TRISTATE CAPITAL HOLDINGS, INC. 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 endedDecember 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. ThroughTriState Capital Bank , aPennsylvania 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. ThroughChartwell Investment Partners, LLC , anSEC 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 throughChartwell 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 inPittsburgh, Pennsylvania . The Company has three wholly owned subsidiaries: the Bank, Chartwell, andCTSC Securities . Through the Bank, we serve middle-market and financial services businesses in our primary markets throughout the states ofPennsylvania ,Ohio ,New Jersey andNew 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 theSEC and theFINRA .
2021 Compared to 2020 Operating Performance
For the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2021 , as compared to 1.58% in 2020. The increase in net interest margin for the year endedDecember 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 theFederal 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 inMarch 2020 , in line with theFederal Reserve rate reduction. TheFederal 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 endedDecember 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 ofDecember 31, 2021 , an increase of$1.58 billion fromDecember 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 ofDecember 31, 2021 , compared to$35.6 million as ofDecember 31, 2020 . For the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2021 , compared to$3.9 million during the year endedDecember 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 endedDecember 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 endedDecember 31, 2021 . The Bank's efficiency ratio improved for the year endedDecember 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 endedDecember 31, 2021 compared to$123.1 million in 2020. Our non-interest expense to average assets for the year endedDecember 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 endedDecember 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 endedDecember 31, 2021 , as compared to 7.15% in 2020. Both ratios increased primarily due to increased earnings during the year endedDecember 31, 2021 , as compared to the same period in 2020. Total assets of$13 billion as ofDecember 31, 2021 , increased$3.11 billion , or 31.4%, fromDecember 31, 2020 . Loans and leases held-for-investment increased by$2.53 billion to$10.76 billion as ofDecember 31, 2021 , an increase of 30.7% fromDecember 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 ofDecember 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 ofDecember 31, 2021 , from$8.49 billion as ofDecember 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 endedDecember 31, 2021 . Our ratio of adverse-rated credits to total loans declined to 0.34% atDecember 31, 2021 , from 0.62% atDecember 31, 2020 . Our ratio of allowance for credit losses on loans and leases to loans decreased to 0.27% as ofDecember 31, 2021 , from 0.42% as ofDecember 31, 2020 . We recorded a provision for credit losses of$808,000 for the year endedDecember 31, 2021 compared to a provision of$19.4 million for the year endedDecember 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 ofDecember 31, 2021 , from$17.78 as ofDecember 31, 2020 , largely as a result of higher levels of retained earnings as ofDecember 31, 2021 , which was partially offset by increased common shares outstanding as ofDecember 31, 2021 .
2020 Compared to 2019 Operating Performance
For the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2020 , as compared to 1.97% in 2019. The decrease in net interest margin for the year endedDecember 31, 2020 , resulted from theFederal 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 theFederal 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 inMarch 2020 , in line with theFederal 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 endedDecember 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 ofDecember 31, 2020 , an increase of$562.0 million fromDecember 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 endedDecember 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 endedDecember 31, 2020 , compared to$416,000 during the year endedDecember 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 endedDecember 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 endedDecember 31, 2020 . Our non-interest expense to average assets for the year endedDecember 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 endedDecember 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 endedDecember 31, 2020 , as compared to 11.47% in 2019. Both ratios declined due to a reduction in earnings during the year endedDecember 31, 2020 , as compared to the same period in 2019. Total assets of$9.90 billion as ofDecember 31, 2020 , increased$2.13 billion , or 27.4%, fromDecember 31, 2019 . Loans and leases held-for-investment increased by$1.66 billion to$8.24 billion as ofDecember 31, 2020 , an increase of 25.2% fromDecember 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 ofDecember 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 ofDecember 31, 2020 , from$6.63 billion as ofDecember 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% atDecember 31, 2020 , from 0.53% atDecember 31, 2019 . Our ratio of allowance for credit losses on loans and leases to loans increased to 0.42% as ofDecember 31, 2020 , from 0.21% as ofDecember 31, 2019 . We recorded provision for credit losses of$19.4 million for the year endedDecember 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 endedDecember 31, 2019 . In addition, we implemented the Current Expected Credit Losses ("CECL") model as ofJanuary 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 ofDecember 31, 2020 , from$17.21 as ofDecember 31, 2019 , largely as a result of an increase in our net income available to common shareholders, partially offset by the issuance of restricted stock during year endedDecember 31, 2020 .
Results of Operations
Net Interest Income
Net interest income represents the difference between the interest received on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the volume of interest-earning assets and interest-bearing liabilities and changes in interest yields earned and interest rates paid. Net interest income comprised 75.4%, 72.1% and 70.8% of total revenue for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The table below reflects an analysis of net interest income, on a fully taxable equivalent basis, for the periods indicated. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the statutory federal income tax rate of 21%. Years Ended December 31, (Dollars in thousands) 2021 2020 2019 Interest income$ 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 (1) 2.12 % 2.49 % 4.06 % Cost of interest-bearing liabilities 0.53 % 1.01 % 2.34 % Net interest spread (1) 1.59 % 1.48 % 1.72 % Net interest margin (1) 1.64 % 1.58 % 1.97 %
(1)Calculated on a fully taxable equivalent basis.
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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
Interest Average Interest Average Interest Average
Average Income (1)/ Yield/ Average Income (1)/ Yield/ Average Income (1)/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate Assets Interest-earning deposits$ 453,625 $ 573 0.13 %$ 775,276 $ 2,199 0.28 %$ 313,413 $ 6,628 2.11 % Federal funds sold 11,148 9 0.08 % 8,076 25 0.31 % 8,803 167 1.90 % Debt securities available-for-sale 402,391 5,640 1.40 % 438,293 6,550 1.49 % 250,064 8,119 3.25 % Debt securities held-to-maturity, net 866,245 9,301 1.07 % 246,054 6,439 2.62 % 193,443 6,921 3.58 % Debt securities trading 555 5 0.90 % 592 5 0.84 % - - - % Equity securities 1,298 - - % - - - % 6,733 115 1.71 % FHLB stock 11,766 613 5.21 % 14,994 1,098 7.32 % 18,043 1,270 7.04 % Total loans and leases 9,187,492 215,186 2.34 % 7,255,035 200,839 2.77 % 5,669,507 239,328 4.22 % Total interest-earning assets 10,934,520 231,327 2.12 % 8,738,320 217,155 2.49 % 6,460,006 262,548 4.06 % Other assets 371,876 387,080 281,171 Total assets$ 11,306,396 $ 9,125,400 $ 6,741,177 Liabilities and Shareholders' Equity Interest-bearing deposits: Interest-bearing checking accounts$ 3,768,446 $ 13,106 0.35 %$ 2,407,087 $ 14,493 0.60 %$ 1,058,064 $ 21,480 2.03 % Money market deposit accounts 4,735,297 23,299 0.49 % 3,812,942 35,095 0.92 % 2,943,541 69,336 2.36 % Certificates of deposit 920,820 5,099 0.55 % 1,223,631 19,614 1.60 % 1,371,038 34,776 2.54 % Borrowings: FHLB borrowings 251,164 4,348 1.73 % 330,314 6,095 1.85 % 394,480 8,639 2.19 % Line of credit borrowings 3,433 148 4.31 % 6,243 261 4.18 % 1,234 68 5.51 % Senior & subordinated notes payable, net 101,413 5,938 5.86 % 59,078 3,593 6.08 % 17,335 1,091 6.29 % Total interest-bearing liabilities 9,780,573 51,938 0.53 % 7,839,295 79,151 1.01 % 5,785,692 135,390 2.34 % Noninterest-bearing deposits 508,404 408,313 267,846 Other liabilities 220,303 239,137 128,618 Shareholders' equity 797,116 638,655 559,021 Total liabilities and shareholders' equity$ 11,306,396 $ 9,125,400 $ 6,741,177 Net interest income (1)$ 179,389 $ 138,004 $ 127,158 Net interest spread 1.59 % 1.48 % 1.72 % Net interest margin (1) 1.64 % 1.58 % 1.97 %
(1)Calculated on a fully taxable equivalent basis.
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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.
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The following tables analyze the dollar amount of the change in interest income
and interest expense with respect to the primary components of interest-earning
assets and interest-bearing liabilities. The tables show the amount of the
change in interest income or interest expense caused by either changes in
outstanding balances or changes in interest rates for the periods indicated. The
effect of changes in balance is measured by applying the average rate during the
first period to the balance ("volume") change between the two periods. The
effect of changes in rate is measured by applying the change in rate between the
two periods to the average volume during the first period.
Years Ended December 31,
2021 over 2020
(Dollars in thousands) Yield/Rate Volume Change (1)
Increase (decrease) in:
Interest income:
Interest-earning deposits $ (929) $ (697) $ (1,626)
Federal funds sold (23) 7 (16)
Debt securities available-for-sale (383) (527) (910)
Debt securities held-to-maturity (5,586) 8,448 2,862
FHLB stock (277) (208) (485)
Total loans and leases (33,498) 47,845 14,347
Total increase (decrease) in interest income (40,696) 54,868 14,172
Interest expense:
Interest-bearing deposits:
Interest-bearing checking accounts (7,566) 6,179 (1,387) Money market deposit accounts (18,883) 7,087 (11,796) Certificates of deposit (10,529) (3,986) (14,515) Borrowings: FHLB borrowings (346) (1,401) (1,747) Line of credit borrowings 9 (122) (113) Subordinated notes payable, net (129) 2,474 2,345
Total increase (decrease) in interest expense (37,444) 10,231 (27,213)
Total increase (decrease) in net interest income
(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.
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Years Ended December 31,
2020 over 2019
(Dollars in thousands) Yield/Rate Volume Change (1)
Increase (decrease) in:
Interest income:
Interest-earning deposits $ (8,891) $ 4,462 $ (4,429)
Federal funds sold (129) (13) (142)
Debt securities available-for-sale (5,781) 4,212 (1,569)
Debt securities held-to-maturity (2,123) 1,641 (482)
Debt securities trading - 5 5
Equity securities - (115) (115)
FHLB stock 47 (219) (172)
Total loans and leases (95,516) 57,027 (38,489)
Total increase in interest income (112,393) 67,000 (45,393)
Interest expense:
Interest-bearing deposits:
Interest-bearing checking accounts (22,029) 15,042 (6,987) Money market deposit accounts (50,751) 16,510 (34,241) Certificates of deposit (11,747) (3,415) (15,162) Borrowings: FHLB borrowings (1,260) (1,284) (2,544) Line of credit borrowings (20) 213 193 Subordinated notes payable, net (41) 2,543 2,502
Total increase in (decrease) interest expense (85,848) 29,609 (56,239)
Total increase (decrease) in net interest income
(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 onDecember 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 ofJanuary 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 endedDecember 31, 2021 , compared to a provision for loan losses of$19.3 million for the year endedDecember 31, 2020 , and a credit to provision for loan losses of$968,000 for the year endedDecember 31, 2019 . The provision for credit losses on loans and leases for the year endedDecember 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 endedDecember 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 endedDecember 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 62 --------------------------------------------------------------------------------
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
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
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 $ -
- - 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 (1)Other income largely includes items such as change in fair value on swaps and equity securities, gains on the sale of loans or OREO, and other general operating income.
Non-Interest Income for the Years EndedDecember 31, 2021 and 2020. Our non-interest income was$58.6 million for the year endedDecember 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
•Swap fees decreased$2.2 million for the year endedDecember 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 endedDecember 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
•Other income increased$492,000 for year endedDecember 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 endedDecember 31, 2021 , as compared to 2020, primarily due to higher levels of assets under management. Assets under management were$11.84 billion as ofDecember 31, 2021 , an 63 --------------------------------------------------------------------------------
increase of
The following table presents the components of our non-interest income by
operating segment for the years ended
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 $ -
32,035 $ -
- - 1,072 559 - - 559
Net gain on the sale and call
of debt securities 3,948 - - 3,948 416 - - 416
Swap fees 16,274 - - 16,274 11,029 - - 11,029
Commitment and other loan
fees 1,715 - - 1,715 1,788 - - 1,788
Bank owned life insurance
income 1,742 - - 1,742 1,736 - - 1,736
Other income (loss) 361 58 - 419 (61) 31 842 812
Total non-interest income $ 25,112 $ 32,785 $ (692) $ 57,205 $ 15,467 $ 36,920 $ 395 $ 52,782 (1)Other income largely includes items such as change in fair value on swaps and equity securities, gains on the sale of loans or OREO, and other general operating income.
Non-Interest Income for the Years EndedDecember 31, 2020 and 2019. Our non-interest income was$57.2 million for the year endedDecember 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 endedDecember 31, 2020 , as compared to a net gain of$416,000 for the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 31, 2020 , compared to 0.36% for the year endedDecember 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
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
Year Ended December 31, 2021 Year Ended December 31, 2020
Investment Parent Investment Parent
(Dollars in thousands) Bank Management and Other Consolidated Bank Management and Other Consolidated
Compensation and employee
benefits $ 59,687 $ 23,527 $ 1,385 $ 84,599 $ 50,240 $ 19,738 $ 1,219 $ 71,197
Premises and equipment costs 4,560 1,277 - 5,837 4,318 1,557 - 5,875
Professional fees 7,353 766 2,701 10,820 4,773 829 599 6,201
FDIC insurance expense 5,080 - - 5,080 9,680 - - 9,680
General insurance expense 1,076 294 - 1,370 866 276 - 1,142
State capital shares tax 2,911 - - 2,911 1,720 - - 1,720
Travel and entertainment
expense 2,288 346 - 2,634 2,093 291 39 2,423
Technology and data services 11,549 3,270 - 14,819 7,830 2,973 - 10,803
Intangible amortization
expense - 1,911 - 1,911 - 1,944 - 1,944
Marketing and advertising 2,260 1,364 - 3,624 1,210 1,192 - 2,402
Other operating expenses (1) 10,609 1,095 1,185 12,889 7,811 879 1,026 9,716
Total non-interest expense $ 107,373 $ 33,850 $ 5,271 $
146,494
308 53 - 361 255 53 - 308
(1)Other operating expenses include items such as organizational dues and
subscriptions, charitable contributions, investor relations fees, sub-advisory
fees, employee-related expenses, provision for unfunded commitments and other
general operating expenses.
(2)Full-time equivalent employees shown are as of the end of the period
presented.
Non-Interest Expense for the Years Ended December 31, 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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•Other operating expenses increased by
Investment Management Segment:
•Chartwell's compensation and employee benefits costs increased by$3.8 million for the year endedDecember 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 endedDecember 31, 2021 , as compared to 2020, primarily due to one-time costs incurred in 2021 associated with the previously announced agreement to be acquired byRaymond James .
The following table presents the components of our non-interest expense by
operating segment for the years ended
Year Ended December 31, 2020 Year Ended December 31, 2019
Investment Parent Investment Parent
(Dollars in thousands) Bank Management and Other Consolidated Bank Management and Other Consolidated
Compensation and employee
benefits $ 50,240 $ 19,738 $ 1,219 $ 71,197 $ 46,841 $ 22,335 $ - $ 69,176
Premises and equipment costs 4,318 1,557 - 5,875 3,911 1,547 - 5,458
Professional fees 4,773 829 599 6,201 5,170 1,159 (141) 6,188
FDIC insurance expense 9,680 - - 9,680 5,292 - - 5,292
General insurance expense 866 276 - 1,142 825 272 - 1,097
State capital shares tax 1,720 - - 1,720 420 - - 420
Travel and entertainment
expense 2,093 291 39 2,423 3,481 1,139 - 4,620
Technology and data services 7,830 2,973 - 10,803 5,539 2,981 - 8,520
Intangible amortization
expense - 1,944 - 1,944 - 2,009 - 2,009
Marketing and advertising 1,210 1,192 - 2,402 1,461 801 1 2,263
Other operating expenses (1) 7,811 879 1,026 9,716 5,005 1,326 775 7,106
Total non-interest expense $ 90,541 $ 29,679 $ 2,883 $ 123,103 $ 77,945 $ 33,569 $ 635 $ 112,149
Full-time equivalent
employees (2) 255 53 - 308 219 57 - 276
(1)Other operating expenses include items such as organizational dues and
subscriptions, charitable contributions, investor relations fees, sub-advisory
fees, employee-related expenses, provision for unfunded commitments and other
general operating expenses.
(2)Full-time equivalent employees shown are as of the end of the period
presented.
Non-Interest Expense for the Years Ended December 31, 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 endedDecember 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 endedDecember 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
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•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 endedDecember 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 endedDecember 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
•Travel and entertainment expense for the year ended
•Technology and data services for the year endedDecember 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 endedDecember 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 endedDecember 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 EndedDecember 31, 2021 and 2020. For the year endedDecember 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 EndedDecember 31, 2020 and 2019. For the year endedDecember 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 endedDecember 31, 2020 , increased to 14.1% as compared to the prior year largely due to the amount of tax credits recognized during the year endedDecember 31, 2020 compared to 2019. Financial Condition Our total assets as ofDecember 31, 2021 , were$13 billion , an increase of$3.11 billion , or 31.4%, fromDecember 31, 2020 , driven primarily by growth in our loan and lease portfolio and investment portfolio. As ofDecember 31, 2021 , our loan portfolio was$10.76 billion , an increase of$2.53 billion , or 30.7%, from$8.24 billion , as ofDecember 31, 2020 . Total investment securities increased$563.1 million , or 66.8%, to$1.41 billion , as ofDecember 31, 2021 , from$842.5 million as ofDecember 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 ofDecember 31, 2021 , our total deposits were$11.50 billion , an increase of$3.02 billion , or 35.5%, fromDecember 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 ofDecember 31, 2021 , compared to$400.5 million as ofDecember 31, 2020 . Our shareholders' equity increased$79.6 million to$836.7 million as ofDecember 31, 2021 , compared to$757.1 million as ofDecember 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 ofDecember 31, 2020 , were$9.90 billion , an increase of$2.13 billion , or 27.4%, fromDecember 31, 2019 , driven primarily by growth in our loan and lease portfolio, investment portfolio and cash and cash equivalents. As ofDecember 31, 2020 , our loan portfolio was$8.24 billion , an increase of$1.66 billion , or 25.2%, from$6.58 billion , as ofDecember 31, 2019 . Total investment securities increased$373.4 million , or 79.6%, to$842.5 million , as ofDecember 31, 2020 , from$469.2 million as ofDecember 31, 2019 . Cash and cash equivalents increased$31.6 million to$435.4 million as ofDecember 31, 2020 , from$403.9 million as ofDecember 31, 2019 . As ofDecember 31, 2020 , our total deposits were$8.49 billion , an increase of$1.85 billion , or 28.0%, fromDecember 31, 2019 , and were primarily used to fund loan growth. Net borrowings increased$45.5 million , or 12.8%, to$400.5 million as ofDecember 31, 2020 , compared to$355.0 million as ofDecember 31, 2019 . Our shareholders' equity increased$135.9 million to$757.1 million as ofDecember 31, 2020 , compared to$621.3 million as ofDecember 31, 2019 . This increase was primarily the result of the issuance of$100.0 million in net proceeds from our private placement, which closedDecember 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 onDecember 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
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 ofDecember 31, 2021 , compared toDecember 31, 2020 . Our growth for the year endedDecember 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 ofDecember 31, 2020 , as compared toDecember 31, 2019 . Our growth for the year endedDecember 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.
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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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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
One Year One to Five to Greater than
(Dollars in thousands) Due on Demand or Less Five Years Fifteen Years Fifteen Years Total Maturity: Private banking
$ 6,637,934 $ 51,898
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 Interest rate sensitivity: Fixed interest rates$ 64,820 $ 32,158
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 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 ofDecember 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 ofDecember 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 ofDecember 31, 2021 andDecember 31, 2020 . December 31, 2021 December 31, 2020 Commitment Commitment (based on Outstanding (based on Outstanding (Dollars in thousands) Number of Relationships availability) Balance Number of Relationships availability) 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 ofDecember 31, 2021 andDecember 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 orUnited 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 ofDecember 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 effectiveJanuary 1, 2022 .
Interest Reserve Loans
As ofDecember 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 ofDecember 31, 2020 , largely attributable to growth in the commercial real estate portfolio. 70 -------------------------------------------------------------------------------- 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
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
Percent of Percent of Percent of
(Dollars in thousands) Reserve Loans Reserve Loans Reserve 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 ofDecember 31, 2020 and 2019. Our allowance for credit losses on loans and leases was$34.6 million , or 0.42% of loans, as ofDecember 31, 2020 , as compared to$14.1 million , or 0.21% of loans, as ofDecember 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 onDecember 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 fromDecember 31, 2019 toDecember 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 fromDecember 31, 2019 toDecember 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 ofDecember 31, 2021 , 2020 and 2019, and there was no interest income recognized on loans while on non-accrual status for the years 72 -------------------------------------------------------------------------------- endedDecember 31, 2021 , 2020 and 2019. As ofDecember 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 ofDecember 31, 2020 and 2019, respectively. We had specific reserves of$4.3 million ,$2.0 million and$171,000 as ofDecember 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 ofDecember 31, 2021 , 2020 and 2019, respectively. For additional information on our non-performing loans as ofDecember 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 ofDecember 31, 2021 , as compared to$12.4 million , or 0.13% of total assets, as ofDecember 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 ofDecember 31, 2021 , we had OREO properties totaling$2.0 million as compared to$2.7 million as ofDecember 31, 2020 . During the year endedDecember 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 ofDecember 31, 2021 . We had non-performing assets of$12.4 million , or 0.13% of total assets, as ofDecember 31, 2020 , as compared to$4.4 million , or 0.06% of total assets, as ofDecember 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 ofDecember 31, 2020 , we had OREO properties totaling$2.7 million as compared to$4.3 million as ofDecember 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 ofDecember 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
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
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--------------------------------------------------------------------------------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 forDecember 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 forDecember 31, 2021 and 2020, refer to Note 5, Allowance for Credit Losses on Loans and Leases, to our consolidated financial statements.
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 ofDecember 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 ofDecember 31, 2021 , our available-for-sale debt securities portfolio consists ofU.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 ofU.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 ofDecember 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 ofDecember 31, 2021 andDecember 31, 2020 , respectively. The decrease of$31.2 million was primarily attributable to purchases of 74 --------------------------------------------------------------------------------
On a fair value basis, 23.1% of our available-for-sale debt securities as ofDecember 31, 2021 , were floating-rate securities for which yields increase or decrease based on changes in market interest rates. As ofDecember 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 ofDecember 31, 2021 , wereU.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 ofDecember 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 ofDecember 31, 2021 andDecember 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 endedDecember 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 ofDecember 31, 2021 . Trading Debt Securities. We held no trading debt securities as ofDecember 31, 2021 andDecember 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 ofU.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 ofDecember 31, 2021 , equity securities, which are recorded at fair value, included only the investment in theChartwell Short Duration Bond Fund which was valued at$4.98 million . The Company held no equity securities as ofDecember 31, 2020 . The following tables summarize the amortized cost and fair value of debt securities available-for-sale and held-to-maturity, as of the dates indicated: December 31, 2021 Allowance for Amortized Gross Unrealized Gross Unrealized Credit Losses Estimated (Dollars in thousands) Cost Appreciation Depreciation (1) Fair Value
Debt securities available-for-sale:
Corporate bonds$ 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 (1)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. 75 --------------------------------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated Allowance for
(Dollars in thousands) Cost Appreciation Depreciation Fair Value Credit Losses (1)
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
(1)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 Allowance for Amortized Gross Unrealized
Gross Unrealized Credit Losses Estimated (Dollars in thousands)
Cost Appreciation Depreciation (1) 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 (1) 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 Amortized Gross Unrealized Gross Unrealized Estimated Allowance for (Dollars in thousands) Cost Appreciation Depreciation Fair Value 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
(1) 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
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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 to Five to Greater Than
One Year Five Years 10 Years 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.
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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
Years Ended December 31,
2021 2020 2019
Average Rate Average Rate Average Rate
(Dollars in thousands) Average Amount Paid Average Amount Paid Average Amount 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
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The following table summarizes the aggregate amount of individual certificates
of deposit exceeding
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 ofDecember 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 ofDecember 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 ofDecember 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 theFederal 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. OnDecember 15, 2021 , the Company issued a senior unsecured fixed-to-floating rate note (the "Senior Note") toRaymond James in the amount of$125 million . The Senior Note, which matures onDecember 15, 2024 , bears interest at a fixed annual rate of 2.25% from the date of issuance toDecember 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 toDecember 15, 2022 . On and afterDecember 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 ofDecember 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 ofDecember 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 endedDecember 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 endedDecember 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 ofDecember 31, 2021 . In addition, atDecember 31, 2021 , the holding company maintained an unsecured line of credit of$75.0 million withThe Huntington National Bank , of which$75.0 million was available as of that date. OnFebruary 18, 2022 , the Company renewed its$75 million unsecured line of credit withThe Huntington National Bank which matures onFebruary 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 ofPittsburgh , 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 byFDIC 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 ofDecember 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 endedDecember 31, 2021 , from 86.0% from the same period in 2020. As ofDecember 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$885.7 million , or 6.8% of total assets. Available cash excludes pledged accounts for derivative and letter of credit transactions and the reserve balance requirement at theFederal Reserve . The following table shows our available liquidity, by source, as of the dates indicated: December 31, (Dollars in thousands) 2021 2020 2019 Available cash$ 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 endedDecember 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 endedDecember 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 endedDecember 31, 2021 , as compared to a net cash outflow of$2.04 billion in 2020. The outflows for the year endedDecember 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 endedDecember 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 endedDecember 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 endedDecember 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 ofDecember 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 ofDecember 31, 2021 , compared to$757.1 million as ofDecember 31, 2020 . The$79.6 million increase during the year endedDecember 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 ofDecember 31, 2020 , compared to$621.3 million as ofDecember 31, 2019 . The$135.9 million increase during the year endedDecember 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 onDecember 31, 2020 . OnDecember 30, 2020 , the Company completed the private placement of securities pursuant to an Investment Agreement, datedOctober 10, 2020 and amendedDecember 9, 2020 , withT-VIII PubOpps LP ("T-VIII PubOpps"), an affiliate of investment funds managed byStone 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 ofStone 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 atDecember 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. InMay 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 excludingJuly 1, 2026 , at a rate of 6.375% per annum, payable quarterly, in arrears, and from and includingJuly 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 afterJuly 1, 2024 , as described in the prospectus supplement relating to the offering filed with theSEC onMay 23, 2019 . InMarch 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 excludingApril 1, 2023 , at a rate of 6.75% per annum, payable quarterly, in arrears, and from and includingApril 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 afterApril 1, 2023 , as described in the prospectus supplement relating to the offering filed with theSEC onMarch 19, 2018 .Regulatory Capital . As ofDecember 31, 2021 and 2020,TriState Capital Holdings, Inc. andTriState Capital Bank were in compliance with all applicable regulatory capital requirements, andTriState Capital Bank was categorized as well capitalized for purposes of theFDIC'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 ofDecember 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, beginningJanuary 1, 2020 , followed by a three-year transition period. As the Company adopted CECL onDecember 31, 2020 , the Company elected to utilize the remainder of the two-year delay of CECL's impact on its regulatory capital, fromDecember 31, 2020 throughDecember 31, 2021 , followed by the three-year transition period of CECL impact on regulatory capital, fromJanuary 1, 2022 throughDecember 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
To be Well Capitalized Under
Prompt Corrective Action
Actual For Capital Adequacy Purposes 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 %
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December 31, 2020
To be Well Capitalized Under
Prompt Corrective Action
Actual For Capital Adequacy Purposes 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.
One Year One to Three to Greater than
(Dollars in thousands) or Less Three Years Five Years 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 $
-
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
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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
One Year One to Three to Greater than
(Dollars in thousands) Due on Demand or Less Three Years Five Years 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
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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
Amount Change Percent Change Amount Change Percent Change
from from from from
(Dollars in thousands) Base Case Base Case Base Case 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.
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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
Less Than 91 to 180 181 to 365 One to Three Three to Five Greater Than (Dollars in thousands)
90 Days Days Days Years Years 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
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.
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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
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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.
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--------------------------------------------------------------------------------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.
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