $250.0 million was outstanding in advances. As of December 31, 2020, there was $300.0 million
outstanding in advances from the FHLB. When the Bank borrows from the FHLB, interest is charged at the FHLB’s posted rates at the time of the borrowing.
The Bank maintains an unsecured line of credit of $10.0 million with M&T Bank and an unsecured line of credit of $20.0 million with Texas Capital Bank. As of
December 31, 2021 and 2020, there were no outstanding borrowings under these lines of credit, and they are available to the Bank at the lenders’ discretion. In
addition, the Bank maintains an $8.0 million unsecured line of credit with PNC Bank for private label credit card facilities for certain existing commercial clients
of the Bank, of which $3.4 million in notional value of credit cards have been issued. The clients of the Bank are responsible for repaying any balances due on
these credit cards directly to PNC; however, if the customer fails to repay PNC, the Bank could be required to satisfy the obligation to PNC and initiate collection
from our customer as part of the existing credit facility of that customer. In August 2021, the Bank entered into a standby letter of credit with PNC Bank for
$643,000, which expires in August 2022.
As of December 31, 2020, the Company held an unsecured line of credit of $75.0 million with Texas Capital Bank and had $5.0 million in outstanding borrowings
under this line of credit. On February 18, 2021, the Company terminated its line of credit with Texas Capital Bank and established a new unsecured line of credit of
$75.0 million with The Huntington National Bank. As of December 31, 2021, there were no outstanding borrowings under the Huntington National Bank line of
credit.
123
Interest expense on borrowings for the years ended December 31, 2021, 2020 and 2019, was as follows:
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
FHLB borrowings
$
4,348 $
6,095 $
8,639
Line of credit borrowings
148
261
68
Senior and subordinated notes payable
5,938
3,593
1,091
Total interest expense on borrowings
$
10,434 $
9,949 $
9,798
[11] INCOME TAXES
The income tax provision reconciled to taxes computed at the statutory federal rate for the years ended December 31, 2021, 2020 and 2019, was as follows:
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Tax provision at statutory rate
$
19,048 $
11,056 $
14,418
Nondeductible expenses
1,299
772
919
Bank owned life insurance
(450)
(366)
(364)
Stock option exercises and cancellations
(193)
(288)
(668)
State tax expense, net of federal benefit
4,237
1,636
2,481
Adjustments to prior year tax
98
284
(121)
Tax exempt income, net of disallowed interest
(25)
(47)
(71)
Renewable energy tax credits
(3,504)
(1,531)
(1,912)
Low-income housing tax credits
(1,115)
(880)
(364)
Historic tax credits
(6,752)
(3,273)
(6,036)
Other
—
49
183
Income tax provision
$
12,643 $
7,412 $
8,465
The tax credits in the table above relate to transactions for the financing of renewable solar energy facilities, low-income housing tax credits and historic tax
credits. These transactions provided federal tax credits and state tax credits (where applicable) during the 2021, 2020 and 2019 tax years. The financing of the solar
energy facilities is accounted for as direct financing leases included within the C&I loan and lease portfolio. The amortization of the Company’s low-income
housing tax credit investments has been reflected as income tax expense. The net amount of low-income housing tax credits, amortization and tax benefits recorded
to income tax expenses during the years ended December 31, 2021, 2020 and 2019, was $1.1 million, $880,000 and $364,000, respectively. The carrying amount
of the investment in low income housing tax credits was $31.1 million, of which $6.0 million was unfunded as of December 31, 2021. The carrying amount of the
investment in historic tax credits was $11.4 million, of which $8.1 million was unfunded as of December 31, 2021.
The income tax provision for the years ended December 31, 2021, 2020 and 2019, consisted of:
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Current income tax provision - federal
$
7,927 $
4,812 $
4,058
Current income tax provision - state
3,911
2,094
1,767
Deferred tax provision (benefit) - federal
(342)
431
1,312
Deferred tax provision - state
1,147
75
1,328
Income tax provision
$
12,643 $
7,412 $
8,465
124
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2021 and
2020, were as follows:
December 31,
(Dollars in thousands)
2021
2020
Deferred tax assets:
Net operating loss - state
$
672 $
672
Start-up expenses
—
9
Stock compensation
2,415
1,546
Compensation related accruals
3,753
4,311
Leasehold improvement
590
666
Allowance for credit losses on loans and leases
7,887
8,369
Right-of-use liability
8,892
4,891
Reserve for unfunded commitments
701
820
Supplemental executive retirement plan
919
917
Transaction costs
802
112
Earn out liability non-purchase accounting
181
214
Unrealized loss on investments and derivatives
1,012
857
State bonus depreciation
2,557
3,535
General business credits
14,207
14,551
Valuation allowance
(367)
—
Other
1,727
31
Gross deferred tax assets
45,948
41,501
Deferred tax liabilities:
Office properties and equipment
(32,749)
(31,632)
Prepaid expenses
(475)
(649)
Deferred loan costs
(4,714)
(5,036)
Intangibles
(3,063)
(257)
Goodwill
(2,710)
(4,885)
State capital shares tax liability
(109)
(229)
Right-of-use asset
(8,454)
(4,489)
Gross deferred tax liability
(52,274)
(47,177)
Net deferred tax liability
$
(6,326) $
(5,676)
Management believes that, as of December 31, 2021, it is more likely than not that the deferred tax assets will be fully realized upon the generation of future
taxable income, except for a portion of the state net operating losses. A valuation allowance of $367,000 was recorded based on the lack of projected taxable
income on separate company state income tax returns. The Company has certain pre-tax state net operating loss carryforwards of $13.6 million, which will expire
in years 2034 through 2041. The Company has general business credits of $14.2 million, which will expire in 2040.
The change in the net deferred tax asset or liability for the years ended December 31, 2021 and 2020, was detailed as follows:
December 31,
(Dollars in thousands)
2021
2020
Deferred tax provision
$
(805) $
(506)
Deferred tax retained earnings for CECL adoption
—
543
Deferred tax impact from other comprehensive income
155
1,218
Change in net deferred tax asset or liability
$
(650) $
1,255
The Company considers uncertain tax positions that it has taken or expects to take on a tax return. The Company recognizes interest accrued and penalties (if any)
related to unrecognized tax benefits in income tax expense. Tax years 2018 through 2021 remain subject to federal and state tax examinations as of December 31,
2021.
125
A reconciliation of the beginning and ending gross amounts of unrecognized tax benefits for the years ended December 31, 2021, 2020 and 2019, was as follows:
December 31,
(Dollars in thousands)
2021
2020
2019
Beginning of year balance
$
685 $
528 $
704
Increases in prior period tax positions
—
—
111
Decreases in prior period tax positions
—
(46)
—
Increases in current period tax positions
—
203
148
Settlements
(508)
—
(435)
End of year balance
$
177 $
685 $
528
The total estimated unrecognized tax benefit that, if recognized, would affect the Company’s effective tax rate was approximately $75,000, $628,000 and $478,000
as of December 31, 2021, 2020 and 2019, respectively. The impact of interest and penalties was immaterial to the Company’s financial statements for the years
ended December 31, 2021, 2020 and 2019. The Company does not expect changes in its unrecognized tax benefits in the next twelve months to have a material
impact on its financial statements.
[12] STOCK TRANSACTIONS
On December 30, 2020, the Company completed the private placement of securities pursuant to an Investment Agreement, dated October 10, 2020 and amended
December 9, 2020, with T-VIII PubOpps LP (“T-VIII PubOpps”), an affiliate of investment funds managed by Stone Point Capital LLC. Pursuant to the
Investment Agreement, the Company sold to T-VIII PubOpps (i) 2,770,083 shares of voting common stock for $40.0 million, (ii) 650 shares of Series C Preferred
Stock for $65.0 million, and (iii) warrants to purchase up to 922,438 shares of voting common stock, or a future series of non-voting common stock at an exercise
price of $17.50 per share. After two years, the Series C Preferred Stock is convertible into shares of a future series of non-voting common stock or, when
transferred under certain limited circumstances to a holder other than an affiliate of Stone Point Capital LLC, voting common stock, at a price of 13.75 per share.
The Company has the right to effect a mandatory conversion of the Series C Preferred Stock held by T-VIII PubOpps into shares of non-voting common stock
following the three year anniversary of the closing of the investment subject to certain conditions. The Series C Preferred Stock has a liquidation preference of
$100,000 per share and pays a quarterly dividend at an annualized rate of 6.75%. The Company received gross proceeds of $105.0 million at closing and may
receive up to an additional $16.1 million if the warrants are exercised in full. The net proceeds have been recorded to shareholders’ equity at December 31,2020
and allocated to the three equity instruments issued using the relative fair value method applied to common stock, preferred stock, and to the warrants issued which
were recorded to additional paid-in capital. The net proceeds constitute Tier 1 capital for the holding company under federal regulatory capital rules.
In May 2019, the Company completed a registered, underwritten public offering of 3.2 million depositary shares, each representing a 1/40th interest in a share of
its 6.375% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, no par value (the “Series B Preferred Stock”), with a liquidation preference
of $1,000 per share (equivalent to $25 per depository share). The Company received net proceeds of $77.6 million from the sale of 80,500 shares of its Series B
Preferred Stock (equivalent to 3.2 million depositary shares), after deducting underwriting discounts, commissions and direct offering expenses. The preferred
stock constitutes Tier 1 capital for the holding company under federal regulatory capital rules.
When, as, and if declared by the board of directors (the “Board”) of the Company, dividends will be payable on the Series B Preferred Stock from the date of
issuance to, but excluding July 1, 2026, at a rate of 6.375% per annum, payable quarterly, in arrears, and from and including July 1, 2026, dividends will accrue
and be payable at a floating rate equal to three-month LIBOR plus a spread of 408.8 basis points per annum (subject to potential adjustment as provided in the
definition of three-month LIBOR), payable quarterly, in arrears. The Company may redeem the Series B Preferred Stock at its option, subject to regulatory
approval, on or after July 1, 2024, as described in the prospectus supplement relating to the offering filed with the SEC on May 23, 2019.
During the year ended December 31, 2021, the Company paid dividends of $2.7 million on its Series A Preferred Stock, $5.1 million on its Series B Preferred
Stock, and $4.5 million on its Series C Preferred Stock. During the year ended December 31, 2020, the Company paid dividends of $2.7 million on its Series A
Preferred Stock and $5.1 million on its Series B Preferred Stock. During the year ended December 31, 2019, the Company paid dividends of $2.7 million on its
Series A Preferred Stock and $3.1 million on its Series B Preferred Stock.
Under authorization of the Board, the Company was permitted to repurchase shares of its common stock up to prescribed amounts of which $7.3 million remained
available as of December 31, 2021. The Board also authorized the Company to utilize some of the share repurchase program authorizations to cancel certain
options to purchase shares of its common stock granted by the Company.
126
During the year ended December 31, 2020, the Company repurchased a total of 40,000 shares of common stock for approximately $671,000, at an average cost of
$16.76 per share. During the year ended December 31, 2019, the Company repurchased a total of 90,000 shares of common stock for approximately $1.8 million,
at an average cost of $20.21 per share. The repurchased shares are held as treasury stock.
Treasury shares increased 102,611, or approximately $2.1 million, in connection with the net settlement of equity awards exercised or vested during the year ended
December 31, 2021. The Company reissued 8,500 shares of treasury stock for approximately $135,000 during the year ended December 31, 2020. Treasury shares
increased 141,500, or approximately $2.9 million, in connection with the net settlement of equity awards exercised or vested during the year ended December 31,
2020. Treasury shares increased 21,512, or approximately $493,000, in connection with the net settlement of equity awards exercised or vested during the year
ended December 31, 2019.
The table below shows the changes in the Company’s preferred and common shares outstanding during the periods indicated:
Number of
Preferred Shares
Outstanding
Number of
Common Shares
Outstanding
Number of
Treasury Shares
Balance, December 31, 2018
40,250
28,878,674
2,014,910
Issuance of preferred stock
80,500
—
—
Issuance of restricted common stock
—
580,453
—
Forfeitures of restricted common stock
—
(78,209)
—
Exercise of stock options
—
86,580
—
Purchase of treasury stock
—
(90,000)
90,000
Increase in treasury stock related to equity awards
—
(21,512)
21,512
Balance, December 31, 2019
120,750
29,355,986
2,126,422
Issuance of preferred stock
650
—
—
Issuance of common stock
—
2,770,083
—
Issuance of restricted common stock
—
638,832
—
Forfeitures of restricted common stock
—
(32,751)
—
Exercise of stock options
—
61,000
—
Purchase of treasury stock
—
(40,000)
40,000
Increase in treasury stock related to equity awards
—
(141,500)
141,500
Reissuance of treasury stock
—
8,500
(8,500)
Balance, December 31, 2020
121,400
32,620,150
2,299,422
Issuance of preferred stock
33
—
—
Issuance of restricted common stock
—
633,386
—
Forfeitures of restricted common stock
—
(12,297)
—
Exercise of stock options
—
124,870
—
Increase in treasury stock related to equity awards
—
(102,611)
102,611
Balance, December 31, 2021
121,433
33,263,498
2,402,033
[13] REGULATORY CAPITAL
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory – and possibly additional discretionary – actions by regulators that, if undertaken, could have a direct and material
adverse effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth
in the tables below) of Common Equity Tier 1 (“CET 1”), Tier 1 and Total risk-based capital to risk-weighted assets, and a Tier 1 leverage ratio of Tier 1 capital to
average assets (as each term is defined in the applicable regulations).
127
As of December 31, 2021 and 2020, TriState Capital Holdings, Inc. and TriState Capital Bank exceeded all capital adequacy requirements to which they were
subject.
Insured depository institutions are categorized as well capitalized if they meet minimum capital ratios as set forth in the tables below. The Bank exceeded the
capital ratios necessary to be well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since the filing
of the most recent Call Report that management believes have materially changed the Bank’s capital, as presented in the tables below.
A banking organization is also subject to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does
not maintain the necessary capital conservation buffer of CET 1 capital to risk weighted assets ratio of 2.5% or more, in addition to the minimum risk-based capital
adequacy levels shown in the tables below. As of December 31, 2021 and 2020, both the Company and the Bank were above the levels required to avoid
limitations on capital distributions and discretionary bonus payments.
In 2020, U.S. federal regulatory authorities issued a final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option
to delay the impact of CECL on regulatory capital for up to two years, beginning January 1, 2020, followed by a three-year transition period. As the Company
adopted CECL on December 31, 2020, the Company elected to utilize the remainder of the two-year delay of CECL’s impact on its regulatory capital, from
December 31, 2020 through December 31, 2021, followed by the three-year transition period of CECL impact on regulatory capital, from January 1, 2022 through
December 31, 2024.
The following tables set forth certain information concerning the Company’s and the Bank’s regulatory capital as of December 31, 2021 and 2020:
December 31, 2021
Actual
For Capital Adequacy Purposes
To be Well Capitalized Under
Prompt Corrective Action
Provisions
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital ratio
Company
$
910,320
13.43 %
$
542,409
8.00 %
N/A
N/A
Bank
$
986,657
14.60 %
$
540,639
8.00 %
$
675,798
10.00 %
Tier 1 risk-based capital ratio
Company
$
788,910
11.64 %
$
406,807
6.00 %
N/A
N/A
Bank
$
960,955
14.22 %
$
405,479
6.00 %
$
540,639
8.00 %
Common equity tier 1 risk-based capital ratio
Company
$
607,367
8.96 %
$
305,105
4.50 %
N/A
N/A
Bank
$
960,955
14.22 %
$
304,109
4.50 %
$
439,269
6.50 %
Tier 1 leverage ratio
Company
$
788,910
6.36 %
$
496,431
4.00 %
N/A
N/A
Bank
$
960,955
7.76 %
$
495,417
4.00 %
$
619,271
5.00 %
128
December 31, 2020
Actual
For Capital Adequacy Purposes
To be Well Capitalized Under
Prompt Corrective Action
Provisions
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk-based capital ratio
Company
$
833,819
14.12 %
$
472,267
8.00 %
N/A
N/A
Bank
$
789,273
13.41 %
$
470,820
8.00 %
$
588,525
10.00 %
Tier 1 risk-based capital ratio
Company
$
707,711
11.99 %
$
354,200
6.00 %
N/A
N/A
Bank
$
758,658
12.89 %
$
353,115
6.00 %
$
470,820
8.00 %
Common equity tier 1 risk-based capital ratio
Company
$
530,568
8.99 %
$
265,650
4.50 %
N/A
N/A
Bank
$
758,658
12.89 %
$
264,836
4.50 %
$
382,542
6.50 %
Tier 1 leverage ratio
Company
$
707,711
7.29 %
$
388,408
4.00 %
N/A
N/A
Bank
$
758,658
7.83 %
$
387,626
4.00 %
$
484,533
5.00 %
[14] EMPLOYEE BENEFIT PLANS
The Company participates in a qualified 401(k) defined contribution plan under which eligible employees may contribute a percentage of their salary, at their
discretion. During the years ended December 31, 2021, 2020 and 2019, the Company automatically contributed three percent of each eligible employee’s base
salary to the individual’s 401(k) plan, subject to IRS limitations. Full-time employees and certain part-time employees are eligible to participate upon the first
month following their first day of employment or having attained the age of 21, whichever is later. The Company’s contribution expense was $1.1 million, $1.1
million and $1.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.
On February 28, 2013, the Company entered into a supplemental executive retirement plan (“SERP”) for its Chairman and Chief Executive Officer. The benefits
were earned over a five-year period ended January 31, 2018, with the projected payments for this SERP of $25,000 per month for 180 months commencing the
latter of retirement or 60 months. For the years ended December 31, 2021, 2020 and 2019, the Company recorded expense related to SERP of $38,000, $149,000
and $8,000, respectively, utilizing a discount rate of 2.37%, 2.52% and 3.66%, respectively. The recorded liability related to the SERP plan was $3.8 million and
$3.8 million as of December 31, 2021 and 2020, respectively.
129
[15] EARNINGS PER COMMON SHARE
The computation of basic and diluted earnings per common share for the years ended December 31, 2021, 2020 and 2019, was as follows:
Years Ended December 31,
(Dollars in thousands, except per share data)
2021
2020
2019
Basic earnings per common share:
Net income
$
78,060 $
45,234 $
60,193
Less: Preferred dividends on Series A and Series B
7,849
7,849
5,753
Less: Preferred dividends on Series C
4,499
24
—
Net income available to common shareholders
$
65,712 $
37,361 $
54,440
Allocation of net income available:
Common shareholders
$
55,487 $
37,320 $
54,440
Series C convertible preferred shareholders
8,590
34
—
Warrant shareholders
1,635
7
—
Total
$
65,712 $
37,361 $
54,440
Basic weighted average common shares outstanding:
Basic common shares
31,315,235
28,267,512
27,864,933
Series C convertible preferred stock, as-if converted
4,848,039
25,832
—
Warrants, as-if exercised
922,438
5,041
—
Basic earnings per common share
$
1.77 $
1.32 $
1.95
Diluted earnings per common share:
Income available to common shareholders after allocation
$
55,487 $
37,320 $
54,440
Diluted weighted average common shares outstanding:
Basic common shares
31,315,235
28,267,512
27,864,933
Restricted stock - dilutive
994,997
345,026
633,802
Stock options - dilutive
149,716
125,930
334,600
Diluted common shares
32,459,948
28,738,468
28,833,335
Diluted earnings per common share
$
1.71 $
1.30 $
1.89
December 31,
December 31,
December 31,
Anti-dilutive shares:
2021
2020
2019
Restricted stock
37,500
581,717
31,500
Stock options
—
—
—
Series C convertible preferred stock, as-if converted
4,967,272
4,727,272
—
Warrants, as-if exercised
922,438
922,438
—
Total anti-dilutive shares
5,927,210
6,231,427
31,500
The Series C Preferred Stock and warrants are antidilutive under the treasury stock method compared to the basic EPS calculation under the two-class method.
[16] STOCK-BASED COMPENSATION PROGRAMS
The Company’s 2006 Stock Option Plan (the “2006 Plan”) provided for the granting of incentive and non-qualifying stock options to the Company’s key
employees, key contractors and outside directors at the discretion of the Board. The Omnibus Incentive Plan (the “Omnibus Plan”), which was approved by the
Company’s shareholders on May 20, 2014, provides for the granting of incentive and non-qualifying stock options, stock appreciation rights, restricted shares,
restricted stock units, dividend equivalent rights and other equity-based or equity-related awards to the Company’s key employees, key contractors and outside
directors at the discretion of the
130
Board. The Omnibus Plan, upon its approval, replaced the 2006 Plan. The total number of shares of common stock that may be granted under the Omnibus Plan is
the number of authorized shares of common stock of the Company that remained available under the 2006 Plan as of the date of shareholder approval, plus any
shares of common stock issued pursuant to the 2006 Plan that were forfeited, canceled, expired or otherwise terminated. The shares reserved for grants under the
2006 Plan are no longer available for grants under that plan but are instead reserved for grants under the Omnibus Plan.
In May 2021, the shareholders of the Company authorized the issuance of up to an additional 800,000 common shares relating to stock awards, which may be
issued upon the grant or exercise of stock-based awards, bringing the total authorized shares in connection with stock-based awards to 5,800,000 as of
December 31, 2021, under both the 2006 Plan and the Omnibus Plan (together, the “Plans”). The aggregate awards outstanding were 1,989,060 under the Plans. As
of December 31, 2021, 2,641,306 stock options and restricted shares had been exercised or vested, respectively, leaving 1,169,634 additional awards available for
the Company to grant under the Omnibus Plan.
The Company’s stock option grants contain terms that provide for a graded vesting schedule whereby portions of the options vest in increments over the requisite
service period. Options and restricted shares issued under the Plans typically vest in 1 to 5 years. The Company recognizes compensation expense for awards with
graded vesting schedules on a straight-line basis over the requisite service period for the entire grant. The Company’s compensation expense for all awards was
$11.0 million, $9.5 million and $8.8 million for the years ended December 31, 2021, 2020 and 2019, respectively.
In 2020, the Board approved a stock option cancellation program to allow for certain outstanding and vested stock option awards to be canceled by the option
holder at a price based on the closing day’s stock price less the option exercise price. During the year ended December 31, 2020, there were 212,447 options
canceled for approximately $2.5 million, which was recorded as a reduction to additional paid-in capital.
STOCK OPTIONS
There were no stock options granted for the years ended December 31, 2021, 2020 and 2019.
Stock option activity during the periods indicated was as follows:
Number of Options
Weighted Average
Exercise Price
Weighted Average
Remaining Contractual Term
(years)
Balance, December 31, 2018
694,147 $
10.60
4.26
Granted
—
—
Exercised
(86,580)
10.39
Forfeited
(5,000)
10.31
Canceled
—
—
Expired
—
—
Balance, December 31, 2019
602,567 $
10.64
3.47
Granted
—
—
Exercised
(61,000)
8.30
Forfeited
(1,500)
12.29
Canceled
(212,447)
10.88
Expired
—
—
Balance, December 31, 2020
327,620 $
10.90
2.67
Granted
—
—
Exercised
(124,870)
10.20
Forfeited
—
—
Canceled
—
—
Expired
(2,500)
8.00
Balance, December 31, 2021
200,250 $
11.38
2.02
Exercisable as of December 31, 2019
512,236 $
10.64
3.17
Exercisable as of December 31, 2020
320,620 $
10.86
2.61
Exercisable as of December 31, 2021
200,250 $
11.38
2.02
131
The weighted average grant date fair value of options exercised during the years ended December 31, 2021, 2020 and 2019 was $4.87, $4.82 and $5.13,
respectively.
A summary of the status of the Company’s non-vested options as of and changes during the years ended December 31, 2021, 2020 and 2019, is presented below:
Non-vested options:
Number of Options
Weighted Average
Grant-Date
Fair Value
Balance, December 31, 2018
264,697 $
4.96
Granted
—
—
Vested
(169,366)
4.94
Forfeited
(5,000)
4.95
Balance, December 31, 2019
90,331 $
4.98
Granted
—
—
Vested
(81,831)
4.96
Forfeited
(1,500)
4.75
Balance, December 31, 2020
7,000 $
5.21
Granted
—
—
Vested
(7,000)
5.21
Forfeited
—
—
Balance, December 31, 2021
— $
—
RESTRICTED SHARES
A summary of the status of the Company’s non-vested restricted shares as of and changes during the years ended December 31, 2021, 2020 and 2019, is presented
below:
Non-vested restricted shares:
Number of Shares
Weighted Average
Grant-Date
Fair Value
Balance, December 31, 2018
1,353,012 $
18.70
Granted
580,453
21.85
Vested
(424,134)
13.20
Forfeited
(78,209)
19.13
Balance, December 31, 2019
1,431,122 $
21.58
Granted
638,832
22.37
Vested
(544,075)
20.22
Forfeited
(32,751)
23.62
Balance, December 31, 2020
1,493,128 $
22.37
Granted
633,386
21.00
Vested
(325,407)
22.61
Forfeited
(12,297)
21.63
Balance, December 31, 2021
1,788,810 $
21.84
As of December 31, 2021, there was $20.8 million of total unrecognized compensation cost related to non-vested restricted shares granted under the Omnibus Plan,
and the unrecognized compensation cost is expected to be recognized over a weighted average period of 2.0 years.
[17] DERIVATIVES AND HEDGING ACTIVITY
RISK MANAGEMENT OBJECTIVE OF USING DERIVATIVES
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a
wide variety of business and operational risks through management of its core business activities. The
132
Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources, and duration of its debt funding
and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from
business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The
Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash
payments related to certain of the Company’s FHLB borrowings and to manage the volatility of the change in fair value related to certain of the Company’s equity
investments. The Company also has derivatives that are a result of a service the Company provides to certain qualifying customers. When providing this service,
the Company generally enters into an offsetting derivative transaction in order to eliminate its interest rate risk exposure resulting from such transactions.
FAIR VALUES OF DERIVATIVE INSTRUMENTS ON THE STATEMENTS OF FINANCIAL CONDITION
The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated statements of financial
condition as of December 31, 2021 and 2020:
Asset Derivatives
Liability Derivatives
as of December 31, 2021
as of December 31, 2021
(Dollars in thousands)
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments:
Interest rate products
Other assets
$
1,217
Other liabilities
$
2,838
Derivatives not designated as hedging instruments:
Interest rate products
Other assets
88,956
Other liabilities
88,919
Total
Other assets
$
90,173
Other liabilities
$
91,757
Asset Derivatives
Liability Derivatives
as of December 31, 2020
as of December 31, 2020
(Dollars in thousands)
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Derivatives designated as hedging instruments:
Interest rate products
Other assets
$
—
Other liabilities
$
9,082
Derivatives not designated as hedging instruments:
Interest rate products
Other assets
144,333
Other liabilities
144,351
Total
Other assets
$
144,333
Other liabilities
$
153,433
The following tables show the impact legally enforceable master netting agreements had on the Company’s derivative financial instruments as of December 31,
2021 and 2020:
Offsetting of Derivative Assets
Gross Amounts of
Recognized Assets
Gross Amounts Offset
in the Statement of
Financial Position
Net Amounts of
Assets
presented in the
Statement of
Financial Position
Gross Amounts Not Offset in the Statement
of Financial Position
Net Amount
(Dollars in thousands)
Financial
Instruments
Cash Collateral
Received
December 31, 2021
$
90,173
$
—
$
90,173
$
(13,929)
$
—
$
76,244
December 31, 2020
$
144,333
$
—
$
144,333
$
(94)
$
—
$
144,239
Offsetting of Derivative Liabilities
Gross Amounts of
Recognized
Liabilities
Gross Amounts Offset
in the Statement of
Financial Position
Net Amounts of
Liabilities
presented in the
Statement of
Financial Position
Gross Amounts Not Offset in the Statement
of Financial Position
Net Amount
(Dollars in thousands)
Financial
Instruments
Cash Collateral
Posted
December 31, 2021
$
91,757
$
—
$
91,757
$
(13,929)
$
(59,898)
$
17,930
December 31, 2020
$
153,433
$
—
$
153,433
$
(94)
$
(150,238)
$
3,101
133
CASH FLOW HEDGES OF INTEREST RATE RISK
The Company’s objectives in using certain interest rate derivatives are to add stability to net interest income and to manage its exposure to interest rate movements.
To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. The Company has entered into
derivative contracts to hedge the variable cash flows associated with certain FHLB borrowings. These interest rate swaps designated as cash flow hedges involve
the receipt of variable amounts from a counterparty in exchange for the Company effectively making fixed-rate payments over the life of the agreements without
exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive
income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the
change in fair value of the derivatives is recognized directly in earnings. The Company’s cash flow hedge derivatives did not have any hedge ineffectiveness
recognized in earnings during the years ended December 31, 2021 and 2020.
Characteristics of the Company’s interest rate derivative transactions designated as cash flow hedges of interest rate risk as of December 31, 2021, were as follows:
(Dollars in thousands)
Notional
Amount
Effective Rate
Estimated
Increase/(Decrease) to
Interest Expense in the
Next Twelve Months
Maturity Date
Remaining Term
(in Months)
Interest rate products:
Issued 5/30/2019
$
50,000
2.05 % $
373
6/1/2022
5
Issued 5/30/2019
50,000
2.03 %
758
6/1/2023
17
Issued 5/30/2019
50,000
2.04 %
764
6/1/2024
29
Issued 3/2/2020
50,000
0.98 %
227
3/2/2025
38
Issued 3/20/2020
50,000
0.60 %
36
3/20/2025
39
Total
$
250,000
$
2,158
The effective rate is adjusted for the difference between the three-month FHLB advance rate and three-month LIBOR.
The table below presents the effective portion of the Company’s cash flow hedge instruments in the consolidated statements of income for the years ended
December 31, 2021, 2020 and 2019:
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Derivatives designated as hedging instruments:
Location of Gain (Loss) Recognized in Income on
Derivatives
Realized Gain (Loss)
Recognized in Income on Derivatives
Interest rate products
Interest expense
$
(3,513) $
(2,732) $
1,259
The table below presents the effective portion of the Company’s cash flow hedge instruments in accumulated other comprehensive income for the years ended
December 31, 2021, 2020 and 2019:
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Derivatives designated as hedging instruments:
Unrealized Gain (Loss) Recognized in Accumulated Other
Comprehensive Income on Derivatives
Interest rate products
$
3,723 $
(9,168) $
(2,239)
NON-DESIGNATED HEDGES
The Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and result from a service the
Company provides to certain customers. The Company executes interest rate derivatives with its commercial and private banking customers to facilitate their
respective risk management strategies. Those derivatives are simultaneously and economically hedged by offsetting derivatives that the Company executes with a
third party, such that the
(1)
(1)
134
Company generally eliminates its interest rate exposure resulting from such transactions. Changes in the fair value of derivatives not designated in hedging
relationships are recorded directly in earnings. As of December 31, 2021, the Company had interest rate derivative transactions with an aggregate notional amount
of $4.83 billion related to this program.
In addition, the Company also has executed equity derivatives to economically hedge certain of its equity investments. Changes in the fair value of derivatives not
designated in hedging relationships are recorded directly in earnings. As of December 31, 2021 and 2020, the Company had no outstanding equity derivative
transactions.
The table below presents the effect of the Company’s non-designated hedge instruments in the consolidated statements of income for the years ended
December 31, 2021, 2020 and 2019:
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Derivatives not designated as hedging instruments:
Location of Gain (Loss) Recognized in Income on
Derivatives
Realized Gain (Loss)
Recognized in Income on Derivatives
Interest rate products
Non-interest income
$
36 $
(20) $
(45)
Equity products
Non-interest income
$
— $
— $
(176)
Total
$
36 $
(20) $
(221)
CREDIT-RISK-RELATED CONTINGENT FEATURES
The Company has agreements with each of its derivative counterparties that contain a provision where, if the Company defaults on any of its indebtedness,
including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative
obligations.
The Company has agreements with certain of its derivative counterparties that contain a provision where, if either the Company or the counterparty fails to
maintain its status as a well-capitalized or adequately capitalized institution, then the Company or the counterparty could be required to terminate any outstanding
derivative positions and settle its obligations under the agreement.
As of December 31, 2021, the termination value of derivatives for which the Company had master netting arrangements with the counterparty and in a net liability
position was $61.1 million, including accrued interest. As of December 31, 2021, the Company has minimum collateral posting thresholds with certain of its
derivative counterparties and has posted collateral of $60.3 million which is considered restricted cash. If the Company had breached any of these provisions as of
December 31, 2021, it could have been required to settle its obligations under the agreements at their termination value.
[18] DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates of financial instruments are based on the present value of expected future cash flows, quoted market prices of similar financial instruments, if
available, and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions and risk assumptions used.
Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realized in
an immediate settlement of instruments. Accordingly, the aggregate fair value amounts presented below do not represent the underlying value of the Company.
FAIR VALUE MEASUREMENTS
In accordance with U.S. GAAP, the Company must account for certain financial assets and liabilities at fair value on a recurring and non-recurring basis. The
Company utilizes a three-level fair value hierarchy of valuation techniques to estimate the fair value of its financial assets and liabilities based on whether the
inputs to those valuation techniques are observable or unobservable. The fair value hierarchy gives the highest priority to quoted prices with readily available
independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs
for measurement fall within multiple levels of the fair value hierarchy, the lowest level input that has a significant impact on fair value measurement is used.
Financial assets and liabilities are categorized based upon the following characteristics or inputs to the valuation techniques:
•
Level 1 – Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in
actively traded markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.
135
•
Level 2 – Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar
assets or liabilities that are actively traded. Level 2 also includes pricing models in which the inputs are corroborated by market data, such as matrix
pricing.
•
Level 3 – Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and
significant to the overall fair value measurement. Level 3 inputs include assumptions of a source independent of the reporting entity or the reporting
entity’s own assumptions that are supported by little or no market activity or observable inputs.
The Company is responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value. The Company
performs due diligence to understand the inputs used or how the data was calculated or derived and corroborates the reasonableness of external inputs in the
valuation process.
RECURRING FAIR VALUE MEASUREMENTS
The following tables represent assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020:
December 31, 2021
(Dollars in thousands)
Level 1
Level 2
Level 3
Total Assets /
Liabilities
at Fair Value
Financial assets:
Debt securities available-for-sale:
Corporate bonds
$
— $
146,192 $
— $
146,192
Trust preferred securities
—
13,627
—
13,627
Non-agency residential mortgage-backed securities
—
277,118
—
277,118
Agency collateralized mortgage obligations
—
16,498
—
16,498
Agency mortgage-backed securities
—
120,477
—
120,477
Agency debentures
—
7,228
—
7,228
Municipal bonds
—
5,185
—
5,185
Equity securities
4,975
—
—
4,975
Interest rate swaps
—
90,173
—
90,173
Total financial assets
$
4,975 $
676,498 $
— $
681,473
Financial liabilities:
Interest rate swaps
$
— $
91,757 $
— $
91,757
Total financial liabilities
$
— $
91,757 $
— $
91,757
December 31, 2020
(Dollars in thousands)
Level 1
Level 2
Level 3
Total Assets /
Liabilities
at Fair Value
Financial assets:
Debt securities available-for-sale:
Corporate bonds
$
— $
158,464 $
— $
158,464
Trust preferred securities
—
18,087
—
18,087
Agency collateralized mortgage obligations
—
22,089
—
22,089
Agency mortgage-backed securities
—
410,127
—
410,127
Agency debentures
—
8,803
—
8,803
Interest rate swaps
—
144,333
—
144,333
Total financial assets
$
— $
761,903 $
— $
761,903
Financial liabilities:
Interest rate swaps
$
— $
153,433 $
— $
153,433
Total financial liabilities
$
— $
153,433 $
— $
153,433
136
INVESTMENT SECURITIES
Generally, debt securities are valued using pricing for similar securities, recently executed transactions, and other third-party pricing models utilizing
observable inputs and therefore are classified as Level 2. U.S. treasury securities and equity securities (including mutual funds) are classified as Level 1
because these securities are in actively traded markets.
INTEREST RATE SWAPS
The fair value of interest rate swaps is estimated using inputs that are observable or that can be corroborated by observable market data and therefore are
classified as Level 2. These fair value estimations include primarily market observable inputs such as the forward LIBOR swap curve.
NON-RECURRING FAIR VALUE MEASUREMENTS
Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an
ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
The following tables represent the balances of assets measured at fair value on a non-recurring basis as of December 31, 2021 and 2020:
December 31, 2021
(Dollars in thousands)
Level 1
Level 2
Level 3
Total Assets
at Fair Value
Loans measured for impairment, net
$
— $
— $
12,129 $
12,129
Other real estate owned
—
—
2,005
2,005
Total assets
$
— $
— $
14,134 $
14,134
December 31, 2020
(Dollars in thousands)
Level 1
Level 2
Level 3
Total Assets
at Fair Value
Loans measured for impairment, net
$
— $
— $
7,692 $
7,692
Other real estate owned
—
—
2,724
2,724
Total assets
$
— $
— $
10,416 $
10,416
As of December 31, 2021 and 2020, the Company recorded $4.7 million and $2.0 million, respectively, of specific reserves to the allowance for credit losses on
loans and leases as a result of adjusting the fair value of individually evaluated loans.
INDIVIDUALLY EVALUATED LOANS
The Company evaluates individually loans that do not share similar risk characteristics, including non-accrual loans and loans designated as a TDR. Specific
allowance for credit losses is measured based on a discounted cash flow of ongoing operations, discounted at the loan’s original effective interest rate, or a
calculation of the fair value of the underlying collateral less estimated selling costs. Our policy is to obtain appraisals on collateral supporting individually
evaluated loans on an annual basis, unless circumstances dictate a shorter time frame. Appraisals are reduced by estimated costs to sell the collateral, and,
under certain circumstances, additional factors that may arise and cause us to believe our recoverable value may be less than the independent appraised value.
Accordingly, individually evaluated loans are classified as Level 3.
OTHER REAL ESTATE OWNED
OREO is comprised of property acquired through foreclosure or voluntarily conveyed by borrowers. These assets are recorded on the date acquired at fair
value, less estimated disposition costs, with the fair value being determined by appraisal. Our policy is to obtain appraisals on collateral supporting OREO on
an annual basis, unless circumstances dictate a shorter time frame. Appraisals are reduced by estimated costs to sell the collateral and, under certain
circumstances, additional factors that may arise and cause us to believe our recoverable value may be less than the independent appraised value. Accordingly,
OREO is classified as Level 3.
137
LEVEL 3 VALUATION
The following tables present additional quantitative information about assets measured at fair value on a recurring and non-recurring basis and for which we have
utilized Level 3 inputs to determine fair value as of December 31, 2021 and 2020:
December 31, 2021
(Dollars in thousands)
Fair Value
Valuation Techniques
Significant Unobservable
Inputs
Weighted Average
Discount Rate
Loans measured for impairment, net
$
12,129
Other
Discount due to restructured
nature of operations
3%
Other real estate owned
$
2,005
Collateral
Appraisal value and discount
due to salability conditions
12%
Fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the
discounted cash flow of ongoing operations if the loan is not collateral dependent.
The collateral which is used in the valuation of these loans is commercial real estate.
December 31, 2020
(Dollars in thousands)
Fair Value
Valuation Techniques
Significant Unobservable
Inputs
Weighted Average
Discount Rate
Loans measured for impairment, net
$
7,692
Collateral
Appraisal value and discount
due to salability conditions
23%
Other real estate owned
$
2,724
Collateral
Appraisal value and discount
due to salability conditions
12%
Fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the
discounted cash flow method if the loan is not collateral dependent.
The collateral which is used in the valuation of these loans is commercial real estate.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying amounts and estimated fair values of financial instruments:
December 31, 2021
December 31, 2020
(Dollars in thousands)
Fair Value
Level
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Financial assets:
Cash and cash equivalents
1
$
452,016 $
452,016
$
435,442 $
435,442
Debt securities available-for-sale
2
586,325
586,325
617,570
617,570
Debt securities held-to-maturity
1
39,098
38,666
—
—
Debt securities held-to-maturity
2
763,478
753,296
211,691
214,299
Equity securities
1
4,975
4,975
—
—
Federal Home Loan Bank stock
2
11,802
11,802
13,284
13,284
Loans and leases held-for-investment, net
3
10,734,761
10,717,430
8,202,788
8,199,922
Accrued interest receivable
2
25,060
25,060
18,783
18,783
Investment management fees receivable, net
2
8,641
8,641
7,935
7,935
Bank owned life insurance
2
98,928
98,928
71,787
71,787
Other real estate owned
3
2,005
2,005
2,724
2,724
Interest rate swaps
2
90,173
90,173
144,333
144,333
Financial liabilities:
Deposits
2
$
11,504,389 $
11,504,856
$
8,489,089 $
8,510,799
Borrowings, net
2
470,163
474,949
400,493
402,714
Interest rate swaps
2
91,757
91,757
153,433
153,433
During the years ended December 31, 2021, 2020 and 2019, there were no transfers between fair value Levels 1, 2 or 3.
(1) (2)
(1)
(2)
(1)(2)
(1)
(2)
138
The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of December 31, 2021 and 2020:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value.
INVESTMENT SECURITIES
The fair values of debt securities available-for-sale, debt securities held-to-maturity, debt securities trading and equity securities are based on quoted market
prices for the same or similar securities, recently executed transactions and third-party pricing models. U.S. treasury securities and equity securities (including
mutual funds) are classified as Level 1 because these securities are in actively traded markets.
FEDERAL HOME LOAN BANK STOCK
The carrying value of our FHLB stock, which is carried at cost, approximates fair value.
LOANS AND LEASES HELD-FOR-INVESTMENT
The fair value of loans and leases held-for-investment is estimated by discounting the future cash flows using market rates (utilizing both unobservable and
certain observable inputs when applicable) at which similar loans would be made to borrowers with similar credit ratings over the estimated remaining
maturities. Impaired loans are generally valued at the fair value of the associated collateral.
ACCRUED INTEREST RECEIVABLE
The carrying amount approximates fair value.
INVESTMENT MANAGEMENT FEES RECEIVABLE
The carrying amount approximates fair value.
BANK OWNED LIFE INSURANCE
The fair value of general account BOLI is based on the insurance contract net cash surrender value.
OTHER REAL ESTATE OWNED
OREO is carried at fair valued less estimated selling costs.
DEPOSITS
The fair value of demand deposits is the amount payable on demand as of the reporting date, i.e., their carrying amounts. The fair value of fixed maturity
deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.
BORROWINGS
The fair value of borrowings is calculated by discounting scheduled cash flows through the estimated maturity using period end market rates for borrowings of
similar remaining maturities.
INTEREST RATE SWAPS
The fair value of interest rate swaps is estimated through the assistance of an independent third party and compared to the fair value determined by the swap
counterparty to establish reasonableness.
OFF-BALANCE SHEET INSTRUMENTS
Fair values for the Company’s off-balance sheet instruments, which consist of lending commitments, standby letters of credit and risk participation agreements
related to interest rate swap agreements, are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties’ credit standing. Management believes that the fair value of these off-balance sheet instruments is not significant.
139
[19] CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table shows the changes in accumulated other comprehensive income (loss) net of tax, for the years ended December 31, 2021, 2020 and 2019:
Years Ended December 31,
2021
2020
2019
(Dollars in thousands)
Debt
Securities
Derivatives
Total
Debt
Securities
Derivatives
Total
Debt
Securities
Derivatives
Total
Balance, beginning of period
$
3,834 $
(6,531) $
(2,697)
$
2,756 $
(1,624) $
1,132
$
(2,363) $
1,032 $
(1,331)
Change in unrealized holding gains
(losses)
(6,041)
2,826
(3,215)
3,997
(6,981)
(2,984)
5,356
(1,701)
3,655
Losses (gains) reclassified from other
comprehensive income
(178)
2,666
2,488
(2,919)
2,074
(845)
(237)
(955)
(1,192)
Net other comprehensive income (loss)
(6,219)
5,492
(727)
1,078
(4,907)
(3,829)
5,119
(2,656)
2,463
Balance, end of period
$
(2,385) $
(1,039) $
(3,424)
$
3,834 $
(6,531) $
(2,697)
$
2,756 $
(1,624) $
1,132
[20] RELATED PARTY TRANSACTIONS
Certain directors of the Company have loan accounts with the Bank. Such loans were made in the ordinary course of business on substantially the same terms,
including interest rates, as those prevailing at the time for comparable transactions with outsiders. As of December 31, 2021, the Bank had one director with five
loans outstanding totaling $28.1 million.
From time to time, the Bank obtains services from affiliated companies of certain directors in the normal course of business. These services cumulatively totaled
approximately $650,000 for the three years ended December 31, 2021, 2020 and 2019, were negotiated at arm’s length, reflected market pricing and were de
minimis to the Company’s cost of operations. In addition, an affiliated entity represented the Company in its efforts to obtain office space and was compensated by
the third party lessors.
[21] CONTINGENT LIABILITIES
Following the public announcement of the Agreement and Plan of Merger (the “Merger Agreement”) dated as of October 20, 2021, among the Company,
Raymond James Financial, Inc. (“Raymond James”), Macaroon One LLC (“Merger Sub 1”) and Macaroon Two LLC (“Merger Sub 2”), six lawsuits were filed by
purported stockholders of the Company against the Company and the members of the Company’s board of directors. Each complaint contains allegations
contending, among other things, that the proxy statement/prospectus contained within the Registration Statement on Form S-4 filed in connection with the
proposed mergers failed to disclose certain allegedly material information in violation of federal securities laws. The complaints seek injunctive relief enjoining the
mergers, attorneys’ and experts’ fees, and other remedies. The outcome of the pending and any additional future litigation is uncertain. If any case is not resolved,
the lawsuit(s) could prevent or delay completion of the mergers 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 mergers is the absence of any order, injunction, law, regulation or
other legal restraints preventing, prohibiting or making illegal the completion of the mergers or any other transactions contemplated by the Merger Agreement. As
such, if plaintiffs are successful in obtaining an injunction prohibiting the completion of the mergers on the agreed-upon terms, then such injunction may prevent
the mergers 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 mergers are completed may adversely affect the combined company’s business, financial condition, results of operations and cash flows.
From time to time the Company is party to various litigation matters incidental to the conduct of its business. The Company is not aware of any other material
unasserted claims. In the opinion of management, there are no other potential claims that could have a material adverse effect on the Company’s financial position,
liquidity or results of operations.
140
[22] CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition of the parent company as of December 31, 2021 and 2020, and the related condensed statements of
income and cash flows for the years ended December 31, 2021, 2020 and 2019, should be read in conjunction with our Consolidated Financial Statements and
related notes:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
PARENT COMPANY ONLY
December 31,
(Dollars in thousands)
2021
2020
ASSETS
Cash and cash equivalents
$
27,936 $
31,856
Equity securities
4,975
—
Investment in subsidiaries
1,024,016
821,719
Prepaid expenses and other assets
5,519
6,604
Total assets
$
1,062,446 $
860,179
LIABILITIES AND SHAREHOLDERS’ EQUITY
Borrowings, net
$
220,163 $
100,493
Other accrued expenses and other liabilities
5,561
2,541
Shareholders’ equity
836,722
757,145
Total liabilities and shareholders’ equity
$
1,062,446 $
860,179
CONDENSED STATEMENTS OF INCOME
PARENT COMPANY ONLY
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Interest income
$
37 $
43 $
219
Dividends received from subsidiaries
5,000
7,005
13,000
Total interest and dividend income
5,037
7,048
13,219
Interest expense
6,086
3,855
1,159
Net interest income
(1,049)
3,193
12,060
Non-interest income (loss)
(25)
—
842
Non-interest expense
6,518
3,576
1,081
Income (loss) before income taxes and undisbursed income of subsidiaries
(7,592)
(383)
11,821
Income tax expense
(2,628)
(1,226)
(467)
Income (loss) before undisbursed income of subsidiaries
(4,964)
843
12,288
Undisbursed income of subsidiaries
83,024
44,391
47,905
Net income
$
78,060 $
45,234 $
60,193
141
CONDENSED STATEMENTS OF CASH FLOWS
PARENT COMPANY ONLY
Years Ended December 31,
(Dollars in thousands)
2021
2020
2019
Cash Flows from Operating Activities:
Net income
$
78,060 $
45,234 $
60,193
Adjustments to reconcile net income to net cash provided by operating activities:
Undisbursed income of subsidiaries
(83,024)
(44,391)
(47,905)
Net loss (gain) on equity securities
25
—
(842)
Amortization of deferred financing costs
215
144
84
Stock-based compensation expense
290
317
—
Increase (decrease) in accrued interest payable
117
716
(1,005)
Decrease (increase) in other assets
1,085
(1,334)
1,539
Increase (decrease) in other liabilities
2,903
838
(2,269)
Net cash provided by operating activities
(329)
1,524
9,795
Cash Flows from Investing Activities:
Purchase of equity securities
(5,000)
—
—
Sale of equity securities
—
—
13,679
Net payments for investments in subsidiaries
(120,000)
(171,944)
(43,000)
Net cash used in investing activities
(125,000)
(171,944)
(29,321)
Cash Flows from Financing Activities:
Net proceeds from issuance of senior and subordinated notes payable
124,455
95,349
—
Repayment of subordinated debt
—
—
(35,000)
Net proceeds from issuance of stock
—
100,002
77,611
Proceeds from line of credit advances
15,200
40,000
—
Repayment of line of credit advances
(20,200)
(35,000)
(4,250)
Net proceeds from exercise of stock options
1,273
506
900
Cancellation of stock options
—
(2,484)
—
Subsidiary reimbursement for issuance of restricted stock awards
10,736
—
—
Purchase of treasury stock
(2,108)
(3,479)
(2,312)
Dividends paid on preferred stock
(7,947)
(7,849)
(5,753)
Net cash provided by financing activities
121,409
187,045
31,196
Net change in cash and cash equivalents
(3,920)
16,625
11,670
Cash and cash equivalents at beginning of year
31,856
15,231
3,561
Cash and cash equivalents at end of year
$
27,936 $
31,856 $
15,231
[23] SEGMENTS
The Company operates two reportable segments: Bank and Investment Management.
•
The Bank segment provides commercial banking services to middle-market businesses and private banking services to high-net-worth individuals through
the TriState Capital Bank subsidiary.
•
The Investment Management segment provides advisory and sub-advisory investment management services primarily to institutional investors, mutual
funds and individual investors through the Chartwell subsidiary. It also supports marketing efforts for Chartwell’s proprietary investment products
through the CTSC Securities subsidiary.
142
The following tables provide financial information for the two segments of the Company as of and for the years ended December 31, 2021 and 2020. 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.
(Dollars in thousands)
December 31, 2021
December 31, 2020
Assets:
Bank
$
12,926,161 $
9,819,719
Investment management
86,563
86,150
Parent and other
(7,872)
(9,053)
Total assets
$
13,004,852 $
9,896,816
Year Ended December 31, 2021
(Dollars in thousands)
Bank
Investment
Management
Parent
and Other
Consolidated
Income statement data:
Interest income
$
231,297 $
— $
— $
231,297
Interest expense
45,889
—
6,049
51,938
Net interest income (loss)
185,408
—
(6,049)
179,359
Provision for credit losses
808
—
—
808
Net interest income (loss) after provision for credit losses
184,600
—
(6,049)
178,551
Non-interest income:
Investment management fees
—
38,702
(1,248)
37,454
Net gain on the sale and call of debt securities
242
—
—
242
Other non-interest income
20,941
34
(25)
20,950
Total non-interest income (loss)
21,183
38,736
(1,273)
58,646
Non-interest expense:
Intangible amortization expense
—
1,911
—
1,911
Other non-interest expense
107,373
31,939
5,271
144,583
Total non-interest expense
107,373
33,850
5,271
146,494
Income (loss) before tax
98,410
4,886
(12,593)
90,703
Income tax expense (benefit)
14,171
1,100
(2,628)
12,643
Net income (loss)
$
84,239 $
3,786 $
(9,965) $
78,060
143
Year Ended December 31, 2020
(Dollars in thousands)
Bank
Investment
Management
Parent
and Other
Consolidated
Income statement data:
Interest income
$
217,095 $
— $
— $
217,095
Interest expense
75,339
—
3,812
79,151
Net interest income (loss)
141,756
—
(3,812)
137,944
Provision for credit losses
19,400
—
—
19,400
Net interest income (loss) after provision for credit losses
122,356
—
(3,812)
118,544
Non-interest income:
Investment management fees
—
32,727
(692)
32,035
Net gain on the sale and call of debt securities
3,948
—
—
3,948
Other non-interest income
21,164
58
—
21,222
Total non-interest income
25,112
32,785
(692)
57,205
Non-interest expense:
Intangible amortization expense
—
1,944
—
1,944
Other non-interest expense
90,541
27,735
2,883
121,159
Total non-interest expense
90,541
29,679
2,883
123,103
Income (loss) before tax
56,927
3,106
(7,387)
52,646
Income tax expense (benefit)
8,330
308
(1,226)
7,412
Net income (loss)
$
48,597 $
2,798 $
(6,161) $
45,234
Year Ended December 31, 2019
(Dollars in thousands)
Bank
Investment
Management
Parent
and Other
Consolidated
Income statement data:
Interest income
$
262,332 $
— $
115 $
262,447
Interest expense
134,336
—
1,054
135,390
Net interest income (loss)
127,996
—
(939)
127,057
Provision (credit) for loan losses
(968)
—
—
(968)
Net interest income (loss) after provision for loan losses
128,964
—
(939)
128,025
Non-interest income:
Investment management fees
—
36,889
(447)
36,442
Net loss on the sale and call of debt securities
416
—
—
416
Other non-interest income
15,051
31
842
15,924
Total non-interest income
15,467
36,920
395
52,782
Non-interest expense:
Intangible amortization expense
—
2,009
—
2,009
Other non-interest expense
77,945
31,560
635
110,140
Total non-interest expense
77,945
33,569
635
112,149
Income (loss) before tax
66,486
3,351
(1,179)
68,658
Income tax expense (benefit)
8,015
918
(468)
8,465
Net income (loss)
$
58,471 $
2,433 $
(711) $
60,193
[24] SUBSEQUENT EVENTS
On January 21, 2022, the Board declared a dividend payable of approximately $679,000, or $0.42 per depositary share, on the Series A Preferred Stock and a
dividend payable of approximately $1.3 million, or $0.40 per depository share, on the Company’s Series B Preferred Stock each of which is payable on April 1,
2022, to preferred shareholders of record as of the close of business on March 15, 2022. The Board also declared a dividend payable of 11 shares of the Company’s
Series C Preferred Stock and cash in the amount of
144
$71,125, which is payable on April 1, 2022, to preferred shareholders of record of the Series C Preferred Stock as of the close of business on March 15, 2022.
On February 18, 2022, the Company renewed its $75.0 million unsecured line of credit with The Huntington National Bank which matures on February 18, 2023.
At a special meeting of the Company's shareholders held on February 28, 2022, the Company’s shareholders approved the adoption of the Agreement and Plan of
Merger, dated October 20, 2021 (the “Merger Agreement”), among Raymond James, Macaroon One LLC (“Merger Sub 1”), Macaroon Two LLC (“Merger Sub
2”) and the Company. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub 1 will
merge with and into the Company, with the Company remaining as the surviving entity in such merger and a wholly owned subsidiary of Raymond James and,
following such merger, the Company will merge with and into Merger Sub 2, with Merger Sub 2 remaining as the surviving entity in such merger and a wholly
owned subsidiary of Raymond James. The acquisition is subject to customary closing conditions, including regulatory approvals, and is expected to close in 2022.
145
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as
of December 31, 2021. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and
Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s
Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2021.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of the financial statements in accordance with accounting principles generally accepted in the United
States, and that receipts and expenditures of the Company are being made only in accordance with the authorization of management and the directors of the
Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a
material effect on the consolidated financial statements. Internal control over financial reporting includes the controls themselves, monitoring and internal auditing
practices and actions taken to correct any identified deficiencies. Because of inherent limitations, internal control over financial reporting can only provide
reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, the effectiveness of our internal control over
financial reporting may vary over time.
Management assessed the Company’s system of internal control over financial reporting as of December 31, 2021, in relation to criteria for effective internal
control over financial reporting as described in “Internal Control Integrated Framework (2013),” issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2021, the Company’s system of internal control over financial
reporting was effective.
KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report
on Form 10-K, has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. The report,
which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, is included in this
Item under the heading “Report of Independent Registered Public Accounting Firm.”
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the quarter ended December 31, 2021, that have materially affected or are reasonably likely to materially affect the Company’s internal control
over financial reporting.
146
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors
TriState Capital Holdings, Inc:
Opinion on Internal Control Over Financial Reporting
We have audited TriState Capital Holdings, Inc and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on
criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements
of financial condition of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in
shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated
financial statements), and our report dated March 1, 2022 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
March 1, 2022
147
ITEM 9B. OTHER INFORMATION
Other Matters
LIBOR Transition
On March 5, 2021, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rate (“LIBOR”), confirmed
that the publication of most LIBOR term rates will end on June 30, 2023, (excluding 1-week U.S. LIBOR and 2-month U.S. LIBOR, the publication of which
ended on December 31, 2021). Given LIBOR’s extensive use across financial markets, the transition away from LIBOR presents various risks and challenges to
financial markets and institutions, including the Company. The Company’s commercial and consumer businesses issue, trade and hold various products that are
currently indexed to LIBOR. As of December 31, 2021, the Company had a material amount of loans, investment securities, and notional value of derivatives
indexed to LIBOR. If not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational and compliance risks to
financial markets and institutions, including the Company.
The Alternative Reference Rates Committee (“ARRC”) has proposed the Secured Overnight Financing Rate (“SOFR”) as its preferred rate as an alternative to
LIBOR, although the ARRC has not proposed that SOFR be required. The selection of SOFR as the alternative reference rate currently presents certain market
concerns because it is a risk-free rate, while LIBOR incorporates credit risk, and because the methodology for the proposed term structure for SOFR differs from
the LIBOR framework. The federal banking agencies are not requiring SOFR as the replacement rate. On April 6, 2021, New York Governor Cuomo signed into
law legislation that provides for the substitution of SOFR as an alternative reference rate in any LIBOR-based contract governed by New York state law that does
not include clear fallback language, once LIBOR is discontinued.
The ARRC has released final recommended fallback contract language for new issuances of LIBOR-indexed bilateral business loans, syndicated loans, floating
rate notes, securitizations and adjustable-rate mortgage loans, and it continues to develop other LIBOR transition guidance. The International Swaps and
Derivatives Association, Inc. (“ISDA”) has announced protocol for the transition of derivative instruments away from LIBOR. The process for modification of
legacy contracts that do not provide for a permanent transition from LIBOR remains a work in progress.
Due to the uncertainty surrounding the future of LIBOR, it is expected that the transition will span several reporting periods through the end of LIBOR publication
in June 2023. Consistent with regulatory guidance, the Bank has transitioned away from LIBOR for purposes of new transactions effective January 1, 2022. One of
the identified risks is inadequate fallback language in various instruments that may result in issues establishing the alternative index and adjusting the margin as
applicable. The Company continues to monitor this activity and evaluate the related risks. The Company has: (1) established a cross-functional team to identify,
assess and monitor risks associated with the transition of LIBOR and other benchmark rates; (2) developed an inventory of affected products; (3) implemented
more robust fallback contract language; and (4) implemented a plan to adhere to the ISDA protocol for the transition of derivatives away from LIBOR. The
Company’s cross-functional team is also tasked with managing clear communication of the Company’s transition plans with both internal and external stakeholders
and ensuring that the Company appropriately updates its business processes, analytical tools, information systems and contract language to minimize disruption
during and after the LIBOR transition. For additional information related to the potential impact surrounding the transition from LIBOR on the Company’s
business, see “Item 1A. Risk Factors” in this Annual Report on Form 10-K.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this item will be set forth in our proxy statement to be mailed to shareholders in connection with our 2022 annual meeting of shareholders
or, alternatively, in an amendment to this Annual Report on Form 10-K, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item will be set forth in our proxy statement to be mailed to shareholders in connection with our 2022 annual meeting of shareholders
or, alternatively, in an amendment to this Annual Report on Form 10-K, and is incorporated herein by reference.
148
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required by this item will be set forth in our proxy statement to be mailed to shareholders in connection with our 2022 annual meeting of shareholders
or, alternatively, in an amendment to this Annual Report on Form 10-K, and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required by this item will be set forth in our proxy statement to be mailed to shareholders in connection with our 2022 annual meeting of shareholders
or, alternatively, in an amendment to this Annual Report on Form 10-K, and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this item will be set forth in our proxy statement to be mailed to shareholders in connection with our 2022 annual meeting of shareholders
or, alternatively, in an amendment to this Annual Report on Form 10-K, and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) FINANCIAL STATEMENTS
The consolidated financial statements required in response to this item are incorporated by reference to Part II - Item 8 of this Report.
(b) EXHIBITS
The exhibits filed or incorporated by reference as a part of this report are incorporated by reference to the Exhibit Index in the following section of this
Report.
(c) SCHEDULES
No financial statement schedules are being filed because of the absence of conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes thereto.
149
ITEM 16. FORM 10-K SUMMARY
None.
EXHIBIT INDEX
Exhibit
No. Description
2.1 Agreement and Plan of Merger, dated October 20, 2021, among Raymond James Financial, Inc., Macaroon One LLC, Macaroon Two LLC and TriState
Capital Holdings, Inc., which is incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on October 27, 2021.
3.1 Amended and Restated Articles of Incorporation, which is incorporated by reference to Exhibit 3.1 to Amendment No. 1 to our Registration Statement on
Form S-1 (File No. filed with the SEC on April 16, 2013.
3.2 Articles of Amendment for TriState Capital Holdings, Inc. 6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, which is
incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on March 20, 2018.
3.3 Statement of Correction to the Articles of Amendment of TriState Capital Holdings. Inc. 6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual
Preferred Stock, which is incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed with the SEC on May 29, 2019.
3.4 Articles of Amendment for TriState Capital Holdings, Inc. 6.375% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, which is
incorporated by reference to Exhibit 4.1 of the Registration Statement on Form 8-A filed with the SEC on May 29, 2019.
3.5 Articles of Amendment for TriState Capital Holdings, Inc., dated as of May 17, 2021, which is incorporated by reference to Exhibit 3.1 to our Current Report
on Form 8-K, filed with the SEC on May 17, 2021.
3.6 Certificate of Designation for TriState Capital Holdings, Inc. Series C Perpetual Non-Cumulative Convertible Non-Voting Preferred Stock, which is
incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on December 30, 2020.
3.7 Articles of Amendment of Certificate of Designation for TriState Capital Holdings, Inc. Series C Preferred Stock, dated as of December 13, 2021, which is
incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K, filed with the SEC on December 15, 2021.
3.8 Bylaws, as amended, which is incorporated by reference to Exhibit 3.2 to Amendment No. 1 to our Registration Statement on Form S-1 filed with the SEC on
April 16, 2013.
4.1 Description of Securities, filed herewith.
4.2 Specimen common stock certificate, which is incorporated by reference to Exhibit 4.1 to Amendment No. 1 to our Registration Statement on Form S-1 filed
with the SEC on April 16, 2013.
4.3 Form of Deposit Agreement among TriState Capital Holdings, Inc., Computershare Inc., Computershare Trust Company, N.A. and the holders from time to
time of the depositary receipts described therein relating to TriState Capital Holdings, Inc. 6.75% Fixed-to-Floating Rate Series A Non-Cumulative
Perpetual Preferred Stock, which is incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on March 20, 2018.
4.4 Form of Depositary Receipt representing the depositary shares, each representing a 1/40th ownership interest in a share of 6.75% Fixed-to-Floating Rate
Series A Non-Cumulative Perpetual Preferred Stock (included in Exhibit 4.3).
4.5 Form of Deposit Agreement among TriState Capital Holdings, Inc.,Computershare Inc., Computershare Trust Company, N.A. and the holders from time to
time of the depositary receipts described therein relating to TriState Capital Holdings, Inc.
150
6.375% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, which is incorporated by reference to Exhibit 4.1 of our Current
Report on Form 8-K filed with the SEC on May 29, 2019.
4.6 Form of Depositary Receipt representing the depositary shares, each representing a 1/40th ownership interest in a share of 6.375% Fixed-to-Floating Rate
Series B Non-Cumulative Perpetual Preferred Stock, (included in Exhibit 4.5).
10.1 Investment Agreement, dated as of October 10, 2020, by and between TriState Capital Holdings, Inc. and T-VIII PubOpps LP, which is incorporated by
reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on October 13, 2020.
10.2 Amendment No. 1 to Investment Agreement, dated as of December 9, 2020, by and between TriState Capital Holdings, Inc. and T-VIII PubOpps LP, which
is incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on December 30, 2020.
10.3 Subordinated Indenture, dated as of May 11, 2020, between TriState Capital Holdings, Inc. and U.S. Bank National Association, as trustee, which is
incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on May 11, 2020.
10.4 First Supplemental Indenture, dated as of May 11, 2020, to the Subordinated Indenture, dated as of May 11, 2020, between TriState Capital Holdings, Inc.
and U.S. Bank National Association, as trustee, which is incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC
on December May 11, 2020.
10.5 Second Supplemental Indenture, dated as of June 3, 2020, to the Subordinated Indenture, dated as of May 11, 2020, between TriState Capital Holdings, Inc.
and U.S. Bank National Association, as trustee., which is incorporated by reference to Exhibit 4.3 to our current Report filed with the SEC on June 3,
2020.
10.7 TriState Capital Holdings, Inc. 2006 Stock Option Plan (“2006 Stock Option Plan”), which is incorporated by reference to Exhibit 10.1 to our Registration
Statement on Form S-1 filed with the SEC on April 2, 2013.
10.8 Form of Non-qualified Stock Option Award Agreement under 2006 Stock Option Plan, which is incorporated by reference to Exhibit 10.2 to our
Registration Statement on Form S-1 filed with the SEC on April 2, 2013.
10.9 Agreement of Lease dated August 29, 2006 between Oxford Development Company/Grant Street, Landlord, and TriState Capital Holdings, Inc., Tenant and
amendment thereto dated September 13, 2010, which is incorporated by reference to Exhibit 10.4 to our Registration Statement on Form S-1 filed with
the SEC on April 2, 2013.
10.10 TriState Capital Bank Supplemental Executive Retirement Agreement dated February 28, 2013, by and among TriState Capital Holdings, Inc., TriState
Capital Bank and James F. Getz, which is incorporated by reference to Exhibit 10.9 to our Registration Statement on Form S-1 filed with the SEC on
April 2, 2013.
10.11 TriState Capital Holdings, Inc. 2014 Omnibus Incentive Plan, which is incorporated by reference to Appendix A to our Definitive Proxy Statement on
Form DEF 14A filed with the SEC on April 15, 2014.
10.12 Amendment to TriState Capital Holdings, Inc. 2014 Omnibus Incentive Plan, which is incorporated by reference to Exhibit 10.12 to our Annual Report on
Form 10-K filed with the SEC on February 25, 2021.
10.13 Amendment to TriState Capital Holdings, Inc. 2014 Omnibus Incentive Plan, filed herewith.
10.14 Form of Three-Year Officer Restricted Stock Grant Agreement under 2014 Omnibus Incentive Plan, which is incorporated by reference to Exhibit 10.8 to
our Annual Report on Form 10-K filed with the SEC on February 19, 2019.
10.15 Form of Five-Year Officer Restricted Stock Grant Agreement under 2014 Omnibus Incentive Plan, which is incorporated by reference to Exhibit 10.9 to
our Annual Report on Form 10-K filed with the SEC on February 19, 2019.
10.16 Form of Non-Employee Director Restricted Stock Grant Agreement under 2014 Omnibus Incentive Plan, which is incorporated by reference to Exhibit
10.10 to our Annual Report on Form 10-K filed with the SEC on February 19, 2019.
10.17 TriState Capital Holdings, Inc. Short-Term Incentive Plan, which is incorporated by reference to Appendix B to our Definitive Proxy Statement on Form
DEF 14A filed with the SEC on April 15, 2014.
151
10.18 Support Agreement, dated October 20, 2021, by and among T-VIII PubOpps LP, Raymond James Financial, Inc., Macaroon One LLC and TriState Capital
Holdings, Inc., which is incorporated by reference to Exhibit B to the Amendment No. 1 to Schedule 13D on October 21, 2021.
10.19 Support Agreement, dated October 20, 2021, by and among James F. Getz, Brian S. Fetterolf, Raymond James Financial, Inc., Macaroon One LLC and,
solely for purposes of the last sentence of Section 9 thereof, TriState Capital Holdings, Inc., which is incorporated by reference to Exhibit 10.1 to our
Current Report on Form 8-K filed with the SEC on October 27, 2021.
10.20 Support Agreement, dated October 20, 2021, by and among T-VIII PubOpps LP, Raymond James Financial, Inc., Macaroon One LLC and, solely for
purposes of the last sentence of Section 9 and Section 10(c) thereof, TriState Capital Holdings, Inc., which is incorporated by reference to Exhibit 10.2 to
our Current Report on Form 8-K filed with the SEC on October 27, 2021.
10.21 Unsecured Fixed-to-Floating Rate Note due December 15, 2024, which is incorporated by reference to Exhibit 1.1 to our Current Report on Form 8-K filed
with the SEC on December 16, 2021.
10.22 First Amendment to Credit Agreement, dated February 18, 2022, among TriState Capital Holdings, Inc., as Borrower, the lenders party thereto, and The
Huntington National Bank, as Administrative Agent which was filed as Exhibit 10.1 the Current Report on Form 8-K filed on February 25, 2022.
21 Subsidiaries of TriState Capital Holdings, Inc., filed herewith.
23.1 Consent of KPMG LLP, Independent Registered Public Accounting Firm, filed herewith.
24 Power of Attorney, filed herewith.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
101 The following materials from TriState Capital Holdings, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, formatted in
Inline XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of
Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi)
the Notes to Consolidated Financial Statements, and (vii) the Cover Page furnished herewith.
104 Cover Page Interactive Data File, formatted in Inline XBRL (included in Exhibit 101).
152
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TRISTATE CAPITAL HOLDINGS, INC.
Date:
March 1, 2022
By:
/s/ Brian S. Fetterolf
Brian S. Fetterolf
President and Chief Executive Officer
Date:
March 1, 2022
By:
/s/ David J. Demas
David J. Demas
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Date:
March 1, 2022
By:
/s/ Brian S. Fetterolf
Brian S. Fetterolf
President, Chief Executive Officer, and Director
(Principal Executive Officer)
Date:
March 1, 2022
By:
/s/ David J. Demas
David J. Demas
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date:
March 1, 2022
By:
/s/ David L. Bonvenuto*
David L. Bonvenuto
Director
Date:
March 1, 2022
By:
/s/ Anthony J. Buzzelli*
Anthony J. Buzzelli
Director
Date:
March 1, 2022
By:
/s/ Helen Hanna Casey*
Helen Hanna Casey
Director
Date:
March 1, 2022
By:
/s/ E.H. (Gene) Dewhurst*
E.H. (Gene) Dewhurst
Director
Date:
March 1, 2022
By:
/s/ James J. Dolan*
James J. Dolan
Director
Date:
March 1, 2022
By:
/s/ Christopher M. Doody*
Christopher M. Doody
Director
153
Date:
March 1, 2022
By:
/s/ Audrey P. Dunning*
Audrey P. Dunning
Director
Date:
March 1, 2022
By:
/s/ James F. Getz*
James F. Getz
Chairman and Director
Date:
February 25, 2022
By:
/s/ Michael R. Harris*
Michael R. Harris
Director
Date:
March 1, 2022
By:
/s/ Kim A. Ruth*
Kim A. Ruth
Director
Date:
March 1, 2022
By:
/s/ A. William Schenck, III*
A. William Schenck, III
Vice Chairman and Director
Date:
March 1, 2022
By:
/s/ John B. Yasinsky*
John B. Yasinsky
Director
* By:
/s/ Brian S. Fetterolf
Brian S. Fetterolf, Attorney-in-Fact
154
EXHIBIT 4.1
DESCRIPTION OF SECURITIES
TriState Capital Holdings, Inc. (“TriState Capital,” the “Company,” “we,” “us” and “our”) has three classes of securities that are registered under Section
12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): our voting common stock, no par value (the “common stock”); depositary shares,
each representing a 1/40th interest in a share of our 6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock (the “Series A Preferred
Stock”), which we refer to as the “Series A Depositary Shares”; and depositary shares, each representing a 1/40th interest in a share of our 6.375% Fixed-to-
Floating Rate Series B Non-Cumulative Perpetual Preferred Stock (the “Series B Preferred Stock”), which we refer to as the “Series B Depositary Shares,” and
collectively with the Series A Depositary Shares, as the “Depositary Shares.”
The following descriptions of certain terms of our registered securities does not purport to be complete and is subject to, and qualified in its entirety by
reference to, our amended and restated articles of incorporation, as amended (the “Articles of Incorporation”) and our by-laws, as amended and restated (the
“Bylaws”), each of which is incorporated by reference as an exhibit to the Annual Report on Form 10-K of which this Exhibit 4.1 is a part, as well as the applicable
provisions of the Pennsylvania Business Corporation Law, as amended (the “PBCL”). We encourage you to read the Articles of Incorporation, the Bylaws and the
applicable provisions of the PBCL for additional information.
Description of Common Stock
General
Our Articles of Incorporation authorize us to issue a total of 51,653,347 shares of common stock, no par value per share. The authorized but unissued
shares of our capital stock will be available for future issuance without shareholder approval, unless otherwise required by applicable law or the rules of any
applicable securities exchange. Our Articles of Incorporation also authorize us to issue a total of 6,653,347 shares of non-voting common stock, no par value per
share (the “non-voting common stock”). Our non-voting common stock is not registered under Section 12 of the Exchange Act. Our non-voting common stock will
in all respects carry the same rights, privileges and preferences as the common stock (including in respect of dividends and in respect of distributions upon any
dissolution, liquidation or winding up of the Company) and will be treated the same as common stock (including in any merger, consolidation, share exchange,
stock split, reverse stock split, reclassification or other similar transaction) except as otherwise provided in the Articles of Incorporation. For additional information
regarding our non-voting common stock, please refer to the Current Report on Form 8-K that we filed with the U.S. Securities and Exchange Commission on May
17, 2021.
Voting. Each holder of our common stock is entitled to one vote for each share on all matters submitted to the shareholders, except as otherwise required
by law and subject to the rights and preferences of the holders of any outstanding shares of our preferred stock. Holders of our common stock are not entitled to
cumulative voting in the election of directors.
Dividends and other distributions. Subject to certain regulatory restrictions discussed herein and to the rights of holders of any preferred stock that we
may issue, all shares of our common stock are entitled to share equally in dividends from legally available funds, when, as, and if declared by our board of
directors. Upon any voluntary or involuntary liquidation, dissolution or winding up of our affairs, all shares of our common stock would be entitled to share equally
in all of our remaining assets available for distribution to our shareholders after payment of creditors and subject to any prior distribution rights related to our
preferred stock.
Preemptive rights. Holders of our common stock do not have preemptive or subscription rights to acquire any authorized but unissued shares of our
capital stock upon any future issuance of shares.
Preferred Stock. Our Articles of Incorporation permit us to issue up to 150,000 shares of one or more series of preferred stock and authorize our board of
directors to designate the preferences, limitations and relative rights of any such series of preferred stock. As of December 31, 2021, we have 40,250 shares of
Series A Preferred Stock that are issued and outstanding, 80,500 shares of Series B Preferred Stock that are issued and outstanding, and 683 shares of Series C
perpetual non-cumulative non-voting preferred stock (the “Series C Preferred Stock”) that are issued and outstanding. Our Series C Preferred Stock is not
registered under Section 12 of the Exchange Act. For additional information regarding our Series C Preferred Stock, please refer to the Current Report on Form 8-
K that we filed with the U.S. Securities and Exchange Commission on December 30, 2020.
Although the creation and authorization of preferred stock does not, in and of itself, have any effect on the rights of the holders of our common stock, the
issuance of one or more series of preferred stock may affect the holders of common stock in a number of respects, including the following: by subordinating our
common stock to the preferred stock with respect to dividend rights, liquidation preferences, and other rights, preferences, and privileges; by diluting the voting
power of our common stock; by diluting
the earnings per share of our common stock; and by issuing common stock, upon the conversion of the preferred stock, at a price below the fair market value or
original issue price of the common stock that is outstanding prior to such issuance.
Anti-Takeover Effect of Governing Documents and Applicable Law
Provisions of governing documents. Our Articles of Incorporation and Bylaws contain certain provisions that may have the effect of deterring or
discouraging, among other things, a non-negotiated tender or exchange offer for our common stock, a proxy contest for control of TriState Capital, the assumption
of control of TriState Capital by a holder of a large block of our voting stock and the removal of our management. These provisions: empower our board of
directors, without shareholder approval, to issue our 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; and require at least 60 days’ advance notice of
nominations for the election of directors and the presentation of shareholder proposals at meetings of shareholders.
Provisions of applicable law. The PBCL also contains certain provisions applicable to us which may have the effect of impeding a change in control of
TriState Capital. These provisions, among other things: prohibit (under Subchapter C of Chapter 25) shareholders from calling a special meeting in most
circumstances, or by acting by less than unanimous written consent; prohibit (under Subchapter D of Chapter 25) of shareholders from proposing amendments to a
corporation’s articles of incorporation, require (under Subchapter E of Chapter 25) that, following any acquisition by any person or group of 20% of a public
corporation’s voting power, the remaining shareholders have the right to receive payment for their shares, in cash, from such person or group in an amount equal to
the “fair value” of the shares, including an increment representing a proportion of any value payable for control of the corporation; prohibit (under Subchapter F of
Chapter 25) for five years, subject to certain exceptions, a “business combination” (which includes a merger or consolidation of the corporation or a sale, lease or
exchange of assets) with a person or group beneficially owning 20% or more of a public corporation’s voting power, provided that this provision does not apply to
any business combinations approved by a corporation’s board of directors; generally prohibit (under Subchapter G of Chapter 25) a person or group who or which
acquires voting power in an election of directors in excess of certain thresholds (20%, 33 1/3% and 50%) for the first time from voting the “control shares” (i.e., the
shares acquired which result in the person exceeding the applicable threshold, plus all voting shares acquired in the preceding 180 days and any other voting shares
acquired with the intent of making a “control-share acquisition”) unless voting rights are restored at a shareholders meeting requested by the acquiring shareholder
by the affirmative vote of a majority of the shares eligible to vote in elections of directors of both (1) the disinterested shareholders and (2) all voting shares;
require (under Subchapter H of Chapter 25) any person or group that publicly announces that it may acquire control of a public company, or that acquires or
publicly discloses an intent to acquire twenty percent (20%) or more of the voting power of a public company, to disgorge to the corporation any profits that it
receives from sales of the corporation’s equity securities purchased over the prior 24 or subsequent 18 months; require (under Subchapter I of Chapter 25) the
payment of minimum severance benefits to certain employees whose employment is terminated within two years of the approval of a control-share acquisition
under Subchapter G of Chapter 25 of the PBCL; prohibit (under Subchapter I of Chapter 25) the cancellation of certain labor contracts in connection with a
control-share acquisition under Subchapter G of Chapter 25 of the Act; expand the factors and groups (including, without limitation, shareholders) that a
corporation’s board of directors can consider in determining whether an action or transaction is in the best interests of the corporation; provide that a corporation’s
board of directors need not consider the interests of any particular stakeholder group as dominant or controlling in determining whether an action or transaction is
in the best interests of the corporation; provide that a corporation’s directors, in order to satisfy the presumption that they have acted in the best interests of the
corporation, need not satisfy any greater obligation or higher burden of proof with respect to actions relating to an acquisition or potential acquisition of control;
and provide that the fiduciary duty of a corporation’s directors is due solely to the corporation and may be enforced by the corporation or by a shareholder in a
derivative action, but not directly by a shareholder.
In addition to the foregoing, the PBCL also explicitly provides that the fiduciary duties of directors do not require them to redeem any rights under, or to
modify or render inapplicable, any shareholder rights plan; render inapplicable, or make determinations under, provisions of the PBCL relating to control
transactions, business combinations, control-share acquisitions or disgorgement by certain controlling shareholders following attempts to acquire control; or act as
the board of directors, a committee of the board or an individual director, solely because of the effect that the action could have on an acquisition or potential
acquisition of control of the corporation or the consideration that might be offered or paid to shareholders in such an acquisition.
The PBCL further provides that any act of the board of directors, a committee of the board or an individual director relating to or affecting an acquisition
or potential or proposed acquisition of control to which a majority of the disinterested directors have assented will be presumed to satisfy the standard of care set
forth in the statute, unless it is proven by clear and convincing evidence that disinterested directors did not consent to such act in good faith after reasonable
investigation. As a result of this and the other provisions of the PBCL, our directors have broad discretion with respect to actions that may be taken in response to
acquisitions or proposed acquisitions of corporate control.
2
Through amendments to our Articles of Incorporation, we have opted out of coverage by Subchapters E, G and H of Chapter 25 of the PBCL which are
described above. As a result, those provisions would not apply to a non-negotiated attempt to acquire control of TriState Capital, although such an attempt would
still be subject to the special provisions of our governing documents described in the paragraphs above.
The overall effect of these provisions may be to deter a future offer or other merger or acquisition proposals that a majority of our shareholders might
view to be in their best interests as the offer might include a substantial premium over the market price of our common stock at that time. In addition, these
provisions may have the effect of assisting our board of directors and our management in retaining their respective positions and placing them in a better position
to resist changes that the shareholders may want to make if dissatisfied with the conduct of our business.
Description of Series A Depositary Shares and Series B Depositary Shares
General
Our Articles of Incorporation permit us to issue, without shareholder approval, up to 150,000 shares of one or more series of preferred stock and authorize
our board of directors to designate the preferences, limitations and relative rights of any such series of preferred stock. We may, instead of offering full shares of
any series of preferred stock, offer depositary shares evidenced by depositary receipts, each representing a fraction of a share of the particular series of preferred
stock issued and deposited with a depositary. We have 40,250 shares of Series A Preferred Stock that are issued and outstanding, 80,500 shares of Series B
Preferred Stock that are issued and outstanding, and 683 shares of Series C Preferred Stock that are issued and outstanding. Our outstanding shares of Series A
Preferred Stock and Series B Preferred Stock are represented by depositary shares that are registered pursuant to the Exchange Act.
Series A Depositary Shares
References in this section to the depositary shares, preferred stock and other terms that are defined herein are in reference to the Series A Depositary
Shares and Series A Preferred Stock only.
General
Each Series A Depositary Share represents a 1/40th interest in a share of the Series A Preferred Stock, and is evidenced by depositary receipts. We deposited
the underlying shares of Series A Preferred Stock with a depositary pursuant to a deposit agreement among us, Computershare Trust Company, N.A., acting as
depositary, and the holders from time to time of the depositary receipts. Subject to the terms of the deposit agreement, the depositary shares are entitled to all the
powers, preferences and special rights of the Series A Preferred Stock, as applicable, in proportion to the applicable fraction of a share of Series A Preferred Stock
those depositary shares represent.
In this section, references to “holders” of depositary shares mean those who own depositary shares registered in their own names on the books that we or the
depositary maintain for this purpose. DTC is the only registered holder of the depositary receipts representing the depositary shares. References to “holders” of
depositary shares do not include indirect holders who own beneficial interests in depositary shares registered in street name or issued in book-entry form through
DTC.
Listing
The depositary shares are listed on Nasdaq under the symbol “TSCAP.” The Series A Preferred Stock is not listed.
Dividends and Other Distributions
Each dividend payable on a depositary share is in an amount equal to 1/40th of the dividend declared and payable on each share of Series A Preferred Stock.
The depositary distributes all dividends and other cash distributions received on the Series A Preferred Stock to the holders of record of the depositary
receipts in proportion to the number of depositary shares held by each holder. In the event of a distribution other than in cash, the depositary will distribute
property received by it to the holders of record of the depositary receipts in proportion to the number of depositary shares held by each holder, unless the depositary
determines that this distribution is not feasible, in which case the depositary may, with our approval, adopt a method of distribution that it deems practicable,
including the sale of the property and distribution of the net proceeds of that sale to the holders of the depositary receipts.
3
If the calculation of a dividend or other cash distribution results in an amount that is a fraction of a cent and that fraction is equal to or greater than $0.005,
the depositary will round that amount up to the next highest whole cent and will request that we pay the resulting additional amount to the depositary for the
relevant dividend or other cash distribution. If the fractional amount is less than $0.005, the depositary will disregard that fractional amount.
Record dates for the payment of dividends and other matters relating to the depositary shares are the same as the corresponding record dates for the Series A
Preferred Stock.
The amount paid as dividends or otherwise distributable by the depositary with respect to the depositary shares or the underlying Series A Preferred Stock
will be reduced by any amounts required to be withheld by us or the depositary on account of taxes or other governmental charges. The depositary may refuse to
make any payment or distribution, or any transfer, exchange, or withdrawal of any depositary shares or the shares of the Series A Preferred Stock until such taxes
or other governmental charges are paid.
Liquidation Preference
In the event of our liquidation, dissolution or winding up, a holder of depositary shares will receive the fraction of the liquidation preference accorded each
share of underlying Series A Preferred Stock represented by the depositary shares.
Our merger or consolidation with one or more other entities or the sale, lease, exchange or other transfer of all or substantially all of our assets (for cash,
securities or other consideration) will not be deemed to be a voluntary or involuntary liquidation, dissolution or winding up.
Redemption of Depositary Shares
If we redeem the Series A Preferred Stock, in whole or in part, as described below under “Description of Series A Depositary Shares and Series B
Depositary Shares—Series A Preferred Stock—Redemption—Optional Redemption,” depositary shares also will be redeemed with the proceeds received by the
depositary from the redemption of the Series A Preferred Stock held by the depositary. The redemption price per depositary share will be 1/40th of the redemption
price per share payable with respect to the Series A Preferred Stock (or $25 per depositary share), plus, as applicable, any accumulated and unpaid dividends on the
shares of the Series A preferred stock called for redemption for the then-current Dividend Period (as defined under “Description of Series A Depositary Shares and
Series B Depositary Shares—Series A Preferred Stock—Dividends”) to, but excluding, the redemption date, without accumulation of any undeclared dividends.
If we redeem shares of the Series A Preferred Stock held by the depositary, the depositary will redeem, as of the same redemption date, the number of
depositary shares representing those shares of the Series A Preferred Stock so redeemed. If we redeem less than all of the outstanding depositary shares, the
depositary shares to be redeemed will be selected either pro rata or by lot. In any case, the depositary will redeem depositary shares only in increments of 40
depositary shares and multiples thereof. The depositary will provide notice of redemption to record holders of the depositary receipts not less than 30 and not more
than 60 days prior to the date fixed for redemption of the Series A preferred stock and the related depositary shares.
Voting
Because each depositary share represents a 1/40th ownership interest in a share of Series A Preferred Stock, holders of depositary receipts are entitled to vote
1/40th of a vote per depositary share under those limited circumstances in which holders of the Series A preferred stock are entitled to vote, as described below
under “Description of Series A Depositary Shares and Series B Depositary Shares—Series A Preferred Stock—Voting Rights.”
When the depositary receives notice of any meeting at which the holders of the Series A Preferred Stock are entitled to vote, the depositary will provide the
information contained in the notice to the record holders of the depositary shares relating to the Series A Preferred Stock. Each record holder of the depositary
shares on the record date, which will be the same date as the record date for the Series A Preferred Stock, may instruct the depositary to vote the amount of the
Series A Preferred Stock represented by the holder’s depositary shares. To the extent possible, the depositary will vote the amount of the Series A Preferred Stock
represented by depositary shares in accordance with the instructions it receives. We will agree to take all reasonable actions that the depositary determines are
necessary to enable the depositary to vote as instructed. If the depositary does not receive specific instructions from the holders of any depositary shares
representing the Series A Preferred Stock, it will abstain from voting with respect to such shares (but shall appear at the meeting with respect to such shares unless
directed to the contrary).
Withdrawal of Series A Preferred Stock
4
Upon surrender of depositary shares at the principal office of the depositary, upon payment of any unpaid amount due the depositary, and subject to the
terms of the deposit agreement, the owner of the depositary shares evidenced thereby is entitled to delivery of the number of shares of Series A Preferred Stock and
all money and other property, if any, represented by such depositary shares. Only whole shares of Series A Preferred Stock may be withdrawn. If the depositary
shares surrendered by the holder in connection with withdrawal exceed the number of depositary shares that represent the number of whole shares of Series A
Preferred Stock to be withdrawn, the depositary will deliver to that holder at the same time a new depositary receipt evidencing the excess number of depositary
shares. Holders of Series A Preferred Stock thus withdrawn will not thereafter be entitled to deposit such shares under the deposit agreement or to receive
depositary shares therefor.
Resignation and Removal of the Depositary
The depositary may resign at any time by delivering to us notice of its election to resign. We may also remove or replace a depositary at any time. Any
resignation or removal will take effect upon the earlier of the appointment of a successor depositary and 30 days following such notice. We will appoint a
successor depositary within 30 days after delivery of the notice of resignation or removal. The successor must be a bank or trust company with its principal office
in the United States and have a combined capital and surplus of at least $50 million.
Miscellaneous
The depositary will forward to the holders of depositary shares any reports and communications from us with respect to the underlying Series A Preferred
Stock. Neither we nor the depositary will be liable if any law or any circumstances beyond their control prevent or delay them from performing their obligations
under the deposit agreement. The obligations of ours and a depositary under the deposit agreement are limited to performing their duties without bad faith, gross
negligence or willful misconduct. Neither we nor a depositary must prosecute or defend any legal proceeding with respect to any depositary shares or the
underlying Series A Preferred Stock unless they are furnished with satisfactory indemnity. Both we and the depositary may rely on the written advice of counsel or
accountants, or information provided by holders of depositary shares or other persons they believe in good faith to be competent, and on documents they believe in
good faith to be genuine and signed by a proper party. In the event a depositary receives conflicting claims, requests or instructions from us and any holders of
depositary shares, the depositary will be entitled to act on the claims, requests or instructions received from us.
Series A Preferred Stock
Ranking
With respect to the payment of dividends and distributions upon our liquidation, dissolution or winding up, the Series A Preferred Stock ranks (i) senior to
our common stock and any other class or series of preferred stock that by its terms ranks junior to the Series A Preferred Stock, (ii) equally with all existing or
future series of preferred stock that does not by its terms rank junior or senior to the Series A Preferred Stock, and (iii) junior to all existing and future indebtedness
and other liabilities and any class or series of preferred stock that expressly provides in the Certificate of Designation creating such preferred stock that such series
ranks senior to the Series A Preferred Stock (subject to any requisite consents prior to issuance).
The Series A Preferred Stock is not convertible into, or exchangeable for, shares of any other class or series of our capital stock or other securities and is not
subject to any sinking fund or other obligation to redeem or repurchase the Series A Preferred Stock. The preferred stock is not secured, is not guaranteed by us or
any of our affiliates and is not subject to any other arrangement that legally or economically enhances the ranking of the Series A Preferred Stock.
Dividends
Holders of the Series A Preferred Stock are entitled to receive, only when, as, and if declared by our board of directors (or a duly authorized committee of
our board of directors), out of assets legally available under applicable law for payment, non-cumulative cash dividends based on the liquidation preference of
$1,000 per share of Series A Preferred Stock, and no more, at a rate equal to 6.75% per annum (equivalent to $1.6875 per depositary share per annum), for each
quarterly Dividend Period occurring from, and including, the original issue date of the Series A Preferred Stock to, but excluding, April 1, 2023 (the “Fixed Rate
Period”), and thereafter, three-month LIBOR plus a spread of 398.5 basis points per annum, for each quarterly Dividend Period beginning April 1, 2023 (the
“Floating Rate Period”). A “Dividend Period” means the period from, and including, each Dividend Payment Date (as defined below) to, but excluding, the next
succeeding Dividend Payment Date, except for the initial Dividend Period, which will be the period from, and including, the issue date of the shares of Series A
Preferred Stock to, but excluding, the next succeeding Dividend Payment Date.
5
When, as, and if declared by our board of directors (or a duly authorized committee of our board of directors), we pay cash dividends on the Series A
Preferred Stock quarterly, in arrears, on January 1, April 1, July 1 and October 1 of each year (each such date, a “Dividend Payment Date”), beginning on July 1,
2018. We pay cash dividends to the holders of record of shares of the Series A Preferred Stock as they appear on our stock register on the applicable record date,
which is the fifteenth calendar day before that Dividend Payment Date or such other record date fixed by our board of directors (or a duly authorized committee of
the board of directors) that is not more than 60 nor less than 10 days prior to such Dividend Payment Date.
If any Dividend Payment Date on or prior to April 1, 2023 is a day that is not a business day (as defined below), then the dividend with respect to that
Dividend Payment Date will instead be paid on the immediately succeeding business day, without interest or other payment in respect of such delayed payment. If
any Dividend Payment Date after April 1, 2023 is a day that is not a business day, then the Dividend Payment Date will be the immediately succeeding business
day unless such day falls in the next calendar month, in which case the Dividend Payment Date will instead be the immediately preceding day that is a business
day, and dividends will accumulate to the Dividend Payment Date as so adjusted. A “business day” for the Fixed Rate Period means any weekday in New York,
New York that is not a day on which banking institutions in that city are authorized or required by law, regulation, or executive order to be closed. A “business
day” for the Floating Rate Period means any weekday in New York, New York that is not a day on which banking institutions in that city are authorized or
required by law, regulation, or executive order to be closed, and additionally, is a London banking day (as defined below).
We calculate dividends on the Series A Preferred Stock for the Fixed Rate Period on the basis of a 360-day year of twelve 30-day months. We will calculate
dividends on the Series A Preferred Stock for the Floating Rate Period on the basis of the actual number of days in a Dividend Period and a 360-day year. Dollar
amounts resulting from that calculation will be rounded to the nearest cent, with one-half cent being rounded upward. Dividends on the Series A Preferred Stock
will cease to accumulate after the redemption date, as described below under “— Redemption,” unless we default in the payment of the redemption price of the
shares of the Series A Preferred Stock called for redemption.
Dividends on the Series A Preferred Stock are not cumulative or mandatory. If our board of directors (or a duly authorized committee of our board of
directors) does not declare a dividend on the Series A Preferred Stock for, or our board of directors authorizes and we declare less than a full dividend in respect of,
any Dividend Period, the holders will have no right to receive any dividend or a full dividend, as the case may be, for the Dividend Period, and we will have no
obligation to pay a dividend or to pay full dividends for that Dividend Period at any time, whether or not dividends on the Series A Preferred Stock or any other
series of our preferred stock or common stock are declared for any future Dividend Period.
Dividends on the Series A Preferred Stock accumulate from the issue date at the then-applicable dividend rate on the liquidation preference amount of
$1,000 per share (equivalent to $25 per depositary share). If we issue additional shares of the Series A Preferred Stock, dividends on those additional shares will
accumulate from the issue date of those additional shares at the then-applicable dividend rate.
The dividend rate for each Dividend Period in the Floating Rate Period will be determined by the calculation agent using three-month LIBOR as in effect on
the second London banking day prior to the beginning of the Dividend Period, which date is the “dividend determination date” for the relevant Dividend Period.
The calculation agent then will add three-month LIBOR as determined on the dividend determination date and the applicable spread. Once the dividend rate for the
Series A Preferred Stock is determined, the calculation agent will deliver that information to us and the transfer agent for us. Absent manifest error, the calculation
agent’s determination of the dividend rate for a Dividend Period for the Series A Preferred Stock will be final. A “London banking day” is any day on which
commercial banks are open for dealings in deposits in U.S. dollars in the London interbank market.
The term “three-month LIBOR” means the London interbank offered rate for deposits in U.S. dollars for a three month period, as that rate appears on
Reuters screen page “LIBOR01” (or any successor or replacement page) at approximately 11:00 a.m., London time, on the relevant dividend determination date.
If no offered rate appears on Reuters screen page “LIBOR01” (or any successor or replacement page) on the relevant dividend determination date at
approximately 11:00 a.m., London time, then the calculation agent, in consultation with us, will select four major banks in the London interbank market and will
request each of their principal London offices to provide a quotation of the rate at which three-month deposits in U.S. dollars in amounts of at least $1,000,000 are
offered by it to prime banks in the London interbank market, on that date and at that time. If at least two quotations are provided, three-month LIBOR will be the
arithmetic average (rounded upward if necessary to the nearest .00001 of 1%) of the quotations provided. Otherwise, the calculation agent in consultation with us
will select three major banks in New York City and will request each of them to provide a quotation of the rate offered by it at approximately 11:00 a.m., New
York City time, on the dividend determination date for loans in U.S. dollars to leading European banks for a three month period for the applicable Dividend Period
in an amount of at least $1,000,000. If three quotations are provided, three-month LIBOR will be the arithmetic average (rounded upward if necessary to the
nearest .00001 of 1%) of the quotations provided. Otherwise, three-month LIBOR for the next Dividend Period will be equal to three-month LIBOR in effect for
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the then-current Dividend Period or, in the case of the first Dividend Period in the Floating Rate Period, the most recent rate on which three-month LIBOR could
have been determined in accordance with the first sentence of this paragraph had the dividend rate been a floating rate during the Fixed Rate Period.
If the calculation agent determines on the relevant dividend determination date that the LIBOR base rate has been discontinued, then the calculation agent
will use a substitute or successor base rate that it has determined in its sole discretion is the most comparable LIBOR base rate, provided that if the calculation
agent determines there is an industry-accepted substitute or successor base rate, then the calculation agent shall use such substitute or successor base rate. If the
calculation agent has determined a substitute or successor base rate in accordance with the foregoing, the calculation agent in its sole discretion may determine
what business day convention to use, the definition of business day, the dividend determination date to be used and any other relevant methodology for calculating
such substitute or successor base rate, including any adjustment factor needed to make such substitute or successor base rate comparable to the LIBOR base rate, in
a manner that is consistent with industry-accepted practices for such substitute or successor base rate.
Priority Regarding Dividends
So long as any share of Series A Preferred Stock remains outstanding,
(1) no dividend will be declared and paid or set aside for payment and no distribution will be declared and made or set aside for payment on any
Junior Stock (as defined below) (other than a dividend payable solely in shares of Junior Stock or any dividend in connection with the implementation of a
shareholder rights plan or the redemption or repurchase of any rights under such a plan, including with respect to any successor shareholder rights plan);
(2) no shares of Junior Stock will be repurchased, redeemed, or otherwise acquired for consideration by us, directly or indirectly (other than as a
result of a reclassification of Junior Stock for or into other Junior Stock, or the exchange for or conversion into Junior Stock, through the use of the proceeds
of a substantially contemporaneous sale of other shares of Junior Stock or pursuant to a contractually binding requirement to buy Junior Stock pursuant to a
binding stock repurchase plan existing prior to the most recently completed Dividend Period), nor will any monies be paid to or made available for a sinking
fund for the redemption of any such securities by us; and
(3) no shares of Parity Stock will be repurchased, redeemed or otherwise acquired for consideration by us (other than pursuant to pro rata offers to
purchase all, or a pro rata portion, of the Series A Preferred Stock and such Parity Stock, through the use of the proceeds of a substantially contemporaneous
sale of other shares of Parity Stock or Junior Stock, as a result of a reclassification of Parity Stock for or into other Parity Stock, or by conversion into or
exchange for other Parity Stock or Junior Stock), during a Dividend Period, unless, in each case of clauses (1), (2) and (3) above, the full dividends for the
most recently completed Dividend Period on all outstanding shares of the Series A Preferred Stock have been declared and paid in full or declared and a sum
sufficient for the payment of those dividends has been set aside. The foregoing limitations do not apply to purchases or acquisitions of our Junior Stock
pursuant to any employee or director incentive or benefit plan or arrangement (including any of our employment, severance, or consulting agreements) of
ours or of any of our subsidiaries adopted before or after the date of this filing.
Except as provided below, for so long as any share of Series A Preferred Stock remains outstanding, we will not declare, pay, or set aside for payment full
dividends on any Parity Stock unless we have paid in full, or set aside payment in full, in respect of all accumulated dividends for all Dividend Periods for
outstanding shares of preferred stock. To the extent that we declare dividends on the Series A Preferred Stock and on any Parity Stock but cannot make full
payment of such declared dividends, we will allocate the dividend payments on a pro rata basis among the holders of the shares of Series A Preferred Stock and the
holders of any Parity Stock then outstanding. For purposes of calculating the pro rata allocation of partial dividend payments, we will allocate dividend payments
based on the ratio between the then current and unpaid dividend payments due on the shares of Series A Preferred Stock and (1) in the case of cumulative Parity
Stock the aggregate of the accumulated and unpaid dividends due on any such Parity Stock and (2) in the case of non-cumulative Parity Stock, the aggregate of the
declared but unpaid dividends due on any such Parity Stock. No interest will be payable in respect of any dividend payment on Series A Preferred Stock that may
be in arrears.
As used herein, “Junior Stock” means our common stock and any other class or series of our capital stock over which the Series A Preferred Stock has
preference or priority in the payment of dividends or in the distribution of assets on our liquidation, dissolution or winding up, and “Parity Stock” means any other
class or series of our capital stock that ranks on a par with the Series A Preferred Stock in the payment of dividends and in the distribution of assets on our
liquidation, dissolution or winding up, including the Series B Preferred Stock and the Series C Preferred Stock.
Subject to the conditions described above, and not otherwise, dividends (payable in cash, stock, or otherwise), as may be determined by our board of
directors (or a duly authorized committee of our board of directors), may be declared and paid on our common stock and any Junior Stock from time to time out of
any funds legally available for such payment, and the holders of the Series A Preferred Stock will not be entitled to participate in those dividends.
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Liquidation Rights
Upon our voluntary or involuntary liquidation, dissolution or winding up, the holders of the outstanding shares of Series A Preferred Stock are entitled to be
paid out of our assets legally available for distribution to our shareholders, before any distribution of assets is made to holders of common stock or any other Junior
Stock, a liquidating distribution in the amount of a liquidation preference of $1,000 per share (equivalent to $25 per depositary share), plus the sum of any declared
and unpaid dividends for prior Dividend Periods prior to the Dividend Period in which the liquidation distribution is made and any declared and unpaid dividends
for the then current Dividend Period in which the liquidation distribution is made to the date of such liquidation distribution. After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of Series A Preferred Stock will have no right or claim to any of our remaining assets.
Distributions will be made only to the extent that our assets are available after satisfaction of all liabilities to depositors, and creditors and subject to the
rights of holders of any securities ranking senior to the Series A Preferred Stock. If our remaining assets are not sufficient to pay the full liquidating distributions to
the holders of all outstanding Series A Preferred Stock and all Parity Stock, then we will distribute our assets to those holders pro rata in proportion to the full
liquidating distributions to which they would otherwise have received.
Our merger or consolidation with one or more other entities or the sale, lease, exchange or other transfer of all or substantially all of our assets (for cash,
securities or other consideration) will not be deemed to be a voluntary or involuntary liquidation, dissolution or winding up. If we enter into any merger or
consolidation transaction with or into any other entity and we are not the surviving entity in such transaction, the Series A Preferred Stock may be converted into
shares of the surviving or successor corporation or the direct or indirect parent of the surviving or successor corporation having terms identical to the terms of the
Series A Preferred Stock.
Because we are a holding company, our rights and the rights of our creditors and our shareholders, including the holders of the Series A Preferred Stock, to
participate in the distribution of assets of any of our subsidiaries upon that subsidiary’s voluntary or involuntary liquidation, dissolution or winding up will be
subject to the prior claims of that subsidiary’s creditors, except to the extent that we are a creditor with recognized claims against that subsidiary. In addition,
holders of the Series A Preferred Stock (and of depositary shares representing the Series A Preferred Stock) may be fully subordinated to interests held by the U.S.
Government in the event we enter into a receivership, insolvency, liquidation or similar proceeding.
Conversion Rights
The Series A Preferred Stock is not convertible into or exchangeable for any other of our property, interests or securities.
Redemption
The Series A Preferred Stock is not subject to any mandatory redemption, sinking fund or other similar provision.
Neither the holders of Series A Preferred Stock nor the holders of the related depositary shares have the right to require the redemption or repurchase of the
Series A Preferred Stock. In addition, under the Federal Reserve risk-based capital rules applicable to bank holding companies, any redemption of the Series A
Preferred Stock is subject to prior approval of the Federal Reserve.
Optional Redemption
The Series A Preferred Stock is not subject to any mandatory redemption, sinking fund or other similar provisions. We may redeem the Series A Preferred
Stock, in whole or in part, at our option, on any Dividend Payment Date on or after April 1, 2023, with not less than 30 days’ and not more than 60 days’ notice
(“Optional Redemption”), subject to the approval of the appropriate federal banking agency, at the redemption price provided below. Dividends will not
accumulate on those shares of Series A Preferred Stock on and after the redemption date.
Redemption Following a Regulatory Capital Event
We may redeem the Series A Preferred Stock, in whole but not in part, at our option, for cash, at any time within 90 days following a Regulatory Capital
Treatment Event, subject to the approval of the appropriate federal banking agency, at the redemption price provided below (“Regulatory Event Redemption”). A
“Regulatory Capital Treatment Event” means a good faith determination by us that, as a result of any:
•
amendment to, clarification of, or change (including any announced prospective change) in, the laws or regulations of the
United States or any political subdivision of or in the United States that is enacted or becomes effective after the initial
issuance of the Series A Preferred Stock;
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•
proposed change in those laws or regulations that is announced or becomes effective after the initial issuance of the
Series A Preferred Stock; or
•
official administrative decision or judicial decision or administrative action or other official pronouncement interpreting
or applying those laws or regulations that is announced or becomes effective after the initial issuance of the Series A
Preferred Stock;
there is more than an insubstantial risk that we will not be entitled to treat the full liquidation value of the Series A Preferred Stock then outstanding as “Tier 1
Capital” (or its equivalent) for purposes of the capital adequacy laws or regulations of the Federal Reserve Board (or, as and if applicable, the capital adequacy
laws or regulations of any successor appropriate federal banking agency), as then in effect and applicable, for as long as any share of Series A Preferred Stock is
outstanding. Dividends will not accumulate on the shares of Series A Preferred Stock on and after the redemption date.
Redemption Price
The redemption price for any redemption of Series A Preferred Stock, whether an Optional Redemption or Regulatory Event Redemption, will be equal to
$1,000 per share of Series A Preferred Stock (equivalent to $25 per depositary share), plus any declared and unpaid dividends (without regard to any undeclared
dividends) to, but excluding, the date of redemption.
Redemption Procedures
If we elect to redeem any shares of Series A Preferred Stock, we will provide notice to the holders of record of the shares of Series A Preferred Stock to be
redeemed, not less than 30 days and not more than 60 days before the date fixed for redemption thereof (provided, however, that if the shares of Series A Preferred
Stock or the depositary shares representing the shares of Series A Preferred Stock are held in book-entry form through DTC, we may give this notice in any manner
permitted by DTC). Any notice given as provided in this paragraph will be conclusively presumed to have been duly given, whether or not the holder receives this
notice, and any defect in this notice or in the provision of this notice, to any holder of shares of Series A Preferred Stock designated for redemption will not affect
the redemption of any other shares of Series A Preferred Stock. Each notice of redemption shall state:
•
the redemption date;
•
the redemption price;
•
if fewer than all shares of Series A Preferred Stock are to be redeemed, the number of shares of Series A Preferred Stock
to be redeemed; and
•
the manner in which holders of Series A Preferred Stock called for redemption may obtain payment of the redemption
price in respect to those shares.
If notice of redemption of any shares of Series A Preferred Stock has been given and if the funds necessary for such redemption have been set aside by us in
trust for the benefit of the holders of any shares of Series A Preferred Stock so called for redemption, then from and after the redemption date such shares of Series
A Preferred Stock will no longer be deemed outstanding, all dividends with respect to such shares of Series A Preferred Stock shall cease to accumulate after the
redemption date and all rights of the holders of such shares will terminate, except the right to receive the redemption price, without interest.
In the case of any redemption of only part of the Series A Preferred Stock at the time outstanding, the shares of Series A Preferred Stock to be redeemed will
be selected either pro rata or by lot or in such other manner as our board of directors (or a duly authorized committee of our board of directors) determines to be
fair and equitable and permitted by the rules of any stock exchange on which the Series A Preferred Stock is listed. Subject to the provisions set forth in the
prospectus supplement relating to the depositary shares representing the Series A Preferred Stock and the accompanying prospectus, the board of directors (or a
duly authorized committee of our board of directors) has the full power and authority to prescribe the terms and conditions upon which shares of Series A Preferred
Stock may be redeemed from time to time.
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Voting Rights
Registered owners of Series A Preferred Stock do not have any voting rights, except as set forth below or as otherwise required by applicable law. To the
extent that owners of Series A Preferred Stock are entitled to vote, each holder of Series A Preferred Stock has one vote per share.
Whenever dividends payable on the Series A Preferred Stock or any other class or series of preferred stock ranking equally with the Series A Preferred Stock
as to payment of dividends, and upon which voting rights equivalent to those described in this paragraph have been conferred and are exercisable, have not been
declared and paid in an aggregate amount equal to, as to any class or series, the equivalent of at least six or more quarterly Dividend Periods, whether or not for
consecutive Dividend Periods (a “Nonpayment”), the holders of outstanding shares of the Series A Preferred Stock voting as a class with holders of shares of any
other series of our preferred stock ranking equally with the Series A Preferred Stock as to payment of dividends, and upon which like voting rights have been
conferred and are exercisable (“Voting Parity Stock”), will be entitled to vote for the election of two additional directors of our board of directors on the terms set
forth below (and to fill any vacancies in the terms of such directorships) (the “Preferred Stock Directors”). Holders of all series of Voting Parity Stock will vote as
a single class. In the event that the holders of the shares of the Series A Preferred Stock are entitled to vote as described in this paragraph, the number of members
of our board of directors at the time will be increased by two directors, and the holders of the Series A Preferred Stock will have the right, as members of that class,
as outlined above, to elect two directors at a special meeting called at the request of the holders of record of at least 20% of the aggregate voting power of the
Series A Preferred Stock or any other series of Voting Parity Stock (unless such request is received less than 90 days before the date fixed for our next annual or
special meeting of the shareholders, in which event such election shall be held at such next annual or special meeting of the shareholders), provided that the
election of any Preferred Stock Directors shall not cause us to violate the corporate governance requirements of the Nasdaq Global Select Market (or any other
exchange on which our securities may at such time be listed) that listed companies must have a majority of independent directors, and provided further that at no
time shall our board of directors include more than two Preferred Stock Directors.
When we have paid full dividends on the Series A Preferred Stock for the equivalent of at least four Dividend Periods following a Nonpayment, the voting
rights described above will terminate, except as expressly provided by law. The voting rights described above are subject to re-vesting upon each and every
subsequent Nonpayment.
Upon termination of the right of the holders of the Series A Preferred Stock and Voting Parity Stock to vote for Preferred Stock Directors as described
above, the term of office of all Preferred Stock Directors then in office elected by only those holders will terminate immediately. Whenever the term of office of
the Preferred Stock Directors ends and the related voting rights have expired, the number of directors automatically will be decreased to the number of directors as
otherwise would prevail. Any Preferred Stock Director may be removed at any time by the holders of record of a majority of the outstanding shares of the Series A
Preferred Stock (together with holders of any Voting Parity Stock) when they have the voting rights described in the prospectus supplement relating to the
depositary shares representing the Series A Preferred Stock and the accompanying prospectus.
Under regulations adopted by the Federal Reserve, if the holders of any series of preferred stock are or become entitled to vote for the election of directors,
such series will be deemed a class of voting securities and a company holding 25% or more of the series, or 10% or more if it otherwise exercises a “controlling
influence” over us, will be subject to regulation as a bank holding company under the Bank Holding Company Act of 1956 (the “BHC Act”). In addition, at the
time the series is deemed a class of voting securities, any other bank holding company will be required to obtain the prior approval of the Federal Reserve under
the BHC Act to acquire or retain more than 5% of that series. Any other person (other than a bank holding company) will be required to obtain the non-objection of
the Federal Reserve under the Change in Bank Control Act of 1978, as amended, to acquire or retain 10% or more of that series.
So long as any shares of preferred stock remain outstanding, we will not, without the affirmative vote or consent of holders of at least 66 2/3% in voting
power of the Series A Preferred Stock and any Voting Parity Stock, voting together as a class, authorize, create or issue any capital stock ranking senior to the
Series A Preferred Stock as to dividends or the distribution of assets upon liquidation, dissolution or winding up, or reclassify any authorized capital stock into any
such shares of such capital stock or issue any obligation or security convertible into or evidencing the right to purchase any such shares of capital stock. So long as
any shares of the Series A Preferred Stock remain outstanding, we will not, without the affirmative vote of the holders of at least 66 2/3% in voting power of the
Series A Preferred Stock, amend, alter or repeal any provision of the Certificate of Designation or our Articles, including by merger, consolidation or otherwise, so
as to affect the powers, preferences or special rights of the Series A Preferred Stock.
Notwithstanding the foregoing, none of the following will be deemed to affect the powers, preferences or special rights of the Series A Preferred Stock:
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•
any increase in the amount of authorized common stock or authorized preferred stock, or any increase or decrease in the
number of shares of any series of preferred stock, or the authorization, creation and issuance of other classes or series of
capital stock, in each case ranking on parity with or junior to the Series A Preferred Stock as to dividends or distribution
of assets upon our liquidation, dissolution or winding up;
•
a merger or consolidation of us with or into another entity in which the shares of the Series A Preferred Stock remain
outstanding; and
•
a merger or consolidation of us with or into another entity in which the shares of the Series A Preferred Stock are
converted into or exchanged for preference securities of the surviving entity or any entity, directly or indirectly,
controlling such surviving entity and such new preference securities have powers, preferences and special rights that are
not materially less favorable than the Series A Preferred Stock.
The foregoing voting rights of the holders of Series A Preferred Stock shall not apply if, at or prior to the time when the act with respect to which the vote
would otherwise be required shall be effected, all outstanding shares of Series A Preferred Stock shall have been redeemed or called for redemption upon proper
notice and we shall have set aside sufficient funds for the benefit of holders of Series A Preferred Stock to effect the redemption.
Depositary, Transfer Agent, and Registrar
Computershare Trust Company, N.A. is the depositary, transfer agent, and registrar for the Series A Preferred Stock.
Calculation Agent
We will appoint a calculation agent for the Series A Preferred Stock prior to the commencement of the Floating Rate Period. The Company may appoint
itself or an affiliate as the calculation agent.
Series B Depositary Shares
References in this section to the depositary shares, preferred stock and other terms that are defined herein are in reference to the Series B Depositary Shares and
Series B Preferred Stock only.
General
Each Series B Depositary Share represents a 1/40th interest in a share of the Series B Preferred Stock, and is evidenced by depositary receipts. We deposited
the underlying shares of Series B Preferred Stock with a depositary pursuant to a deposit agreement among us, Computershare Trust Company, N.A., acting as
depositary, and the holders from time to time of the depositary receipts. Subject to the terms of the deposit agreement, the depositary shares are entitled to all the
powers, preferences and special rights of the Series B Preferred Stock, as applicable, in proportion to the applicable fraction of a share of Series B Preferred Stock
those depositary shares represent.
In this section, references to “holders” of depositary shares mean those who own depositary shares registered in their own names on the books that we or the
depositary maintain for this purpose. DTC is the only registered holder of the depositary receipts representing the depositary shares. References to “holders” of
depositary shares do not include indirect holders who own beneficial interests in depositary shares registered in street name or issued in book-entry form through
DTC.
Listing
The depositary shares are listed on Nasdaq under the symbol “TSCBP.” The Series B Preferred Stock is not listed.
Dividends and Other Distributions
Each dividend payable on a depositary share is in an amount equal to 1/40th of the dividend declared and payable on each share of Series B Preferred Stock.
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The depositary distributes all dividends and other cash distributions received on the Series B Preferred Stock to the holders of record of the depositary receipts
in proportion to the number of depositary shares held by each holder. In the event of a distribution other than in cash, the depositary will distribute property
received by it to the holders of record of the depositary receipts in proportion to the number of depositary shares held by each holder, unless the depositary
determines that this distribution is not feasible, in which case the depositary may, with our approval, adopt a method of distribution that it deems practicable,
including the sale of the property and distribution of the net proceeds of that sale to the holders of the depositary receipts.
If the calculation of a dividend or other cash distribution results in an amount that is a fraction of a cent and that fraction is equal to or greater than $0.005, the
depositary will round that amount up to the next highest whole cent and will request that we pay the resulting additional amount to the depositary for the relevant
dividend or other cash distribution. If the fractional amount is less than $0.005, the depositary will disregard that fractional amount.
Record dates for the payment of dividends and other matters relating to the depositary shares are the same as the corresponding record dates for the Series B
Preferred Stock.
The amount paid as dividends or otherwise distributable by the depositary with respect to the depositary shares or the underlying Series B Preferred Stock will
be reduced by any amounts required to be withheld by us or the depositary on account of taxes or other governmental charges. The depositary may refuse to make
any payment or distribution, or any transfer, exchange, or withdrawal of any depositary shares or the shares of the Series B Preferred Stock until such taxes or other
governmental charges are paid.
Liquidation Preference
In the event of our liquidation, dissolution or winding up, a holder of depositary shares will receive the fraction of the liquidation preference accorded each
share of underlying Series B Preferred Stock represented by the depositary shares.
Our merger or consolidation with one or more other entities or the sale, lease, exchange or other transfer of all or substantially all of our assets (for cash,
securities or other consideration) will not be deemed to be a voluntary or involuntary liquidation, dissolution or winding up.
Redemption of Depositary Shares
If we redeem the Series B preferred stock, in whole or in part, as described below under “Description of Series A Depositary Shares and Series B Depositary
Shares—Series B Preferred Stock—Redemption—Optional Redemption,” depositary shares also will be redeemed with the proceeds received by the depositary
from the redemption of the Series B Preferred Stock held by the depositary. The redemption price per depositary share will be 1/40th of the redemption price per
share payable with respect to the Series B Preferred Stock (or $25 per depositary share), plus, as applicable, any accumulated and unpaid dividends on the shares of
the Series B Preferred Stock called for redemption for the then-current Dividend Period (as defined under “Description of Series A Depositary Shares and Series B
Depositary Shares—Series B Preferred Stock—Dividends”) to, but excluding, the redemption date, without accumulation of any undeclared dividends.
If we redeem shares of the Series B Preferred Stock held by the depositary, the depositary will redeem, as of the same redemption date, the number of
depositary shares representing those shares of the Series B Preferred Stock so redeemed. If we redeem less than all of the outstanding depositary shares, the
depositary shares to be redeemed will be selected either pro rata or by lot. In any case, the depositary will redeem depositary shares only in increments of 40
depositary shares and multiples thereof. The depositary will provide notice of redemption to record holders of the depositary receipts not less than 30 and not more
than 60 days prior to the date fixed for redemption of the Series Preferred Stock and the related depositary shares.
Voting
Because each depositary share represents a 1/40th ownership interest in a share of Series B Preferred Stock, holders of depositary receipts are entitled to vote
1/40th of a vote per depositary share under those limited circumstances in which holders of the Series B preferred stock are entitled to vote, as described below
under “Description of Series A Depositary Shares and Series B Depositary Shares—Series B Preferred Stock—Voting Rights.”
When the depositary receives notice of any meeting at which the holders of the Series B Preferred Stock are entitled to vote, the depositary will provide the
information contained in the notice to the record holders of the depositary shares relating to the Series B Preferred Stock. Each record holder of the depositary
shares on the record date, which will be the same date as the record date for the Series B Preferred Stock, may instruct the depositary to vote the amount of the
Series B Preferred Stock represented by the holder’s
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depositary shares. To the extent possible, the depositary will vote the maximum number of whole shares of the Series B Preferred Stock represented by depositary
shares in accordance with the instructions it receives. We will agree to take all reasonable actions that the depositary determines are necessary to enable the
depositary to vote as instructed. If the depositary does not receive specific instructions from the holders of any depositary shares representing the Series B
Preferred Stock, it will abstain from voting with respect to such shares (but shall appear at the meeting with respect to such shares unless directed to the contrary).
Withdrawal of Series B Preferred Stock
Upon surrender of depositary shares at the principal office of the depositary, upon payment of any unpaid amount due the depositary, and subject to the terms
of the deposit agreement, the owner of the depositary shares evidenced thereby is entitled to delivery of the number of shares of Series B Preferred Stock and all
money and other property, if any, represented by such depositary shares. Only whole shares of Series B Preferred Stock may be withdrawn. If the depositary shares
surrendered by the holder in connection with withdrawal exceed the number of depositary shares that represent the number of whole shares of Series B Preferred
Stock to be withdrawn, the depositary will deliver to that holder at the same time a new depositary receipt evidencing the excess number of depositary shares.
Holders of Series B Preferred Stock thus withdrawn will not thereafter be entitled to deposit such shares under the deposit agreement or to receive depositary
shares therefor.
Resignation and Removal of the Depositary
The depositary may resign at any time by delivering to us notice of its election to resign. We may also remove or replace a depositary at any time. Any
resignation or removal will take effect upon the earlier of the appointment of a successor depositary and 30 days following such notice. We will appoint a
successor depositary within 30 days after delivery of the notice of resignation or removal. The successor must be a bank or trust company with its principal office
in the United States and have a combined capital and surplus of at least $50 million.
Miscellaneous
The depositary will forward to the holders of depositary shares any reports and communications from us with respect to the underlying Series B Preferred
Stock. Neither we nor the depositary will be liable if any law or any circumstances beyond their control prevent or delay them from performing their obligations
under the deposit agreement. The obligations of ours and a depositary under the deposit agreement are limited to performing their duties without bad faith, gross
negligence or willful misconduct. Neither we nor a depositary must prosecute or defend any legal proceeding with respect to any depositary shares or the
underlying Series B Preferred Stock unless they are furnished with satisfactory indemnity. Both we and the depositary may rely on the written advice of counsel or
accountants, or information provided by holders of depositary shares or other persons they believe in good faith to be competent, and on documents they believe in
good faith to be genuine and signed by a proper party. In the event a depositary receives conflicting claims, requests or instructions from us and any holders of
depositary shares, the depositary will be entitled to act on the claims, requests or instructions received from us.
Series B Preferred Stock
Ranking
With respect to the payment of dividends and distributions upon our liquidation, dissolution or winding up, the Series B Preferred Stock rank (i) senior to our
common stock and any other class or series of preferred stock that by its terms ranks junior to the Series B Preferred Stock, (ii) equally with our Series A Preferred
Stock and any future series of preferred stock the terms of which expressly provide that it will rank equally with the Series B Preferred Stock with respect to
dividends and distributions, and (iii) junior to all existing and future indebtedness and other liabilities and any class or series of preferred stock that expressly
provides in the Articles of Amendment creating such preferred stock that such series ranks senior to the Series B Preferred Stock (subject to any requisite consents
prior to issuance).
The Series B Preferred Stock is not convertible into, or exchangeable for, shares of any other class or series of our capital stock or other securities and will not
be subject to any sinking fund or other obligation to redeem or repurchase the Series B Preferred Stock. The preferred stock is not secured, is not guaranteed by us
or any of our affiliates and is not subject to any other arrangement that legally or economically enhances the ranking of the Series B Preferred Stock.
Dividends
Holders of the Series B Preferred Stock are entitled to receive, only when, as, and if declared by our board of directors (or a duly authorized committee of
our board of directors), out of assets legally available under applicable law for payment, non-cumulative cash dividends based on the liquidation preference of
$1,000 per share of Series B Preferred Stock, and no more, at a rate equal to
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6.375% per annum (equivalent to $1.59375 per depositary share per annum), for each quarterly Dividend Period occurring from, and including, the original issue
date of the Series B Preferred Stock to, but excluding, July 1, 2026 (the “Fixed Rate Period”), and thereafter, three-month LIBOR plus a spread of 408.8 basis
points per annum, subject to potential adjustment as provided in clause (iii) of the definition of three-month LIBOR, for each quarterly Dividend Period beginning
July 1, 2026 (the “Floating Rate Period”). A “Dividend Period” means the period from, and including, each Dividend Payment Date (as defined below) to, but
excluding, the next succeeding Dividend Payment Date, except for the initial Dividend Period, which will be the period from, and including, the issue date of the
shares of Series B Preferred Stock to, but excluding, the next succeeding Dividend Payment Date.
When, as, and if declared by our board of directors (or a duly authorized committee of our board of directors), we pay cash dividends on the Series B
Preferred Stock quarterly, in arrears, on January 1, April 1, July 1 and October 1 of each year (each such date, a “Dividend Payment Date”), beginning on July 1,
2019. We pay cash dividends to the holders of record of shares of the Series B Preferred Stock as they appear on our stock register on the applicable record date,
which shall be the fifteenth calendar day before that Dividend Payment Date or such other record date fixed by our board of directors (or a duly authorized
committee of the board of directors) that is not more than 60 nor less than 10 days prior to such Dividend Payment Date.
If any Dividend Payment Date on or prior to July 1, 2026 is a day that is not a Business Day (as defined below), then the dividend with respect to that
Dividend Payment Date will instead be paid on the immediately succeeding Business Day, without interest or other payment in respect of such delayed payment. If
any Dividend Payment Date after July 1, 2026 is a day that is not a Business Day, then the Dividend Payment Date will be the immediately succeeding Business
Day unless such day falls in the next calendar month, in which case the Dividend Payment Date will instead be the immediately preceding day that is a Business
Day, and dividends will accumulate to the Dividend Payment Date as so adjusted. A “Business Day” for the Fixed Rate Period means any weekday in New York,
New York that is not a day on which banking institutions in that city are authorized or required by law, regulation or executive order to be closed. A “Business
Day” for the Floating Rate Period means any weekday in New York, New York that is not a day on which banking institutions in that city are authorized or
required by law, regulation or executive order to be closed, and additionally, is a London Banking Day (as defined below).
We calculate dividends on the Series B Preferred Stock for the Fixed Rate Period on the basis of a 360-day year of twelve 30-day months. We will calculate
dividends on the Series B Preferred Stock for the Floating Rate Period on the basis of the actual number of days in a Dividend Period and a 360-day year. Dollar
amounts resulting from that calculation will be rounded to the nearest cent, with one-half cent being rounded upward. Dividends on the Series B Preferred Stock
will cease to accumulate after the redemption date, as described below under “-Redemption,” unless we default in the payment of the redemption price of the
shares of the Series B Preferred Stock called for redemption.
Dividends on the Series B Preferred Stock are not cumulative or mandatory. If our board of directors (or a duly authorized committee of our board of
directors) does not declare a dividend on the Series B Preferred Stock for, or our board of directors authorizes and we declare less than a full dividend in respect of,
any Dividend Period, the holders will have no right to receive any dividend or a full dividend, as the case may be, for the Dividend Period, and we will have no
obligation to pay a dividend or to pay full dividends for that Dividend Period at any time, whether or not dividends on the Series B Preferred Stock or any other
series of our preferred stock or common stock are declared for any future Dividend Period.
Dividends on the Series B Preferred Stock accumulate from the issue date at the then-applicable dividend rate on the liquidation preference amount of $1,000
per share (equivalent to $25 per depositary share). If we issue additional shares of the Series B Preferred Stock, dividends on those additional shares will
accumulate from the issue date of those additional shares at the then-applicable dividend rate.
The dividend rate for each Dividend Period in the Floating Rate Period will be determined by the calculation agent using three-month LIBOR as in effect on
the second London Banking Day prior to the beginning of the Dividend Period, which date is the “Dividend Determination Date” for the relevant Dividend Period.
The calculation agent then will add three-month LIBOR as determined on the Dividend Determination Date and the applicable spread. Once the dividend rate for
the Series B Preferred Stock is determined, the calculation agent will deliver that information to us and the transfer agent for us. Absent manifest error, the
determination by the calculation agent or, for the avoidance of doubt, by the IFA in clause (iii) below, of the dividend rate for a Dividend Period for the Series B
Preferred Stock will be final. A “London Banking Day” is any day on which commercial banks are open for dealings in deposits in U.S. dollars in the London
interbank market.
The term “three-month LIBOR” means, for each Dividend Determination Date related to the Floating Rate Period, the rate determined by the calculation
agent as follows:
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(i) The London interbank offered rate for deposits in U.S. dollars for a three month period, as that rate appears on Reuters screen page “LIBOR01” (or any
successor or replacement page) at approximately 11:00 a.m., London time, on the relevant Dividend Determination Date.
(ii) If no offered rate appears on Reuters screen page “LIBOR01” (or any successor or replacement page) on the relevant Dividend Determination Date at
approximately 11:00 a.m., London time, then the calculation agent, in consultation with us, will select four major banks in the London interbank market and will
request each of their principal London offices to provide a quotation of the rate at which three-month deposits in U.S. dollars in amounts of at least $1,000,000 are
offered by it to prime banks in the London interbank market, on that date and at that time. If at least two quotations are provided, three-month LIBOR will be the
arithmetic average (rounded upward if necessary to the nearest .00001 of 1%) of the quotations provided. Otherwise, the calculation agent in consultation with us
will select three major banks in New York City and will request each of them to provide a quotation of the rate offered by it at approximately 11:00 a.m., New
York City time, on the Dividend Determination Date for loans in U.S. dollars to leading European banks for a three-month period for the applicable Dividend
Period in an amount of at least $1,000,000. If three quotations are provided, three-month LIBOR will be the arithmetic average of the quotations provided.
Otherwise, if a LIBOR Event (as defined below) has not occurred, three-month LIBOR for the next Dividend Period will be equal to three-month LIBOR in effect
for the then current Dividend Period or, in the case of the first Dividend Period in the Floating Rate Period, the most recent rate on which three-month LIBOR
could have been determined in accordance with the first sentence of this paragraph had the dividend rate been a floating rate during the Fixed Rate Period.
(iii) Notwithstanding clauses (i) and (ii) above, if we, in our sole discretion, determine on the relevant Dividend Determination Date that the three-month
LIBOR has been permanently discontinued or is no longer viewed as an acceptable benchmark for securities like the Series B Preferred Stock, and we have
notified the calculation agent (if it is not us) of such determination (a “LIBOR Event”), then the calculation agent will use, as directed by us, as a substitute or
successor base rate (the “Alternative Rate”) for each future Dividend Determination Date the alternative reference rate selected by the central bank, reserve bank,
monetary authority or any similar institution (including any committee or working group thereof) that is consistent with market practice regarding a substitute for
the three-month LIBOR. As part of such substitution, the calculation agent will, as directed by us, make such adjustment to the Alternative Rate or the spread
thereon, as well as the business day convention, the Dividend Determination Date and related provisions and definitions (“Adjustments”), in each case that are
consistent with market practice for the use of such Alternative Rate. Notwithstanding the foregoing, if we determine that there is no alternative reference rate
selected by the central bank, reserve bank, monetary authority or any similar institution (including any committee or working group thereof) that is consistent with
market practice regarding a substitute for three-month LIBOR, we may, in our sole discretion, appoint an independent financial advisor (“IFA”) to determine an
appropriate Alternative Rate and any Adjustments, and the decision of the IFA will be binding on us, the calculation agent and the holders of the Series B Preferred
Stock. If on any Dividend Determination Date during the Floating Rate Period (which may be the first Dividend Determination Date of the Floating Rate Period) a
LIBOR Event has occurred prior to such Dividend Determination Date and for any reason an Alternative Rate has not been determined or there is no such market
practice for the use of such Alternative Rate (and, in each case, an IFA has not determined an appropriate Alternative Rate and Adjustments or an IFA has not been
appointed) as of such Dividend Determination Date, then commencing on such Dividend Determination Date the dividend rate, business day convention and
manner of calculating dividends applicable during the Fixed Rate Period will be in effect for the applicable Dividend Period and will remain in effect during the
remainder of the Floating Rate Period.
Priority Regarding Dividends
During a Dividend Period, so long as any share of Series B Preferred Stock remains outstanding,
(1) no dividend will be declared and paid or set aside for payment and no distribution will be declared and made or set aside for payment on
any Junior Stock (as defined below) (other than a dividend payable solely in shares of Junior Stock or any dividend in connection with the implementation of
a shareholder rights plan or the redemption or repurchase of any rights under such a plan, including with respect to any successor shareholder rights plan);
(2) no shares of Junior Stock will be repurchased, redeemed, or otherwise acquired for consideration by us, directly or indirectly (other than as
a result of a reclassification of Junior Stock for or into other Junior Stock, or the exchange for or conversion into Junior Stock, through the use of the proceeds
of a substantially contemporaneous sale of other shares of Junior Stock or pursuant to a contractually binding requirement to buy Junior Stock pursuant to a
binding stock repurchase plan existing prior to the most recently completed Dividend Period), nor will any monies be paid to or made available for a sinking
fund for the redemption of any such securities by us; and
(3) no shares of Parity Stock (as defined below) will be repurchased, redeemed or otherwise acquired for consideration by us (other than
pursuant to pro rata offers to purchase all, or a pro rata portion, of the Series B Preferred Stock and such Parity Stock, through the use of the proceeds of a
substantially contemporaneous sale of other shares of Parity Stock or
15
Junior Stock, as a result of a reclassification of Parity Stock for or into other Parity Stock, or by conversion into or exchange for other Parity Stock or Junior
Stock),
unless, in each case of clauses (1), (2) and (3) above, the full dividends for the most recently completed Dividend Period on all outstanding shares of the Series B
Preferred Stock have been declared and paid in full or declared and a sum sufficient for the payment of those dividends has been set aside. The foregoing
limitations do not apply to purchases or acquisitions of our Junior Stock pursuant to any employee or director incentive or benefit plan or arrangement (including
any of our employment, severance, or consulting agreements) of ours or of any of our subsidiaries.
Except as provided below, for so long as any share of Series B Preferred Stock remains outstanding, we will not declare, pay, or set aside for payment full
dividends on any Parity Stock unless we have paid in full, or set aside payment in full, in respect of all accumulated dividends for all Dividend Periods for
outstanding shares of preferred stock. To the extent that we declare dividends on the Series B Preferred Stock and on any Parity Stock but cannot make full
payment of such declared dividends, we will allocate the dividend payments on a pro rata basis among the holders of the shares of Series B Preferred Stock and the
holders of any Parity Stock then outstanding. For purposes of calculating the pro rata allocation of partial dividend payments, we will allocate dividend payments
based on the ratio between the then current and unpaid dividend payments due on the shares of Series B Preferred Stock and (1) in the case of cumulative Parity
Stock, the aggregate of the accumulated and unpaid dividends due on any such Parity Stock, and (2) in the case of non-cumulative Parity Stock, the aggregate of
the declared but unpaid dividends due on any such Parity Stock. No interest will be payable in respect of any dividend payment on Series B Preferred Stock that
may be in arrears.
As used herein, “Junior Stock” means our common stock and any other class or series of our capital stock over which the Series B Preferred Stock has
preference or priority in the payment of dividends or in the distribution of assets on our liquidation, dissolution or winding up, and “Parity Stock” means any other
class or series of our capital stock that ranks equally with the Series B Preferred Stock in the payment of dividends and in the distribution of assets on our
liquidation, dissolution or winding up, which includes the Series A Preferred Stock, the Series C Preferred Stock and any other class or series of our stock hereafter
authorized the terms of which expressly provide that it ranks equally with the Series B Preferred Stock in the payment of dividends and in the distribution of assets
on our liquidation, dissolution or winding up.
Subject to the conditions described above, and not otherwise, dividends (payable in cash, stock, or otherwise), as may be determined by our board of directors
(or a duly authorized committee of our board of directors), may be declared and paid on our common stock and any Junior Stock from time to time out of any
funds legally available for such payment, and the holders of the Series B Preferred Stock will not be entitled to participate in those dividends.
Liquidation Rights
Upon our voluntary or involuntary liquidation, dissolution or winding up, the holders of the outstanding shares of Series B Preferred Stock are entitled to
be paid out of our assets legally available for distribution to our shareholders, before any distribution of assets is made to holders of common stock or any other
Junior Stock, a liquidating distribution in the amount of a liquidation preference of $1,000 per share (equivalent to $25 per depositary share), plus the sum of any
declared and unpaid dividends for prior Dividend Periods prior to the Dividend Period in which the liquidation distribution is made and any declared and unpaid
dividends for the then current Dividend Period in which the liquidation distribution is made to the date of such liquidation distribution. After payment of the full
amount of the liquidating distributions to which they are entitled, the holders of Series B Preferred Stock will have no right or claim to any of our remaining assets.
Distributions will be made only to the extent that our assets are available after satisfaction of all liabilities to depositors, and creditors and subject to the rights of
holders of any securities ranking senior to the Series B Preferred Stock. If our remaining assets are not sufficient to pay the full liquidating distributions to the
holders of all outstanding Series B Preferred Stock and all Parity Stock, then we will distribute our assets to those holders pro rata in proportion to the full
liquidating distributions to which they would otherwise have received.
Our merger or consolidation with one or more other entities or the sale, lease, exchange or other transfer of all or substantially all of our assets (for cash,
securities or other consideration) will not be deemed to be a voluntary or involuntary liquidation, dissolution or winding up. If we enter into any merger or
consolidation transaction with or into any other entity and we are not the surviving entity in such transaction, the Series B Preferred Stock may be converted into
shares of the surviving or successor corporation or the direct or indirect parent of the surviving or successor corporation having terms identical to the terms of the
Series B Preferred Stock.
Because we are a holding company, our rights and the rights of our creditors and our shareholders, including the holders of the Series B Preferred Stock,
to participate in the distribution of assets of any of our subsidiaries upon that subsidiary’s voluntary or
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involuntary liquidation, dissolution or winding up will be subject to the prior claims of that subsidiary’s creditors, except to the extent that we are a creditor with
recognized claims against that subsidiary. In addition, holders of the Series B Preferred Stock (and of depositary shares representing the Series B Preferred Stock)
may be fully subordinated to interests held by the U.S. Government in the event we enter into a receivership, insolvency, liquidation or similar proceeding.
Conversion Rights
The Series B Preferred Stock is not convertible into or exchangeable for any other of our property, interests or securities.
Redemption
The Series B Preferred Stock is not subject to any mandatory redemption, sinking fund or other similar provision.
Neither the holders of Series B Preferred Stock nor the holders of the related depositary shares have the right to require the redemption or repurchase of the
Series B Preferred Stock. In addition, under the Federal Reserve risk-based capital rules applicable to bank holding companies, any redemption of the Series B
Preferred Stock is subject to prior approval of the Federal Reserve.
Optional Redemption
We may redeem the Series B Preferred Stock, in whole or in part, at our option, on any Dividend Payment Date on or after July 1, 2024, with not less than 30
days’ and not more than 60 days’ notice (“Optional Redemption”), subject to the approval of the appropriate federal banking agency, at the redemption price
provided below. Dividends will not accumulate on those shares of Series B Preferred Stock on and after the redemption date.
Redemption Following a Regulatory Capital Event
We may redeem the Series B Preferred Stock, in whole but not in part, at our option, for cash, at any time within 90 days following a Regulatory Capital
Treatment Event, subject to the approval of the appropriate federal banking agency, at the redemption price provided below (“Regulatory Event Redemption”). A
“Regulatory Capital Treatment Event” means a good faith determination by us that, as a result of any:
•
amendment to, clarification of, or change (including any announced prospective change) in, the laws or regulations of the
United States or any political subdivision of or in the United States that is enacted or becomes effective after the initial
issuance of the Series B Preferred Stock;
•
proposed change in those laws or regulations that is announced or becomes effective after the initial issuance of the
Series B Preferred Stock; or
•
official administrative decision or judicial decision or administrative action or other official pronouncement interpreting
or applying those laws or regulations that is announced or becomes effective after the initial issuance of the Series B
Preferred Stock;
there is more than an insubstantial risk that we will not be entitled to treat the full liquidation value of the Series B Preferred Stock then outstanding as “Tier 1
Capital” (or its equivalent) for purposes of the capital adequacy laws or regulations of the Federal Reserve (or, as and if applicable, the capital adequacy laws or
regulations of any successor appropriate federal banking agency), as then in effect and applicable, for as long as any share of Series B Preferred Stock is
outstanding. Dividends will not accumulate on the shares of Series B Preferred Stock on and after the redemption date.
Redemption Price
The redemption price for any redemption of Series B Preferred Stock, whether an Optional Redemption or Regulatory Event Redemption, will be equal to
$1,000 per share of Series B Preferred Stock (equivalent to $25 per depositary share), plus any declared and unpaid dividends (without regard to any undeclared
dividends) to, but excluding, the date of redemption.
Redemption Procedures
17
If we elect to redeem any shares of Series B Preferred Stock, we will provide notice to the holders of record of the shares of Series B Preferred Stock to be
redeemed, not less than 30 days and not more than 60 days before the date fixed for redemption thereof (provided, however, that if the shares of Series B Preferred
Stock or the depositary shares representing the shares of Series B Preferred Stock are held in book-entry form through DTC, we may give this notice in any manner
permitted by DTC). Any notice given as provided in this paragraph will be conclusively presumed to have been duly given, whether or not the holder receives this
notice, and any defect in this notice or in the provision of this notice, to any holder of shares of Series B Preferred Stock designated for redemption will not affect
the redemption of any other shares of Series B Preferred Stock. Each notice of redemption shall state:
•
the redemption date;
•
the redemption price;
•
if fewer than all shares of Series B Preferred Stock are to be redeemed, the number of shares of Series B Preferred Stock
to be redeemed; and
•
the manner in which holders of Series B Preferred Stock called for redemption may obtain payment of the redemption
price in respect to those shares.
If notice of redemption of any shares of Series B Preferred Stock has been given and if the funds necessary for such redemption have been set aside by us in trust
for the benefit of the holders of any shares of Series B Preferred Stock so called for redemption, then from and after the redemption date such shares of Series B
Preferred Stock will no longer be deemed outstanding, all dividends with respect to such shares of Series B Preferred Stock shall cease to accumulate after the
redemption date and all rights of the holders of such shares will terminate, except the right to receive the redemption price, without interest.
In the case of any redemption of only part of the Series B Preferred Stock at the time outstanding, the shares of Series B Preferred Stock to be redeemed
will be selected either pro rata or by lot or in such other manner as our board of directors (or a duly authorized committee of our board of directors) determines to
be fair and equitable and permitted by the rules of any stock exchange on which the Series B Preferred Stock is listed. Subject to the provisions set forth in the
prospectus supplement relating to the depositary shares representing the Series B Preferred Stock and the accompanying prospectus, the board of directors (or a
duly authorized committee of our board of directors) will have the full power and authority to prescribe the terms and conditions upon which shares of Series B
Preferred Stock may be redeemed from time to time.
Voting Rights
Registered owners of Series B Preferred Stock do not have any voting rights, except as set forth below or as otherwise required by applicable law. To the
extent that owners of Series B Preferred Stock are entitled to vote, each holder of Series B Preferred Stock has one vote per share.
Whenever dividends payable on the Series B Preferred Stock or any other class or series of preferred stock ranking equally with the Series B Preferred
Stock, including the Series A Preferred Stock, as to payment of dividends, and upon which voting rights equivalent to those described in this paragraph have been
conferred and are exercisable, have not been declared and paid in an aggregate amount equal to, as to any class or series, the equivalent of at least six quarterly
Dividend Periods, whether or not for consecutive Dividend Periods (a “Nonpayment”), the holders of outstanding shares of the Series B Preferred Stock voting as a
class with holders of shares of any other series of our preferred stock ranking equally with the Series B Preferred Stock, including the Series A Preferred Stock, as
to payment of dividends, and upon which like voting rights have been conferred and are exercisable (“Voting Parity Stock”), will be entitled to vote for the election
of two additional directors of our board of directors on the terms set forth below (and to fill any vacancies in the terms of such directorships) (the “Preferred Stock
Directors”). Holders of all series of Voting Parity Stock will vote as a single class. In the event that the holders of the shares of the Series B Preferred Stock are
entitled to vote as described in this paragraph, the number of members of our board of directors at the time will be increased by two directors, and the holders of
the Series B Preferred Stock will have the right, as members of that class, as outlined above, to elect two directors at a special meeting called at the request of the
holders of record of at least 20% of the aggregate voting power of the Series B Preferred Stock or any other series of Voting Parity Stock (unless such request is
received less than 90 days before the date fixed for our next annual or special meeting of the shareholders, in which event such election shall be held at such next
annual or special meeting of the shareholders), provided that the election of any Preferred Stock Directors shall not cause us to violate the corporate governance
requirements of the Nasdaq Global Select Market (or any other exchange on which our securities may at such time be listed) that listed
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companies must have a majority of independent directors, and provided further that at no time shall our board of directors include more than two Preferred Stock
Directors.
When we have paid full dividends on the Series B Preferred Stock for the equivalent of at least four Dividend Periods following a Nonpayment, the
voting rights described above will terminate, except as expressly provided by law. The voting rights described above are subject to re-vesting upon each and every
subsequent Nonpayment.
Upon termination of the right of the holders of the Series B Preferred Stock and Voting Parity Stock to vote for Preferred Stock Directors as described
above, the term of office of all Preferred Stock Directors then in office elected by only those holders will terminate immediately. Whenever the term of office of
the Preferred Stock Directors ends and the related voting rights have expired, the number of directors automatically will be decreased to the number of directors as
otherwise would prevail. Any Preferred Stock Director may be removed at any time by the holders of record of a majority of the outstanding shares of the Series B
Preferred Stock (together with holders of any Voting Parity Stock) when they have the voting rights described in the prospectus supplement relating to the
depositary shares representing the Series B Preferred Stock and the accompanying prospectus.
Under regulations adopted by the Federal Reserve, if the holders of any series of preferred stock are or become entitled to vote for the election of
directors, such series will be deemed a class of voting securities and a company holding 25% or more of the series, or that is deemed to exercise a “controlling
influence” over us, will be subject to regulation as a bank holding company under the Bank Holding Company Act of 1956, as amended (“BHC Act”). In addition,
at the time the series is deemed a class of voting securities, any other bank holding company will be required to obtain the prior approval of the Federal Reserve
under the BHC Act to acquire or retain 5% or more of that series. Any other person (other than a bank holding company) may be required to enter into passivity or
anti-association commitments with the Federal Reserve if it owns 5% or more and less than 25% of that series and will be required to obtain the non-objection of
the Federal Reserve under the Change in Bank Control Act of 1978, as amended, to acquire or retain 10% or more of that series.
So long as any shares of preferred stock remain outstanding, we will not, without the affirmative vote or consent of holders of at least 66 2/3% in voting
power of the Series B Preferred Stock and any Voting Parity Stock, voting together as a class, authorize, create or issue any capital stock ranking senior to the
Series B Preferred Stock as to dividends or the distribution of assets upon liquidation, dissolution or winding up, or reclassify any authorized capital stock into any
such shares of such capital stock or issue any obligation or security convertible into or evidencing the right to purchase any such shares of capital stock. So long as
any shares of the Series B Preferred Stock remain outstanding, we will not, without the affirmative vote of the holders of at least 66 2/3% in voting power of the
Series B Preferred Stock, amend, alter or repeal any provision of the Articles of Amendment or our Articles, including by merger, consolidation or otherwise, so as
to affect the powers, preferences or special rights of the Series B Preferred Stock.
Notwithstanding the foregoing, none of the following will be deemed to affect the powers, preferences or special rights of the Series B Preferred Stock:
•
any increase in the amount of authorized common stock or authorized preferred stock, or any increase or decrease in the
number of shares of any series of preferred stock, or the authorization, creation and issuance of other classes or series of
capital stock, in each case ranking on parity with or junior to the Series B Preferred Stock as to dividends or distribution
of assets upon our liquidation, dissolution or winding up;
•
a merger or consolidation of us with or into another entity in which the shares of the Series B Preferred Stock remain
outstanding; and
•
a merger or consolidation of us with or into another entity in which the shares of the Series B Preferred Stock are
converted into or exchanged for preference securities of the surviving entity or any entity, directly or indirectly,
controlling such surviving entity and such new preference securities have powers, preferences and special rights that are
not materially less favorable than the Series A Preferred Stock.
The foregoing voting rights of the holders of Series B Preferred Stock will not apply if, at or prior to the time when the act with respect to which the vote
would otherwise be required will be effected, all outstanding shares of Series B Preferred Stock will have been redeemed or called for redemption upon proper
notice and we have set aside sufficient funds for the benefit of holders of Series B Preferred Stock to effect the redemption.
Voting Rights under Pennsylvania Law
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The PBCL attaches mandatory voting rights to preferred stock in connection with certain amendments to a company’s articles of incorporation, providing
that the holders of preferred stock of a particular series would be entitled to vote as a class if the amendment would:
•
authorize the board of directors to fix and determine the relative rights and preferences, as between series, of any
preferred or special class;
•
make any change in the preferences, limitations or special rights (other than preemptive rights or the right to vote
cumulatively) of the shares of a class or series adverse to the class or series;
•
authorize a new class or series of shares having a preference as to dividends or assets which is senior to the shares of a
class or series;
•
increase the number of authorized shares of any class or series having a preference as to dividends or assets which is
senior in any respect to the shares of a class or series; or
•
make the outstanding shares of a class or series redeemable by a method that is not pro rata, by lot or otherwise equitable.
Holders of outstanding shares of our preferred stock are also entitled under Pennsylvania law to vote as a class on a plan of merger that effects any change
in our Articles of Incorporation if the holders would have been entitled to a class vote under the statutory provision relating to the adoption of the Articles of
Amendment discussed above.
Information Rights
During any period in which we are not subject to Section 13 or 15(d) of the Exchange Act and any shares of Series B Preferred Stock are outstanding, we
will use commercially reasonable efforts to provide any requesting beneficial owner a copy of our most recently filed “Consolidated Financial Statements for
Holding Companies- FR Y-9C” and “Consolidated Reports of Condition and Income for a Bank With Domestic Offices Only-FFIEC 041,” in each case or any
applicable successor form. Any such request must be made in writing addressed to TriState Capital Holdings, Inc., Attention: Investor Relations, One Oxford
Centre, 301 Grant Street, Suite 2700, Pittsburgh, PA 15219.
Depositary, Transfer Agent and Registrar
Computershare Trust Company, N.A., 250 Royall Street, Canton, Massachusetts 02021, is the depositary, transfer agent and registrar for the Series B
Preferred Stock.
Calculation Agent
We will appoint a calculation agent for the Series B Preferred Stock prior to the commencement of the Floating Rate Period. The Company may appoint
itself or an affiliate as the calculation agent.
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EXHIBIT 10.13
AMENDMENT TO THE 2014 OMNIBUS INCENTIVE PLAN
THIS AMENDMENT (this “Amendment”) to the TriState Capital Holdings, Inc. 2014 Omnibus Incentive Plan (as amended from time to time, the “Plan”), is
made and adopted by the Board of Directors (the “Board”) of TriState Capital Holdings, Inc. (the “Company”), effective as of the Effective Date (as defined
below). All capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed to such terms in the Plan (as defined below).
WHEREAS, the Company has previously adopted, and the Company’s stockholders have previously approved, the Plan;
WHEREAS, pursuant to Section 4.1 of the Plan, the Board has the authority to amend the Plan, subject to certain limitations;
WHEREAS, the Board believes it is in the best interests of the Company and its stockholders to amend the Plan as set forth herein; and
WHEREAS, this Amendment shall become effective upon the approval of this Amendment by the Company’s stockholders at the annual meeting of
stockholders held on May 17, 2021 (the date of such approval, the “Effective Date”).
NOW, THEREFORE, BE IT RESOLVED, that the Plan is hereby amended as follows, effective as of the Effective Date:
1.
Section 1.6.1 of the Plan is hereby amended to (i) increase the aggregate number of shares available for issuance under the Plan by 800,000 and
(ii) increase the aggregate number of shares available for issuance as Incentive Stock Options by 800,000.
2.
Section 1.4 of the Plan is hereby amended to state as follows:
Awards under the Plan may be made to current Employees; Contractors; Directors (or, with respect to Awards other than stock options, any person
or entity with the contractual right to representation on the Board); or solely with respect to their final year of service, former Employees. For the
avoidance of doubt, any references to “persons” who have received Awards shall include any entities that have received Awards pursuant to this
Section 1.4.
3. Section 1.6.3 of the Plan is hereby amended to state as follows:
In order to retain and compensate Directors for their services, and to strengthen the alignment of their interests with those of the shareholders of
TriState, the Plan permits the grant of stock-based awards to Directors (or, with respect to Awards other than stock options, any person or entity
with the contractual right to representation on the Board). Aggregate Awards to any one non-employee Director (or any person or entity with the
contractual right to representation on the Board) in respect of any calendar year, solely with respect to service on the Board, may not exceed
50,000 shares.
4. This Amendment shall be and is hereby incorporated into and forms a part of the Plan.
5. Except as expressly provided herein, all terms and conditions of the Plan shall continue in full force and effect.
EXHIBIT 21
Subsidiaries of the Registrant
The following is a list of the consolidated subsidiaries of TriState Capital Holdings, Inc., the names under which such subsidiaries do business, and the state in
which each was organized, as of December 31, 2021. All subsidiaries are wholly-owned unless otherwise noted in parenthesis.
Subsidiaries of TriState Capital Holdings, Inc:
Name
State of Organization
TriState Capital Bank
Pennsylvania
Chartwell Investment Partners, LLC
Pennsylvania
Chartwell TSC Securities Corp.
Pennsylvania
Subsidiaries of TriState Capital Bank:
Name
State of Organization
Meadowood Asset Management, LLC
Pennsylvania
TSC Equipment Finance LLC
Pennsylvania
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
TriState Capital Holdings, Inc.:
We consent to the incorporation by reference in the registration statements (No. 333-258511, 333-249296, 333-196564 and 333-188923) on Form S-8 and in the
registration statements (No. 333-253497 and 333-235713) on Form S-3 of our reports dated March 1, 2022, with respect to the consolidated financial statements of
TriState Capital Holdings, Inc. and the effectiveness of internal control over financial reporting.
/s/ KPMG LLP
Pittsburgh, Pennsylvania
March 1, 2022
EXHIBIT 24
POWER OF ATTORNEY
Each of the undersigned officers and directors of TriState Capital Holdings, Inc. hereby constitutes and appoints Brian S. Fetterolf as his or her true and lawful
attorney-in-fact and agent for and in his or her name, place and stead and on his or her behalf, and in any and all capacities, to sign the Company’s Annual Report
on Form 10-K for the year ended December 31, 2021, and to file the same, with all exhibits thereto, and all amendments or other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every
act and thing which said attorney-in-fact and agent may deem necessary or advisable to be done or performed in connection with any or all of the above-described
matters, as fully as each of the undersigned could do if personally present and acting, hereby ratifying and confirming all that said attorney-in-fact and agent, or his
substitute
or
substitutes,
may
lawfully
do
or
cause
to
be
done
by
virtue
hereof.
Date:
March 1, 2022
By:
/s/ David L. Bonvenuto
David L. Bonvenuto
Director
Date:
March 1, 2022
By:
/s/ Anthony J. Buzzelli
Anthony J. Buzzelli
Director
Date:
March 1, 2022
By:
/s/ Helen Hanna Casey
Helen Hanna Casey
Director
Date:
March 1, 2022
By:
/s/ E.H. (Gene) Dewhurst
E.H. (Gene) Dewhurst
Director
Date:
March 1, 2022
By:
/s/ James J. Dolan
James J. Dolan
Director
Date:
March 1, 2022
By:
/s/ Christopher M. Doody
Christopher M. Doody
Director
Date:
March 1, 2022
By:
/s/ Audrey P. Dunning
Audrey P. Dunning
Director
Date:
March 1, 2022
By:
/s/ James F. Getz
James F. Getz
Chairman and Director
Date:
March 1, 2022
By:
/s/ Michael R. Harris
Michael R. Harris
Director
Date:
March 1, 2022
By:
/s/ Kim A. Ruth
Kim A. Ruth
Director
Date:
March 1, 2022
By:
/s/ A. William Schenck, III
A. William Schenck, III
Vice Chairman and Director
Date:
March 1, 2022
By:
/s/ John B. Yasinsky
John B. Yasinsky
Director
EXHIBIT 31.1
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Brian S. Fetterolf, certify that:
1.
I have reviewed this Annual Report on Form 10-K of TriState Capital Holdings, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with the generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over
financial reporting.
By:
/s/ Brian S Fetterolf
Brian S. Fetterolf
President and Chief Executive Officer
Dated: March 1, 2022
EXHIBIT 31.2
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David J. Demas, certify that:
1.
I have reviewed this Annual Report on Form 10-K of TriState Capital Holdings, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4.
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with the generally accepted accounting principles;
(c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal
quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over
financial reporting.
By:
/s/ David J. Demas
David J. Demas
Chief Financial Officer
Dated: March 1, 2022
EXHIBIT 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF SARBANES-OXLEY ACT
Pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, the undersigned officers of TriState Capital Holdings, Inc. hereby
certify that the Annual Report of TriState Capital Holdings, Inc. on Form 10-K for the fiscal year ended December 31, 2021 (the “Report"), fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that the information contained in such Report fairly presents, in all
material respects, the financial condition and results of operations of TriState Capital Holdings, Inc.
By:
/s/ Brian S. Fetterolf
Brian S. Fetterolf
President and Chief Executive Officer
Dated: March 1, 2022
By:
/s/ David J. Demas
David J. Demas
Chief Financial Officer
Dated: March 1, 2022