UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________

FORM 10-Q
___________
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019March 31, 2020
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____

Commission file number: 001-35913
___________

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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, no par value TSC Nasdaq Global Select Market
Depositary Shares, Each Representing a 1/40th Interest in a Share of 6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock TSCAP Nasdaq Global Select Market
Depositary Shares, Each Representing a 1/40th Interest in a Share of 6.375% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock TSCBP Nasdaq Global Select Market
___________

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

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



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

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

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

As of October 31, 2019,April 30, 2020, there were 29,303,97029,841,310 shares of the registrant’s common stock, no par value, outstanding.


TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance, as well as our goals and objectives for future operations, financial and business trends, business prospects and management’s outlook or expectations for earnings, revenues, expenses, capital levels, liquidity levels, asset quality or other measures of future financial or business performance, strategies or expectations. These statements are often, but not always, indicated through the use of words or phrases such as “achieve,” “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “maintain,” “may,” “opportunity,” “outlook,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “sustain,” “target,” “trend,” “will,” “will likely result,” and “would,” or the negative version of those words or other comparable statements of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections and beliefs or assumptions made by management, many of which, by their nature, are inherently uncertain. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that change over time and are difficult to predict, including, but not limited to, the following:

risks associated with COVID-19 and their expected impact and duration, including effects on our operations, our clients, economic conditions and the demand for our products and services;
our ability to prudently manage our growth and execute our strategy; including the successful integration of past and future acquisitions, our ability to fully realize the cost savings and other benefits of our acquisitions, manage risks related to business disruption following those acquisitions, and manage customer disintermediation;
deterioration of our asset quality;
our level of non-performing assets and the costs associated with resolving problem loans, including litigation and other costs;
possible loan and lease losses and impairment, changes in the value of collateral securing our loans and leases and the collectability of loans and leases;
possible changes in the speed of loan prepayments by customers and loan origination or sales volumes;
business and economic conditions and trends generally and in the financial services industry, nationally and within our local market areas, including the effects of an increase in unemployment levels, slowdowns in economic growth and changes in demand for products or services or the value of assets under management;
our ability to maintain important deposit customer relationships, our reputation and otherwise avoid liquidity risks;
changes in management personnel;
our ability to recruit and retain key employees;
volatility and direction of interest rates;
changes in accounting policies, accounting standards, or authoritative accounting guidance, including the current expected credit loss (“CECL”) model, which may increase the level of our allowance for credit losses after adoption on January 1, 2020;upon adoption;
any impairment of our goodwill or other intangible assets;
our ability to develop and provide competitive products and services that appeal to our customers and target markets;
our ability to provide investment management performance competitive with our peers and benchmarks;
fluctuations in the carrying value of the assets under management held by our Chartwell Investment Partners, LLC subsidiary, as well as the relative and absolute investment performance of such subsidiary’s investment products;
operational risks associated with our business, including technology and cyber-security related risks;
increased competition in the financial services industry, particularly from regional and national institutions;
negative perceptions or publicity with respect to any products or services we offer;
adverse judgments or other resolutions of pending and future legal proceedings, and costs incurred in defending such proceedings;
changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters, and potential expenses associated with complying with such laws and regulations;

our ability to comply with applicable capital and liquidity requirements, including our ability to generate liquidity internally or raise capital on favorable terms;
regulatory limits on our ability to receive dividends from our subsidiaries and pay dividends to shareholders;

furtherchanges and direction of government policy toward and intervention in the U.S. financial system;
natural disasters and adverse weather, acts of terrorism, cyber-attacks, an outbreak of hostilities, a public health outbreak (such as COVID-19) or other international or domestic calamities, and other matters beyond our control;
the effects of any reputation, credit, interest rate, market, operational, legal, liquidity, regulatory or compliance risk resulting from developments related to any of the risks discussed above; and
other factors that are discussed in the section entitled “Risk Factors” in our Annual Report on Form 10-K, filed with the SEC, which is accessible at www.sec.gov.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this document. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which will arise. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)September 30,
2019
December 31,
2018
March 31,
2020
December 31,
2019
ASSETS  
  
Cash$355
$367
$357
$357
Interest-earning deposits with other institutions378,182
183,625
1,004,612
395,860
Federal funds sold5,411
5,993
5,159
7,638
Cash and cash equivalents383,948
189,985
1,010,128
403,855
Debt securities available-for-sale, at fair value261,180
233,296
275,170
248,782
Debt securities held-to-maturity, at cost187,210
196,131
312,842
196,044
Equity securities, at fair value4,807
12,661
Federal Home Loan Bank stock15,524
24,671
18,724
24,324
Total investment securities468,721
466,759
606,736
469,150
Loans and leases held-for-investment6,016,680
5,132,873
6,958,149
6,577,559
Allowance for loan and lease losses(13,374)(13,208)(17,304)(14,108)
Loans and leases held-for-investment, net6,003,306
5,119,665
6,940,845
6,563,451
Accrued interest receivable22,157
20,702
22,106
22,326
Investment management fees receivable, net7,453
7,299
6,656
7,560
Goodwill41,660
41,660
41,659
41,660
Intangible assets, net of accumulated amortization of $9,935 and $8,429, respectively24,697
26,203
Office properties and equipment, net of accumulated depreciation of $13,591 and $12,385, respectively7,764
5,126
Intangible assets, net of accumulated amortization of $10,939 and $10,437, respectively23,693
24,194
Office properties and equipment, net of accumulated depreciation of $14,479 and $13,976, respectively10,089
9,569
Operating lease right-of-use asset23,088

22,085
22,589
Bank owned life insurance69,607
68,309
70,472
70,044
Prepaid expenses and other assets146,048
89,947
235,592
131,412
Total assets$7,198,449
$6,035,655
$8,990,061
$7,765,810
  
LIABILITIES AND SHAREHOLDERS’ EQUITY  
  
Liabilities:  
Deposits$6,094,605
$5,050,461
$7,782,759
$6,634,613
Borrowings, net330,000
404,166
330,000
355,000
Accrued interest payable on deposits and borrowings5,705
5,204
4,462
5,490
Deferred tax liability, net4,529
3,513
2,366
6,931
Acquisition earn out liability
2,920
Operating lease liability24,037

23,244
23,644
Other accrued expenses and other liabilities135,066
90,037
232,850
118,851
Total liabilities6,593,942
5,556,301
8,375,681
7,144,529
  
Shareholders’ Equity:  
Preferred stock, no par value; Shares authorized - 150,000;
Series A Shares issued and outstanding -
40,250 and 40,250, respectively
38,468
38,468
38,468
38,468
Series B Shares issued and outstanding - 80,500 and 0, respectively77,596

Common stock, no par value; Shares authorized - 45,000,000;
Shares issued -
31,410,262 and 30,893,584, respectively;
Shares outstanding -
29,296,970 and 28,878,674, respectively
294,188
293,355
Series B Shares issued and outstanding - 80,500 and 80,500, respectively77,611
77,611
Common stock, no par value; Shares authorized - 45,000,000;
Shares issued -
32,002,728 and 31,482,408, respectively;
Shares outstanding -
29,762,578 and 29,355,986, respectively
295,587
295,349
Additional paid-in capital21,480
15,364
22,783
23,095
Retained earnings205,807
164,009
229,382
218,449
Accumulated other comprehensive income (loss), net(530)(1,331)(14,049)1,132
Treasury stock (2,113,292 and 2,014,910 shares, respectively)(32,502)(30,511)
Treasury stock (2,240,150 and 2,126,422 shares, respectively)(35,402)(32,823)
Total shareholders’ equity604,507
479,354
614,380
621,281
Total liabilities and shareholders’ equity$7,198,449
$6,035,655
$8,990,061
$7,765,810

See accompanying notes to unaudited condensed consolidated financial statements.

TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
(Dollars in thousands, except per share data)20192018 2019201820202019
    
Interest income:    
Loans and leases$61,551
$48,470
 $179,392
$132,111
$58,918
$57,262
Investments3,993
2,893
 12,497
6,977
3,901
4,353
Interest-earning deposits2,188
1,061
 5,084
2,536
1,383
1,287
Total interest income67,732
52,424
 196,973
141,624
64,202
62,902
    
Interest expense:    
Deposits34,114
22,182
 95,602
52,279
27,244
29,333
Borrowings1,302
1,423
 7,380
5,473
2,036
3,197
Total interest expense35,416
23,605
 102,982
57,752
29,280
32,530
Net interest income32,316
28,819
 93,991
83,872
34,922
30,372
Provision (credit) for loan and lease losses(607)(234) (1,696)376
2,993
(377)
Net interest income after provision for loan and lease losses32,923
29,053
 95,687
83,496
31,929
30,749
Non-interest income:    
Investment management fees8,902
9,828
 27,580
28,422
7,638
9,424
Service charges on deposits129
146
 343
420
213
136
Net gain on the sale and call of debt securities206

 346
6
57
28
Swap fees4,171
1,881
 7,666
5,066
4,373
1,803
Commitment and other loan fees464
373
 1,251
1,036
419
531
Other income371
523
 2,105
1,392
616
1,147
Total non-interest income14,243
12,751
 39,291
36,342
13,316
13,069
Non-interest expense:    
Compensation and employee benefits18,707
16,967
 52,467
48,177
17,446
16,775
Premises and occupancy costs1,704
1,432
 4,808
3,986
1,909
1,270
Professional fees1,305
889
 3,706
3,538
1,470
995
FDIC insurance expense994
1,053
 3,462
3,333
2,170
1,421
General insurance expense258
278
 811
767
262
294
State capital shares tax(720)485
 40
1,396
383
380
Travel and entertainment expense1,339
986
 3,214
2,638
864
835
Intangible amortization expense502
502
 1,506
1,465
502
502
Other operating expenses3,684
3,094
 12,016
9,554
4,138
4,200
Total non-interest expense27,773
25,686
 82,030
74,854
29,144
26,672
Income before tax19,393
16,118
 52,948
44,984
16,101
17,146
Income tax expense3,059
1,807
 7,359
5,680
3,206
2,582
Net income$16,334
$14,311
 $45,589
$39,304
$12,895
$14,564
Preferred stock dividends1,962
679
 3,791
1,441
1,962
679
Net income available to common shareholders$14,372
$13,632
 $41,798
$37,863
$10,933
$13,885
    
Earnings per common share:    
Basic$0.52
$0.49
 $1.50
$1.37
$0.39
$0.50
Diluted$0.50
$0.47
 $1.45
$1.31
$0.38
$0.48

See accompanying notes to unaudited condensed consolidated financial statements.


TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in thousands)20192018 20192018
      
Net income$16,334
$14,311
 $45,589
$39,304
      
Other comprehensive income (loss):     
      
Unrealized holding gains (losses) on debt securities, net of tax expense (benefit) of $272, $(59), $1,466 and $(455), respectively787
(192) 4,477
(1,517)
      
Reclassification adjustment for gains included in net income on debt securities, net of tax expense of $(32), $0, $(62) and $(1), respectively(101)
 (198)(5)
      
Unrealized holding gains (losses) on derivatives, net of tax expense (benefit) of $(231), $37, $(787) and $336, respectively(736)120
 (2,506)1,103
      
Reclassification adjustment for gains included in net income on derivatives, net of tax expense of $(37), $(96), $(305) and $(222), respectively(120)(316) (972)(730)
      
Other comprehensive income (loss)(170)(388) 801
(1,149)
      
Total comprehensive income$16,164
$13,923
 $46,390
$38,155
 Three Months Ended March 31,
(Dollars in thousands)20202019
   
Net income$12,895
$14,564
   
Other comprehensive income (loss):  
   
Unrealized holding gains (losses) on debt securities, net of tax expense (benefit) of $(2,997) and $766, respectively(9,422)2,430
   
Reclassification adjustment for gains included in net income on debt securities, net of tax expense of $(3) and $(4), respectively(12)(13)
   
Unrealized holding losses on derivatives, net of tax expense of $(1,837) and $(44), respectively(5,874)(162)
   
Reclassification adjustment for losses (gains) included in net income on derivatives, net of tax benefit (expense) of $32 and $(139), respectively127
(422)
   
Other comprehensive income (loss)(15,181)1,833
   
Total comprehensive income (loss)$(2,286)$16,397

See accompanying notes to unaudited condensed consolidated financial statements.


TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands)Preferred StockCommon
Stock
Additional
Paid-in-Capital
Retained EarningsAccumulated Other Comprehensive Income (Loss), NetTreasury StockTotal Shareholders’ EquityPreferred StockCommon
Stock
Additional
Paid-in-Capital
Retained EarningsAccumulated Other Comprehensive Income (Loss), NetTreasury StockTotal Shareholders’ Equity
Balance, December 31, 2017$
$289,507
$10,290
$111,732
$1,246
$(23,704)$389,071
Impact of adoption of ASU 2014-09


534


534
Reclassification for equity securities under ASU 2016-01


(286)286


Reclassification for certain income tax effects under ASU 2018-02


(274)274


Balance, December 31, 2018$38,468
$293,355
$15,364
$164,009
$(1,331)$(30,511)$479,354
Net income


39,304


39,304



14,564


14,564
Other comprehensive loss



(1,149)
(1,149)
Issuance of preferred stock (net of offering costs of $1,782)38,468





38,468
Other comprehensive income



1,833

1,833
Preferred stock dividends


(1,441)

(1,441)


(679)

(679)
Exercise of stock options
3,314
(1,968)


1,346

342
(154)


188
Purchase of treasury stock




(4,584)(4,584)




(433)(433)
Stock-based compensation

6,071



6,071


1,730



1,730
Balance, September 30, 2018$38,468
$292,821
$14,393
$149,569
$657
$(28,288)$467,620
Balance, March 31, 2019$38,468
$293,697
$16,940
$177,894
$502
$(30,944)$496,557
      
Balance, December 31, 2018$38,468
$293,355
$15,364
$164,009
$(1,331)$(30,511)$479,354
Balance, December 31, 2019$116,079
$295,349
$23,095
$218,449
$1,132
$(32,823)$621,281
Net income


45,589


45,589



12,895


12,895
Other comprehensive income



801

801
Issuance of preferred stock (net of offering costs of $2,904)77,596





77,596
Other comprehensive loss



(15,181)
(15,181)
Preferred stock dividends


(3,791)

(3,791)


(1,962)

(1,962)
Exercise of stock options
833
(375)


458

238
(147)


91
Purchase of treasury stock




(1,991)(1,991)




(2,579)(2,579)
Cancellation of stock options

(2,484)


(2,484)
Stock-based compensation

6,491



6,491


2,319



2,319
Balance, September 30, 2019$116,064
$294,188
$21,480
$205,807
$(530)$(32,502)$604,507
Balance, March 31, 2020$116,079
$295,587
$22,783
$229,382
$(14,049)$(35,402)$614,380

See accompanying notes to unaudited condensed consolidated financial statements.


TRISTATE CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,Three Months Ended March 31,
(Dollars in thousands)2019201820202019
Cash flows from operating activities:  
Net income$45,589
$39,304
$12,895
$14,564
Adjustments to reconcile net income to net cash provided by operating activities:  
Depreciation and intangible amortization expense2,711
2,625
1,005
906
Amortization of deferred financing costs84
152

51
Provision (credit) for loan losses(1,696)376
2,993
(377)
Net gain on the sale of loans
(19)
Stock-based compensation expense6,491
6,071
2,319
1,730
Net gain on the sale or call of debt securities available-for-sale(260)(3)(15)(17)
Net gain on the call of debt securities held-to-maturity(86)(3)(42)(11)
Income from equity securities(881)(38)
(719)
Net amortization of premiums and discounts on debt securities40
551
Increase in investment management fees receivable, net(154)(346)
Increase in accrued interest receivable(1,455)(4,951)
Increase in accrued interest payable501
1,572
Income from debt securities trading(239)
Purchase of debt securities trading(20,932)
Proceeds from the sale of debt securities trading21,171

Net amortization (accretion) of premiums and discounts on debt securities15
(5)
Decrease (increase) in investment management fees receivable, net904
(595)
Decrease (increase) in accrued interest receivable220
(3,145)
Decrease (increase) in accrued interest payable(1,028)593
Bank owned life insurance income(1,298)(1,285)(428)(420)
Increase in income taxes payable1,997

Increase in prepaid income taxes9,130
10,790
Decrease in income taxes payable
(488)
Decrease in prepaid income taxes2,688
7,066
Deferred tax provision705
944
240
223
Decrease in accounts payable and other accrued expenses(9,951)(313)
Increase (decrease) in accounts payable and other accrued expenses(13,816)(19,323)
Other, net(2,735)129
(3,653)(4,173)
Net cash provided by operating activities48,732
55,556
Net cash provided by (used in) operating activities4,297
(4,140)
Cash flows from investing activities:  
Purchase of debt securities available-for-sale(59,110)(150,556)(92,637)(12,425)
Purchase of debt securities held-to-maturity(174,614)(38,928)(219,269)(42,367)
Purchase of equity securities
(5,200)
Proceeds from the sale of debt securities available-for-sale4,993
2,037
49,967

Proceeds from the sale of equity securities8,844


2,000
Principal repayments and maturities of debt securities available-for-sale32,171
18,657
3,856
10,202
Principal repayments and maturities of debt securities held-to-maturity183,585
7,004
122,505
21,595
Investment in low income housing and historic tax credits(12,201)(3,541)(2,847)(311)
Investment in small business investment companies(1,043)(736)
Net redemption (purchase) of Federal Home Loan Bank stock9,147
(3,087)
Net redemption of Federal Home Loan Bank stock5,600
4,600
Net increase in loans and leases(881,944)(582,394)(380,388)(201,971)
Proceeds from loan sales
7,092
Additions to office properties and equipment(3,843)(1,253)(1,023)(656)
Acquisition
(1,335)
Net cash used in investing activities(894,015)(752,240)(514,236)(219,333)
Cash flows from financing activities:  
Net increase in deposit accounts1,044,144
766,977
1,148,146
287,243
Net decrease in Federal Home Loan Bank advances(35,000)(70,000)(55,000)(5,000)
Net decrease in line of credit advances(4,250)(3,700)
Net proceeds from issuance of preferred stock77,596
38,468
Repayment of subordinated debt(35,000)
Net increase (decrease) in line of credit advances30,000
(1,000)
Net proceeds from exercise of stock options458
1,346
91
188
Cancellation of stock options(2,484)
Payment of contingent consideration(2,920)

(2,920)
Purchase of treasury stock(1,991)(4,584)(2,579)(433)
Dividends paid on preferred stock(3,791)(1,441)(1,962)(679)
Net cash provided by financing activities1,039,246
727,066
1,116,212
277,399
Net change in cash and cash equivalents during the period193,963
30,382
606,273
53,926
Cash and cash equivalents at beginning of the period189,985
156,153
403,855
189,985
Cash and cash equivalents at end of the period$383,948
$186,535
$1,010,128
$243,911
  

Nine Months Ended September 30,Three Months Ended March 31,
(Dollars in thousands)2019201820202019
Supplemental disclosure of cash flow information:  
Cash paid (received) during the period for:  
Interest expense$102,397
$56,028
$30,308
$31,886
Income taxes$(4,473)$(6,054)$278
$(4,219)
Other non-cash activity:  
Operating lease right-of-use asset$23,088
$
$22,084
$24,766
Loan foreclosures and repossessions$1,492
$
Unsettled purchase of debt securities held-to-maturity$
$5,000
$20,000
$
Contingent consideration$
$3,138

See accompanying notes to unaudited condensed consolidated financial statements.

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

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

The Bank was established to serve the commercial banking needs of regionally located middle-market businesses and financial services providers and the private banking needs of high-net-worth individuals.individuals nation-wide. The Bank has two wholly owned subsidiaries: TSC Equipment Finance LLC (“TSC Equipment Finance”), established to hold and manage loans and leases of our equipment finance business, and Meadowood Asset Management, LLC (“Meadowood”), established to hold and manage other real estate owned by the bank and/or foreclosed properties for the Bank.

Chartwell provides investment management services primarily to institutional investors, mutual funds and individual investors. CTSC Securities supports marketing efforts for the proprietary investment products provided by Chartwell, including shares of mutual funds advised and/or administered by Chartwell.

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

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

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

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

CONSOLIDATION
Our consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, the Bank, Chartwell and CTSC Securities, after elimination of inter-company accounts and transactions. The accounts of the Bank, in turn, include its wholly owned subsidiaries, TSC Equipment Finance and Meadowood, after elimination of inter-company accounts and transactions. The unaudited condensed consolidated financial statements of the Company presented herein have been prepared pursuant to SEC rules for Quarterly Reports on Form 10-Q and do not include all of the information and note disclosures required by GAAP for a full year presentation. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) and disclosures considered necessary for the fair presentation of the accompanying unaudited condensed consolidated financial statements have been included. Interim results are not necessarily reflective of the results of the entire year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and the related notes for the fiscal year ended December 31, 2018,2019, included in the Company’s Annual Report on Form 10-K filed with the SEC on February 19, 2019.24, 2020.

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


BUSINESS COMBINATIONS
The Company accounts for business combinations using the acquisition method of accounting. Under this method of accounting, the acquired company’s net assets are recorded at fair value as of the date of acquisition, and the results of operations of the acquired company are combined with our results from that date forward. Acquisition costs are expensed when incurred. The difference between the purchase price, which includes an initial measurement of any contingent earn out, and the fair value of the net assets acquired (including identified intangibles) is recorded as goodwill in the consolidated statements of financial condition. A change in the initial estimate of any contingent earn out amount is recorded to non-interest expense in the consolidated statements of income.

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

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

FEDERAL HOME LOAN BANK STOCK
The Company is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh. Member institutions are required to invest in FHLB stock. The stock is carried at cost, which approximates its liquidation value, and it is evaluated for impairment based on the ultimate recoverability of the par value. The following matters are considered by management when evaluating the FHLB stock for impairment: the ability of the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; the impact of legislative and regulatory changes on the institution and its customer base; and the Company’s intent and ability to hold its FHLB stock for the foreseeable future. Management believes the Company’s holdings in the FHLB stock were recoverable at par value as of September 30, 2019March 31, 2020 and December 31, 2018.2019. Cash and stock dividends are reported as interest income on investments in the consolidated statements of income.

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

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

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

interest has been reversed, then the recognition of interest income on the loan is resumed once the loan has been current for a period of six consecutive months or greater.

The Company is a party to financial instruments with off-balance sheet risk, such as commitments to extend credit, in the normal course of business to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the lending agreement with such customer. Commitments generally have fixed expiration dates or other termination clauses (i.e., loans due on demand) and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the unfunded commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer’s credit-worthiness on a case-by-case basis using the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary by the Company upon extension of a commitment, is based on management’s credit evaluation of the borrower.

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

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

In management’s judgment, the allowance was appropriate to cover probable losses inherent in the loan and lease portfolio as of September 30, 2019March 31, 2020 and December 31, 2018.2019. Management’s judgment takes into consideration general economic conditions, diversification and seasoning of the loan portfolio, historic loss experience, identified credit problems, delinquency levels and adequacy of collateral. Although management believes it has used the best information available to it in making such determinations, and that the present allowance for loan and lease losses is adequate, future adjustments to the allowance may be necessary, and net income may be adversely affected if circumstances differ substantially from the assumptions used in determining the level of the allowance. In addition, as an integral part of their periodic examination, certain regulatory agencies review the adequacy of the Bank’s allowance for loan and lease losses and may direct the Bank to make additions to the allowance based on their judgments about information available to them at the time of their examination.

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

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

In estimating probable loan and lease loss of general reserves, management considers numerous factors, including historical charge-offs and subsequent recoveries. Management also considers qualitative factors that influence our credit quality, 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 local and regional economic conditions in the markets that we serve.

Management bases the computation of the allowance for loan and lease losses of general reserves on two factors: the primary factor and the secondary factor. The primary factor is based on the inherent risk identified by management within each of the Company’s three loan portfolios based on the historical loss experience of each loan portfolio in addition to the loss emergence period. Management has developed a methodology that is applied to each of the three primary loan portfolios: private banking loans, commercial and industrial (“C&I”) loans and leases, and commercial real estate (“CRE”) loans. As the loan loss history, mix and risk ratings of each loan portfolio change, the primary factor adjusts accordingly. The allowance for loan and lease losses related to the primary factor is based on our estimates as to probable losses for each loan portfolio. The secondary factor is intended to capture risks related to events and circumstances that management believes have an impact on the performance of the loan portfolio. Although this factor

is more subjective in nature, the methodology focuses on internal and external trends in pre-specified categories, or risk factors, and applies a quantitative percentage that drives the secondary factor. Nine risk factors have been identified and each risk factor is assigned a reserve level based on management’s judgment as to the probable impact of each risk factor on each loan portfolio and is monitored on a quarterly basis. As the trend in any risk factor changes, a corresponding change occurs in the reserve associated with each respective risk factor, such that the secondary factor remains current to changes in each loan portfolio.

The Company also maintains a reserve for losses on unfunded commitments. This reserve is reflected as a component of other liabilities and, in management’s judgment, is sufficient to cover probable losses inherent in the loan commitments. Management tracks the level and trends in unused commitments and takes into consideration the same factors as those considered for purposes of the allowance for loan and lease losses on outstanding loans.

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

Investment management fees receivable represent amounts due for contractual investment management services provided to the Company’s clients, primarily institutional investors, mutual funds and individual investors. Management performs credit evaluations of its customers’ financial condition when it is deemed to be necessary and does not require collateral. The Company provides an allowance for uncollectible accounts based on specifically identified receivables. Bad debt expense is recorded to other non-interest expense on the consolidated statements of income and the allowance for uncollectible accounts is recorded to investment management fees receivable, net on the consolidated statements of financial position. Investment management fees receivable are considered delinquent when payment is not received within contractual terms and are charged off against the allowance for uncollectible accounts when management determines that recovery is unlikely and the Company ceases its collection efforts. There was no bad debt expense recorded for the ninethree months ended September 30,March 31, 2020, and 2019 and 2018 and no allowance for uncollectible accounts as of September 30, 2019March 31, 2020 and December 31, 2018.2019.

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

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

OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated depreciation. Office properties include furniture, fixtures and leasehold improvements. Equipment includes computer equipment and internal use software. Depreciation is computed utilizing the straight-line method over the estimated useful lives of the related assets, except for leasehold improvements, which are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Estimated useful lives are dependent upon the nature and condition of the asset and range from three to 10 years. Repairs and maintenance are charged to expense as incurred, while improvements that extend the useful life are capitalized and depreciated to non-interest expense over the estimated remaining life of the asset.


OPERATING LEASES
The Company is a lessee in noncancellable operating leases, primarily for its office spaces and other office equipment. The Company accounts for leases in accordance with ASC Topic 842, Leases,“Leases,” and records operating leases as a right-of-use asset and an offsetting lease liability in the consolidated statements of financial condition at the present value of the unpaid lease payments. The Company generally uses its incremental borrowing rate as the discount rate for operating leases. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. For operating leases, the right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

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

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

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

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

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

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

DERIVATIVES AND HEDGING ACTIVITIES
All derivatives are evaluated at inception as to whether or not they are hedging or non-hedging activities. All derivatives are recognized as either assets or liabilities on the consolidated statements of financial condition and measured at fair value. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. Any hedge ineffectiveness would be recognized in the income statement line item pertaining to the hedged item. For derivatives designated as cash flow hedges, changes in fair value of the effective portion of the cash flow hedges are reported in

accumulated other comprehensive income (loss). When the cash flows associated with the hedged item are realized, the gain or loss

included in accumulated other comprehensive income (loss) is recognized in the consolidated statements of income. The Company also has interest rate derivative positions that are not designated as hedging instruments. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.

The Company executes interest rate derivatives with its commercial banking customers to facilitate their respective risk management strategies which generate swap fee income. Those derivatives are simultaneously and economically hedged by offsetting derivatives that the Company executes with a third party, such that the Company eliminates its interest rate exposure resulting from such transactions and are not designated as hedging instruments. Swap fees are based on the notional amount and weighted maturity of each individual transaction and are collected and recorded to non-interest income in the consolidated statements of income when the transaction is executed.

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

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

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

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

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

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

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

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

In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which requires an entity to no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. The changes are effective for public business entities, for annual and interim periods in fiscal years beginning after December 15, 2019.

All entities may early adopt the standard for goodwill impairment tests with measurement dates after January 1, 2017. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which significantly changes the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses expected to occur over their remaining life. The new impairment methodology, known as the current expected credit loss ("CECL") model, replaces the current incurred loss model and requires financial assets measured at amortized cost basis, such as loans, debt securities, net investments in leases, and off-balance-sheet credit exposures, to be presented at the net amount expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The changes are effective for public business entities that are SEC filers for annual and interim periods in fiscal years beginning after December 15, 2019.

Management created a formal working group, consisting of key stakeholders from finance, risk management and credit management, to govern the implementation of this accounting standard. Management is in the process of designing current expected credit loss estimation methodologies and analyzing data to be able to comply with this standard. Management has engaged a third-party software model to determine the current expected credit loss within the requirements of the accounting standard. Management has begun parallel runs and continue to analyze initial results. Management is also in the process of developing a governance process, a qualitative framework, and an operational and control structure. The adoption of this standard could have a material impact on the Company’s financial statements depending on the composition, characteristics and quality of its loan portfolio, as well as the current and forecasted economic conditions as of the date of adoption and thereafter. The Company is continuing to evaluate the quantitative and qualitative effects of the standard on our estimated credit losses, results of operations, financial position and related disclosure.

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

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


[2] INVESTMENT SECURITIES

Debt securities available-for-sale and held-to-maturity were comprised of the following:
September 30, 2019March 31, 2020
(Dollars in thousands)Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Debt securities available-for-sale:  
Corporate bonds$183,621
$2,788
$444
$185,965
$213,148
$1,214
$8,596
$205,766
Trust preferred securities18,060

706
17,354
18,125

2,329
15,796
Agency collateralized mortgage obligations28,887
17
38
28,866
25,983
1
325
25,659
Agency mortgage-backed securities18,469
426

18,895
17,683
753
9
18,427
Agency debentures9,486
614

10,100
8,967
555

9,522
Total debt securities available-for-sale258,523
3,845
1,188
261,180
283,906
2,523
11,259
275,170
Debt securities held-to-maturity:  
Corporate bonds27,180
585

27,765
22,177
575
12
22,740
Agency debentures136,892
969
105
137,756
Agency debentures (1)
271,743
1,091

272,834
Municipal bonds18,765
150

18,915
14,575
121

14,696
Agency mortgage-backed securities4,373
409

4,782
4,347
719

5,066
Total debt securities held-to-maturity187,210
2,113
105
189,218
312,842
2,506
12
315,336
Total debt securities$445,733
$5,958
$1,293
$450,398
$596,748
$5,029
$11,271
$590,506
(1)
Balance includes $20 million of unsettled transactions.

December 31, 2018December 31, 2019
(Dollars in thousands)Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Debt securities available-for-sale:  
Corporate bonds$152,691
$33
$1,661
$151,063
$172,704
$2,821
$107
$175,418
Trust preferred securities17,964

1,115
16,849
18,092
216
48
18,260
Non-agency collateralized loan obligations393

3
390
Agency collateralized mortgage obligations33,680
42
4
33,718
27,262
11
80
27,193
Agency mortgage-backed securities21,575
37
348
21,264
18,058
451

18,509
Agency debentures9,994
67
49
10,012
8,961
441

9,402
Total debt securities available-for-sale236,297
179
3,180
233,296
245,077
3,940
235
248,782
Debt securities held-to-maturity:  
Corporate bonds27,184
353
22
27,515
24,678
619

25,297
Agency debentures141,575
472
34
142,013
149,912
628
935
149,605
Municipal bonds22,963
11
61
22,913
17,094
144

17,238
Agency mortgage-backed securities4,409

27
4,382
4,360
255

4,615
Total debt securities held-to-maturity196,131
836
144
196,823
196,044
1,646
935
196,755
Total debt securities$432,428
$1,015
$3,324
$430,119
$441,121
$5,586
$1,170
$445,537

Interest income on investment securities was as follows:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
(Dollars in thousands)20192018 2019201820202019
Taxable interest income$3,521
$2,408
 $11,034
$5,722
$3,391
$3,872
Non-taxable interest income90
101
 295
317
112
104
Dividend income382
384
 1,168
938
398
377
Total interest income on investment securities$3,993
$2,893
 $12,497
$6,977
$3,901
$4,353


As of September 30, 2019,March 31, 2020, the contractual maturities of the debt securities were:
September 30, 2019March 31, 2020
Available-for-Sale Held-to-MaturityAvailable-for-Sale Held-to-Maturity
(Dollars in thousands)Amortized
Cost
Estimated
Fair Value
 Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
 Amortized
Cost
Estimated
Fair Value
Due in less than one year$45,082
$45,284
 $3,306
$3,316
$53,698
$53,423
 $4,824
$4,834
Due from one to five years107,420
109,664
 20,622
20,892
98,325
96,411
 87,424
87,785
Due from five to ten years40,983
40,816
 127,952
128,597
70,963
64,959
 197,656
198,490
Due after ten years65,038
65,416
 35,330
36,413
60,920
60,377
 22,938
24,227
Total debt securities$258,523
$261,180
 $187,210
$189,218
$283,906
$275,170
 $312,842
$315,336

The $65.4$60.4 million fair value of debt securities available-for-sale with a contractual maturity due after 10 years as of September 30, 2019,March 31, 2020, included $38.6$34.2 million, or 58.9%56.7%, that are floating-rate securities. The $128.0$197.7 million amortized cost of debt securities held-to-maturity with a contractual maturity due from five to 10 years as of September 30, 2019,March 31, 2020, included $20.8$15.8 million that have call provisions within the next fourthree years that would either mature, if called, or become floating-rate securities after the call date.

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

Proceeds from the sale and call of debt securities available-for-sale and held-to-maturity and related gross realized gains and losses were:
Available-for-Sale Held-to-Maturity Available-for-Sale Held-to-MaturityAvailable-for-Sale Held-to-Maturity
Three Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31, Three Months Ended March 31,
(Dollars in thousands)20192018 20192018 20192018 2019201820202019 20202019
Proceeds from sales$
$
 $
$
 $4,993
$2,037
 $
$
$49,967
$
 $
$
Proceeds from calls9,435

 63,529

 13,517
4,081
 180,824
1,000

1,224
 122,353
21,460
Total proceeds$9,435
$
 $63,529
$
 $18,510
$6,118

$180,824
$1,000
$49,967
$1,224

$122,353
$21,460
          
Gross realized gains$134
$
 $72
$
 $260
$6
 $86
$3
$15
$17
 $42
$11
Gross realized losses

 

 
3
 



 

Net realized gains$134
$
 $72
$
 $260
$3
 $86
$3
$15
$17
 $42
$11

Debt securities available-for-sale of $3.0$2.6 million as of September 30, 2019,March 31, 2020, were held in safekeeping at the FHLB and were included in the calculation of borrowing capacity. Additionally, there were $14.1 million of debt securities held-to-maturity that were pledged as collateral for certain deposit relationships.


The following tables show the fair value and gross unrealized losses on temporarily impaired debt securities available-for-sale and held-to-maturity, by investment category and length of time that the individual securities have been in a continuous unrealized loss position as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively:
September 30, 2019March 31, 2020
Less than 12 Months 12 Months or More TotalLess than 12 Months 12 Months or More Total
(Dollars in thousands)Fair valueUnrealized losses Fair valueUnrealized losses Fair valueUnrealized lossesFair valueUnrealized losses Fair valueUnrealized losses Fair valueUnrealized losses
Debt securities available-for-sale:          
Corporate bonds$
$
 $20,660
$444
 $20,660
$444
$125,170
$6,582
 $17,986
$2,014
 $143,156
$8,596
Trust preferred securities17,353
706
 

 17,353
706
15,795
2,329
 

 15,795
2,329
Agency collateralized mortgage obligations22,319
29
 2,720
9
 25,039
38
3,794
41
 21,188
284
 24,982
325
Agency mortgage-backed securities1,289
9
 

 1,289
9
Total debt securities available-for-sale39,672
735
 23,380
453
 63,052
1,188
146,048
8,961
 39,174
2,298
 185,222
11,259
Debt securities held-to-maturity:          
Agency debentures31,922
105
 

 31,922
105
Corporate bonds4,489
12
 

 4,489
12
Total debt securities held-to-maturity31,922
105
 

 31,922
105
4,489
12
 

 4,489
12
Total temporarily impaired debt securities (1)
$71,594
$840
 $23,380
$453
 $94,974
$1,293
$150,537
$8,973
 $39,174
$2,298
 $189,711
$11,271
(1) 
The number of investment positions with unrealized losses totaled 2063 for available-for-sale securities and 4 for held-to-maturity securities.


December 31, 2018December 31, 2019
Less than 12 Months 12 Months or More TotalLess than 12 Months 12 Months or More Total
(Dollars in thousands)Fair valueUnrealized losses Fair valueUnrealized losses Fair valueUnrealized lossesFair valueUnrealized losses Fair valueUnrealized losses Fair valueUnrealized losses
Debt securities available-for-sale:          
Corporate bonds$110,200
$789
 $22,954
$872
 $133,154
$1,661
$4,942
$58
 $19,951
$49
 $24,893
$107
Trust preferred securities16,849
1,115
 

 16,849
1,115


 4,417
48
 4,417
48
Non-agency collateralized loan obligations

 390
3
 390
3
Agency collateralized mortgage obligations

 3,015
4
 3,015
4
22,117
66
 2,544
14
 24,661
80
Agency mortgage-backed securities5,851
51
 8,690
297
 14,541
348
Agency debentures3,487
49
 

 3,487
49
Total debt securities available-for-sale136,387
2,004
 35,049
1,176
 171,436
3,180
27,059
124
 26,912
111
 53,971
235
Debt securities held-to-maturity:          
Corporate bonds3,978
22
 

 3,978
22
Agency debentures1,952
34
 

 1,952
34
87,879
935
 

 87,879
935
Municipal bonds16,105
51
 2,110
10
 18,215
61
Agency mortgage-backed securities4,382
27
 

 4,382
27
Total debt securities held-to-maturity26,417
134
 2,110
10
 28,527
144
87,879
935
 

 87,879
935
Total temporarily impaired debt securities (1)
$162,804
$2,138
 $37,159
$1,186
 $199,963
$3,324
$114,938
$1,059
 $26,912
$111
 $141,850
$1,170
(1) 
The number of investment positions with unrealized losses totaled 7886 for available-for-sale securities and 2953 for held-to-maturity securities.

The changes in the fair values of our municipal bonds, agency debentures, agency collateralized mortgage obligations and agency mortgage-backed securities are primarily the result of interest rate fluctuations. To assess for credit impairment, management evaluates the underlying issuer’s financial performance and the related credit rating information through a review of publicly available financial statements and other publicly available information. The 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, the Company considers all of the unrealized losses to be temporary.

There were no outstanding debt securities classified as trading as of September 30, 2019March 31, 2020 and December 31, 2018.

Equity securities as of September 30, 2019, consisted of an investment in a mid-cap value equity mutual fund. There were $4.8 million and $12.7 million in equity securities outstanding as of September 30, 2019 and December 31, 2018, respectively.2019.

There was $15.5$18.7 million and $24.7$24.3 million in FHLB stock outstanding as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.

[3] LOANS AND LEASES

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


Loans and leases held-for-investment were comprised of the following:
September 30, 2019March 31, 2020
(Dollars in thousands)Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
TotalPrivate
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Loans and leases held-for-investment, before deferred fees and costs$3,361,987
$989,769
$1,660,564
$6,012,320
$3,908,672
$1,186,242
$1,856,183
$6,951,097
Deferred loan costs (fees)6,155
2,739
(4,534)4,360
6,883
4,862
(4,693)7,052
Loans and leases held-for-investment, net of deferred fees and costs3,368,142
992,508
1,656,030
6,016,680
3,915,555
1,191,104
1,851,490
6,958,149
Allowance for loan and lease losses(1,851)(5,316)(6,207)(13,374)(2,174)(6,685)(8,445)(17,304)
Loans and leases held-for-investment, net$3,366,291
$987,192
$1,649,823
$6,003,306
$3,913,381
$1,184,419
$1,843,045
$6,940,845

December 31, 2018December 31, 2019
(Dollars in thousands)Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
TotalPrivate
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Loans and leases held-for-investment, before deferred fees and costs$2,864,094
$781,836
$1,482,148
$5,128,078
$3,688,779
$1,080,767
$1,801,375
$6,570,921
Deferred loan costs (fees)5,449
3,484
(4,138)4,795
6,623
4,942
(4,927)6,638
Loans and leases held-for-investment, net of deferred fees and costs2,869,543
785,320
1,478,010
5,132,873
3,695,402
1,085,709
1,796,448
6,577,559
Allowance for loan and lease losses(1,942)(5,764)(5,502)(13,208)(1,973)(5,262)(6,873)(14,108)
Loans and leases held-for-investment, net$2,867,601
$779,556
$1,472,508
$5,119,665
$3,693,429
$1,080,447
$1,789,575
$6,563,451

The Company’s customers have unused loan commitments based on the availability of eligible collateral or other terms and conditions under their loan agreements. Often these commitments are not fully utilized and therefore the total amount does not necessarily represent future cash requirements. The amount of unfunded commitments, including standby letters of credit, as of September 30, 2019March 31, 2020 and December 31, 2018,2019, was $4.54$4.78 billion and $3.54$4.91 billion, respectively. The interest rate for each commitment is based on the prevailing market conditions at the time of funding. The reserve for losses on unfunded commitments was $595,000$712,000 and $542,000$645,000 as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, which includes reserves for probable losses on unfunded loan commitments, including standby letters of credit and also risk participations.

The total unfunded commitments above included loans in the process of origination totaling approximately $36.1$37.7 million and $64.4$20.7 million as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, which extend over varying periods of time.

The Company issues standby letters of credit in the normal course of business. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party. The Company would be required to perform under a standby letter of credit when drawn upon by the guaranteed party in the case of non-performance by the Company’s customer. Collateral may be obtained based on management’s credit assessment of the customer. The amount of unfunded commitments related to standby letters of credit as of September 30, 2019March 31, 2020 and December 31, 2018,2019, included in the total unfunded commitments above, was $71.1$70.6 million and $60.0$72.8 million, respectively. Should the Company be obligated to perform under any standby letters of credit, the Company will seek repayment from the customer for amounts paid. During the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, there were draws on letters of credit totaling $135,000$35,000 and $6.0 million,$48,000, respectively, which were repaid by the borrowers. Most of these commitments are expected to expire without being drawn upon and the total amount does not necessarily represent future cash requirements. The potential liability for losses on standby letters of credit was included in the reserve for losses on unfunded commitments.

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

[4] ALLOWANCE FOR LOAN AND LEASE LOSSES

Our allowance for loan and lease losses represents our estimate of probable loan and lease losses inherent in the portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans and leases, as well as estimated probable credit losses inherent in the remainder of the loan and lease portfolio. Additions are made to the allowance through both periodic provisions recorded in the consolidated statements of income and recoveries of losses previously incurred. Reductions to the allowance occur as loans and leases are charged off or when the credit history of any of the Company’s three loan portfolios (private banking loans, C&I loans and leases, and CRE loans) improves. Management evaluates the adequacy of the allowance quarterly, and in doing so relies on

various factors including, but not limited to, assessment of historical loss experience, delinquency and non-accrual trends, portfolio growth, underlying collateral coverage and current economic conditions. This evaluation is subjective and requires material estimates that may change over time. In addition, management evaluates the overall methodology for the allowance for loan and lease losses on an annual basis. The calculation of the allowance for loan and lease losses takes into consideration the inherent risk identified within each of the Company’s three loan portfolios. In addition, management considers the historical loss experience of each loan portfolio to ensure that the allowance for loan and lease losses is sufficient to cover probable losses inherent in such loan portfolios. Refer to Note 1, Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements for more details on the Company’s allowance for loan and lease losses policy.


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

Private Banking Loans
Our private banking lending activities are conducted on a national basis. This loan portfolio primarily includes loans made to high-net-worth individuals, trusts and businesses that are typically secured by cash, marketable securities and/or cash value life insurance. This portfolio also has some loans that are secured by residential real estate or other financial assets, lines of credit and unsecured loans. The primary sources of repayment for these loans are the income and/or assets of the borrower.

The underlying collateral is the most important indicator of risk for this loan portfolio. The overall lower risk profile of this portfolio is driven by loans secured by cash, marketable securities and/or cash value life insurance, which were 97.2%97.5% and 96.7%97.4% of total private banking loans as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.

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

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

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

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

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

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


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

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

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


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

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

The following tables present the recorded investment in loans by credit quality indicator:
September 30, 2019March 31, 2020
(Dollars in thousands)Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
TotalPrivate
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Pass$3,364,566
$976,204
$1,649,303
$5,990,073
$3,912,060
$1,175,517
$1,835,993
$6,923,570
Special mention3,392
9,745
6,467
19,604

15,587
4,872
20,459
Substandard184
6,559
260
7,003
3,495

10,625
14,120
Loans and leases held-for-investment$3,368,142
$992,508
$1,656,030
$6,016,680
$3,915,555
$1,191,104
$1,851,490
$6,958,149

December 31, 2018December 31, 2019
(Dollars in thousands)Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
TotalPrivate
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Pass$2,864,774
$767,540
$1,475,793
$5,108,107
$3,691,866
$1,069,932
$1,780,768
$6,542,566
Special mention2,532
12,636
2,217
17,385

15,777
14,284
30,061
Substandard2,237
5,144

7,381
3,536

1,396
4,932
Loans and leases held-for-investment$2,869,543
$785,320
$1,478,010
$5,132,873
$3,695,402
$1,085,709
$1,796,448
$6,577,559

Changes in the allowance for loan and lease losses were as follows for the three months ended September 30, 2019March 31, 2020 and 2018:2019:
 Three Months Ended March 31, 2020
(Dollars in thousands)Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Balance, beginning of period$1,973
$5,262
$6,873
$14,108
Provision (credit) for loan losses201
1,220
1,572
2,993
Charge-offs



Recoveries
203

203
Balance, end of period$2,174
$6,685
$8,445
$17,304
Three Months Ended September 30, 2019Three Months Ended March 31, 2019
(Dollars in thousands)Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
TotalPrivate
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Balance, beginning of period$2,140
$5,911
$5,965
$14,016
$1,942
$5,764
$5,502
$13,208
Provision (credit) for loan losses(177)(672)242
(607)59
(604)168
(377)
Charge-offs(112)

(112)



Recoveries
77

77

1,881

1,881
Balance, end of period$1,851
$5,316
$6,207
$13,374
$2,001
$7,041
$5,670
$14,712

 Three Months Ended September 30, 2018
(Dollars in thousands)Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Balance, beginning of period$1,557
$8,786
$4,978
$15,321
Provision (credit) for loan losses337
(838)267
(234)
Charge-offs
(2,068)
(2,068)
Recoveries
564

564
Balance, end of period$1,894
$6,444
$5,245
$13,583


Changes in the allowance for loan and lease losses were as follows for the nine months ended September 30, 2019 and 2018:
 Nine Months Ended September 30, 2019
(Dollars in thousands)Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Balance, beginning of period$1,942
$5,764
$5,502
$13,208
Provision (credit) for loan losses21
(2,422)705
(1,696)
Charge-offs(112)

(112)
Recoveries
1,974

1,974
Balance, end of period$1,851
$5,316
$6,207
$13,374

 Nine Months Ended September 30, 2018
(Dollars in thousands)Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Balance, beginning of period$1,577
$8,043
$4,797
$14,417
Provision (credit) for loan losses317
(389)448
376
Charge-offs
(2,068)
(2,068)
Recoveries
858

858
Balance, end of period$1,894
$6,444
$5,245
$13,583

The following tables present the age analysis of past due loans and leases segregated by class:
September 30, 2019March 31, 2020
(Dollars in thousands)30-59 Days Past Due60-89 Days Past Due90 Days or More Past DueTotal Past DueCurrentTotal30-59 Days Past Due60-89 Days Past Due90 Days or More Past DueTotal Past DueCurrentTotal
Private banking$
$808
$184
$992
$3,367,150
$3,368,142
$450
$206
$184
$840
$3,914,715
$3,915,555
Commercial and industrial



992,508
992,508




1,191,104
1,191,104
Commercial real estate



1,656,030
1,656,030




1,851,490
1,851,490
Loans and leases held-for-investment$
$808
$184
$992
$6,015,688
$6,016,680
$450
$206
$184
$840
$6,957,309
$6,958,149

December 31, 2018December 31, 2019
(Dollars in thousands)30-59 Days Past Due60-89 Days Past Due90 Days or More Past DueTotal Past DueCurrentTotal30-59 Days Past Due60-89 Days Past Due90 Days or More Past DueTotal Past DueCurrentTotal
Private banking$1,040
$173
$2,000
$3,213
$2,866,330
$2,869,543
$261
$
$184
$445
$3,694,957
$3,695,402
Commercial and industrial



785,320
785,320




1,085,709
1,085,709
Commercial real estate



1,478,010
1,478,010




1,796,448
1,796,448
Loans and leases held-for-investment$1,040
$173
$2,000
$3,213
$5,129,660
$5,132,873
$261
$
$184
$445
$6,577,114
$6,577,559

Non-Performing and Impaired Loans

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

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




The following tables present the Company’s investment in loans considered to be impaired and related information on those impaired loans:
As of and for the Nine Months Ended September 30, 2019As of and for the Three Months Ended March 31, 2020
(Dollars in thousands)Recorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentInterest Income RecognizedRecorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentInterest Income Recognized
With a related allowance recorded:  
Private banking$171
$193
$171
$171
$
$171
$193
$171
$171
$
Commercial and industrial









Commercial real estate









Total with a related allowance recorded171
193
171
171

171
193
171
171

Without a related allowance recorded:  
Private banking13
13

13

13
13

13

Commercial and industrial









Commercial real estate









Total without a related allowance recorded13
13

13

13
13

13

Total:  
Private banking184
206
171
184

184
206
171
184

Commercial and industrial









Commercial real estate









Total$184
$206
$171
$184
$
$184
$206
$171
$184
$

As of and for the Twelve Months Ended December 31, 2018As of and for the Twelve Months Ended December 31, 2019
(Dollars in thousands)Recorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentInterest Income RecognizedRecorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentInterest Income Recognized
With a related allowance recorded:  
Private banking$2,237
$2,421
$437
$2,293
$
$171
$193
$171
$171
$
Commercial and industrial









Commercial real estate









Total with a related allowance recorded2,237
2,421
437
2,293

171
193
171
171

Without a related allowance recorded:  
Private banking




13
13

13

Commercial and industrial









Commercial real estate









Total without a related allowance recorded




13
13

13

Total:  
Private banking2,237
2,421
437
2,293

184
206
171
184

Commercial and industrial









Commercial real estate









Total$2,237
$2,421
$437
$2,293
$
$184
$206
$171
$184
$

Impaired loans as of September 30, 2019March 31, 2020 and December 31, 2018,2019, were $184,000 and $2.2 million,$184,000, respectively. There was no interest income recognized on impaired loans that were also on non-accrual status for the ninethree months ended September 30, 2019,March 31, 2020, and the twelve months ended December 31, 2018.2019. As of September 30, 2019March 31, 2020 and December 31, 2018,2019, there were no loans 90 days or more past due and still accruing interest income.

Impaired loans were evaluated using a discounted cash flow method or based on the fair value of the collateral less estimated selling costs. Based on those evaluations there were specific reserves totaling $171,000 and $437,000$171,000 as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.


The following tables present the allowance for loan and lease losses and recorded investment in loans by class:
September 30, 2019March 31, 2020
(Dollars in thousands)Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
TotalPrivate
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Allowance for loan and lease losses:  
Individually evaluated for impairment$171
$
$
$171
$171
$
$
$171
Collectively evaluated for impairment1,680
5,316
6,207
13,203
2,003
6,685
8,445
17,133
Total allowance for loan and lease losses$1,851
$5,316
$6,207
$13,374
$2,174
$6,685
$8,445
$17,304
Loans and leases held-for-investment:  
Individually evaluated for impairment$184
$
$
$184
$184
$
$
$184
Collectively evaluated for impairment3,367,958
992,508
1,656,030
6,016,496
3,915,371
1,191,104
1,851,490
6,957,965
Loans and leases held-for-investment$3,368,142
$992,508
$1,656,030
$6,016,680
$3,915,555
$1,191,104
$1,851,490
$6,958,149


December 31, 2018December 31, 2019
(Dollars in thousands)Private
Banking
Commercial
and
Industrial
Commercial
Real Estate
TotalPrivate
Banking
Commercial
and
Industrial
Commercial
Real Estate
Total
Allowance for loan and lease losses:  
Individually evaluated for impairment$437
$
$
$437
$171
$
$
$171
Collectively evaluated for impairment1,505
5,764
5,502
12,771
1,802
5,262
6,873
13,937
Total allowance for loan and lease losses$1,942
$5,764
$5,502
$13,208
$1,973
$5,262
$6,873
$14,108
Loans and leases held-for-investment:  
Individually evaluated for impairment$2,237
$
$
$2,237
$184
$
$
$184
Collectively evaluated for impairment2,867,306
785,320
1,478,010
5,130,636
3,695,218
1,085,709
1,796,448
6,577,375
Loans and leases held-for-investment$2,869,543
$785,320
$1,478,010
$5,132,873
$3,695,402
$1,085,709
$1,796,448
$6,577,559

Troubled Debt Restructuring

The following table provides additional information on the Company’saggregate recorded investment of impaired loans designated aswith terms modified through a troubled debt restructurings:
(Dollars in thousands)September 30,
2019
December 31,
2018
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:  
Performing loans accruing interest$
$
Non-accrual loans171
237
Total troubled debt restructurings$171
$237

restructuring was $171,000 and $171,000 as of March 31, 2020 and December 31, 2019, respectively, which were also on non-accrual. There were no unused commitments on loans designated as troubled debt restructurings as of September 30, 2019March 31, 2020 and December 31, 2018.2019.

The modifications made to restructured loans typically consist of an extension of the payment terms or the deferral of principal payments. There were no loans modified as TDRs within 12 months of the corresponding balance sheet date with a payment default during the ninethree months ended September 30, 2019March 31, 2020 and 2018.2019.

There were no loans newly designated as TDRs during the ninethree months ended September 30, 2019March 31, 2020 and 2018.2019.

Other Real Estate Owned

As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the balance of the other real estate owned portfolio was $4.3 million and $3.4$4.3 million, respectively. During the three and nine months ended September 30, 2019, collateral related to an impaired loan was transferred to OREO at a fair value of $1.5 million based on the appraised value, less estimated selling costs. In addition, a property was sold from other real estate owned totaling $169,000 with a net loss of $97,000 during the nine months ended September 30, 2019. There were no residential mortgage loans in the process of foreclosure as of September 30, 2019.


[5] OPERATING LEASES

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

Operating lease cost for the three and nine months ended September 30, 2019, was $805,000 and $2.0 million, respectively. As of September 30, 2019, the weighted average remaining lease term was 14.1 years and the weighted average discount rate as 4.25%.

Maturities of lease liabilities under noncancellable leases as of September 30, 2019, are as follows:
(Dollars in thousands)Amount
September 30, 
2020$2,594
20212,637
20222,621
20232,151
20242,046
Thereafter20,709
Total undiscounted lease payments$32,758
Imputed interest(8,721)
Operating lease liability$24,037
March 31, 2020.

[6]5] DEPOSITS

As of September 30, 2019March 31, 2020 and December 31, 2018,2019, deposits were comprised of the following:
Interest Rate
Range
 Weighted Average
Interest Rate
 BalanceInterest Rate
Range
 Weighted Average
Interest Rate
 Balance
(Dollars in thousands)September 30,
2019
 September 30,
2019
December 31,
2018
 September 30,
2019
December 31,
2018
March 31,
2020
 March 31,
2020
December 31,
2019
 March 31,
2020
December 31,
2019
Demand and savings accounts:    
Noninterest-bearing checking accounts  $312,285
$258,268
  $362,075
$356,102
Interest-bearing checking accounts0.05 to 3.15% 1.83%2.29% 1,333,189
778,131
0.05 to 1.86% 0.49%1.57% 2,195,824
1,398,264
Money market deposit accounts0.10 to 3.25% 2.10%2.45% 3,149,346
2,781,870
0.10 to 3.25% 0.90%1.84% 3,783,842
3,426,745
Total demand and savings accounts 4,794,820
3,818,269
 6,341,741
5,181,111
Certificates of deposit1.29 to 3.25% 2.50%2.39% 1,299,785
1,232,192
0.65 to 3.25% 1.84%2.24% 1,441,018
1,453,502
Total deposits $6,094,605
$5,050,461
 $7,782,759
$6,634,613
Weighted average rate on interest-bearing accounts 2.13%2.41%   0.96%1.87%  

As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the Bank had total brokered deposits of $618.1 million$1.29 billion and $641.4$766.6 million, respectively. Reciprocal deposits through Certificate of Deposit Account Registry Service® (“CDARS®”) and Insured Cash Sweep® (“ICS®”) totaled $883.6$938.9 million and $565.3$857.9 million as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, and were considered non-brokered.

As of September 30, 2019March 31, 2020 and December 31, 2018,2019, certificates of deposit with balances of $100,000 or more, excluding brokered and reciprocal deposits, totaled $552.3$521.9 million and $569.8$551.5 million, respectively. As of September 30, 2019March 31, 2020 and December 31, 2018,2019, certificates of deposit with balances of $250,000 or more, excluding brokered and reciprocal deposits, totaled $223.7$214.6 million and $230.0$233.5 million.


The contractual maturity of certificates of deposit was as follows:
(Dollars in thousands)September 30,
2019
December 31,
2018
March 31,
2020
December 31,
2019
12 months or less$1,082,409
$992,468
$1,325,423
$1,244,838
12 months to 24 months176,331
181,456
95,403
168,437
24 months to 36 months41,045
58,268
20,192
40,227
Total$1,299,785
$1,232,192
$1,441,018
$1,453,502

Interest expense on deposits was as follows:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
(Dollars in thousands)20192018 2019201820202019
Interest-bearing checking accounts$5,795
$3,267
 $15,303
$7,464
$5,214
$4,542
Money market deposit accounts18,870
12,428
 53,608
30,263
14,655
16,540
Certificates of deposit9,449
6,487
 26,691
14,552
7,375
8,251
Total interest expense on deposits$34,114
$22,182
 $95,602
$52,279
$27,244
$29,333

[7]6] BORROWINGS

As of September 30, 2019March 31, 2020 and December 31, 2018,2019, borrowings were comprised of the following:
September 30, 2019 December 31, 2018March 31, 2020 December 31, 2019
(Dollars in thousands)Interest RateEnding BalanceMaturity Date Interest RateEnding BalanceMaturity DateInterest RateEnding BalanceMaturity Date Interest RateEnding BalanceMaturity Date
FHLB borrowings:            
FHLB line of credit2.08%$130,000
5/1/2020 2.62%$250,000
5/1/2019—%$
 1.81%$55,000
5/1/2020
Issued 9/3/20192.26%150,000
12/2/2019 


Issued 7/8/20192.50%50,000
10/8/2019 


Issued 12/31/2018


 2.65%65,000
1/2/2019
Issued 10/10/2018


 2.54%50,000
1/8/2019
Issued 3/20/20200.67%50,000
6/22/2020 —%
 
Issued 3/02/20201.68%50,000
6/2/2020 —%
 
Issued 3/02/20201.68%150,000
6/1/2020 —%
 
Issued 1/08/20201.84%50,000
4/8/2020 —%
 
Issued 12/12/2019—%
 1.85%100,000
1/13/2020
Issued 12/02/2019—%
 1.91%150,000
3/2/2020
Issued 10/08/2019 
 2.00%50,000
1/8/2020
Line of credit borrowings


 5.47%4,250
9/28/20194.25%30,000
10/17/2020 
 
Subordinated notes payable (net of debt issuance costs of $0 and $84)


 5.75%34,916
7/1/2019
Total borrowings, net $330,000
 $404,166
  $330,000
 $355,000
 

The Bank’s FHLB borrowing capacity is based on the collateral value of certain securities held in safekeeping at the FHLB and loans pledged to the FHLB. The Bank submits a quarterly Qualifying Collateral Report (“QCR”) to the FHLB to update the value of the loans pledged. As of September 30, 2019,March 31, 2020, the Bank’s borrowing capacity is based on the information provided in the June 30,December 31, 2019, QCR filing. As of September 30, 2019,March 31, 2020, the Bank had securities held in safekeeping at the FHLB with a fair value of $3.0$2.6 million, combined with pledged loans of $1.18$1.24 billion, for a gross borrowing capacity of $843.0$886.7 million, of which $330.0$300.0 million was outstanding in advances. As of December 31, 2018,2019, there was $365.0$355.0 million outstanding in advances from the FHLB. When the Bank borrows from the FHLB, interest is charged at the FHLB’s posted rates at the time of the borrowing.

The Bank maintains an unsecured line of credit of $10.0 million with M&T Bank and an unsecured line of credit of $20.0 million with Texas Capital Bank. As of September 30, 2019March 31, 2020 and December 31, 2018,2019, there were no outstanding borrowings under these lines of credit and they are available to the Bank at the lenders’ discretion. In addition, the Bank maintains an $8.0 million unsecured line of credit with PNC Bank for private label credit card facilities for certain existing commercial clients of the Bank, of which $2.6$3.2 million in notional value of credit cards have been issued. The clients of the Bank are responsible for repaying any balances due on these credit cards directly to PNC, however if the customer fails to repay PNC, the Bank could be required to satisfy the obligation to PNC and initiate collection from our customer as part of the existing credit facility of that customer.

The holding company maintains an unsecured line of credit of $50.0$75.0 million with Texas Capital Bank. As of September 30, 2019March 31, 2020 and December 31, 2018,2019, there was $0$30.0 million and $4.3 million$0 outstanding under this line of credit, respectively.


Interest expense on borrowings was as follows:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
(Dollars in thousands)20192018 2019201820202019
FHLB borrowings$1,302
$853
 $6,222
$3,743
$2,035
$2,585
Line of credit borrowings
16
 68
69
1
58
Subordinated notes payable
554
 1,090
1,661

554
Total interest expense on borrowings$1,302
$1,423
 $7,380
$5,473
$2,036
$3,197

[8]7] STOCK TRANSACTIONS

In May 2019, the Company completed the issuance and sale of a registered, underwritten public offering of 3.2 million3,220,000 depositary shares, each representing a 1/40th interest in a share of its 6.375% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, no par value (the “Series B Preferred Stock”), with a liquidation preference of $1,000 per share (equivalent to $25 per depository share). The Company received net proceeds of $77.6 million from the sale of 80,500 shares of its Series B Preferred Stock (equivalent to 3.2 million3,220,000 depositary shares), after deducting underwriting discounts, commissions and direct offering expenses. The preferred stock provides Tier 1 capital for the holding company under federal regulatory capital rules.

When, as, and if declared by the board of directors (the “Board”) of the Company, dividends will be payable on the Series B Preferred Stock from the date of issuance to, but excluding July 1, 2026, at a rate of 6.375% per annum, payable quarterly, in arrears, and from and including July 1, 2026, dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 408.8 basis points per annum (subject to potential adjustment as provided in the definition of three-month LIBOR), payable quarterly, in arrears. The Company may redeem the Series B Preferred Stock at its option, subject to regulatory approval, on or after July 1, 2024, as described in the prospectus supplement relating to the offering filed with the SEC on May 23, 2019.

In March 2018, the Company completed the issuance and sale of a registered, underwritten public offering of 1.6 million1,610,000 depositary shares, each representing a 1/40th interest in a share of its 6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, no par value (the “Series A Preferred Stock”), with a liquidation preference of $1,000 per share (equivalent to $25 per depository share). The Company received net proceeds of $38.5 million from the sale of 40,250 shares of its Series A Preferred Stock (equivalent to 1.6 million1,610,000 depositary shares), after deducting underwriting discounts, commissions and direct offering expenses. The preferred stock provides Tier 1 capital for the holding company under federal regulatory capital rules.

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

During the ninethree months ended September 30, 2019,March 31, 2020, the Company paid dividends of $2.0 million$679,000 on its Series A Preferred Stock and $1.8$1.3 million on its Series B Preferred Stock. During the ninethree months ended September 30, 2018,March 31, 2019, the Company paid dividends of $1.4 million$679,000 on its Series A Preferred Stock.

Under authorization by the Board, the Company was permitted to repurchase its common stock up to prescribed amounts, of which $10.4$9.9 million remained available as of September 30, 2019.March 31, 2020. The Board also authorized the Company to utilize some of the share repurchase program authorizations to cancel certain options to purchase shares of its common stock granted by the Company. During the ninethree months ended September 30, 2019,March 31, 2020, the Company repurchased a total of 90,00030,000 shares for approximately $1.8 million,$520,000, at an average cost of $20.21$17.33 per share, which are held as treasury stock. During the ninethree months ended September 30, 2018,March 31, 2019, the Company repurchased a total of 169,93620,000 shares for approximately $4.6 million,$433,000, at an average cost of $26.9721.66 per share, which are held as treasury stock.

In addition to the shares purchased in the market, the Company acquired 8,38283,728 shares of treasury stock for approximately $173,000$2.1 million in connection with the exercise, net settlement or vesting of equity awards during the ninethree months ended September 30,March 31, 2020. The Company did not aquire shares of treasury stock in connection with the exercise, net settlement or vesting of equity awards during the three months ended March 31, 2019.


Under prior authorization of the Board, stock option cancellation programs were approved to allow for certain outstanding and vested stock option awards to be canceled by the option holder at a price based on the closing day’s stock price less the option exercise price. During the three months ended March 31, 2020, there were 212,447 options canceled for approximately $2.5 million, which was recorded as a reduction to additional paid-in capital.

The tables below show the changes in the Company’s preferred and common shares outstanding during the periods indicated:
Number of
Preferred Shares Outstanding
Number of
Common Shares
Outstanding
Balance, December 31, 2017
28,591,101
Issuance of preferred stock40,250

Issuance of restricted common stock
396,113
Forfeitures of restricted common stock
(24,000)
Exercise of stock options
127,700
Purchase of treasury stock
(169,936)
Balance, September 30, 201840,250
28,920,978
 Number of
Preferred Shares Outstanding
Number of
Common Shares
Outstanding
Balance, December 31, 201840,250
28,878,674
40,250
28,878,674
Issuance of preferred stock80,500



Issuance of restricted common stock
550,453

538,703
Forfeitures of restricted common stock
(74,355)
(61,474)
Exercise of stock options
40,580

15,930
Purchase of treasury stock
(98,382)
(20,000)
Balance, September 30, 2019120,750
29,296,970
Balance, March 31, 201940,250
29,351,833
 
Balance, December 31, 2019120,750
29,355,986
Issuance of restricted common stock
513,820
Forfeitures of restricted common stock
(3,500)
Exercise of stock options
10,000
Purchase of treasury stock
(113,728)
Balance, March 31, 2020120,750
29,762,578

[9]8] REGULATORY CAPITAL

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the tables below) of Common Equity Tier 1 (“CET 1”), Tier 1 and Total risk-based capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). As of September 30, 2019March 31, 2020 and December 31, 2018,2019, TriState Capital Holdings, Inc. and TriState Capital Bank exceeded all capital adequacy requirements to which they were subjected.

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

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

The final rules subject a banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of risk-based capital ratios in an amount greater than 2.5% of its total risk-weighted assets. The implementation of the capital conservation buffer began on January 1, 2016, at 0.625%, and was phased in ratably over a four-year period until it reached 2.5% on January 1, 2019. As of September 30, 2019both March 31, 2020 and December 31, 2018,2019, the capital conservation buffer was 2.5% and 1.875%, respectively, in addition to the minimum capital adequacy levels shown in the tables below. Thus, both the Company and the Bank were above the levels required to avoid limitations on capital distributions and discretionary bonus payments.


The following tables set forth certain information concerning the Company’s and the Bank’s regulatory capital as of September 30, 2019March 31, 2020 and December 31, 2018:2019:
September 30, 2019March 31, 2020
Actual For Capital Adequacy Purposes To be Well Capitalized Under Prompt Corrective Action ProvisionsActual For Capital Adequacy Purposes To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)AmountRatio AmountRatio AmountRatioAmountRatio AmountRatio AmountRatio
Total risk-based capital ratio                
Company$552,734
12.40% $356,596
8.00%  N/A
N/A
$585,503
11.42% $410,021
8.00%  N/A
N/A
Bank$505,370
11.38% $355,135
8.00% $443,919
10.00%$597,764
11.69% $408,904
8.00% $511,131
10.00%
Tier 1 risk-based capital ratio                
Company$541,505
12.15% $267,447
6.00%  N/A
N/A
$567,487
11.07% $307,516
6.00%  N/A
N/A
Bank$491,401
11.07% $266,352
6.00% $355,135
8.00%$579,748
11.34% $306,678
6.00% $408,904
8.00%
Common equity tier 1 risk-based capital ratio                
Company$427,084
9.58% $200,585
4.50%  N/A
N/A
$451,408
8.81% $230,637
4.50%  N/A
N/A
Bank$491,401
11.07% $199,764
4.50% $288,547
6.50%$579,748
11.34% $230,009
4.50% $332,235
6.50%
Tier 1 leverage ratio                
Company$541,505
7.91% $273,931
4.00%  N/A
N/A
$567,487
7.19% $315,811
4.00%  N/A
N/A
Bank$491,401
7.20% $273,036
4.00% $341,295
5.00%$579,748
7.36% $315,172
4.00% $393,966
5.00%

December 31, 2018December 31, 2019
Actual For Capital Adequacy Purposes To be Well Capitalized Under Prompt Corrective Action ProvisionsActual For Capital Adequacy Purposes To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)AmountRatio AmountRatio AmountRatioAmountRatio AmountRatio AmountRatio
Total risk-based capital ratio                
Company$426,066
10.86% $313,789
8.00%  N/A
N/A
$572,221
12.05% $379,911
8.00%  N/A
N/A
Bank$437,849
11.25% $311,497
8.00% $389,371
10.00%$547,532
11.57% $378,623
8.00% $473,279
10.00%
Tier 1 risk-based capital ratio                
Company$414,808
10.58% $235,342
6.00%  N/A
N/A
$558,068
11.75% $284,933
6.00%  N/A
N/A
Bank$424,418
10.90% $233,622
6.00% $311,497
8.00%$532,779
11.26% $283,967
6.00% $378,623
8.00%
Common equity tier 1 risk-based capital ratio                
Company$378,117
9.64% $176,506
4.50%  N/A
N/A
$442,385
9.32% $213,700
4.50%  N/A
N/A
Bank$424,418
10.90% $175,217
4.50% $253,091
6.50%$532,779
11.26% $212,975
4.50% $307,631
6.50%
Tier 1 leverage ratio                
Company$414,808
7.28% $227,851
4.00%  N/A
N/A
$558,068
7.54% $296,038
4.00%  N/A
N/A
Bank$424,418
7.49% $226,762
4.00% $283,453
5.00%$532,779
7.22% $295,277
4.00% $369,097
5.00%


[10]9] EARNINGS PER COMMON SHARE

The computation of basic and diluted earnings per common share for the periods presented was as follows:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
(Dollars in thousands, except per share data)20192018 2019201820202019
    
Net income available to common shareholders$14,372
$13,632
 $41,798
$37,863
$10,933
$13,885
Weighted average common shares outstanding:    
Basic27,863,767
27,588,607
 27,861,515
27,603,784
28,180,589
27,832,839
Restricted stock - dilutive600,985
863,084
 569,260
757,572
427,404
538,711
Stock options - dilutive313,919
498,233
 328,633
488,570
236,851
332,086
Diluted28,778,671
28,949,924
 28,759,408
28,849,926
28,844,844
28,703,636
    
Earnings per common share:    
Basic$0.52
$0.49
 $1.50
$1.37
$0.39
$0.50
Diluted$0.50
$0.47
 $1.45
$1.31
$0.38
$0.48
 Three Months Ended September 30, Nine Months Ended September 30,
 20192018 20192018
Anti-dilutive shares (1)
9,000
4,000
 13,000
7,000
 Three Months Ended March 31,
 20202019
Anti-dilutive shares (1)
545,320
146,579
(1) 
Includes stock options and/or restricted stock not considered for the calculation of diluted EPS as their inclusion would have been anti-dilutive.

[11]10] DERIVATIVES AND HEDGING ACTIVITY

RISK MANAGEMENT OBJECTIVE OF USING DERIVATIVES

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments related to certain of the Company’s FHLB borrowings and to manage the volatility of the change in fair value related to certain of the Company’s equity investments. The Company also has derivatives that are a result of a service the Company provides to certain qualifying customers while at the same time the Company enters into an offsetting derivative transaction in order to eliminate its interest rate risk exposure resulting from such transactions.

FAIR VALUES OF DERIVATIVE INSTRUMENTS ON THE STATEMENTS OF FINANCIAL CONDITION

The tables below present the fair value of the Company’s derivative financial instruments as well as their classification on the unaudited condensed consolidated statements of financial condition as of September 30, 2019March 31, 2020 and December 31, 2018:2019:
Asset Derivatives Liability DerivativesAsset Derivatives Liability Derivatives
as of September 30, 2019 as of September 30, 2019as of March 31, 2020 as of March 31, 2020
(Dollars in thousands)Balance Sheet LocationFair Value Balance Sheet LocationFair ValueBalance Sheet LocationFair Value Balance Sheet LocationFair Value
Derivatives designated as hedging instruments:        
Interest rate productsOther assets$
 Other liabilities$3,191
Other assets$21
 Other liabilities$9,837
        
Derivatives not designated as hedging instruments:        
Interest rate productsOther assets73,030
 Other liabilities73,100
Other assets157,938
 Other liabilities158,036
Equity productsOther assets
 Other liabilities109
    
        
TotalOther assets$73,030
 Other liabilities$76,400
Other assets$157,959
 Other liabilities$167,873


Asset Derivatives Liability DerivativesAsset Derivatives Liability Derivatives
as of December 31, 2018 as of December 31, 2018as of December 31, 2019 as of December 31, 2019
(Dollars in thousands)Balance Sheet LocationFair Value Balance Sheet LocationFair ValueBalance Sheet LocationFair Value Balance Sheet LocationFair Value
Derivatives designated as hedging instruments:        
Interest rate productsOther assets$1,384
 Other liabilities$
Other assets$
 Other liabilities$2,184
        
Derivatives not designated as hedging instruments:        
Interest rate productsOther assets25,523
 Other liabilities25,518
Other assets55,241
 Other liabilities55,289
        
    
TotalOther assets$26,907
 Other liabilities$25,518
Other assets$55,241
 Other liabilities$57,473

The following tables show the impact legally enforceable master netting agreements had on the Company’s derivative financial instruments as of September 30, 2019March 31, 2020 and December 31, 2018:2019:
 Offsetting of Derivative Assets
 Gross Amounts of Recognized Assets Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets
presented in the Statement of Financial Position
 Gross Amounts Not Offset in the Statement of Financial Position Net Amount
     
(Dollars in thousands)   Financial Instruments Cash Collateral Received 
September 30, 2019$73,030
 $
 $73,030
 $(248) $
 $72,782
            
December 31, 2018$26,907
 $
 $26,907
 $(9,587) $
 $17,320
 Offsetting of Derivative Assets
 Gross Amounts of Recognized Assets Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets
presented in the Statement of Financial Position
 Gross Amounts Not Offset in the Statement of Financial Position Net Amount
     
(Dollars in thousands)   Financial Instruments Cash Collateral Received 
March 31, 2020$157,959
 $
 $157,959
 $(32) $
 $157,927
            
December 31, 2019$55,241
 $
 $55,241
 $(850) $
 $54,391

 Offsetting of Derivative Liabilities
 Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Statement of Financial Position Net Amounts of Liabilities
presented in the Statement of Financial Position
 Gross Amounts Not Offset in the Statement of Financial Position Net Amount
     
(Dollars in thousands)   Financial Instruments Cash Collateral Posted 
September 30, 2019$76,400
 $
 $76,400
 $(248) $(75,789) $363
            
December 31, 2018$25,518
 $
 $25,518
 $(9,587) $(3,941) $11,990
 Offsetting of Derivative Liabilities
 Gross Amounts of Recognized Liabilities Gross Amounts Offset in the Statement of Financial Position Net Amounts of Liabilities
presented in the Statement of Financial Position
 Gross Amounts Not Offset in the Statement of Financial Position Net Amount
     
(Dollars in thousands)   Financial Instruments Cash Collateral Posted 
March 31, 2020$167,873
 $
 $167,873
 $(32) $(167,250) $591
            
December 31, 2019$57,473
 $
 $57,473
 $(850) $(55,753) $870

CASH FLOW HEDGES OF INTEREST RATE RISK

The Company’s objectives in using certain interest rate derivatives are to add stability to net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. The Company has entered into derivative contracts to hedge the variable cash flows associated with certain FHLB borrowings. These interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company effectively making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company’s cash flow hedge derivatives did not have any hedge ineffectiveness recognized in earnings during the ninethree months ended September 30, 2019.March 31, 2020.


Characteristics of the Company’s interest rate derivative transactions designated as cash flow hedges of interest rate risk as of September 30, 2019,March 31, 2020, were as follows:
(Dollars in thousands)Notional
Amount
Effective
Rate
(1)
Estimated Increase/
(Decrease) to Interest
Expense in the Next
Twelve Months
Maturity
Date
Remaining Term
(in Months)
Notional
Amount
Effective
Rate
(1)
Estimated Increase/
(Decrease) to Interest
Expense in the Next
Twelve Months
Maturity
Date
Remaining Term
(in Months)
Interest rate products:        
Issued 1/8/2018$50,000
2.21%$207
1/8/202115$50,000
2.21%$581
1/8/20219
Issued 5/30/201950,000
2.05%125
6/1/20223250,000
2.05%731
6/1/202226
Issued 5/30/201950,000
2.03%118
6/1/20234450,000
2.03%724
6/1/202338
Issued 5/30/201950,000
2.04%123
6/1/20245650,000
2.04%729
6/1/202450
Issued 2/28/202050,000
0.98%192
3/2/202559
Issued 3/20/202050,000
0.60%10
3/20/202560
Total$200,000
 $573
 $300,000
 $2,967
 
(1) 
The effective rate is adjusted for the difference between the three-month FHLB advance rate and three-month LIBOR.

The tables below present the effective portion of the Company’s cash flow hedge instruments in the unaudited condensed consolidated statements of income and accumulated other comprehensive income (loss):
   Three Months Ended September 30, Three Months Ended September 30,
(Dollars in thousands)  20192018 20192018
Derivatives designated as hedging instruments:Location of Gain (Loss) Recognized in Income on Derivatives Realized Gain (Loss) Recognized in Income on Derivatives Unrealized Gain (Loss) Recognized in Accumulated Other Comprehensive Income on Derivatives
Interest rate productsInterest expense $156
$412
 $(967)$157
 Nine Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31, Three Months Ended March 31,
(Dollars in thousands) 20192018 20192018 20202019 20202019
Derivatives designated as hedging instruments:Location of Gain (Loss) Recognized in Income on Derivatives Realized Gain (Loss) Recognized in Income on Derivatives Unrealized Gain (Loss) Recognized in Accumulated Other Comprehensive Income on DerivativesLocation of Gain (Loss) Recognized in Income on Derivatives Realized Gain (Loss) Recognized in Income on Derivatives Unrealized Gain (Loss) Recognized in Accumulated Other Comprehensive Income on Derivatives
Interest rate productsInterest expense $1,277
$952
 $(3,293)$1,439
Interest expense $(159)$561
 $(7,711)$(206)

NON-DESIGNATED HEDGES

The Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and primarily result from a service the Company provides to certain customers. The Company executes interest rate derivatives with its commercial banking customers to facilitate their respective risk management strategies. Those derivatives are simultaneously and economically hedged by offsetting derivatives that the Company executes with a third party, such that the Company eliminates its interest rate exposure resulting from such transactions. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of September 30, 2019,March 31, 2020, the Company had interest rate derivative transactions with an aggregate notional amount of $2.59$3.10 billion related to this program.

In addition, the Company also has executed equity derivatives to economically hedge certain of its equity investments. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of September 30, 2019, the Company had equity derivative transactions with an aggregate notional amount of $2.5 million.

The table below presents the effect of the Company’s non-designated hedge instruments in the unaudited condensed consolidated statements of income:
 Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended March 31,
(Dollars in thousands) 20192018 20192018 20202019
Derivatives not designated as hedging instruments:Location of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on DerivativesLocation of Gain (Loss) Recognized in Income on Derivatives Amount of Gain (Loss) Recognized in Income on Derivatives
Interest rate productsNon-interest income $(17)$
 $(59)$22
Non-interest income $(61)$(20)
Equity productsNon-interest income (32)
 (109)
Total $(49)$
 $(168)$22

CREDIT-RISK-RELATED CONTINGENT FEATURES

The Company has agreements with each of its derivative counterparties that contain a provision where, if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations.

The Company has agreements with certain of its derivative counterparties that contain a provision where, if either the Company or the counterparty fails to maintain its status as a well/adequately capitalized institution, then the Company or the counterparty could be required to terminate any outstanding derivative positions and settle its obligations under the agreement.

As of September 30, 2019,March 31, 2020, the termination value of derivatives for which the Company had master netting arrangements with the counterparty and in a net liability position was $75.8$167.8 million, including accrued interest. As of September 30, 2019,March 31, 2020, the Company has minimum collateral

posting thresholds with certain of its derivative counterparties and has posted collateral of $80.1$169.0 million. If the Company had breached any of these provisions as of September 30, 2019,March 31, 2020, it could have been required to settle its obligations under the agreements at their termination value.

[12]11] DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value estimates of financial instruments are based on the present value of expected future cash flows, quoted market prices of similar financial instruments, if available, and other valuation techniques. These valuations are significantly affected by discount rates, cash flow assumptions and risk assumptions used. Therefore, fair value estimates may not be substantiated by comparison to independent markets and are not intended to reflect the proceeds that may be realized in an immediate settlement of instruments. Accordingly, the aggregate fair value amounts presented below do not represent the underlying value of the Company.

FAIR VALUE MEASUREMENTS

In accordance with U.S. GAAP, the Company must account for certain financial assets and liabilities at fair value on a recurring and non-recurring basis. The Company utilizes a three-level fair value hierarchy of valuation techniques to estimate the fair value of its financial assets and liabilities based on whether the inputs to those valuation techniques are observable or unobservable. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). When various inputs for measurement fall within multiple levels of the fair value hierarchy, the lowest level input that has a significant impact on fair value measurement is used.

Financial assets and liabilities are categorized based upon the following characteristics or inputs to the valuation techniques:

Level 1 – Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in actively traded markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.
Level 2 – Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets or liabilities that are actively traded. Level 2 also includes pricing models in which the inputs are corroborated by market data, for example, matrix pricing.
Level 3 – Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include assumptions of a source independent of the reporting entity or the reporting entity’s own assumptions that are supported by little or no market activity or observable inputs.

The Company is responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value. The Company performs due diligence to understand the inputs used or how the data was calculated or derived and corroborates the reasonableness of external inputs in the valuation process.


RECURRING FAIR VALUE MEASUREMENTS

The following tables represent assets and liabilities measured at fair value on a recurring basis as of September 30, 2019March 31, 2020 and December 31, 2018:2019:
September 30, 2019March 31, 2020
(Dollars in thousands)Level 1Level 2Level 3Total Assets /
Liabilities
at Fair Value
Level 1Level 2Level 3Total Assets /
Liabilities
at Fair Value
Financial assets:  
Debt securities available-for-sale:  
Corporate bonds$
$185,965
$
$185,965
$
$205,766
$
$205,766
Trust preferred securities
17,354

17,354

15,796

15,796
Agency collateralized mortgage obligations
28,866

28,866

25,659

25,659
Agency mortgage-backed securities
18,895

18,895

18,427

18,427
Agency debentures
10,100

10,100

9,522

9,522
Equity securities4,807


4,807
Interest rate swaps
73,030

73,030

157,959

157,959
Total financial assets4,807
334,210

339,017

433,129

433,129
  
Financial liabilities:  
Interest rate swaps
76,291

76,291

167,873

167,873
Equity swaps109


109
Total financial liabilities$109
$76,291
$
$76,400
$
$167,873
$
$167,873

December 31, 2018December 31, 2019
(Dollars in thousands)Level 1Level 2Level 3Total Assets /
Liabilities
at Fair Value
Level 1Level 2Level 3Total Assets /
Liabilities
at Fair Value
Financial assets:  
Debt securities available-for-sale:  
Corporate bonds$
$151,063
$
$151,063
$
$175,418
$
$175,418
Trust preferred securities
16,849

16,849

18,260

18,260
Non-agency collateralized loan obligations
390

390
Agency collateralized mortgage obligations
33,718

33,718

27,193

27,193
Agency mortgage-backed securities
21,264

21,264

18,509

18,509
Agency debentures
10,012

10,012

9,402

9,402
Equity securities12,661


12,661
Interest rate swaps
26,907

26,907

55,241

55,241
Total financial assets12,661
260,203

272,864

304,023

304,023
  
Financial liabilities:  
Interest rate swaps
25,518

25,518

57,473

57,473
Acquisition earn out liability

2,920
2,920
Total financial liabilities$
$25,518
$2,920
$28,438
$
$57,473
$
$57,473

INVESTMENT SECURITIES
Generally, debt securities are valued using pricing for similar securities, recently executed transactions, and other pricing models utilizing observable inputs and therefore are classified as Level 2. Equity securities (including mutual funds) are classified as Level 1 because these securities are in actively traded markets.

INTEREST RATE SWAPS
The fair value of interest rate swaps is estimated using inputs that are observable or that can be corroborated by observable market data and therefore are classified as Level 2. These fair value estimations include primarily market observable inputs such as the forward LIBOR swap curve.


EQUITY SWAPS
Equity swaps are classified as Level 1 because the price of derivative contracts is quoted in actively traded markets.

ACQUISITION EARN OUT LIABILITY
The fair value of the Columbia Partners, L.L.C. Investment Management (“Columbia”) acquisition earn out liability was estimated based on management’s estimate of the projected annualized run-rate revenue of Columbia at December 31, 2018, and therefore is classified as Level 3. The earn out liability was fully paid during the three months ended March 31, 2019, and there is no remaining earn out liability.

NON-RECURRING FAIR VALUE MEASUREMENTS

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.


The following tables represent the balances of assets measured at fair value on a non-recurring basis as of September 30, 2019March 31, 2020 and December 31, 2018:2019:
September 30, 2019March 31, 2020
(Dollars in thousands)Level 1Level 2Level 3Total Assets
at Fair Value
Level 1Level 2Level 3Total Assets
at Fair Value
Loans measured for impairment, net$
$
$13
$13
$
$
$13
$13
Other real estate owned

4,250
4,250


4,250
4,250
Total assets$
$
$4,263
$4,263
$
$
$4,263
$4,263

December 31, 2018December 31, 2019
(Dollars in thousands)Level 1Level 2Level 3Total Assets
at Fair Value
Level 1Level 2Level 3Total Assets
at Fair Value
Loans measured for impairment, net$
$
$1,800
$1,800
$
$
$13
$13
Other real estate owned

3,424
3,424


4,250
4,250
Total assets$
$
$5,224
$5,224
$
$
$4,263
$4,263

As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the Company recorded $171,000 and $437,000,$171,000, respectively, of specific reserves to allowance for loan and lease losses as a result of adjusting the fair value of impaired loans.

IMPAIRED LOANS
A loan is considered impaired when management determines it is probable that all of the principal and interest due under the original terms of the loan may not be collected or if a loan is designated as a TDR. Impairment is measured based on a discounted cash flow of ongoing operations, discounted at the loan’s original effective interest rate, or a calculation of the fair value of the underlying collateral less estimated selling costs. Our policy is to obtain appraisals on collateral supporting impaired loans on an annual basis, unless circumstances dictate a shorter time frame. Appraisals are reduced by estimated costs to sell the collateral, and, under certain circumstances, additional factors that may arise and cause us to believe our recoverable value may be less than the independent appraised value. Accordingly, impaired loans are classified as Level 3. The Company measures impairment on all loans as part of the allowance for loan and lease losses.

OTHER REAL ESTATE OWNED
OREO is comprised of property acquired through foreclosure or voluntarily conveyed by borrowers. These assets are recorded on the date acquired at fair value, less estimated disposition costs, with the fair value being determined by appraisal. Our policy is to obtain appraisals on collateral supporting OREO on an annual basis, unless circumstances dictate a shorter time frame. Appraisals are reduced by estimated costs to sell the collateral and, under certain circumstances, additional factors that may arise and cause us to believe our recoverable value may be less than the independent appraised value. Accordingly, OREO is classified as Level 3.


LEVEL 3 VALUATION

The following tables present additional quantitative information about assets measured at fair value on a recurring and non-recurring basis and for which we have utilized Level 3 inputs to determine fair value as of September 30, 2019March 31, 2020 and December 31, 2018:2019:
 September 30, 2019
(Dollars in thousands)Fair Value 
Valuation Techniques (1)
 Significant Unobservable Inputs Weighted Average Discount Rate
Loans measured for impairment, net$13
 Collateral Appraisal value and discount due to salability conditions —%
        
Other real estate owned$4,250
 Collateral Appraisal value and discount due to salability conditions 18%
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow of ongoing operations if the loan is not collateral dependent.
December 31, 2018March 31, 2020
(Dollars in thousands)Fair Value 
Valuation Techniques (1)
 Significant Unobservable Inputs Weighted Average Multiple/
Discount Rate
Fair Value 
Valuation Techniques (1)
 Significant Unobservable Inputs Weighted Average Discount Rate
Acquisition earn out liability$2,920
 Income approach Run-rate revenue multiple; client retention 1.6 times
  
Loans measured for impairment, net$1,800
 Collateral Appraisal value and discount due to salability conditions 16%$13
 Collateral Appraisal value and discount due to salability conditions —%
    
Other real estate owned$3,424
 Collateral Appraisal value and discount due to salability conditions 10%$4,250
 Collateral Appraisal value and discount due to salability conditions 17%
(1) 
Fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow of ongoing operations if the loan is not collateral dependent.

 December 31, 2019
(Dollars in thousands)Fair Value 
Valuation Techniques (1)
 Significant Unobservable Inputs Weighted Average Multiple/
Discount Rate
Loans measured for impairment, net$13
 Collateral Appraisal value and discount due to salability conditions —%
        
Other real estate owned$4,250
 Collateral Appraisal value and discount due to salability conditions 17%
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which may include Level 3 inputs that are not identifiable, or by using the discounted cash flow of ongoing operations if the loan is not collateral dependent.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table summarizes of the carrying amounts and estimated fair values of financial instruments:
 September 30, 2019 December 31, 2018 March 31, 2020 December 31, 2019
(Dollars in thousands)Fair Value
Level
 Carrying
Amount
Estimated
Fair Value
 Carrying
Amount
Estimated
Fair Value
Fair Value
Level
 Carrying
Amount
Estimated
Fair Value
 Carrying
Amount
Estimated
Fair Value
Financial assets:        
Cash and cash equivalents1 $383,948
$383,948
 $189,985
$189,985
1 $1,010,128
$1,010,128
 $403,855
$403,855
Debt securities available-for-sale2 261,180
261,180
 233,296
233,296
2 275,170
275,170
 248,782
248,782
Debt securities held-to-maturity2 187,210
189,218
 196,131
196,823
2 312,842
315,336
 196,044
196,755
Equity securities1 4,807
4,807
 12,661
12,661
Federal Home Loan Bank stock2 15,524
15,524
 24,671
24,671
2 18,724
18,724
 24,324
24,324
Loans and leases held-for-investment, net3 6,003,306
5,994,960
 5,119,665
5,119,562
3 6,940,845
6,967,244
 6,563,451
6,548,432
Accrued interest receivable2 22,157
22,157
 20,702
20,702
2 22,106
22,106
 22,326
22,326
Investment management fees receivable, net2 7,453
7,453
 7,299
7,299
2 6,656
6,656
 7,560
7,560
Bank owned life insurance2 69,607
69,607
 68,309
68,309
2 70,472
70,472
 70,044
70,044
Other real estate owned3 4,250
4,250
 3,424
3,424
3 4,250
4,250
 4,250
4,250
Interest rate swaps2 73,030
73,030
 26,907
26,907
2 157,959
157,959
 55,241
55,241
        
Financial liabilities:        
Deposits2 $6,094,605
$6,108,128
 $5,050,461
$5,048,079
2 $7,782,759
$7,808,249
 $6,634,613
$6,648,546
Borrowings, net2 330,000
330,020
 404,166
404,084
2 330,000
330,400
 355,000
355,003
Acquisition earn out liability3 

 2,920
2,920
Interest rate swaps2 76,291
76,291
 25,518
25,518
2 167,873
167,873
 57,473
57,473
Equity swaps1 109
109
 


During the ninethree months ended September 30,March 31, 2020 and 2019, and 2018, there were no transfers between fair value Levels 1, 2 or 3.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of September 30, 2019March 31, 2020 and December 31, 2018:2019:

CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value.

INVESTMENT SECURITIES
The fair values of debt securities available-for-sale, debt securities held-to-maturity, debt securities trading and equity securities are based on quoted market prices for the same or similar securities, recently executed transactions and pricing models.

FEDERAL HOME LOAN BANK STOCK
The carrying value of our FHLB stock, which is carried at cost, approximates fair value.

LOANS AND LEASES HELD-FOR-INVESTMENT
The fair value of loans and leases held-for-investment is estimated by discounting the future cash flows using market rates (utilizing both unobservable and certain observable inputs when applicable) at which similar loans would be made to borrowers with similar credit ratings over the estimated remaining maturities. Impaired loans are generally valued at the fair value of the associated collateral.


ACCRUED INTEREST RECEIVABLE
The carrying amount approximates fair value.

INVESTMENT MANAGEMENT FEES RECEIVABLE
The carrying amount approximates fair value.

BANK OWNED LIFE INSURANCE
The fair value of the general account BOLI is based on the insurance contract net cash surrender value.

OTHER REAL ESTATE OWNED
OREO is recorded at fair value, less estimated disposition costs, with the fair value being determined by appraisal.

DEPOSITS
The fair value of demand deposits is the amount payable on demand as of the reporting date, i.e., their carrying amounts. The fair value of fixed maturity deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

BORROWINGS
The fair value of borrowings is calculated by discounting scheduled cash flows through the estimated maturity using period end market rates for borrowings of similar remaining maturities.

ACQUISITION EARN OUT LIABILITY
The carrying amount of the Columbia acquisition earn out liability approximates fair value.

INTEREST RATE SWAPS
The fair value of interest rate swaps is estimated through the assistance of an independent third party and compared to the fair value determined by the swap counterparty to establish reasonableness.

EQUITY SWAPS
Equity swaps are classified as Level 1 because the price of derivative contracts is quoted in actively traded markets.

OFF-BALANCE SHEET INSTRUMENTS
Fair values for the Company’s off-balance sheet instruments, which consist of lending commitments, standby letters of credit and risk participation agreements related to interest rate swap agreements, are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Management believes that the fair value of these off-balance sheet instruments is not significant.

[13]12] CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables show the changes in accumulated other comprehensive income (loss) net of tax, for the periods presented:
 Three Months Ended September 30,
 2019 2018
(Dollars in thousands)Debt SecuritiesDerivativesTotal Debt SecuritiesDerivativesTotal
Balance, beginning of period$1,230
$(1,590)$(360) $(833)$1,878
$1,045
Change in unrealized holding gains (losses)787
(736)51
 (192)120
(72)
Gains reclassified from other comprehensive income(101)(120)(221) 
(316)(316)
Net other comprehensive income (loss)686
(856)(170) (192)(196)(388)
Balance, end of period$1,916
$(2,446)$(530) $(1,025)$1,682
$657
Nine Months Ended September 30,Three Months Ended March 31,
2019 20182020 2019
(Dollars in thousands)Debt SecuritiesDerivativesTotal Debt SecuritiesDerivativesTotalDebt SecuritiesDerivativesTotal Debt SecuritiesDerivativesTotal
Balance, beginning of period$(2,363)$1,032
$(1,331) $172
$1,074
$1,246
$2,756
$(1,624)$1,132
 $(2,363)$1,032
$(1,331)
Change in unrealized holding gains (losses)4,477
(2,506)1,971
 (1,517)1,103
(414)(9,422)(5,874)(15,296) 2,430
(162)2,268
Gains reclassified from other comprehensive income(198)(972)(1,170) (5)(730)(735)
Reclassification for equity securities under ASU 2016-01


 286

286
Reclassification for certain income tax effects under ASU 2018-02


 39
235
274
Losses (gains) reclassified from other comprehensive income(12)127
115
 (13)(422)(435)
Net other comprehensive income (loss)4,279
(3,478)801
 (1,197)608
(589)(9,434)(5,747)(15,181) 2,417
(584)1,833
Balance, end of period$1,916
$(2,446)$(530) $(1,025)$1,682
$657
$(6,678)$(7,371)$(14,049) $54
$448
$502


[14]13] CONTINGENT LIABILITIES

From time to time the Company is a party to various litigation matters incidental to the conduct of its business. The Company is not aware of any material unasserted claims. In the opinion of management, there are no potential claims that would have a material adverse effect on the Company’s financial position, liquidity or results of operations.

[15]14] SEGMENTS

The Company operates two reportable segments: Bank and Investment Management.

The Bank segment provides commercial banking services to middle-market businesses and private banking services to high-net-worth individuals through the Bank subsidiary.


The Investment Management segment provides advisory and sub-advisory investment management services primarily to institutional investors, mutual funds and individual investors through the Chartwell subsidiary. It also supports marketing efforts for Chartwell’s proprietary investment products through the CTSC Securities subsidiary.

The following tables provide financial information for the two segments of the Company as of and for the periods indicated. The information provided under the caption “Parent and Other” represents general operating activity of the Company not considered to be a reportable segment, which includes parent company activity as well as eliminations and adjustments that are necessary for purposes of reconciliation to the consolidated amounts.
(Dollars in thousands)(Dollars in thousands)September 30,
2019
December 31,
2018
(Dollars in thousands)March 31,
2020
December 31,
2019
Assets:Assets: Assets: 
BankBank$7,113,983
$5,947,165
Bank$8,915,114
$7,686,981
Investment managementInvestment management92,283
92,894
Investment management83,238
83,295
Parent and otherParent and other(7,817)(4,404)Parent and other(8,291)(4,466)
Total assetsTotal assets$7,198,449
$6,035,655
Total assets$8,990,061
$7,765,810

 Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
(Dollars in thousands)BankInvestment
Management
Parent
and Other
Consolidated BankInvestment
Management
Parent
and Other
Consolidated
Income statement data:   
Interest income$67,720
$
$12
$67,732
 $52,354
$
$70
$52,424
Interest expense35,455

(39)35,416
 23,038

567
23,605
Net interest income (loss)32,265

51
32,316
 29,316

(497)28,819
Provision (credit) for loan and lease losses(607)

(607) (234)

(234)
Net interest income (loss) after provision for loan and lease losses32,872

51
32,923
 29,550

(497)29,053
Non-interest income:         
Investment management fees
9,016
(114)8,902
 
9,914
(86)9,828
Net gain on the sale and call of debt securities206


206
 



Other non-interest income5,113
(9)31
5,135
 2,850

73
2,923
Total non-interest income5,319
9,007
(83)14,243
 2,850
9,914
(13)12,751
Non-interest expense:         
Intangible amortization expense
502

502
 
502

502
Other non-interest expense18,949
8,186
136
27,271
 17,002
8,173
9
25,184
Total non-interest expense18,949
8,688
136
27,773
 17,002
8,675
9
25,686
Income (loss) before tax19,242
319
(168)19,393
 15,398
1,239
(519)16,118
Income tax expense (benefit)3,142
3
(86)3,059
 1,676
282
(151)1,807
Net income (loss)$16,100
$316
$(82)$16,334
 $13,722
$957
$(368)$14,311

Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018Three Months Ended March 31, 2020 Three Months Ended March 31, 2019
(Dollars in thousands)BankInvestment
Management
Parent
and Other
Consolidated BankInvestment
Management
Parent
and Other
ConsolidatedBankInvestment
Management
Parent
and Other
Consolidated BankInvestment
Management
Parent
and Other
Consolidated
Income statement data:      
Interest income$196,862
$
$111
$196,973
 $141,424
$
$200
$141,624
$64,202
$
$
$64,202
 $62,830
$
$72
$62,902
Interest expense101,891

1,091
102,982
 56,027

1,725
57,752
29,296

(16)29,280
 31,919

611
32,530
Net interest income (loss)94,971

(980)93,991
 85,397

(1,525)83,872
34,906

16
34,922
 30,911

(539)30,372
Provision (credit) for loan and lease losses(1,696)

(1,696) 376


376
2,993


2,993
 (377)

(377)
Net interest income (loss) after provision for loan and lease losses96,667

(980)95,687
 85,021

(1,525)83,496
31,913

16
31,929
 31,288

(539)30,749
Non-interest income:      
Investment management fees
27,912
(332)27,580
 
28,621
(199)28,422

7,765
(127)7,638
 
9,533
(109)9,424
Net gain on the sale and call of debt securities346


346
 6


6
57


57
 28


28
Other non-interest income10,467
17
881
11,365
 7,875
1
38
7,914
Total non-interest income10,813
27,929
549
39,291
 7,881
28,622
(161)36,342
Other non-interest income (loss)5,652
(31)
5,621
 2,877
21
719
3,617
Total non-interest income (loss)5,709
7,734
(127)13,316
 2,905
9,554
610
13,069
Non-interest expense:      
Intangible amortization expense
1,506

1,506
 
1,465

1,465

502

502
 
502

502
Other non-interest expense56,872
23,174
478
80,524
 49,011
23,988
390
73,389
21,034
6,626
982
28,642
 19,021
7,058
91
26,170
Total non-interest expense56,872
24,680
478
82,030
 49,011
25,453
390
74,854
21,034
7,128
982
29,144
 19,021
7,560
91
26,672
Income (loss) before tax50,608
3,249
(909)52,948
 43,891
3,169
(2,076)44,984
16,588
606
(1,093)16,101
 15,172
1,994
(20)17,146
Income tax expense (benefit)6,825
830
(296)7,359
 5,485
786
(591)5,680
3,348
28
(170)3,206
 2,024
563
(5)2,582
Net income (loss)$43,783
$2,419
$(613)$45,589
 $38,406
$2,383
$(1,485)$39,304
$13,240
$578
$(923)$12,895
 $13,148
$1,431
$(15)$14,564

[16]15] SUBSEQUENT EVENTS

On OctoberMay 11, 2020, the Company issued subordinated notes payable of $60.0 million with a maturity date of May 15, 2019,2030. The subordinated notes have a fixed rate of 5.75% through May 15, 2025, at which point they convert to floating rate indexed to three-month LIBOR plus a spread of 5.36%. Beginning with the interest payment due on May 15, 2025, the Company may, at its option, redeem the subordinated notes. The proceeds will qualify under federal regulatory rules as Tier 2 capital for the holding company. The proceeds will be used for general corporate purposes including the funding of the continued growth for the Bank subsidiary, where such funding would count as Tier 1 capital.

On April 14, 2020, the Board declared a dividend payable of approximately $679,000, or $0.42 per depositary share, on the Company’s Series A Preferred Stock and a dividend payable of approximately $1.3 million, or $0.40 per depositary share, on the Company’s Series

B Preferred Stock, each of which is payable on January 2,July 1, 2020, to preferred shareholders of record as of the close of business on December 18, 2019.

On October 17, 2019, the Company amended it’s $50.0 million unsecured line of credit agreement with Texas Capital Bank to extend the maturity until October 17,June 15, 2020.



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section presents management’s perspective on our financial condition and results of operations and highlights material changes to our financial condition and results of operations as of and for the three and nine months ended September 30, 2019March 31, 2020. The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes contained in Item 1 of this quarterly report and our consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2018,2019, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections titled “Cautionary Note Regarding Forward-Looking Statements” at the beginning of this document and “Item 1A. Risk Factors.”

General

We are a bank holding company that operates through two reportable segments: Bank and Investment Management. Through TriState Capital Bank, a Pennsylvania chartered bank (the “Bank”), the Bank segment provides commercial banking services to middle-market businesses and private banking services to high-net-worth individuals and trusts. The Bank segment generates most of its revenue from interest on loans and investments, loan-relatedswap fees, (including swap fees),loan fees, and liquidity and treasury management related fees. Its primary source of funding for loans is deposits and its secondary source of funding is borrowings. The Bank’s largest expenses are interest on these deposits and borrowings, and salaries and related employee benefits. Through Chartwell Investment Partners, LLC, an SEC-registered investment adviser (“Chartwell”), the Investment Management segment provides advisory and sub-advisory investment management services primarily to institutional investors, mutual funds and individual investors. It also supports marketing efforts for Chartwell’s proprietary investment products through Chartwell TSC Securities Corp., our registered broker/dealer subsidiary (“CTSC Securities”). The Investment Management segment generates its revenue from investment management fees earned on assets under management, and its largest expenses are salaries and related employee benefits.

This discussion and analysis present 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 loan and lease losses to loans; net interest margin; the efficiency ratio of the Bank segment; return on average assets; return on average common equity; regulatory leverage and risk-based capital ratios, assets under management and EBITDA of the Investment Management segment.

Executive Overview

TriState Capital Holdings, Inc. (“we,” “us,” “our,” the “holding company,” the “parent company,” or the “Company”) is a bank holding company headquartered in Pittsburgh, Pennsylvania. The Company has three wholly owned subsidiaries: the Bank, Chartwell and CTSC Securities. Through the Bank, we serve middle-market businesses in our primary markets throughout the states of Pennsylvania, Ohio, New Jersey and New York. We also serve high-net-worth individuals and trusts on a national basis through our private banking channel. We market and distribute our products and services through a scalable, branchless banking model, which creates significant operating leverage throughout our business as we continue to grow. Through Chartwell, our investment management subsidiary, we provide investment management services primarily to institutional investors, mutual funds and individual investors on a national basis. Chartwell’s assets under management were $9.62$8.32 billion as of September 30, 2019.March 31, 2020. CTSC Securities, our broker/dealer subsidiary, supports marketing efforts for Chartwell’s proprietary investment products that require SEC or Financial Industry Regulatory Authority, Inc. (“FINRA”) licensing.

Developments Related to COVID-19

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) as a global pandemic. This public health crisis has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we we serve. Responses to the crisis include stay at home orders, voluntary and involuntary closing of businesses deemed as “non-essential” and the Board of Governors of the Federal Reserve (the “Federal Reserve”) cut interest rates to near zero. In addition, on March 27, 2020, the Coronavirus Aid, Relief,

and Economic Security (“CARES”) Act was enacted. The CARES Act contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic.

We have responded quickly to the changing environment and economy by executing our business continuity plan and the vast majority of employees are now working from home even though we are considered an essential business. We also organized a COVID-19 credit strategy committee comprised of leaders from credit, legal, finance, operations, and compliance so that we could develop responsive action plans. We pro-actively conducted outreach to all commercial loan customers to understand the potential impact that COVID-19 could have on their business. In April 2020, we implemented deferral arrangements in accordance with the CARES Act that represent less than 6% of our loan and lease portfolio, and while this crisis may have substantial impact on many businesses, we have maintained our disciplined approach of focusing on commercial lending opportunities within our four-state Mid-Atlantic region where our team has deep experience and relationships. Additionally, we have worked to keep our commercial loan sizes predominately below our preferred hold level of $10.0 million. The Bank is not a qualified lender or additional lender registered with the Small Business Administration and is not participating in the Paycheck Protection Program, established by the CARES Act. Through our private banking business, we had extensive engagement with thousands of investment advisors about loan requirements as they managed portfolios in periods of historic volatility. As a result, limited cure activity was required. Year-to-date through April 15, 2020, we required maintenance on approximately 7% of our private bank accounts. We have not had to force liquidation of any accounts for clients to meet these cure obligations. We have also deliberately increased our balance sheet liquidity in anticipation of clients’ needs during this public health and economic crisis and increased our allowance for loan and lease losses due to the economic uncertainty surrounding COVID-19. Our investment management business, Chartwell, was able to generate net inflows of $57 million despite the recent market volatility and in April 2020, there was excess of $200 million in institutional commitments in its new business pipeline, most of which we expect to fund before the end of the second quarter.

First Quarter Performance

For the three months ended September 30, 2019, our net income available to common shareholders was $14.4 million compared to $13.6 million for the same period in 2018, an increase of $740,000, or 5.4%. This increase was due to the following: (1) a $3.5 million, or 12.1%, increase in net interest income; (2) lower provision for loan and lease losses of $373,000; (3) an increase in non-interest income of $1.5 million, or 11.7%; (4) an increase of $2.1 million, or 8.1%, in non-interest expense; (5) a $1.3 million increase in income tax expense; and (6) an increase in preferred stock dividends of $1.3 million.

For the nine months ended September 30, 2019,March 31, 2020, our net income available to common shareholders was $41.8$10.9 million compared to $37.9$13.9 million for the same period in 20182019, an increasea decrease of $3.9$3.0 million, or 10.4%21.3%. This increase was due to the following: (1) a $10.1 million,

or 12.1%, increaseIncreases in net interest income; (2) lowerincome of $4.6 million, or 15.0%, driven by loan growth and non-interest income of $247,000, or 1.9%, driven by customer facing interest rate swap were offset by higher provision for loan and lease losses of $2.1$3.4 million; (3) an increase in non-interest income of $2.9 million, or 8.1%; (4) an increase of $7.2$2.5 million, or 9.6%9.3%, in non-interest expense; (5) a $1.7 million increase in income tax expense; and (6) an increase in preferred stock dividends of $2.4 million.$1.3 million; and a $624,000 increase in income tax expense.

Our diluted EPS was $0.50$0.38 for the three months ended September 30, 2019,March 31, 2020, compared to $0.47$0.48 for the same period in 2018, and $1.45 for the nine months ended September 30, 2019, compared to $1.31 for the same period in 2018. The increasedecrease in diluted EPS for the ninethree months ended September 30, 2019March 31, 2020, was a result of a decline in our continued growth of our business lines, which was the driver of additional net income available to common shareholders.

For the three months ended September 30, 2019,March 31, 2020, total revenue increased $4.8 million, or 11.5%11.0%, to $46.4$48.2 million from $41.6$43.4 million for the same period in 2018. For the nine months ended September 30, 2019, total revenue increased $12.7 million, or 10.6%, to $132.9 million from $120.2 million for the same period in 2018.2019. The increase in total revenue for the ninethree months ended September 30, 2019,March 31, 2020, was driven largely by higher net interest income and swap fees for the Bank.Bank, partially offset by lower investment management fees.

Our annualized net interest margin was 1.94%1.84% and 2.10% for the three months ended March 31, 2020 and 2.22%for the three months ended September 30, 2019 and 2018, respectively, and 2.02% and 2.31% for the nine months ended September 30, 2019 and 2018, respectively. The decrease in net interest margin for the three months ended September 30, 2019,March 31, 2020, was driven by an increasea decrease of four94 basis points in the yield on loans, more thanpartially offset by an increasea decrease of 3378 basis points in the cost of interest-bearing liabilities.The decrease in net interest margin for the nine months ended September 30, 2019, was driven by an increase of 35 basis points in the yield on loans, more than offset by an increase of 68 basis points.

The significant reduction in interest rates 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 and ourLIBOR. At the end of the first quarter 2020, we placed interest rate floors on many of these floating rate loans, particularly for 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. WhenRate and others that are priced at the financial markets anticipate abank’s discretion. The majority of the floating rate cut by the FOML, LIBOR rates typically decreasedeposits were repriced in advance of action taken byMarch in line with the Federal Reserve which compresses and can invertrate reduction. In addition, we intentionally increased our liquid assets for the historical spread between 1-month LIBOR and the Effective Federal Funds Rate. This occurred at certain timesexpress purpose of carrying more on balance sheet liquidity in anticipation of clients’ needs during the three and nine months ended September 30, 2019, compressing our netCOVID-19 pandemic. These carrying costs will result in marginally lower returns in the short-term based on the interest margin, and impacting our net interest income and our rate of revenue growth as well as other ratios such as the Bank’s efficiency ratio, return on average assets and return on average common equity.environment.

Our non-interest income is largely comprised of investment management fees for Chartwell, which totaled $8.9$7.6 million for the three months ended September 30, 2019,March 31, 2020, as compared to $9.8$9.4 million for the same period in 2018, and $27.6 million for the nine months ended September 30, 2019, as compared to $28.4 million for the same period in 2018.2019. Assets under management were $9.62$8.32 billion as of September 30, 2019,March 31, 2020, a decrease of $250.0 million$1.41 billion from September 30, 2018,March 31, 2019, driven by market appreciationdepreciation of $279.0$742.0 million which was more thanand outflows of 1.89 billion, offset by net outflowsnew client assets of $529.0 million.1.22 billion.

Our annualized ratio of non-interest expense to average assets was 1.59%1.47% and 1.90%1.77% for the three months ended September 30, 2019 and 2018, respectively, and 1.69% and 1.98% for the nine months ended September 30, 2019March 31, 2020 and 20182019, respectively. The Bank’s efficiency ratio was 50.70%51.86% and 56.30% for the three months ended March 31, 2020 and 52.86% for the three months ended September 30, 2019 and 2018, respectively, and 53.94% and 52.55% for the nine months ended September 30, 2019 and 2018, respectively. The Bank’s efficiency ratio reflects growth in the Bank’s total revenue of 13.0%20.0% which was offset by the growth in the Bank’s non-interest expense of 16.0%10.6% for the ninethree months ended September 30, 2019.March 31, 2020.


Our annualized return on average assets (net income to average total assets) was 0.94%0.65% and 1.06% for the three months ended September 30, 2019 and 2018, respectively, and 0.94% and 1.04%0.97% for the ninethree months ended September 30, 2019March 31, 2020 and 20182019, respectively. Our annualized return on average common equity (net income available to common shareholders to average common equity) was 11.82%8.59% and 12.78%12.50% for the three months ended September 30, 2019 and 2018, respectively, and 11.97%March 31, 2020 and 12.36% for2019, respectively. Both ratios declined due to a reduction in earnings during the ninethree months ended September 30, 2019 and 2018, respectively.March 31, 2020 compared to the same period in 2019.

Our total assets were $7.20$8.99 billion as of September 30, 2019March 31, 2020, an increase of $1.16$1.22 billion, or 25.8%63.4% on an annualized basis, from December 31, 20182019., primarily due to an increase in cash and cash equivalents, growth in our loan and lease portfolio and growth in our investment portfolio. Loans and leases held-for-investment grew by $883.8$380.6 million to $6.02$6.96 billion as of September 30, 2019March��31, 2020, an annualized increase of 23.0%23.3%, from December 31, 20182019, as a result of growth in our commercial and private banking loan portfolios. Total depositsCash and cash equivalents increased $1.04 billion,$606.3 million, or 27.6%603.8% on an annualized basis, to $6.09$1.01 billion due to the previously mentioned intentional increase in liquid assets. Total investment securities increased $137.6 million, or 118.0% on an annualized basis to $606.7 million as of March 31, 2020, from December 31, 2019. Total deposits increased $1.15 billion, or 69.6% on an annualized basis, to $7.78 billion as of September 30, 2019March 31, 2020, from December 31, 2018.2019.

Our ratio of adverse rated credits to total loans declined to 0.44%0.50% at September 30, 2019March 31, 2020, from 0.48%0.53% at December 31, 20182019. Our ratio of allowance for loan and lease losses to loans was 0.22%0.25% and 0.26%0.21% as of September 30, 2019March 31, 2020 and December 31, 20182019, respectively. We had a credit to provision for loan losses of $607,000 for the three months ended September 30, 2019 primarily due to a decrease in specific reserves related to a loan moving into other real estate owned (“OREO”) at fair value as well as a decrease in general reserves, compared to provision credit of $234,000 for the three months ended September 30, 2018. We had a credit to provisionexpense for loan and lease losses of $1.7$3.0 million for the ninethree months ended September 30, 2019March 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, partially offset by recoveries of $2.0 million$203,000 in the commercial and industrial portfolio, partially offset by an increase in general reserves in the commercial real estate portfolio due to increased loan growth, compared to a credit to provision expense of $376,000377,000 for the ninethree months ended September 30, 2018.March 31, 2019.


Our book value per common share increased $1.40decreased $0.47 to $16.67$16.74 as of September 30, 2019March 31, 2020, from $15.27$17.21 as of December 31, 20182019, largely as a result of our the issuance of restricted stock and a decrease in equity related to accumulated other comprehensive loss during the three months ended March 31, 2020, partially offset by net income available to common shareholders duringfor the same periodnine months ended September 30, 2019.

CECL Implementation

The CARES Act provides financial institutions with the option to delay the adoption of Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses, Topic 326: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which was partially offsetrequires companies to replace the incurred loss accounting method for estimating credit losses with the current expected credit losses (“CECL”) method. Relief from implementation of ASU 2016-13 ends on the earlier of the termination date of the national emergency declaration by the issuancePresident or December 31, 2020. In response to the unprecedented nature of restricted stock during the same period.COVID-19 pandemic and uncertainty regarding its duration and ultimate impact on economic activity, we elected to delay our implementation of the CECL accounting standard. See “Recent Accounting Pronouncements and Developments” for more information on our decision to delay implementation of CECL.

Non-GAAP Financial Measures

We report certain financial information determined by methods other than in accordance with GAAP. These non-GAAP financial measures are “tangible common equity,” “tangible book value per common share,” “total revenue,” “Pre-tax,“pre-tax, pre-provision net revenue,” “efficiency ratio” and “EBITDA.” These non-GAAP financial measures are supplemental measures that we believe provide management and our investors with a more detailed understanding of our performance, although these measures are not necessarily comparable to similar measures that may be presented by other companies. These disclosures should not be viewed as a substitute for financial measures in accordance with GAAP.

The non-GAAP financial measures presented herein are calculated as follows:

“Tangible common equity” is defined as common shareholders’ equity reduced by intangible assets, including goodwill. We believe this measure is important to management and investors so that they can better understand and assess changes from period to period in common shareholders’ equity exclusive of changes in intangible assets associated with prior acquisitions. Intangible assets are created when we buy businesses that add relationships and revenue to our Company. Intangible assets have the effect of increasing both equity and assets, while not increasing our tangible equity or tangible assets.

“Tangible book value per common share” is defined as common shareholders’ equity reduced by intangible assets, including goodwill, divided by common shares outstanding. We believe this measure is important to many investors who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets associated with prior acquisitions.assets.

“Total revenue” is defined as net interest income and total non-interest income, excluding gains and losses on the sale and call of debt securities. We believe adjustments made to our operating revenue allow management and investors to better assess our core operating revenue by removing the volatility that is associated with certain items that are unrelated to our core business.


“Pre-tax, pre-provision net revenue” is defined as net income, without giving effect to provision for loan and lease loss provisionlosses and income taxes and excluding gains and losses on the sale and call of investment securities. We believe this measure is important because it allows management and investors to better assess our performance in relation to our core operating revenue, excluding the volatility that is associated with provision for loan and lease losses or other items that are unrelated to our core business.

“Efficiency ratio” is defined as total non-interest expense divided by total revenue. We believe this measure allows management and investors to better assess our operating expenses in relation to our core operating revenue, particularly at the Bank.

“EBITDA” is defined as net income before interest expense, income tax expense, depreciation expense and intangible amortization expense. We use EBITDA particularly to assess the strength of our investment management business. We believe this measure is important because it allows management and investors to better assess our investment management performance in relation to our core operating earnings by excluding certain non-cash items and the volatility that is associated with certain discrete items that are unrelated to our core business and its ability to generate cash earnings.business.

The following tables present the financial measures calculated and presented in accordance with GAAP that are most directly comparable to the non-GAAP financial measures and a reconciliation of the differences between the GAAP financial measures and the non-GAAP financial measures.


(Dollars in thousands, except per share data)September 30,
2019
December 31,
2018
March 31,
2020
December 31,
2019
Tangible common equity and tangible book value per common share: 
Tangible common equity and Tangible book value per common share: 
Common shareholders’ equity$488,443
$440,886
$498,301
$505,202
Less: goodwill and intangible assets66,357
67,863
65,352
65,854
Tangible common equity (numerator)$422,086
$373,023
$432,949
$439,348
Common shares outstanding (denominator)29,296,970
28,878,674
29,762,578
29,355,986
Tangible book value per common share$14.41
$12.92
$14.55
$14.97

Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
(Dollars in thousands)20192018 2019201820202019
Total revenue and Pre-tax, pre-provision net revenue:    
Net interest income$32,316
$28,819
 $93,991
$83,872
$34,922
$30,372
Total non-interest income14,243
12,751
 39,291
36,342
13,316
13,069
Less: net gain on the sale and call of debt securities206

 346
6
57
28
Total revenue$46,353
$41,570
 $132,936
$120,208
$48,181
$43,413
Less: total non-interest expense27,773
25,686
 82,030
74,854
29,144
26,672
Pre-tax, pre-provision net revenue$18,580
$15,884
 $50,906
$45,354
$19,037
$16,741


BANK SEGMENT
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
(Dollars in thousands)20192018 2019201820202019
Bank total revenue:    
Net interest income$32,265
$29,316
 $94,971
$85,397
$34,906
$30,911
Total non-interest income5,319
2,850
 10,813
7,881
5,709
2,905
Less: net gain on the sale and call of debt securities206

 346
6
57
28
Bank total revenue$37,378
$32,166
 $105,438
$93,272
$40,558
$33,788
    
Bank efficiency ratio:    
Total non-interest expense (numerator)$18,949
$17,002
 $56,872
$49,011
$21,034
$19,021
Total revenue (denominator)$37,378
$32,166
 $105,438
$93,272
$40,558
$33,788
Bank efficiency ratio50.70%52.86% 53.94%52.55%51.86%56.30%


INVESTMENT MANAGEMENT SEGMENT
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
(Dollars in thousands)20192018 2019201820202019
Investment Management EBITDA:    
Net income$316
$957
 $2,419
$2,383
$578
$1,431
Interest expense

 



Income tax expense3
282
 830
786
28
563
Depreciation expense111
126
 355
376
109
125
Intangible amortization expense502
502
 1,506
1,465
502
502
EBITDA$932
$1,867
 $5,110
$5,010
$1,217
$2,621


Results of Operations

Net Interest Income

Net interest income represents the difference between the interest received on interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is affected by changes in the volume of interest-earning assets and interest-bearing liabilities and changes in interest yields earned and interest rates paid. Net interest income comprised 70.7%72.5% and 69.8%70.0% of total revenue for the ninethree months ended September 30, 2019March 31, 2020 and 20182019, respectively.

The table below reflects an analysis of net interest income, on a fully taxable equivalent basis, for the periods indicated. The adjustment to convert certain income to a fully taxable equivalent basis consists of dividing tax-exempt income by one minus the statutory federal income tax rate of 21% for 20192020 and 20182019.
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
(Dollars in thousands)20192018 2019201820202019
Interest income$67,732
$52,424
 $196,973
$141,624
$64,202
$62,902
Fully taxable equivalent adjustment24
27
 79
84
30
28
Interest income adjusted67,756
52,451
 197,052
141,708
64,232
62,930
Less: interest expense35,416
23,605
 102,982
57,752
29,280
32,530
Net interest income adjusted$32,340
$28,846
 $94,070
$83,956
$34,952
$30,400
    
Yield on earning assets (1) (2)
4.06%4.04% 4.23%3.91%3.38%4.35%
Cost of interest-bearing liabilities (1)
2.38%2.05% 2.47%1.79%1.72%2.50%
Net interest spread (1) (2)
1.68%1.99% 1.76%2.12%1.66%1.85%
Net interest margin (1) (2)
1.94%2.22% 2.02%2.31%1.84%2.10%
(1) 
Annualized.
(2) 
Calculated on a fully taxable equivalent basis.

The following table provides information regarding the average balances and yields earned on interest-earning assets and the average balances and rates paid on interest-bearing liabilities for the three months ended September 30, 2019 and 2018. Non-accrual loans are included in the calculation of average loan balances, while interest collected on non-accrual loans is recorded as a reduction to principal. Where applicable, interest income and yield are reflected on a fully taxable equivalent basis and have been adjusted based on the statutory federal income tax rate of 21% for 2019 and 2018.

 Three Months Ended September 30,
 2019 2018
(Dollars in thousands)Average
Balance
Interest Income (1)/
Expense
Average
Yield/
Rate
(2)
 Average
Balance
Interest Income (1)/
Expense
Average
Yield/
Rate
(2)
Assets       
Interest-earning deposits$388,274
$2,144
2.19% $207,346
$1,015
1.94%
Federal funds sold8,424
44
2.07% 9,563
46
1.91%
Debt securities available-for-sale262,665
2,085
3.15% 236,053
1,836
3.09%
Debt securities held-to-maturity174,331
1,537
3.50% 76,341
699
3.63%
Equity securities4,720
12
1.01% 11,219
71
2.51%
FHLB stock10,585
382
14.32% 11,342
314
10.98%
Total loans and leases5,776,652
61,552
4.23% 4,594,755
48,470
4.19%
Total interest-earning assets6,625,651
67,756
4.06% 5,146,619
52,451
4.04%
Other assets288,216
   223,996
  
Total assets$6,913,867
   $5,370,615
  
        
Liabilities and Shareholders’ Equity       
Interest-bearing deposits:       
Interest-bearing checking accounts$1,116,624
$5,795
2.06% $657,402
$3,267
1.97%
Money market deposit accounts3,106,186
18,870
2.41% 2,506,334
12,428
1.97%
Certificates of deposit1,462,521
9,449
2.56% 1,155,888
6,487
2.23%
Borrowings:       
FHLB borrowings224,130
1,302
2.30% 221,576
853
1.53%
Line of credit borrowings

% 1,277
16
4.97%
Subordinated notes payable, net

% 34,832
554
6.31%
Total interest-bearing liabilities5,909,461
35,416
2.38% 4,577,309
23,605
2.05%
Noninterest-bearing deposits268,013
   253,033
  
Other liabilities137,934
   78,802
  
Shareholders’ equity598,459
   461,471
  
Total liabilities and shareholders’ equity$6,913,867
   $5,370,615
  
        
Net interest income (1)
 $32,340
   $28,846
 
Net interest spread (1)
  1.68%   1.99%
Net interest margin (1)
  1.94%   2.22%
(1)
Calculated on a fully taxable equivalent basis.
(2)
Annualized.

Net Interest Income for the Three Months Ended September 30, 2019 and 2018. Net interest income, calculated on a fully taxable equivalent basis, increased $3.5 million, or 12.1%, to $32.3 million for the three months ended September 30, 2019, from $28.8 million for the same period in 2018. The increase in net interest income for the three months ended September 30, 2019, was primarily attributable to a $1.48 billion, or 28.7%, increase in average interest-earning assets driven primarily by loan growth. This increase in net interest income also reflects an increase of $15.3 million, or 29.2%, in interest income, partially offset by an increase of $11.8 million, or 50.0%, in interest expense. Net interest margin decreased to 1.94% for the three months ended September 30, 2019, as compared to 2.22% for the same period in 2018, driven by higher cost of funds, partially offset by higher yield on our loan portfolio.

The increase in interest income on interest-earning assets was primarily the result of an increase in average total loans, which is our primary earning asset, of $1.18 billion, or 25.7%, as well as an increase of four basis points in yield on our loans for the three months ended September 30, 2019, compared to the same period in 2018. The yield on our loan portfolio was primarily driven by the direction and timing of the Federal Reserve’s target Federal Funds Rate changes, which impacted our floating-rate loans. The change in yield is also attributable to our continuing gradual shift towards lower-risk, lower-yielding marketable-securities-backed private banking loans and commercial loans. The overall yield on interest-earning assets increased two basis points to 4.06% for the three months ended September 30, 2019, as compared to 4.04% for the same period in 2018, primarily due to the higher yield on loans.

The increase in interest expense on interest-bearing liabilities was primarily the result of an increase of $1.33 billion, or 29.1%, in average interest-bearing liabilities for the three months ended September 30, 2019, compared to the same period in 2018, as well as an increase

of 33 basis points in the average rate paid on our interest-bearing liabilities. The increase in the average rate paid on our interest-bearing liabilities reflected increases in rates paid in all deposit categories and FHLB borrowings, which was largely driven by the direction and timing of the Federal Reserve’s target Federal Funds Rate changes, which impacted our variable-rate liabilities. The increase in average interest-bearing liabilities was driven primarily by an increase of $599.9 million in average money market deposit accounts, an increase of $459.2 million in average interest-bearing checking accounts and an increase of $306.6 million in average certificates of deposits.

The following table analyzes the dollar amount of the changes in interest income and interest expense with respect to the primary components of interest-earning assets and interest-bearing liabilities. The table shows 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 three months ended September 30, 2019, compared to the same period in 2018. The effect of a change in balances 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 interest rate is measured by applying the change in rate between the two periods to the average volume during the first period.
 Three Months Ended September 30,
 2019 over 2018
(Dollars in thousands)Yield/Rate Volume 
Change(1)
Increase (decrease) in:     
Interest income:     
Interest-earning deposits$144
 $985
 $1,129
Federal funds sold4
 (6) (2)
Debt securities available-for-sale38
 211
 249
Debt securities held-to-maturity(27) 865
 838
Equity securities(30) (29) (59)
FHLB stock90
 (22) 68
Total loans493
 12,589
 13,082
Total increase in interest income712
 14,593
 15,305
      
Interest expense:     
Interest-bearing deposits:     
Interest-bearing checking accounts151
 2,377
 2,528
Money market deposit accounts3,122
 3,320
 6,442
Certificates of deposit1,075
 1,887
 2,962
Borrowings:     
FHLB borrowings439
 10
 449
Line of credit borrowings
 (16) (16)
Subordinated notes payable, net
 (554) (554)
Total increase in interest expense4,787
 7,024
 11,811
Total increase (decrease) in net interest income$(4,075) $7,569
 $3,494
(1)
The change in interest income and interest 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.

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 the ninethree months ended September 30, 2019March 31, 2020 and 20182019. Non-accrual loans are included in the calculation of average loan balances, while interest payments collected on non-accrual loans are recorded as a reduction to principal. Where applicable, interest income and yield are reflected on a fully taxable equivalent basis and have been adjusted based on the statutory federal income tax rate of 21% for 20192020 and 2018.2019.

Nine Months Ended September 30,Three Months Ended March 31,
2019 20182020 2019
(Dollars in thousands)Average
Balance
Interest Income (1)/
Expense
Average
Yield/
Rate
(2)
 Average
Balance
Interest Income (1)/
Expense
Average
Yield/
Rate
(2)
Average
Balance
Interest Income (1)/
Expense
Average
Yield/
Rate
(2)
 Average
Balance
Interest Income (1)/
Expense
Average
Yield/
Rate
(2)
Assets          
Interest-earning deposits$282,828
$4,942
2.34% $181,368
$2,436
1.80%$464,302
$1,363
1.18% $202,474
$1,256
2.52%
Federal funds sold9,412
142
2.02% 7,761
100
1.72%7,099
20
1.13% 8,595
31
1.46%
Debt securities available-for-sale249,490
6,125
3.28% 187,041
4,150
2.97%281,870
2,044
2.92% 236,235
1,986
3.41%
Debt securities held-to-maturity189,083
5,267
3.72% 69,217
1,973
3.81%201,754
1,488
2.97% 211,833
2,018
3.86%
Debt securities trading230
1
1.75% 

%
Equity securities8,363
112
1.79% 9,498
200
2.82%

% 12,755
72
2.29%
FHLB stock17,069
1,072
8.40% 14,856
738
6.64%20,179
398
7.93% 20,498
305
6.03%
Total loans and leases5,474,522
179,392
4.38% 4,381,057
132,111
4.03%6,672,692
58,918
3.55% 5,177,844
57,262
4.49%
Total interest-earning assets6,230,767
197,052
4.23% 4,850,798
141,708
3.91%7,648,126
64,232
3.38% 5,870,234
62,930
4.35%
Other assets266,059
   215,388
  312,447
   242,553
  
Total assets$6,496,826
   $5,066,186
  $7,960,573
   $6,112,787
  
          
Liabilities and Shareholders’ Equity          
Interest-bearing deposits:          
Interest-bearing checking accounts$927,198
$15,303
2.21% $576,032
$7,464
1.73%$1,473,614
$5,214
1.42% $792,690
$4,542
2.32%
Money market deposit accounts2,883,009
53,608
2.49% 2,369,910
30,263
1.71%3,548,965
14,655
1.66% 2,682,390
16,540
2.50%
Certificates of deposit1,375,324
26,691
2.59% 1,021,248
14,552
1.91%1,383,036
7,375
2.14% 1,300,296
8,251
2.57%
Borrowings:          
FHLB borrowings370,550
6,222
2.24% 316,264
3,743
1.58%421,923
2,035
1.94% 459,333
2,585
2.28%
Line of credit borrowings1,650
68
5.51% 2,202
69
4.19%1,484
1
0.27% 4,139
58
5.68%
Subordinated notes payable, net23,178
1,090
6.29% 34,781
1,661
6.38%

% 34,933
554
6.43%
Total interest-bearing liabilities5,580,909
102,982
2.47% 4,320,437
57,752
1.79%6,829,022
29,280
1.72% 5,273,781
32,530
2.50%
Noninterest-bearing deposits262,056
   242,325
  350,086
   261,682
  
Other liabilities113,331
   68,064
  153,207
   88,485
  
Shareholders’ equity540,530
   435,360
  628,258
   488,839
  
Total liabilities and shareholders’ equity$6,496,826
   $5,066,186
  $7,960,573
   $6,112,787
  
          
Net interest income (1)
 $94,070
   $83,956
  $34,952
   $30,400
 
Net interest spread (1)
 1.76%  2.12% 1.66%  1.85%
Net interest margin (1)
 2.02%  2.31% 1.84%  2.10%
(1)
Calculated on a fully taxable equivalent basis.
(2) 
Annualized.

Net Interest Income for the NineThree Months Ended September 30, 2019March 31, 2020 and 20182019. Net interest income, calculated on a fully taxable equivalent basis, increased $10.1$4.6 million, or 12.0%15.0%, to $94.1$35.0 million for the ninethree months ended September 30, 2019March 31, 2020, from $84.0$30.4 million for the same period in 20182019. The increase in net interest income for the ninethree months ended September 30, 2019March 31, 2020, was primarily attributable to a $1.38$1.78 billion, or 28.4%30.3%, increase in average interest-earning assets driven primarily by loan growth. This increase in net interest income also reflects an increase of $55.3$1.3 million, or 39.1%2.1%, in interest income partially offset by an increaseand a decrease of $45.2$3.3 million, or 78.3%10.0%, in interest expense. Net interest margin was 2.02%1.84% for the ninethree months ended September 30, 2019March 31, 2020, compared to 2.31%2.10% for the same period in 20182019, driven by higher cost of funds, partially offset by highera lower yield on our loan portfolio.portfolio, partially offset by a lower cost of funds.

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 $1.09$1.49 billion, or 25.0%28.9%, as well as an increasepartially offset by a decrease of 3594 basis points in yield on our loans for the ninethree months ended September 30, 2019March 31, 2020, compared to the same period in 20182019. The most significant factor driving the yield on our loan portfolio was primarily driven by the direction and timingimpact of the recent decrease to the Federal Reserve’s target Federal Funds Rate changes, which impactedfederal funds rate on our floating-rate loans. The change in yield

is also attributable to our continuing gradual shift towards lower-risk, lower-yielding marketable-securities-backed private banking loans and commercial loans. The overall yield on interest-earning assets increased 32declined 97 basis points to 4.23%3.38% for the ninethree months ended September 30, 2019March 31, 2020, as compared to 3.91%4.35% for the same period in 20182019, primarily due to the higherlower loan yields.

The increasedecrease in interest expense on interest-bearing liabilities was primarily the result of an increasea decrease of 6878 basis points in the average rate paid on our interest-bearing liabilities, as well aspartially offset by an increase of $1.26$1.56 billion, or 29.2%29.5%, in average interest-bearing liabilities for the

ninethree months ended September 30, 2019March 31, 2020, compared to the same period in 20182019. The increasedecrease in average rate paid on our interest-bearing liabilities reflected increasesdecreases in rates paid in all deposit categories and FHLB borrowings, which was largely driven by the direction and timingimpact of the recent decrease to the Federal Reserve’s target Federal Funds Rate changes, which impactedfederal funds rate on our variable-rate liabilities.liabilities. The increase in average interest-bearing liabilities was driven primarily by an increase of $513.1$866.6 million in average money market deposit accounts, an increase of $351.2$680.9 million in average interest-bearing checking accounts and an increase of $354.1$82.7 million in average certificates of deposit.

The following table analyzes the dollar amount of the changes in interest income and interest expense with respect to the primary components of interest-earning assets and interest-bearing liabilities. The table shows 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 ninethree months ended September 30, 2019March 31, 2020, compared to the same period in 20182019. The effect of a change in balances 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 interest rate is measured by applying the change in rate between the two periods to the average volume during the first period.
Nine Months Ended September 30,Three Months Ended March 31,
2019 over 20182020 over 2019
(Dollars in thousands)Yield/Rate Volume 
Change(1)
Yield/Rate Volume 
Change(1)
Increase (decrease) in:          
Interest income:          
Interest-earning deposits$877
 $1,629
 $2,506
$(926) $1,033
 $107
Federal funds sold19
 23
 42
(6) (5) (11)
Debt securities available-for-sale478
 1,497
 1,975
(310) 368
 58
Debt securities held-to-maturity(46) 3,340
 3,294
(441) (89) (530)
Debt securities trading
 1
 1
Equity securities(66) (22) (88)
 (72) (72)
FHLB stock214
 120
 334
98
 (5) 93
Total loans12,186
 35,095
 47,281
(13,393) 15,049
 1,656
Total increase in interest income13,662
 41,682
 55,344
Total increase (decrease) in interest income(14,978) 16,280
 1,302
          
Interest expense:          
Interest-bearing deposits:          
Interest-bearing checking accounts2,429
 5,410
 7,839
(2,251) 2,923
 672
Money market deposit accounts15,831
 7,514
 23,345
(6,486) 4,601
 (1,885)
Certificates of deposit6,200
 5,939
 12,139
(1,407) 531
 (876)
Borrowings:          
FHLB borrowings1,758
 721
 2,479
(358) (192) (550)
Line of credit borrowings19
 (20) (1)(34) (23) (57)
Subordinated notes payable, net(25) (546) (571)
 (554) (554)
Total increase in interest expense26,212
 19,018
 45,230
Total increase (decrease) in interest expense(10,536) 7,286
 (3,250)
Total increase (decrease) in net interest income$(12,550) $22,664
 $10,114
$(4,442) $8,994
 $4,552
(1)
The change in interest income and interest 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 Loan and Lease Losses

The provision for loan and lease losses represents our determination of the amount necessary to be recorded against the current period’s earnings to maintain the allowance for loan and lease losses at a level that is considered adequate in relation to the estimated losses inherent in the loan and lease portfolio. For additional information regarding our allowance for loan and lease losses, see “Allowance“Allowance for Loan and Lease Losses.”

Provision for Loan and Lease Losses for the Three Months Ended September 30, 2019March 31, 2020 and 20182019. We recorded a credit to provision expense for loan and lease losses of $607,000$3.0 million for the three months ended September 30, 2019,March 31, 2020, compared to a provision credit to provision of $234,000$377,000 for the three

months ended March 31, 2019. The provision expense for loan and lease losses for the three months ended September 30, 2018. March 31, 2020, was comprised of an increase in general reserves of $3.2 million largely due to adjustments to the qualitative risk factors in response to economic uncertainty around the COVID-19 pandemic, partially offset by recoveries of $203,000 in our commercial and industrial portfolio. As provided under the CARES Act, we opted to delay adoption of the CECL methodology until the earlier of the end of the COVID-19 national emergency or December 31, 2020. See “Recent Accounting Pronouncements and Developments” for more information on our decision to delay implementation of CECL.

The credit to provision for loan and lease losses for the three months ended September 30,March 31, 2019, was comprised of a net decrease of $455,000 in specific reserves on non-performing loans in our private banking portfolio, largely driven by a residential mortgage that moved to OREO, a decrease of $187,000 in general reserves due to improved credit loss history, partially offset by increased loan growth, and recoveries of $77,000 in our commercial and industrial portfolio, partially offset by charge-offs of $112,000 in private banking residential mortgages. The credit to provision for loan and lease losses for the three months ended September 30, 2018, was comprised of a net increase of $230,000 in general reserves and an increase of $100,000$1.3 million in specific reserves on non-performing loans and an increase in general reserves of $184,000, which were more than offset by recoveries of $564,000.

Provision for Loan and Lease Losses for the Nine Months Ended September 30, 2019 and 2018. We recorded a credit to provision for loan and lease losses of $1.7 million for the nine months ended September 30, 2019, compared to a provision expense of $376,000 for the nine months ended September 30, 2018. The credit to provision for loan and lease losses for the nine months ended September 30, 2019, was comprised of recoveries of $2.0 million in our commercial and industrial portfolio and a net decrease of $266,000 in specific reserves primarily due to paydowns on these non-performing loans and previously mentioned loan to other real estate owned, partially offset by a net increase in general reserves of $432,000 and charge-offs of $112,000. The provision for loan and lease losses for the nine months ended September 30, 2018, was comprised of a net increase of $1.2 million in general reserves and an increase in specific reserves of $30,000 on non-performing loans, partially offset by recoveries of $858,000.$1.9 million.

Non-Interest Income

Non-interest income is an important component of our total revenue and is comprised primarily 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 in the table below 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 three months ended September 30, 2019March 31, 2020 and 20182019:
 Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
  InvestmentParent   InvestmentParent 
(Dollars in thousands)BankManagementand OtherConsolidated BankManagementand OtherConsolidated
Investment management fees$
$9,016
$(114)$8,902
 $
$9,914
$(86)$9,828
Service charges on deposits129


129
 146


146
Net gain on the sale and call of debt securities206


206
 



Swap fees4,171


4,171
 1,881


1,881
Commitment and other loan fees464


464
 373


373
Other income (1)
349
(9)31
371
 450

73
523
Total non-interest income$5,319
$9,007
$(83)$14,243
 $2,850
$9,914
$(13)$12,751
(1)
Other income largely includes items such as income from bank owned life insurance (“BOLI”), change in fair value on swaps and equity securities, gains on the sale of loans or other real estate owned (“OREO”), and other general operating income.

Non-Interest Income for the Three Months Ended September 30, 2019 and 2018. Our non-interest income was $14.2 million for the three months ended September 30, 2019, an increase of $1.5 million, or 11.7%, from $12.8 million for the same period in 2018. This increase was primarily related to increases in swap fees and higher net gain on debt securities, partially offset by lower investment management fees and other income, as follows:

Bank Segment:

Swap fees increased $2.3 million for the three months ended September 30, 2019, compared to the same period in 2018, due to an increase in the number of customer swap transactions closed during the quarter. 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 is strong customer demand for long-term interest rate protection in the current interest rate environment.

There was a net gain on the sale and call of debt securities of $206,000 for the three months ended September 30, 2019, as compared to no gain or loss for the same period in 2018.

Investment Management Segment:

Investment management fees decreased $898,000 for the three months ended September 30, 2019, compared to the same period in 2018, due to lower assets under management. Assets under management were $9.62 billion as of September 30, 2019, a decrease of $250.0 million from September 30, 2018, driven by market appreciation of $279.0 million, which was more than offset by net outflows of $529.0 million.


Parent and Other:

Other incomereflected $31,000 of unrealized gains on equity securities for the three months ended September 30, 2019, related to a mutual fund investment in mid-cap value equities, compared to unrealized gains of $73,000 for the same period in 2018.

The following table presents the components of our non-interest income by operating segment for the nine months ended September 30, 2019 and 2018:
Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018Three Months Ended March 31, 2020 Three Months Ended March 31, 2019
 InvestmentParent   InvestmentParent  InvestmentParent   InvestmentParent 
(Dollars in thousands)BankManagementand OtherConsolidated BankManagementand OtherConsolidatedBankManagementand OtherConsolidated BankManagementand OtherConsolidated
Investment management fees$
$27,912
$(332)$27,580
 $
$28,621
$(199)$28,422
$
$7,765
$(127)$7,638
 $
$9,533
$(109)$9,424
Service charges on deposits343


343
 420


420
213


213
 136


136
Net gain on the sale and call of debt securities346


346
 6


6
57


57
 28


28
Swap fees7,666


7,666
 5,066


5,066
4,373


4,373
 1,803


1,803
Commitment and other loan fees1,251


1,251
 1,036


1,036
419


419
 531


531
Other income (1)
1,207
17
881
2,105
 1,353
1
38
1,392
647
(31)
616
 407
21
719
1,147
Total non-interest income$10,813
$27,929
$549
$39,291
 $7,881
$28,622
$(161)$36,342
$5,709
$7,734
$(127)$13,316
 $2,905
$9,554
$610
$13,069
(1) 
Other income largely includes items such as income from BOLI, 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 NineThree Months Ended September 30, 2019March 31, 2020 and 20182019. Our non-interest income was $39.3$13.3 million for the ninethree months ended September 30, 2019March 31, 2020, an increase of $2.9 million,$247,000, or 8.1%1.9%, from $36.3$13.1 million for the same period in 20182019. This increase was primarily related to increases in swap fees, other income, net gain on debt securities, commitment and other loan fees, partially offset by decreases in investment management fees, and other income as follows:

Bank Segment:

Swap fees increased $2.6 million for the ninethree months ended September 30, 2019March 31, 2020, compared to the same period in 20182019, driven by ongoing demand for long-term interest rate protectiondue to an increase of customer swap transactions from both new and existing customers. 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 is strong customer demand for long-term interest rate protection in the current interest rate environment.

There was a net gain on the sale and call of debt securities of $346,000 for the nine months ended September 30, 2019, as compared to a net gain of $6,000 for the same period in 2018.

Investment Management Segment:

Investment management fees decreased $709,000$1.8 million for the ninethree months ended September 30, 2019,March 31, 2020, compared to the same period in 2018,2019, which was due to lower assets under management.management and a lower weighted average fee rate of 0.34% for the three months ended March 31, 2020, compared to 0.39% for the three months ended March 31, 2019. The lower fee rate was a result of a shift in the asset composition across investment products. Assets under management were $9.62$8.32 billion as of September 30, 2019,March 31, 2020, a decrease of $250.0 million$1.4 billion from September 30, 2018,March 31, 2019, driven by market appreciationdepreciation of $279.0$742.0 million, which was more than offset byand net outflows of $529.0$667.0 million.


Parent and Other:

Other income reflected $881,000$719,000 of unrealized gains on equity securities for the ninethree months ended September 30,March 31, 2019, related to our mutual fund investment in mid-cap value equities, compared to unrealized gains of $38,000 forthese securities were no longer held in our investment portfolio during the same period in 2018.three months ended March 31, 2020.

Non-Interest Expense

Our non-interest expense represents the operating cost of maintaining and growing our business. The largest portion of non-interest expense for each segment is compensation and employee benefits, which include employee payroll expense as well as the cost of incentive compensation, benefit plans, health insurance and payroll taxes, all of which are impacted by the growth in our employee base, coupled with increases in the level of compensation and benefits of our existing employees. The information provided in the table below 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 three months ended September 30, 2019March 31, 2020 and 20182019:
Three Months Ended September 30, 2019 Three Months Ended September 30, 2018Three Months Ended March 31, 2020 Three Months Ended March 31, 2019
 InvestmentParent   InvestmentParent  InvestmentParent   InvestmentParent 
(Dollars in thousands)BankManagementand OtherConsolidated BankManagementand OtherConsolidatedBankManagementand OtherConsolidated BankManagementand OtherConsolidated
Compensation and employee benefits$12,805
$5,902
$
$18,707
 $10,826
$6,141
$
$16,967
$12,392
$4,768
$286
$17,446
 $11,799
$4,976
$
$16,775
Premises and occupancy costs1,380
324

1,704
 1,138
294

1,432
1,622
287

1,909
 975
295

1,270
Professional fees1,237
141
(73)1,305
 814
190
(115)889
889
106
475
1,470
 934
142
(81)995
FDIC insurance expense994


994
 1,053


1,053
2,170


2,170
 1,421


1,421
General insurance expense190
68

258
 211
67

278
194
68

262
 227
67

294
State capital shares tax(720)

(720) 485


485
383


383
 380


380
Travel and entertainment expense1,053
286

1,339
 727
259

986
670
194

864
 612
223

835
Intangible amortization expense
502

502
 
502

502

502

502
 
502

502
Other operating expenses (1)
2,010
1,465
209
3,684
 1,748
1,222
124
3,094
2,714
1,203
221
4,138
 2,673
1,355
172
4,200
Total non-interest expense$18,949
$8,688
$136
$27,773
 $17,002
$8,675
$9
$25,686
$21,034
$7,128
$982
$29,144
 $19,021
$7,560
$91
$26,672
      
Full-time equivalent employees (2)
219
57

276
 188
65

253
225
57

282
 197
62

259
      
(1) 
Other operating expenses largely include items such as organizational dues and subscriptions, charitable contributions, data processing, investment research fees, sub-advisory fees, telephone, marketing, employee-related expenses and other general operating expenses.
(2) 
Full-time equivalent employees shown are as of the end of the periods presented.

Non-Interest Expense for the Three Months Ended September 30, 2019March 31, 2020 and 20182019. Our non-interest expense for the three months ended September 30, 2019,March 31, 2020, increased $2.1$2.5 million, or 8.1%9.3%, as compared to the same period in 20182019, which included a $1.9$2.0 million increase in expenses of the Bank segment and a $13,000 increase in expenses of the Investment Management segment. Notable changes in each segment’s expenses are as follows:

Bank Segment:

The Bank’s compensation and employee benefits costs for the three months ended September 30, 2019, increased by $2.0 million compared to the same period in 2018, 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.

Premises and occupancy costs for the three months ended September 30, 2019, increased by $242,000 compared to the same period in 2018, primarily due to continued investments in our infrastructure, including additional office space in our Pittsburgh headquarters and investments in technology.

Professional fees for the three months ended September 30, 2019 increased by $423,000 compared to the same period in 2018, primarily due to continued growth in loan production and certain regulatory matters.

State capital shares tax for the three months ended September 30, 2019, decreased by $1.2 million compared to the same period in 2018, primarily due to a recent favorable ruling received by the Company.

Travel and entertainment expense for the three months ended September 30, 2019 increased by $326,000 compared to the same period in 2018, primarily due to a higher level of officer and relationship manager business development efforts consistent with our continued growth.

Other operating expenses for the three months ended September 30, 2019, increased by $262,000 compared to the same period in 2018, primarily related to higher data processing expenses and higher organizational dues and subscription fees.

Investment Management Segment:

Chartwell’s compensation and employee benefits costs for the three months ended September 30, 2019, decreased by $239,000 compared to the same period in 2018, primarily due to decreases in full-time equivalent employees.


Other operating expenses for the three months ended September 30, 2019, increased by $243,000 compared to the same period in 2018, primarily related to higher investment research fees.

The following table presents the components of our non-interest expense by operating segment for the nine months ended September 30, 2019 and 2018:
 Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
  InvestmentParent   InvestmentParent 
(Dollars in thousands)BankManagementand OtherConsolidated BankManagementand OtherConsolidated
Compensation and employee benefits$35,791
$16,676
$
$52,467
 $30,431
$17,746
$
$48,177
Premises and occupancy costs3,892
916

4,808
 3,128
858

3,986
Professional fees3,281
533
(108)3,706
 2,569
879
90
3,538
FDIC insurance expense3,462


3,462
 3,333


3,333
General insurance expense608
203

811
 565
202

767
State capital shares tax40


40
 1,396


1,396
Travel and entertainment expense2,408
806

3,214
 1,915
723

2,638
Intangible amortization expense
1,506

1,506
 
1,465

1,465
Other operating expenses (1)
7,390
4,040
586
12,016
 5,674
3,580
300
9,554
Total non-interest expense$56,872
$24,680
$478
$82,030
 $49,011
$25,453
$390
$74,854
          
(1)
Other operating expenses largely include items such as organizational dues and subscriptions, charitable contributions, data processing, investment research fees, sub-advisory fees, telephone, marketing, employee-related expenses and other general operating expenses.

Non-Interest Expense for the Nine Months Ended September 30, 2019 and 2018. Our non-interest expense for the nine months ended September 30, 2019, increased $7.2 million, or 9.6%, as compared to the same period in 2018, which included a $7.9 million increase in expenses of the Bank segment and a $773,000$432,000 decrease in expenses of the Investment Management segment. Notable changes in each segment’s expenses are as follows:

Bank Segment:

The Bank’s compensation and employee benefits costs for the ninethree months ended September 30, 2019March 31, 2020, increased by $5.4 million$593,000 compared to the same period in 20182019, 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.

Premises and occupancy costs for the ninethree months ended September 30, 2019March 31, 2020, increased by $764,000$647,000 compared to the same period in 20182019, primarily due to continued investments in our infrastructure, including additional office space in our Pittsburgh headquarters and investments in technology.

Professional feesFDIC insurance expense for the ninethree months ended September 30, 2019March 31, 2020, increased by $712,000$749,000 compared to the same period in 2018, primarily due to continued growth in loan production and certain regulatory matters.

FDIC insurance expense for the nine months ended September 30, 2019, included a small bank assessment credit due to the deposit insurance fund reserve ratio exceeding a target threshold.

Travel and entertainment expense for the nine months ended September 30, 2019, increased by $493,000 compared to the same period in 2018, primarily due to a higher level of officer and relationship manager business development efforts consistent with our continued growth.

State capital shares tax for the nine months ended September 30, 2019, decreased by $1.4 million compared to the same period in 2018, due to a recent favorable ruling received by the Company.

Other operating expenses for the nine months ended September 30, 2019, increased by $1.7 million compared to the same period in 2018, primarily related to a valuation adjustment on OREO, higher marketing expenses, an increase in organization dues and subscriptions, and higher data processing expenses.the Bank’s assets.


Investment Management Segment:

Chartwell’s compensation and employee benefits costs for the ninethree months ended September 30, 2019March 31, 2020, decreased by $1.1 million$208,000 compared to the same period in 20182019, primarily due to decreases in full-time equivalent employees and incentive and stock-based compensation expenses.

Professional feesOther operating expenses for the ninethree months ended September 30, 2019March 31, 2020, decreased by $346,000$152,000 compared to the same period in 2018. The prior year period included higher legal fees incurred in connection with the acquisition of Columbia.

Other operating expenses for the nine months ended September 30, 2019, increased by $460,000 compared to the same period in 2018, primarily due to lower mutual fund platform distribution expense, lower organizational dues and subscriptions and lower other operating expenses, partially offset by higher investment research fees.

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 Three Months Ended September 30, 2019March 31, 2020 and 20182019. For the three months ended September 30, 2019,March 31, 2020, we recognized income tax expense of $3.1$3.2 million, or 15.8%19.9% of income before tax, as compared to income tax expense of $1.8$2.6 million, or 11.2%15.1% of income before tax, for the same period in 20182019. Our effective tax rate of 15.8%19.9% for the three months ended September 30, 2019, increased as compared to the same period in the prior year primarily due to the amount and timing of tax credits recognized in 2019 compared to 2018.

Income Taxes for the Nine Months Ended September 30, 2019 and 2018. For the nine months ended September 30, 2019, we recognized income tax expense of $7.4 million, or 13.9% of income before tax, as compared to income tax expense of $5.7 million, or 12.6% of income before tax, for the same period in 2018. Our effective tax rate of 13.9% for the nine months ended September 30, 2019March 31, 2020, increased as compared to the same period in the prior year primarily due to the amount and timing of tax credits recognized in 20192020 compared to 2018.2019.

Financial Condition

Our total assets as of September 30, 2019March 31, 2020, were $7.208.99 billion, an increase of $1.161.22 billion, or 25.8%63.4% on an annualized basis, from December 31, 20182019, driven primarily by growth in our loan portfolio and cash and cash equivalents. As of September 30, 2019March 31, 2020, our loan portfolio totaled $6.02$6.96 billion, an increase of $883.8380.6 million, or 23.0%23.3% on an annualized basis, from December 31, 20182019. Total investment securities increased $2.0$137.6 million, or 0.6%118.0% on an annualized basis, to $468.7606.7 million as of September 30, 2019March 31, 2020, from December 31, 20182019. Cash and cash equivalents increased $194.0606.3 million to $383.9 million1.01 billion as of September 30, 2019March 31, 2020, from December 31, 20182019. Our Asset and Liability Committee (“ALCO”) is responsible for managing the investment portfolio and liquidity of the Bank, among other responsibilities. Given the current overall interest rate environment, the strength of our loan growth, and in anticipation of clients’ credit needs during the COVID-19 crisis, our ALCO has kept excess liquidity in interest-bearing cash deposits and other short-term, high-grade investments rather than deploying this excess liquidity in the Bank’s investment portfolio.deposits.

As of September 30, 2019March 31, 2020, our total deposits were $6.097.78 billion, an increase of $1.041.15 billion, or 27.6%69.6% annualized, from December 31, 20182019. Net borrowings decreased $74.2$25.0 million to $330.0 million as of September 30, 2019March 31, 2020, from December 31, 20182019. Our shareholders’ equity increaseddecreased $125.26.9 million to $604.5614.4 million as of September 30, 2019March 31, 2020, from December 31, 20182019, primarily due primarily to the net proceedsdecrease of $77.6$15.2 million from our issuance in accumulated other comprehensive income (loss), the purchase of $2.6 million in treasury stock, $2.5 million in cancellation of stock options and preferred stock in May 2019 anddividends paid of $2.0 million, partially offset by net income of $45.612.9 million. and $2.3 million in stock-based compensation.

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. As of September 30, 2019, 92.4%March 31, 2020, 92.5% of our loans had a floating interest rate.


The following table presents the composition of our loan portfolio as of the dates indicated:
September 30, 2019 December 31, 2018March 31, 2020 December 31, 2019
(Dollars in thousands)OutstandingPercent of
Loans
 OutstandingPercent of
Loans
OutstandingPercent of
Loans
 OutstandingPercent of
Loans
Private banking loans$3,368,142
56.0% $2,869,543
55.9%$3,915,555
56.3% $3,695,402
56.2%
Middle-market banking loans:          
Commercial and industrial992,508
16.5% 785,320
15.3%1,191,104
17.1% 1,085,709
16.5%
Commercial real estate1,656,030
27.5% 1,478,010
28.8%1,851,490
26.6% 1,796,448
27.3%
Total middle-market banking loans2,648,538
44.0% 2,263,330
44.1%3,042,594
43.7% 2,882,157
43.8%
Loans and leases held-for-investment$6,016,680
100.0% $5,132,873
100.0%$6,958,149
100.0% $6,577,559
100.0%

Loans and Leases Held-for-Investment. Loans and leases held-for-investment increased by $883.8380.6 million, or 23.0%23.3% on an annualized basis, to $6.026.96 billion as of September 30, 2019March 31, 2020, from December 31, 20182019. Our growth for the ninethree months ended September 30, 2019March 31, 2020, was comprised of an increase in private banking loans of $498.6220.2 million, an increase in commercial and industrial loans and leases of $207.2105.4 million and an increase in commercial real estate loans of $178.055.0 million.

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, and/orsecurities. We also originate loans that are secured by cash value life insurance and to a lessor extent residential property or other financial assets. The primary source of repayment for these loans is the income and assets of the borrower. We also have a limited number of unsecured loans and lines of credit in our private banking loan portfolio.

As of September 30, 2019March 31, 2020, $3.27$3.82 billion, or 97.2%97.5%, of our private banking loans were secured by cash, marketable securities and/or cash value life insurance as compared to $2.77$3.60 billion, or 96.7%97.4%, as of December 31, 20182019. Our private banking lines of credit are typically due on demand. We expect the growth in these loans to continue as a result of our focus on this portion of our private banking business. We believe we have strong competitive advantages in this line of business given our proprietary technology and distribution channels. These loans usually 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 the 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 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.
(Dollars in thousands)September 30,
2019
December 31,
2018
March 31,
2020
December 31,
2019
Private banking loans:  
Secured by cash, marketable securities and/or cash value life insurance$3,272,175
$2,774,800
$3,818,475
$3,599,198
Secured by real estate65,822
69,766
62,004
62,782
Other30,145
24,977
35,076
33,422
Total private banking loans$3,368,142
$2,869,543
$3,915,555
$3,695,402

As of September 30, 2019March 31, 2020, there were $3.20$3.75 billion of total private banking loans with a floating interest rate and $167.5$163.2 million with a fixed interest rate, as compared to $2.75$3.53 billion and $122.6$169.4 million, respectively, as of December 31, 20182019.

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

As of September 30, 2019March 31, 2020, there were $819.8$953.2 million of total commercial and industrial loans with a floating interest rate and $172.7$237.9 million with a fixed interest rate, as compared to $645.5$867.7 million and $139.8$218.0 million, respectively, as of December 31, 20182019.


Middle-MarketCommercial Banking - Commercial Real Estate Loans. Our commercial real estate loan portfolio includes loans secured by commercial purpose real estate, including both owner-occupied properties and investment properties for various purposes including office, industrial, multifamily, retail, hospitality, healthcare and self-storage. Also included are commercial construction loans to finance the construction or renovation of structures as well as to finance the acquisition and development of raw land for various purposes. Individual project cash flows, global cash flows and liquidity from the developer, or the sale of the property are the primary sources of repayment for commercial real estate loans secured by investment properties. The primary source of repayment for commercial real estate loans secured by owner-occupied properties is cash flow from the borrower’s operations. There were $189.8$214.3 million and $183.7$210.7 million of owner-occupied commercial real estate loans as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.

As of September 30, 2019March 31, 2020, there were $1.54$1.73 billion of total commercial real estate loans with a floating interest rate and $115.0$117.6 million with a fixed interest rate, as compared to $1.34$1.69 billion and $137.5$111.2 million, respectively, as of December 31, 20182019.

Loan and Lease Maturities and Interest Rate Sensitivity

The following table presents the contractual maturity ranges and the amount of such loans and leases with fixed and adjustable rates in each maturity range as of the date indicated.
September 30, 2019March 31, 2020
(Dollars in thousands)
One Year
or Less
(1)
One to
Five Years
Greater Than
Five Years
Total
One Year
or Less
(1)
One to
Five Years
Greater Than
Five Years
Total
Maturity:  
Private banking$3,198,990
$62,748
$106,404
$3,368,142
$3,717,380
$92,043
$106,132
$3,915,555
Commercial and industrial249,612
534,321
208,575
992,508
322,958
645,265
222,881
1,191,104
Commercial real estate222,299
741,194
692,537
1,656,030
213,399
832,043
806,048
1,851,490
Loans and leases held-for-investment$3,670,901
$1,338,263
$1,007,516
$6,016,680
$4,253,737
$1,569,351
$1,135,061
$6,958,149
  
Interest rate sensitivity:  
Fixed interest rates$152,426
$135,944
$166,833
$455,203
$150,416
$198,831
$169,395
$518,642
Floating or adjustable interest rates3,518,475
1,202,319
840,683
5,561,477
4,103,321
1,370,520
965,666
6,439,507
Loans and leases held-for-investment
$3,670,901
$1,338,263
$1,007,516
$6,016,680
$4,253,737
$1,569,351
$1,135,061
$6,958,149
(1) 
The amounts outstanding reflected in the “One Year or Less” column include $3.16$3.68 billion of loans that are due on demand with no stated maturity.

Interest Reserve Loans

As of September 30, 2019March 31, 2020, loans with interest reserves totaled $331.3$329.8 million, which represented 5.5%4.7% of loans and leases held-for-investment, as compared to $255.4$348.0 million, or 5.0%5.3%, as of December 31, 2018.2019. 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 project budget and schedule for completion, 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.

Allowance for Loan and Lease Losses

Our allowance for loan and lease losses represents our estimate of probable losses inherent in the loan and lease portfolio at a specific point in time. This estimate includes losses associated with specifically identified loans, as well as estimated probable credit losses inherent in the remainder of the loan and lease portfolio. Additions are made to the allowance through both periodic provisions recorded in the consolidated statements of income and recoveries of losses previously incurred. Reductions to the allowance occur as loans and lease are charged off or when the credit history of any of the three loan portfolios improves. Refer to Note 1, Summary of Significant Accounting Policies and Note 4, Allowance for Loan and Lease Losses, to our unaudited condensed consolidated financial statements for more details on the Company’s allowance for loan and lease losses.


The following table summarizes the allowance for loan and lease losses, as of the dates indicated:
(Dollars in thousands)September 30,
2019
December 31,
2018
March 31,
2020
December 31,
2019
General reserves$13,203
$12,771
$17,133
$13,937
Specific reserves171
437
171
171
Total allowance for loan and lease losses
$13,374
$13,208
$17,304
$14,108
Allowance for loan and lease losses to loans and leases
0.22%0.26%0.25%0.21%

As of September 30,March 31, 2020 and December 31, 2019, we had impaired loans with an aggregated total outstanding balance of $184,000$, of which$171,000 that were fully reserved. As of December 31, 2018, we had specific reserves totaling $437,000 related to impaired loans, with an aggregated total outstanding balance of $2.2 million.was reserved for both periods. These loans were on non-accrual status as of September 30, 2019March 31, 2020 and December 31, 20182019, respectively.


The following table summarizes allowance for loan and lease losses and the percentage of loans and leases by category, as of the dates indicated:
September 30, 2019 December 31, 2018March 31, 2020 December 31, 2019
(Dollars in thousands)ReservePercent of Loans ReservePercent of LoansReservePercent of Loans ReservePercent of Loans
Private banking$1,851
56.0% $1,942
55.9%$2,174
56.3% $1,973
56.2%
Commercial and industrial5,316
16.5% 5,764
15.3%6,685
17.1% 5,262
16.5%
Commercial real estate6,207
27.5% 5,502
28.8%8,445
26.6% 6,873
27.3%
Total allowance for loan and lease losses
$13,374
100.0% $13,208
100.0%$17,304
100.0% $14,108
100.0%

Allowance for Loan and Lease Losses as of September 30, 2019March 31, 2020 and December 31, 20182019. Our allowance for loan and lease losses increased to $13.417.3 million, or 0.22%0.25% of loans, as of September 30, 2019March 31, 2020, as compared to $13.214.1 million, or 0.26%0.21% of loans, as of December 31, 20182019. Our allowance for loan and lease losses increased due to adjustments to the qualitative risk factors in response to economic uncertainty around the COVID-19 pandemic as well as the growth in our loan portfolio. Our allowance related to private banking loans decreased $91,000increased $201,000 from December 31, 20182019 to September 30, 2019March 31, 2020, which was primarily attributable to lower specific reserves on non-performing loans, partially offset by higher general reserves relateddue to growth in thisthe portfolio. Our allowance for loan and lease losses related to commercial and industrial loans decreasedincreased $448,000$1.4 million from December 31, 20182019 to September 30, 2019March 31, 2020, which was attributable to lower general reserves due to an improved credit loss history. Ourand our allowance for loan and lease losses related to commercial real estate loans increased by $705,0001.6 million from December 31, 20182019 to September 30, 2019March 31, 2020, which was attributable to higher general reserves relateddue to growth and qualitative adjustments. As previously mentioned, we have elected to delay implementation of CECL, in this portfolio.accordance with relief provided by the CARES Act. See “Recent Accounting Pronouncements and Developments” for more information on our decision to delay implementation of CECL.

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 allowance for loan and lease losses, charge-offs, recoveries and provision for loan and lease losses for the periods indicated:
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended March 31,
(Dollars in thousands)20192018 2019201820202019
Beginning balance$14,016
$15,321
 $13,208
$14,417
$14,108
$13,208
Charge-offs:    
Private banking(112)
 (112)


Commercial and industrial
(2,068) 
(2,068)

Commercial real estate

 



Total charge-offs(112)(2,068) (112)(2,068)

Recoveries:    
Private banking

 



Commercial and industrial77
564
 1,974
858
203
1,881
Commercial real estate

 



Total recoveries77
564
 1,974
858
203
1,881
Net recoveries (charge-offs)(35)(1,504) 1,862
(1,210)
Net recoveries203
1,881
Provision (credit) for loan and lease losses
(607)(234) (1,696)376
2,993
(377)
Ending balance$13,374
$13,583
 $13,374
$13,583
$17,304
$14,712
    
Net loan charge-offs (recoveries) to average total loans, annualized %0.13 % (0.05)%0.04%
Net loan recoveries to average total loans, annualized(0.01)%(0.15)%
Provision (credit) for loan and lease losses to average total loans, annualized(0.04)%(0.02)% (0.04)%0.01%0.18 %(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 includes in-substance foreclosures. We record OREO at fair value, less estimated costs to sell the assets.

Our policy is to place loans in all categories on non-accrual status when collection of interest or principal is doubtful, or when interest or principal payments are 90 days or more past due. There were no loans 90 days or more past due and still accruing interest as of September 30, 2019March 31, 2020 and December 31, 20182019, and there was no interest income recognized on loans while on non-accrual status for the ninethree months ended September 30, 2019March 31, 2020 and 2018.2019. As of September 30, 2019,March 31, 2020, non-performing loans were $184,000, or 0.00% of total loans, compared to $2.2 million,$184,000, or 0.04%0.00% of total loans, as of December 31, 2018.2019. We had specific reserves of $171,000 and $437,000$171,000 as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, on these non-performing loans. The net loan balance of our non-performing loans was 6.3% and 74.3%6.3% of the customer’s outstanding balance after payments, charge-offs and specific reserves as of September 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.

For additional information on our non-performing loans as of September 30, 2019March 31, 2020 and December 31, 2018,2019, refer to Note 4, Allowance for Loan and Lease Losses, to our unaudited condensed 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, and rented or sold to repay the original loan. Historically, foreclosure trends in our loan portfolio have been low due to the improved credit quality of the real estate portfolio. Any loans that are modified or extended are reviewed for potential classification as a troubled debt restructuring (“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.

In response to the COVID-19 pandemic and its economic impact on our customers, we implemented a short-term loan modification program in compliance with the CARES Act to provide temporary payment relief to those borrowers directly impacted by COVID-19. Through April 15, 2020, we have granted temporary modifications on approximately 100 loans totaling approximately $378.0 million. Under the applicable guidance, these loan modifications were not considered TDRs.

We had non-performing assets of$4.4 million, or 0.05% of total assets, as of March 31, 2020, as compared to $4.4 million, or 0.06% of total assets, as of September 30, 2019, as compared to $5.7 million, or 0.09% of total assets, as of December 31, 2018. The decrease in non-performing assets was due to the addition of new non-performing loans of $5.1 million, more than offset by $6.4 million in paydowns on non-performing loans and write-downs on OREO during the nine months ended September 30, 2019. This decrease was considered within the assessment of the determination of the allowance for loan and lease losses. As of each of September 30, 2019March 31, 2020 and December 31, 20182019, we had OREO properties totaling $4.3 million and million.$3.4 million, respectively.


The following table summarizes our non-performing assets as of the dates indicated:
(Dollars in thousands)September 30,
2019
December 31,
2018
March 31,
2020
December 31,
2019
Non-performing loans:  
Private banking$184
$2,237
$184
$184
Commercial and industrial



Commercial real estate



Total non-performing loans$184
$2,237
$184
$184
Other real estate owned4,250
3,424
4,250
4,250
Total non-performing assets$4,434
$5,661
$4,434
$4,434
  
Non-performing troubled debt restructured loans$171
$237
$171
$171
Performing troubled debt restructured loans$
$
$
$
Non-performing loans to total loans%0.04%%%
Allowance for loan and lease losses to non-performing loans
7,268.48%590.43%9,404.35%7,667.39%
Non-performing assets to total assets0.06%0.09%0.05%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. Among other factors, we monitor the 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 as we would with other problem loans and consider the effect of any

potential loss in determining any provision for loan and lease losses. We also assess alternatives to maximize collection of any past due loans, including and without limitation, restructuring loan terms, requiring additional loan guarantee(s) or collateral, or other planned action.

For additional information on the age analysis of past due loans segregated by class of loan for September 30, 2019March 31, 2020 and December 31, 20182019, refer to Note 4, Allowance for Loan and Lease Losses, to our unaudited condensed 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 recorded investment in loans by credit quality indicator for September 30, 2019March 31, 2020 and December 31, 20182019, refer to Note 4, Allowance for Loan and Lease Losses, to our unaudited condensed consolidated financial statements.

Investment Securities

We utilize investment activities to enhance net interest income while supporting liquidity management and interest rate risk management. Our securities portfolio consists of available-for-sale debt securities, held-to-maturity debt securities equity securities and, from time to time, debt securities held for trading purposes. Also included in our investment securities is FHLB stock. For additional information on FHLB stock, refer to Note 2, Investment Securities, to our unaudited condensed 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 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 securities that the Company intends to hold until maturity and are recorded at amortized cost.

The Bank has engaged Chartwell to provide securities portfolio advisory services, subject to the investment parameters set forth in our investment policy.

As of September 30, 2019March 31, 2020 and December 31, 2018,2019, we reported debt securities in available-for-sale and held-to-maturity categories, as well as equity securities.categories. In general, fair value is based on 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 on a quarterly basis 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, debt securities classified as available-for-sale, trading and equitytrading securities are also subject to fair value risks that could negatively affect the level of liquidity available to us, as well as shareholders’ equity.

We perform a quarterly review of our investment securities to identify those that may indicate other-than-temporary impairment (“OTTI”). Our policy for OTTI is based on a number of factors, including, but not limited to the length of time and extent to which the estimated fair value has been less than cost, the financial condition of the underlying issuer, the ability of the issuer to meet contractual obligations, the likelihood of the investment security’s ability to recover any decline in its estimated fair value and, for debt securities, whether we intend to sell the security or if it is more likely than not that we will be required to sell the security prior to its recovery. If the financial markets experience deterioration, charges to income could occur in future periods as a result of OTTI determinations.

Our available-for-sale debt securities portfolio consists of U.S. government agency obligations, mortgage-backed securities, collateralized mortgage obligations, corporate bonds and single-issuer trust preferred securities, all with varying contractual maturities. Our held-to-maturity debt securities consists of certain municipal bonds, agency obligations, mortgage-backed securities and corporate bonds while our trading portfolio, when active, typically consists of U.S. treasury notes, also with varying contractual maturities. However, these maturities do not necessarily represent the expected life of certain securities as the securities may be called or paid down without penalty prior to their stated maturities. The effective duration of our debt securities portfolio as of September 30, 2019March 31, 2020, was approximately 1.4,1.5, 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. Our 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 $261.2275.2 million and $233.3$248.8 million in debt securities available-for-sale as of September 30, 2019March 31, 2020 and December 31, 20182019, respectively. The increase of $27.926.4 million was primarily attributable to purchases of $59.1$92.6 million, net of prepayments, calls and maturities of $32.2$3.9 million and sales of $5.0$50.0 million for certain securities during the ninethree months ended September 30, 2019.March 31, 2020.

On a fair value basis, 43.8%50.7% of our available-for-sale debt securities as of September 30, 2019March 31, 2020, were floating-rate securities, for which yields increase or decrease based on changes in market interest rates. As of December 31, 20182019, floating-rate securities comprised 31.4%45.8% of our available-for-sale debt securities.

On a fair value basis, 22.2%19.5% of our available-for-sale debt securities as of September 30, 2019March 31, 2020, were U.S. government and agency securities, which tend to have a lower risk profile than certain corporate bonds and single-issuer trust preferred securities, which comprised the remainder of the portfolio. As of December 31, 20182019, agency securities comprised 27.9%22.1% of our available-for-sale debt securities.

Held-to-Maturity Debt Securities. We held $187.2$312.8 million and $196.1$196.0 million in debt securities held-to-maturity as of September 30, 2019March 31, 2020 and December 31, 20182019, respectively. The decreaseincrease of $8.9$116.8 million was primarily attributable to purchases of $239.3 million for certain securities, net of calls and maturities of $183.6$122.5 million, net of purchases of $174.6 million for certain securities during the ninethree months ended September 30, 2019.March 31, 2020. 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 as of September 30, 2019March 31, 2020 and December 31, 20182019.

Trading Debt Securities. We held no trading debt securities as of September 30, 2019March 31, 2020 and December 31, 20182019.

Equity Securities.Equity securities as of September 30, 2019, consisted of an investment in a mid-cap value equity mutual fund. We had $4.8 million and $12.7 million in equity securities outstanding as of September 30, 2019 and December 31, 2018, respectively. The decrease was primarily attributable to the sale of $8.8 million of a mutual fund investing in short-duration, corporate bonds during the nine months ended September 30, 2019.


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:
September 30, 2019March 31, 2020
(Dollars in thousands)Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Debt securities available-for-sale:  
Corporate bonds$183,621
$2,788
$444
$185,965
$213,148
$1,214
$8,596
$205,766
Trust preferred securities18,060

706
17,354
18,125

2,329
15,796
Agency collateralized mortgage obligations28,887
17
38
28,866
25,983
1
325
25,659
Agency mortgage-backed securities18,469
426

18,895
17,683
753
9
18,427
Agency debentures9,486
614

10,100
8,967
555

9,522
Total debt securities available-for-sale258,523
3,845
1,188
261,180
283,906
2,523
11,259
275,170
Debt securities held-to-maturity:  
Corporate bonds27,180
585

27,765
22,177
575
12
22,740
Agency debentures136,892
969
105
137,756
271,743
1,091

272,834
Municipal bonds18,765
150

18,915
14,575
121

14,696
Agency mortgage-backed securities4,373
409

4,782
4,347
719

5,066
Total debt securities held-to-maturity187,210
2,113
105
189,218
312,842
2,506
12
315,336
Total debt securities$445,733
$5,958
$1,293
$450,398
$596,748
$5,029
$11,271
$590,506
(1)
Balance includes $20 million of unsettled transactions.



December 31, 2018December 31, 2019
(Dollars in thousands)Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Amortized
Cost
Gross Unrealized
Appreciation
Gross Unrealized
Depreciation
Estimated
Fair Value
Debt securities available-for-sale:  
Corporate bonds$152,691
$33
$1,661
$151,063
$172,704
$2,821
$107
$175,418
Trust preferred securities17,964

1,115
16,849
18,092
216
48
18,260
Non-agency collateralized loan obligations393

3
390
Agency collateralized mortgage obligations33,680
42
4
33,718
27,262
11
80
27,193
Agency mortgage-backed securities21,575
37
348
21,264
18,058
451

18,509
Agency debentures9,994
67
49
10,012
8,961
441

9,402
Total debt securities available-for-sale236,297
179
3,180
233,296
245,077
3,940
235
248,782
Debt securities held-to-maturity:  
Corporate bonds27,184
353
22
27,515
24,678
619

25,297
Agency debentures141,575
472
34
142,013
149,912
628
935
149,605
Municipal bonds22,963
11
61
22,913
17,094
144

17,238
Agency mortgage-backed securities4,409

27
4,382
4,360
255

4,615
Total debt securities held-to-maturity196,131
836
144
196,823
196,044
1,646
935
196,755
Total debt securities$432,428
$1,015
$3,324
$430,119
$441,121
$5,586
$1,170
$445,537

The changes in the fair values of our municipal bonds, agency debentures, agency collateralized mortgage obligations and agency mortgage-backed securities are primarily the result of interest rate fluctuations. To assess for credit impairment, management evaluates the underlying issuer’s financial performance and the related credit rating information through a review of publicly available financial statements and other publicly available information. The 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, the Company considers all of the unrealized losses to be temporary.

Debt securities available-for-sale of $3.0$2.6 million as of September 30, 2019,March 31, 2020, were held in safekeeping at the FHLB and were included in the calculation of borrowing capacity. Additionally, there were no$14.1 million of debt securities held-to-maturity that were pledged as collateral for certain deposit relationships.


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 September 30, 2019March 31, 2020, 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.
September 30, 2019March 31, 2020
Less Than
One Year
 One to
Five Years
 Five to
10 Years
 Greater Than
10 Years
 TotalLess Than
One Year
 One to
Five Years
 Five to
10 Years
 Greater Than
10 Years
 Total
(Dollars in thousands)AmountYield AmountYield AmountYield AmountYield AmountYieldAmountYield AmountYield AmountYield AmountYield AmountYield
Debt securities available-for-sale:                            
Corporate bonds$45,284
2.97% $109,121
3.19% $31,560
3.56% $
% $185,965
3.20%$52,947
3.07% $96,411
2.77% $56,408
2.82% $
% $205,766
2.86%
Trust preferred securities
% 
% 9,256
4.17% 8,098
4.22% 17,354
4.19%
% 
% 8,551
3.72% 7,245
3.05% 15,796
3.40%
Agency collateralized mortgage obligations
% 543
2.80% 
% 28,323
2.64% 28,866
2.64%476
2.17% 
% 
% 25,183
1.93% 25,659
1.93%
Agency mortgage-backed securities
% 
% 
% 18,895
2.87% 18,895
2.87%
% 
% 
% 18,427
2.66% 18,427
2.66%
Agency debentures
% 
% 
% 10,100
3.18% 10,100
3.18%
% 
% 
% 9,522
3.18% 9,522
3.18%
Total debt securities available-for-sale45,284
  109,664
  40,816
  65,416
  261,180
 53,423
  96,411
  64,959
  60,377
  275,170
 
Weighted average yield 2.97%  3.19%  3.70%  3.00%  3.18% 3.06%  2.77%  2.93%  2.49%  2.80%
Debt securities held-to-maturity:                            
Corporate bonds
% 4,646
5.59% 23,119
5.27% 
% 27,765
5.33%
% 4,668
5.59% 18,072
5.32% 
% 22,740
5.37%
Agency debentures
% 5,003
3.30% 101,122
3.09% 31,631
3.57% 137,756
3.20%
% 75,148
1.45% 178,525
2.22% 19,161
3.08% 272,834
2.06%
Municipal bonds3,316
2.62% 11,243
3.16% 4,356
3.67% 
% 18,915
3.18%4,834
1.78% 7,969
2.20% 1,893
2.72% 
% 14,696
2.13%
Agency mortgage-backed securities
% 
% 
% 4,782
3.69% 4,782
3.69%
% 
% 
% 5,066
3.59% 5,066
3.59%
Total debt securities held-to-maturity3,316
  20,892
  128,597
  36,413
  189,218
 4,834
  87,785
  198,490
  24,227
  315,336
 
Weighted average yield 2.62%  3.72%  3.49%  3.59%  3.52% 1.78%  1.73%  2.50%  3.17%  2.32%
Total debt securities$48,600
  $130,556
  $169,413
  $101,829
  $450,398
 $58,257
  $184,196
  $263,449
  $84,604
  $590,506
 
Weighted average yield 2.95%  3.28%  3.54%  3.20%  3.33% 2.95%  2.28%  2.62%  2.67%  2.55%

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 unaudited condensed consolidated financial statements.

Assets Under Management

Chartwell’s total assets under management of $9.62$8.32 billion increased $426.0 million,decreased $1.38 billion, or 4.6%14.2%, as of September 30, 2019,March 31, 2020, from $9.19$9.70 billion as of December 31, 2018.2019.

The following table shows the changes of our assets under management by investment style for the ninethree months ended September 30, 2019.March 31, 2020.
Nine Months Ended September 30, 2019Three Months Ended March 31, 2020
(Dollars in thousands)Beginning
Balance
Inflows (1)
Outflows (2)
Market Appreciation (Depreciation)Ending
Balance
Beginning
Balance
Inflows (1)
Outflows (2)
Market Appreciation (Depreciation)Ending
Balance
Equity investment styles$3,419,000
$282,000
$(416,000)$591,000
$3,876,000
$3,932,000
$129,000
$(94,000)$(1,126,000)$2,841,000
Fixed income investment styles4,263,000
383,000
(262,000)294,000
4,678,000
4,816,000
237,000
(75,000)(182,000)4,796,000
Balanced investment styles1,507,000
121,000
(663,000)96,000
1,061,000
953,000
18,000
(159,000)(126,000)686,000
Total assets under management$9,189,000
$786,000
$(1,341,000)$981,000
$9,615,000
$9,701,000
$384,000
$(328,000)$(1,434,000)$8,323,000
(1) 
Inflows consist of new business and contributions to existing accounts.
(2) 
Outflows consist of business lost as well as distributions from existing accounts.


Deposits

Deposits are our primary source of funds to support our earning assets. We have focused on creating and growing diversified, stable, and lowlower all-in cost deposit channels without operating through a traditional branch network. We market liquidity and treasury management products, to middle-market commercial clients as well aspayment 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 the returns for their total cash position while enhancing our ability to obtain their full liquidity relationship and balance their expectations with our cost of funds expectations.

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 $1.1$1.11 billion as of September 30, 2019,March 31, 2020, increasing $449.8$33.0 million or 74.6%3.1%, from December 31, 2018.

The table below depicts average balances of, and rates paid on our deposit portfolio by major deposit category for the three months ended September 30, 2019 and 2018.
 Three Months Ended September 30,
 2019 2018
(Dollars in thousands)Average AmountAverage Rate Paid Average AmountAverage Rate Paid
Interest-bearing checking accounts$1,116,624
2.06% $657,402
1.97%
Money market deposit accounts3,106,186
2.41% 2,506,334
1.97%
Certificates of deposit1,462,521
2.56% 1,155,888
2.23%
Total average interest-bearing deposits5,685,331
2.38% 4,319,624
2.04%
Noninterest-bearing deposits268,013

 253,033

Total average deposits$5,953,344
2.27% $4,572,657
1.92%

Average Deposits for the Three Months Ended September 30, 2019 and 2018. For the three months ended September 30, 2019, our average total deposits were $5.95 billion, representing an increase of $1.38 billion, or 30.2%, from the same period in 2018. The deposit growth was driven by increases in all deposit categories. Average noninterest-bearing deposits increased $15.0 million, or 5.9%, in the three months ended September 30, 2019, from the three months ended September 30, 2018. Average interest-bearing checking accounts increased to 19.6% of total average interest-bearing deposits for the three months ended September 30, 2019, compared to 15.2% for the same period in 2018. The average cost of total deposits increased 35 basis points to 2.27% for the three months ended September 30, 2019, from 1.92% for the same period in 2018. Our average cost of interest-bearing deposits increased 34 basis points to 2.38% for the three months ended September 30, 2019, from 2.04% for the same period in 2018, as average rates paid were higher in all interest-bearing deposit categories, which was primarily driven by the direction and timing of the Federal Reserve’s target Federal Funds Rate changes, which impacted our variable-rate deposits. Average money market deposits decreased to 54.7% of total average interest-bearing deposits for the three months ended September 30, 2019, from 58.0% for the same period in 2018. Average certificates of deposit decreased to 25.7% of total average interest-bearing deposits for the three months ended September 30, 2019, compared to 26.8% for the same period in 2018.2019.

The table below depicts average balances of, and rates paid on our deposit portfolio by deposit type for the ninethree months ended September 30, 2019March 31, 2020 and 20182019.
Nine Months Ended September 30,Three Months Ended March 31,
2019 20182020 2019
(Dollars in thousands)Average AmountAverage Rate Paid Average AmountAverage Rate PaidAverage AmountAverage Rate Paid Average AmountAverage Rate Paid
Interest-bearing checking accounts$927,198
2.21% $576,032
1.73%$1,473,614
1.42% $792,690
2.32%
Money market deposit accounts2,883,009
2.49% 2,369,910
1.71%3,548,965
1.66% 2,682,390
2.50%
Certificates of deposit1,375,324
2.59% 1,021,248
1.91%1,383,036
2.14% 1,300,296
2.57%
Total average interest-bearing deposits5,185,531
2.46% 3,967,190
1.76%6,405,615
1.71% 4,775,376
2.49%
Noninterest-bearing deposits262,056

 242,325

350,086

 261,682

Total average deposits$5,447,587
2.35% $4,209,515
1.66%$6,755,701
1.62% $5,037,058
2.36%

Average Deposits for the NineThree Months Ended September 30, 2019March 31, 2020 and 20182019. For the ninethree months ended September 30, 2019March 31, 2020, our average total deposits were $5.45$6.76 billion, representing an increase of $1.24$1.72 billion, or 29.4%34.1%, from the same period in 20182019. The average deposit growth was driven by increases in all deposit categories. AOur average cost of interest-bearing deposits decreased 78 basis points to 1.71% for the verage noninterest-bearing deposits increased $19.7 million, or 8.1%, in the

ninethree months ended September 30, 2019,March 31, 2020, from 2.49% for the nine months ended September 30, 2018.same period in 2019, as average rates paid were lower in all interest-bearing deposit categories, driven by the recent decrease to the Federal Reserve’s target federal funds rate, which impacted our variable-rate deposits. Average interest-bearing checking accounts increased to 17.9%23.0% of total average interest-bearing deposits for the ninethree months ended September 30, 2019March 31, 2020, compared to 14.5%16.6% for the same period in 2018. The average cost of total deposits increased 69 basis points to 2.35% for the nine months ended September 30, 2019 from 1.66% for the same period in 2018. Our average cost of interest-bearing deposits increased 70 basis points to 2.46% for the nine months ended September 30, 2019, from 1.76% for the same period in 2018, as average rates paid were higher in all interest-bearing deposit categories, which was driven by the direction and timing of the Federal Reserve’s target Federal Funds Rate changes, which impacted our variable-rate deposits. Average money market deposits decreased to 55.6%55.4% of total average interest-bearing deposits for the ninethree months ended September 30, 2019March 31, 2020, from 59.7%56.2% for the same period in 20182019. Average certificates of deposit increaseddecreased to 26.5%21.6% of total average interest-bearing deposits for the ninethree months ended September 30, 2019March 31, 2020, compared to 25.8%27.2% for the same period in 20182019. Average noninterest-bearing deposits increased 33.8%, in the three months ended March 31, 2020, from the three months ended March 31, 2019, and the average cost of total deposits decreased 74 basis points to 1.62% for the three months ended March 31, 2020, from 2.36% for the same period in 2019.

Certificates of Deposit

Maturities of certificates of deposit of $100,000 or more outstanding are summarized below, as of September 30, 2019.March 31, 2020.
(Dollars in thousands)September 30, 2019March 31, 2020
Months to maturity:  
Three months or less$382,683
$462,851
Over three to six months217,581
301,408
Over six to 12 months288,090
227,603
Over 12 months185,411
110,276
Total$1,073,765
$1,102,138


Reciprocal and Brokered Deposits

As of September 30, 2019March 31, 2020, we consider approximately 90%83% of our total deposits to be relationship-based deposits, which include reciprocal certificates of deposit placed through CDARS® and reciprocal demand deposits placed through ICS®. As of September 30, 2019,March 31, 2020, the Bank had CDARS® and ICS® reciprocal deposits totaling $883.6$938.9 million, which were classified as non-brokered deposits. 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. As of September 30, 2019,March 31, 2020, brokered deposits were approximately 10%17% of total deposits. For additional information on our deposits, refer to Note 6,5, Deposits, to our unaudited condensed consolidated financial statements.

Borrowings

Deposits are the primary source of funds for our lending and investment activities, as well as the Bank’s general business purposes. As an alternative source of liquidity, we may obtain advances from the FHLB 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.

The following table presents certain information with respect to our outstanding borrowings, as of September 30, 2019March 31, 2020 and December 31, 20182019.
September 30, 2019 December 31, 2018March 31, 2020 December 31, 2019
(Dollars in thousands)AmountInterest RateMaximum Balance at Any Month EndAverage
Balance During the Period
Maximum
Original Term
 AmountInterest RateMaximum Balance at Any Month EndAverage
Balance During the Period
Maximum
Original Term
AmountInterest RateMaximum Balance at Any Month EndAverage
Balance During the Period
Maximum
Original Term
 AmountInterest RateMaximum Balance at Any Month EndAverage
Balance During the Period
Maximum
Original Term
FHLB borrowings$330,000
2.23%$605,000
$370,550
12 months $365,000
2.61%$565,000
$325,356
12 months$300,000
1.54%$480,000
$421,923
12 months $355,000
1.89%$605,000
$394,480
12 months
Line of credit borrowings
—%4,250
1,650
12 months 4,250
5.47%6,200
2,568
12 months30,000
4.25%30,000
1,484
12 months 
—%4,250
1,234
12 months
Subordinated notes payable
—%35,000
23,205
5 years 35,000
5.75%35,000
35,000
5 years
—%


 
—%35,000
17,356
5 years
Total borrowings outstanding$330,000
2.23%$644,250
$395,405
 $404,250
2.91%$606,200
$362,924
 $330,000
1.79%$510,000
$423,407
 $355,000
1.89%$644,250
$413,070
 

The Company previously entered into cash flow hedge transactions to establish the interest rate paid on $200.0$300.0 million of its FHLB borrowings at varying effective rates and maturities. For additional information on the detail of each cash flow hedge transaction, refer to Note 11,10, Derivatives and Hedging Activity, to our unaudited condensed consolidated financial statements.


Liquidity

We evaluate liquidity both at the holding company level and at the Bank level. As of September 30, 2019March 31, 2020, 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 the Bank and Chartwell, availability on our line of credit, and the net proceeds from the issuance of our debt and/or equity securities. As of September 30, 2019March 31, 2020, our primary liquidity needs at the parent company level were the quarterly dividends on our preferred stock and our share repurchase program. All other liquidity needs were minimal and related to reimbursing the Bank for management, accounting and financial reporting services provided by Bank personnel. During the ninethree months ended September 30, 2019March 31, 2020, the parent company paid $35.0$5.1 million onrelated to our share repurchase and stock cancellation program and $2.0 million related to our preferred stock dividends. During the repayment of principal of subordinated debt,three months ended March 31, 2019, the parent company paid $1.1 million related to interest payments on our subordinated notes and other borrowings, $3.8 million related to our preferred stock dividends and $1.8 million related to our share repurchase program. During the nine months ended September 30, 2018, the parent company paid $1.3 million related to the acquisition of Columbia, $2.1 million related to interest payments on our subordinated notes and other borrowings, $4.6 million$433,000 related to our share repurchase program and $1.4 million$679,000 related to our preferred stock dividend. 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 any foreseeable parent company obligations as of September 30, 2019.March 31, 2020. In addition, the holding company maintains an unsecured line of credit of $50.0$75.0 million with Texas Capital Bank, of which the full amount$45.0 million was available for borrowing as of September 30, 2019March 31, 2020.

Our 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 or 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 or arrangements, and the ability to take advantage of new business opportunities. Our ALCO, which includes members of executive management, 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 crisis 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 and equity securities, loan repayments (scheduled and unscheduled) and future earnings. Sources of liability liquidity include a stable deposit base, the ability to renew maturing certificates of deposit, borrowing availability at the FHLB of Pittsburgh, unsecured lines with other financial institutions, access to reciprocal CDARS® and ICS® deposits and brokered deposits, and the ability to raise debt and equity. Customer deposits, which are an important source of liquidity, depend on the confidence of customers in us. Deposits are supported by our capital position and, up to applicable limits, the protection provided by FDIC insurance.

We measure and monitor liquidity on an ongoing basis, which allows us to more effectively understand and react to trends in our balance sheet. In addition, the ALCO uses a variety of methods to monitor our liquidity position and liquidity needs, 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 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.

We believe thatIn response to the public health and economic crisis resulting from COVID-19 pandemic, we intentionally increased our liquid assets as a component of our assets and our deposits as a portion of our assets for the express purpose of carrying more on balance sheet liquidity in anticipation of clients’ credit needs. Our strong liquidity position continues to be strongis due to our ability to generate strong growth in deposits, which is evidenced by our ratio of total deposits to total assets of 84.7%86.6% and 83.7%85.4% as of September 30, 2019March 31, 2020 and December 31, 20182019, respectively. As of September 30, 2019March 31, 2020, we had available liquidity of $1.152.02 billion, or 16.0%22.5% of total assets. These sources consisted of available cash totaling $162.0$831.0 million, or 2.2%9.2% of total assets, unpledged investment securities totaling $405.6$536.3 million, or 5.6%6.0% of total assets, and the ability to borrow from the FHLB and correspondent bank lines totaling $586.7655.5 million, or 8.2%7.3% of total assets. Available cash excludes cash posted as collateral for derivative and letter of credit transactions and the reserve balance requirement at the Federal Reserve.

The following table shows our available liquidity, by source, as of the dates indicated:
(Dollars in thousands)September 30,
2019
December 31,
2018
March 31,
2020
December 31,
2019
Available cash$161,954
$97,703
$831,044
$167,695
Certain unpledged debt and equity securities405,569
389,010
Certain unpledged debt securities536,343
400,222
Net borrowing capacity586,747
476,686
655,546
569,132
Total liquidity$1,154,270
$963,399
$2,022,933
$1,137,049

For the ninethree months ended September 30, 2019March 31, 2020, we generated $48.74.3 million of cash from operating activities, compared to the utilization of $55.64.1 million for the same period in 20182019. This change in cash flow was primarily the result of an increasea decrease in net income of $6.3$1.7 million for the nine

three months ended September 30, 2019March 31, 2020, more than offset by changes in working capital items largely related to timing. In addition, we received a federal income tax refund of $7.7 million during the nine months ended September 30, 2019, compared to a $6.5 million refund during the nine months ended September 30, 2018.

Investing activities resulted in a net cash outflow of $894.0514.2 million for the ninethree months ended September 30, 2019March 31, 2020, as compared to a net cash outflow of $752.2219.3 million for the same period in 20182019. The outflows for the ninethree months ended September 30, 2019March 31, 2020, were primarily due to net loan growth of $881.9380.4 million and purchases of investment securities totaling $233.7$311.9 million, partially offset by the proceeds from the sale, principal repayments and maturities from investment securities totaling $229.6$176.3 million. The outflows for the ninethree months ended September 30, 2018,March 31, 2019, included net loan growth of $582.4$202.0 million and purchases of investment securities totaling $194.7$54.8 million, partially offset by the proceeds from the sale, principal repayments and maturities from investment securities totaling $27.7$33.8 million.

Financing activities resulted in a net inflow of $1.041.12 billion for the ninethree months ended September 30, 2019March 31, 2020, compared to a net inflow of $727.1277.4 million for the same period in 20182019. The inflows for the ninethree months ended September 30, 2019March 31, 2020, were primarily a result of a net increase in deposits of $1.04$1.15 billion and proceeds froma net increase of $30.0 million in line of credit borrowings, partially offset by a net decrease in FHLB borrowings of $55.0 million. The inflows for the issuancethree months ended March 31, 2019, included a net increase in deposits of preferred stock of $77.6$287.2 million, partially offset by a net decrease in FHLB borrowings of $35.0 million and repayment of subordinated debt of $35.0 million. The inflows for the nine months ended September 30, 2018, included a net increase in deposits of $767.0 million and proceeds from the issuance of preferred stock of $38.5 million, partially offset by a net decrease in FHLB borrowings of $70.0$5.0 million.

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 Company filed a registration statement on Form S-3 with the SEC on December 15, 2017, which was declared effective on December 21, 2017, and26, 2019, which provides a means to allow us to issue registered securities to finance our growth objectives.

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 our current operations and to promote public confidence in our Company.

Shareholders’ Equity. Shareholders’ equity was $604.5614.4 million as of September 30, 2019March 31, 2020, compared to $479.4621.3 million as of December 31, 20182019. The $125.26.9 million increasedecrease during the ninethree months ended September 30, 2019March 31, 2020, was primarily attributable to net proceeds of $77.6 million from the issuance of preferred stock, net income ofa $45.6 million, $6.5 million in stock-based compensation, an increasedecrease of $801,00015.2 million in accumulated other comprehensive income (loss), and $458,000the purchase of $2.6 million in exercisestreasury stock, $2.5 million in cancellation of stock options partially offset byand preferred stock dividends paid of $3.8 million and the purchase of $2.0 million, partially offset by net income of $12.9 million and $2.3 millionin treasury stock.stock-based compensation.

In May 2019, the Company completed the issuance and sale of a registered, underwritten public offering of 3.2 million3,220,000 depositary shares, each representing a 1/40th interest in a share of its 6.375% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock, no par value (the “Series B Preferred Stock”), with a liquidation preference of $1,000 per share (equivalent to $25 per depository share). The Company received net proceeds of $77.6 million from the offering, after deducting underwriting discounts, commissions and direct offering expenses. Our Series B 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 (the “Board”), dividends will be payable on the Series B Preferred Stock from the date of issuance to, but excluding July 1, 2026, at a rate of 6.375% per annum, payable quarterly, in arrears, and from and including July 1, 2026, dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 408.8 basis points per annum, payable quarterly, in arrears. The Company may redeem the Series B Preferred Stock at its option, subject to regulatory approval, on or after July 1, 2024, as described in the prospectus supplement relating to the offering filed with the SEC on May 23, 2019.

In March 2018, the Company completed the issuance and sale of a registered, underwritten public offering of 1.6 million1,610,000 depositary shares, each representing a 1/40th interest in a share of its 6.75% Fixed-to-Floating Rate Series A Non-Cumulative Perpetual Preferred Stock, no par value (the “Series A Preferred Stock”), with a liquidation preference of $1,000 per share (equivalent to $25 per depository share). The Company received net proceeds of $38.5 million from the offering, after deducting underwriting discounts, commissions and direct offering expenses. Our Series A Preferred Stock provides Tier 1 capital for the holding company under federal regulatory capital rules.

When, as, and if declared by the Board, dividends will be payable on the Series A Preferred Stock from the date of issuance to, but excluding April 1, 2023 at a rate of 6.75% per annum, payable quarterly, in arrears, and from and including April 1, 2023, dividends will accrue and be payable at a floating rate equal to three-month LIBOR plus a spread of 398.5 basis points per annum, payable quarterly,

in arrears. The Company may redeem the Series A Preferred Stock at its option, subject to regulatory approval, on or after April 1, 2023, as described in the prospectus supplement relating to the offering filed with the SEC on March 19, 2018.

Regulatory Capital. As of September 30, 2019March 31, 2020 and December 31, 20182019, TriState Capital Holdings, Inc. and TriState Capital Bank were in compliance with all applicable regulatory capital requirements, and TriState Capital Bank was categorized as well capitalized for purposes of the FDIC’s prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease. However, we will monitor our capital in order to remain categorized as well capitalized under the applicable regulatory guidelines and in compliance with all regulatory capital standards applicable to us.

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

The final rules subject a banking organization to certain limitations on capital distributions and discretionary bonus payments to executive officers if the organization does not maintain a capital conservation buffer of risk-based capital ratios in an amount greater than 2.5% of its total risk-weighted assets. The implementation of the capital conservation buffer began on January 1, 2016, at 0.625%, and was phased in ratably over a four-year period until it reached 2.5% on January 1, 2019. As of September 30, 2019March 31, 2020 and December 31, 2018,2019, the capital conservation buffer was 2.5% and 1.875%, respectively, in addition to the minimum capital adequacy levels shown in the tables below. Thus, both the Company and the Bank were above the levels required to avoid limitations on capital distributions and discretionary bonus payments.


The following tables present the actual capital amounts and regulatory capital ratios for the Company and the Bank as of the dates indicated:
September 30, 2019March 31, 2020
Actual For Capital Adequacy Purposes To be Well Capitalized Under Prompt Corrective Action ProvisionsActual For Capital Adequacy Purposes To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)AmountRatio AmountRatio AmountRatioAmountRatio AmountRatio AmountRatio
Total risk-based capital ratio                
Company$552,734
12.40% $356,596
8.00%  N/A
N/A
$585,503
11.42% $410,021
8.00%  N/A
N/A
Bank$505,370
11.38% $355,135
8.00% $443,919
10.00%$597,764
11.69% $408,904
8.00% $511,131
10.00%
Tier 1 risk-based capital ratio                
Company$541,505
12.15% $267,447
6.00%  N/A
N/A
$567,487
11.07% $307,516
6.00%  N/A
N/A
Bank$491,401
11.07% $266,352
6.00% $355,135
8.00%$579,748
11.34% $306,678
6.00% $408,904
8.00%
Common equity tier 1 risk-based capital ratio                
Company$427,084
9.58% $200,585
4.50%  N/A
N/A
$451,408
8.81% $230,637
4.50%  N/A
N/A
Bank$491,401
11.07% $199,764
4.50% $288,547
6.50%$579,748
11.34% $230,009
4.50% $332,235
6.50%
Tier 1 leverage ratio                
Company$541,505
7.91% $273,931
4.00%  N/A
N/A
$567,487
7.19% $315,811
4.00%  N/A
N/A
Bank$491,401
7.20% $273,036
4.00% $341,295
5.00%$579,748
7.36% $315,172
4.00% $393,966
5.00%

December 31, 2018December 31, 2019
Actual For Capital Adequacy Purposes To be Well Capitalized Under Prompt Corrective Action ProvisionsActual For Capital Adequacy Purposes To be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)AmountRatio AmountRatio AmountRatioAmountRatio AmountRatio AmountRatio
Total risk-based capital ratio                
Company$426,066
10.86% $313,789
8.00%  N/A
N/A
$572,221
12.05% $379,911
8.00%  N/A
N/A
Bank$437,849
11.25% $311,497
8.00% $389,371
10.00%$547,532
11.57% $378,623
8.00% $473,279
10.00%
Tier 1 risk-based capital ratio                
Company$414,808
10.58% $235,342
6.00%  N/A
N/A
$558,068
11.75% $284,933
6.00%  N/A
N/A
Bank$424,418
10.90% $233,622
6.00% $311,497
8.00%$532,779
11.26% $283,967
6.00% $378,623
8.00%
Common equity tier 1 risk-based capital ratio                
Company$378,117
9.64% $176,506
4.50%  N/A
N/A
$442,385
9.32% $213,700
4.50%  N/A
N/A
Bank$424,418
10.90% $175,217
4.50% $253,091
6.50%$532,779
11.26% $212,975
4.50% $307,631
6.50%
Tier 1 leverage ratio                
Company$414,808
7.28% $227,851
4.00%  N/A
N/A
$558,068
7.54% $296,038
4.00%  N/A
N/A
Bank$424,418
7.49% $226,762
4.00% $283,453
5.00%$532,779
7.22% $295,277
4.00% $369,097
5.00%

Contractual Obligations and Commitments

There were no material changes to contractual obligations during the ninethree months ended September 30, 2019,March 31, 2020, that were outside the ordinary course of business.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions that are not included in our consolidated balance sheets in accordance with GAAP. These transactions include commitments to extend credit in the ordinary course of business to approved customers.

Loan commitments, 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. Loan commitments include unused commitments for open end lines secured by cash, marketable securities and/or cash value life insurance or residential properties, and commitments to fund loans secured by 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. We have the ability to generate the liquidity necessary to fund anticipated draws under unused loan commitments.

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 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 commitments at any time, 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 standby letters of credit commitments, based on the availability of eligible collateral or other terms under the loan agreement, by contractual maturities outstanding as of the date indicated.
September 30, 2019March 31, 2020
(Dollars in thousands)
One Year
or Less
(1)
One to
Three Years
Three to
Five Years
Greater Than
Five Years
Total
One Year
or Less
(1)
One to
Three Years
Three to
Five Years
Greater Than
Five Years
Total
Unused loan commitments$3,851,043
$436,634
$155,305
$23,104
$4,466,086
$4,206,548
$352,167
$130,574
$24,478
$4,713,767
Standby letters of credit40,813
21,106
9,145

71,064
46,630
15,733
7,970
265
70,598
Total off-balance sheet arrangements$3,891,856
$457,740
$164,450
$23,104
$4,537,150
$4,253,178
$367,900
$138,544
$24,743
$4,784,365
(1) 
The off-balance sheet amounts reflected in the “One Year or Less” column include $3.51$3.82 billion in unused loan commitments and $272,000$1.1 million in standby letters of credit that are due on demand with no stated maturity.

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 unaudited condensed 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) analysis 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 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 analysis helps identify changes in optionality and price over a longer termlonger-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 together 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 and EVE calculated under the particular rate scenario versus the NII simulation and EVE analysis calculated assuming market rates deemed appropriate as of the dates indicated.date of this filing. For the purpose of this exercise it is assumed that rates do not fall below zero.
September 30, 2019 December 31, 2018March 31, 2020 December 31, 2019
(Dollars in thousands)Amount Change from
Base Case
Percent Change from
Base Case
 Amount Change from
Base Case
Percent Change from
Base Case
Amount Change from
Base Case
Percent Change from
Base Case
 Amount Change from
Base Case
Percent Change from
Base Case
Net interest income (loss):          
+300$41,377
30.80 % $26,950
22.28 %$26,913
21.13 % $45,787
31.65 %
+200$27,784
20.68 % $18,056
14.93 %$12,287
9.65 % $30,367
20.99 %
+100$14,295
10.64 % $9,399
7.77 %$(2,238)(1.76)% $15,128
10.46 %
–100$(14,961)(11.14)% $(9,712)(8.03)%$12,007
9.43 % $(16,822)(11.63)%
–200$(30,312)(22.57)% $(22,079)(18.25)%
          
Economic value of equity:          
+300$7,435
1.27 % $(19,782)(4.09)%$(32,493)(5.08)% $6,511
1.10 %
+200$6,898
1.18 % $(12,468)(2.58)%$(32,522)(5.08)% $3,691
0.62 %
+100$7,260
1.24 % $(3,526)(0.73)%$(32,112)(5.02)% $1,513
0.26 %
–100$(9,453)(1.62)% $(505)(0.10)%$(6,558)(1.02)% $(10,886)(1.84)%
–200$(18,784)(3.21)% $(1,380)(0.29)%

We plan to continue to manage an asset sensitive interest rate risk position when it comes to net interest income due to the ongoing desire for some duration in the liability portfolio. Given the longer termlonger-term nature of the EVE analysis and with longer-termthe absolute low level of interest rates, being less certain, we planhave migrated to continue to manage a near neutralmore liability sensitive interest rate risk position when it comes to economic value of equity although our EVE position will continuedue to add more bias toward asset sensitivity as interestthe expectation of low rates decline.for an extended period of time.


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.
September 30, 2019March 31, 2020
(Dollars in thousands)Less Than
90 Days
91 to 180
Days
181 to 365
Days
One to Three
Years
Three to Five
Years
Greater Than Five YearsNon-SensitiveTotal BalanceLess Than
90 Days
91 to 180
Days
181 to 365
Days
One to Three
Years
Three to Five
Years
Greater Than Five YearsNon-SensitiveTotal Balance
Assets:  
Interest-earning deposits$378,182
$
$
$
$
$
$
$378,182
$1,004,612
$
$
$
$
$
$
$1,004,612
Federal funds sold5,411






5,411
5,159






5,159
Total investment securities260,112
19,196
47,239
81,545
36,755
23,433
441
468,721
321,176
120,032
62,357
35,103
47,146
30,838
(9,916)606,736
Total loans and leases5,655,539
37,392
45,094
170,371
61,511
43,251
3,522
6,016,680
6,530,495
33,867
80,123
192,004
79,816
36,513
5,331
6,958,149
Other assets





329,455
329,455






415,405
415,405
Total assets$6,299,244
$56,588
$92,333
$251,916
$98,266
$66,684
$333,418
$7,198,449
$7,861,442
$153,899
$142,480
$227,107
$126,962
$67,351
$410,820
$8,990,061
  
Liabilities:  
Transaction deposits$4,104,240
$10,000
$72,000
$196,295
$100,000
$
$312,285
$4,794,820
$5,442,377
$
$89,738
$372,551
$75,000
$
$362,075
$6,341,741
Certificates of deposit
493,646
276,504
312,259
217,376



1,299,785
691,148
328,337
305,938
115,595



1,441,018
Borrowings, net130,000


100,000
100,000


330,000
30,000

50,000
50,000
200,000


330,000
Other liabilities





169,337
169,337






262,922
262,922
Total liabilities4,727,886
286,504
384,259
513,671
200,000

481,622
6,593,942
6,163,525
328,337
445,676
538,146
275,000

624,997
8,375,681
  
Equity





604,507
604,507






614,380
614,380
Total liabilities and equity$4,727,886
$286,504
$384,259
$513,671
$200,000
$
$1,086,129
$7,198,449
$6,163,525
$328,337
$445,676
$538,146
$275,000
$
$1,239,377
$8,990,061
  
Interest rate sensitivity gap$1,571,358
$(229,916)$(291,926)$(261,755)$(101,734)$66,684
$(752,711) $1,697,917
$(174,438)$(303,196)$(311,039)$(148,038)$67,351
$(828,557) 
Cumulative interest rate sensitivity gap$1,571,358
$1,341,442
$1,049,516
$787,761
$686,027
$752,711
 $1,697,917
$1,523,479
$1,220,283
$909,244
$761,206
$828,557
 
Cumulative interest rate sensitive assets to rate sensitive liabilities133.2%126.8%119.4%113.3%111.2%112.3%109.2% 127.5%123.5%117.6%112.2%109.8%110.7%107.3% 
Cumulative gap to total assets21.8%18.6%14.6%10.9%9.5%10.5% 18.9%16.9%13.6%10.1%8.5%9.2% 

The cumulative 12-month ratio of interest rate sensitive assets to interest rate sensitive liabilities increaseddecreased to 119.4%117.6% as of September 30, 2019March 31, 2020, from 112.2%121.4% as of December 31, 20182019.

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. These transactions have the effect on our gap analysis of moving $200.0$300.0 million of borrowings from the less than 90 days re-pricing category to the six months and longer re-pricing categories. Of the $300.0 million, $50,000 was moved to the six months to one year re-pricing category, $50 million to the one year to three years re-pricingyear repricing category, and $200.0 million to the three to five years re-pricing category of $100.0 million each.category. For additional information on cash flow hedge transactions, refer to Note 11,10, Derivatives and Hedging Activity, to our unaudited condensed consolidated financial statements.

Additionally, in all of these analyses (NII, EVE and gap), we use what we believe is a conservative treatment of non-maturity, interest-bearing deposits. 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. In taking this approach, we provide ourselves with no benefit to either NII or EVE from a potential time lag in the rate increase of our non-maturity, interest-bearing deposits.

Impact of Inflation

Our financial statements and related data presented herein have been prepared in accordance with GAAP, which requires the measure of financial position and operating results in terms of historic dollars, without considering changes in the relative purchasing power of money over time due to inflation.

Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary

in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects

of general levels of inflation. In addition, inflation affects a financial institution’s cost of goods and services purchased, the cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and shareholders’ equity.

Other Matters

NewRecent Regulatory Developments

In March 2020, various regulatory agencies, including the Federal Reserve and the FDIC, issued an Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers affected by the Coronavirus. The interagency statement impacted accounting for loan modifications, which was revised on April 7, 2020, in response to the CARES Act. Under Accounting Standard - Current Expected Credit LossStandards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“CECL”ASC 310-40”), a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the Financial Accounting Standards Board (“FASB”) that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

As describedprovided for under the CARES Act, a financial institution may account for an eligible loan modification either under section 4013 of the CARES Act or in Noteaccordance with ASC Subtopic 310-40. If a loan modification is not eligible under section 4013, or if the institution elects not to account for the loan modification under section 4013, the financial institution should evaluate whether the modified loan is a TDR. To be an eligible loan under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020.

Recent Accounting Pronouncements and Developments

In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848),” which provides optional guidance for a limited time to ease the potential accounting burden associated with transitioning away from reference rates such as LIBOR. The expedients and exceptions provided by this standard will not be available until after December 31, 2022, other than for certain hedging relationships entered into before December 31, 2022. The standard may be applied as of the beginning of the interim period that includes March 12, 2020 through December 21, 2022. The Company is currently evaluating the impact this standard will have on our unaudited condensedresults of operations and financial position.

In January 2020, FASB issued ASU 2020-01, “Investments - ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. This new guidance addresses accounting for the transition into and out of the equity method and also provides guidance on whether equity method accounting would be applied to certain purchased options and forward contracts upon settlement. This standard is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact this standard will have on our results of operations and financial position.

In December 2019, FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which removes certain exceptions for: recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. This standard also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This standard is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact this standard will have on our results of operations and financial statementsposition.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments”Instruments,” along with several other subsequent codification updates related to accounting for credit losses, which significantly changes howchange the way entities recognize impairment of many financial assets by requiring immediate recognition of estimated credit losses thatexpected to occur over the life of the financial asset. Thistheir remaining life. The new impairment recognitionmethodology, under this accounting standard, requires reserves overknown as the life of the loan rather than the loss emergence period used inCECL model, replaces the current incurred loss model.model and requires financial assets measured at amortized cost basis, such as loans, debt securities, net investments in leases, and off-balance-sheet credit exposures, to be presented at the net amount expected to be collected. CECL requires use of expected credit losses based on a standard of relevant information about past events, including historical experience, current conditions, and reasonable and supportable economic forecasts that affect the collectability of the reported amount. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The changes were originally effective for public business entities that are SEC filers for annual and interim

Inperiods in fiscal years beginning after December 2018,15, 2019. The Office of the Comptroller, The Federal Deposit Insurance Corporation and The Board of Governors adopted a final rule that addresses changes to credit loss accounting. The rule provides banks withCARES Act allows the option to phase indelay the day-one effects on regulatory capital of CECL over a three-year period.

Management created a formal working group, consisting of key stakeholders from finance, risk management and credit management, to govern the implementationadoption of this accounting standard. Management is instandard until the process of designing current expected credit loss estimation methodologies and analyzing data to be able to comply with this accounting standard. Management has engaged a third-party software model to determinedate on which the current expected credit loss within the requirements of the accounting standard. Management is developing governing processes to oversee and support all aspects of complying with the accounting standard. Management also is in the process of developing accounting policy documentation and validating the third-party model.

Management has completed parallel runs of its loan portfolio under its existing ALLL methodology and the CECL methodology as estimated by the third-party model for the first three quarters of 2019 and continues to analyze the results. The parallel runs have not yet been fully validated. The key inputsnational emergency related to the model are loan segmentation, origination vintage, amortized cost, contractual lives of loans, historical losses, and a representative national economic forecast.COVID-19 outbreak is terminated or December 31, 2020, whichever occurs first.

The initial and future impactCompany has elected to delay its adoption of ASU 2016-13, commonly referred to as CECL, as provided by the standard is likelyCARES Act. Upon adoption of ASU 2016-13, the Company anticipates recognizing a one-time cumulative effect adjustment of approximately $1.5 million to change$2.0 million, net of tax, through retained earnings as we developof January 1, 2020, for the methodology, and analyze our inputs and decisions made around those inputs, and will also depend on the composition, size and credit quality of our loan portfolio and the economic forecast usedchanges in the model at the time of adoption and future measurements, respectively.

The results of implementing the accounting standard may cause a material increase in our overall allowance for loancredit losses upon adoption.on loans and leases, unfunded commitments and certain debt securities. The allowance for credit losses on loans and leases under CECL would have been approximately $17.5 million to $18.0 million as of March 31, 2020.

LIBOR Transition

On July 27, 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”) announced that it will no longer persuade or require banks to submit rates for the calculation of the London Interbank Offered Rate (“LIBOR”) after 2021. Given LIBOR’s extensive use across financial markets, the transition away from LIBOR presents various risks and challenges to financial markets and institutions, including to the Company. The Company’s commercial and consumer businesses issue, trade and hold various products that are currently indexed to LIBOR. As of September 30, 2019,March 31, 2020, the Company had a material amount of loans, investment securities, FHLB advances and notional value of derivatives indexed to LIBOR that will mature after 2021. If not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks to financial markets and institutions, including to the Company.

The Alternative Reference Rates Committee (“ARRC”) has proposed the Secured Overnight Financing Rate (“SOFR”) as its preferred rate as an alternative to LIBOR. The selection of SOFR as the alternative reference rate currently presents certain market concerns, because a term structure for SOFR has not yet developed, and there is not yet a generally accepted methodology for adjusting SOFR, which represents an overnight, risk-free rate, so that it will be comparable to LIBOR, which has various tenors and reflects a risk component.

In early 2019, the ARRC released final recommended fallback contract language for new issuances of LIBOR-indexed bilateral business loans, syndicated loans, floating rate notes and securitizations. The International Swaps and Derivatives Association, Inc. (“ISDA”) is also expected to provide guidance on fallback contract language related to derivative transactions in late 2019.

Due to the uncertainty surrounding the future of LIBOR, it is expected that the transition will span several reporting periods through the end of 2021. One of the major identified risks is inadequate fallback language in the various instruments’ contracts that may result in issues establishing the alternative index and adjusting the margin as applicable. The Company continues to monitor this activity and evaluate the related risks. The Company has already: (1) established a cross-functional team to identify, assess and monitor risks associated with the transition of LIBOR and other benchmark rates; (2) developed an inventory of affected products; and (3) implemented more

robust fallback contract language. The Company’s cross-functional team is also tasked with managing clear communication of the Company’s transition plans with both internal and external stakeholders and ensuring that the Company appropriately updates its business processes, analytical tools, information systems and contract language to minimize disruption during and after the LIBOR transition. For additional information related to the potential impact surrounding the transition from LIBOR on the Company’s business, see “Item 1A. Risk Factors” in this Quarterly Report on Form 10-Q and “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, previously filed with the SEC.10-K.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and qualitative disclosures about market risk are presented under the caption “Market Risk” in Part I, Item 2 of this Quarterly Report on Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2019.March 31, 2020. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of September 30, 2019.March 31, 2020.


Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2019,March 31, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time the Company is a party to various litigation matters incidental to the conduct of its business. During the three months ended September 30, 2019,March 31, 2020, the Company was not a party to any legal proceedings the resolution of which management believes will be material to the Company’s business, future prospects, financial condition, liquidity, results of operation, cash flows or capital levels.

ITEM 1A. RISK FACTORS

There have not been any material changes to the risk factors previously disclosed under Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, previously filed with the SEC, except for the risk factor included below:

The phasing outnovel coronavirus (“COVID-19”) and ultimate replacementthe impact of LIBOR with an alternative reference rateactions to mitigate it may materially and changes in the manner of calculating other reference rates may adversely impact the value of loans and other financial instruments we hold that are linked to LIBOR or other reference rates in ways that are difficult to predict and could adversely impactaffect our business, financial condition and results of operations.

The FCA announcedCOVID-19 has led to federal, state and local governments enacting various restrictions in July 2017 that it will no longer persuade or require banksan attempt to submit rates forlimit the calculationspread of the LIBOR after 2021. It is not possiblevirus, including the declaration of a national emergency; multiple cities’ and states’ declarations of states of emergency; school and business closings; limitations on social or public gatherings and other social distancing measures, such as working remotely, travel restrictions, quarantines and shelter in place orders. These measures have contributed to predictsignificantly rising unemployment and reductions in consumer and business spending. In response to the economic and financial effects of COVID-19, the Federal Reserve Board has sharply reduced interest rates and instituted quantitative easing measures, as well as domestic and global capital market support programs.

The economic effects of the COVID-19 outbreakhave had a destabilizing effect of these changes, other reforms or the establishment of alternative reference rates in the United Kingdom or elsewhere. While Intercontinental Exchange Inc., the company that administers LIBOR, plans to continue publishing LIBOR, liquidity in the interbankon financial markets, that those LIBOR estimates are based upon has been declining. Accordingly, there is considerablekey market indices and overall economic activity. The uncertainty regarding the publicationduration of such rates beyond 2021. Whether or not SOFR attains market acceptance as a LIBOR replacement remains in questionthe pandemic and the futureresulting economic disruption has caused increased market volatility and is expected to lead to an economic recession and/or a significant decrease in consumer confidence and business generally. We expect the continuation of LIBORthese conditions caused by the outbreak, including the impacts of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, and other federal and state measures, specifically with respect to loan forbearances, will have some adverse impacts on our businesses and results of operations and the business and operations of at least some of our borrowers, customers and business partners and that these impacts may be material. In particular, these events can be expected to, among other things:

impair the ability of borrowers to repay outstanding loans or other obligations, resulting in increases in delinquencies;
impair the value of collateral securing loans;
impair the value of our securities portfolio;
require an increase in our allowance for loan losses;
adversely affect the stability of our deposit base, or otherwise impair our liquidity;
reduce our asset management revenues and the demand for our products and services;
impair the ability of loan guarantors to honor commitments;
negatively impact our regulatory capital ratios;
negatively impact the productivity and availability of key personnel and other employees necessary to conduct our business, and of third-party service providers who perform critical services for us, or otherwise cause operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions;
increase cyber and payment fraud risk, given increased online and remote activity; and
negatively impact revenue and income. 

Prolonged measures by health or other governmental authorities encouraging or requiring significant restrictions on travel, assembly or other core business practices could further harm our business and those of our customers, in particular our small to medium sized business customers. Although we have business continuity plans and other safeguards in place, there is no assurance that they will continue to be effective.

The ultimate impact of these factors is highly uncertain at this time is uncertain. We haveand we do not yet know the full extent of the impacts on our business, our operations or the national or global economies. However, the decline in economic conditions generally and a significant amount of loans, derivatives and other financial obligations or extensions of credit that may be adversely affected by the discontinuation of LIBOR and uncertainty regarding its replacement. In addition, uncertainty regarding the nature of such potential changes, alternative reference rates or other reforms may adversely affect the trading market for securities on which the interest or dividend is determined by reference to LIBOR, including the depositary shares underlying our Series A Preferred Stock and Series B Preferred Stock during their respective floating rate periods. The discontinuation of LIBOR also could result in operational, legal and compliance risks, and if we are unable to adequately manage suchprolonged negative

risks, they could haveimpact on small to medium sized businesses, in particular, may result in a material adverse impact on our reputation and oneffect to our business, financial condition and results of operations or future prospects.

The current expected credit loss standard established by the FASB Board will result in a significant change in how we recognize credit losses and may have a material impact on our financial condition or results of operationsoperations.

In June 2016, FASB issued an accounting standard update, “Financial Instruments - Credit Losses (Topic 326), Measurementaddition, to the extent COVID-19 adversely affects our business, financial condition and results of Credit Lossesoperations, and global economic conditions more generally, it may also have the effect of heightening many of the other risks described in the “Risk Factors” section of our Annual Report on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model, which is referred to as the Current Expected Credit Loss (“CECL”) model. The CECL model will become effectiveForm 10-K for the Company for the fiscal year beginning January 1, 2020. Under the CECL model, we will be required to present certain financial assets carried at amortized costs at the net amount expected to be collected. The measurement of expected credit losses is to be based on historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan. This differs significantly from the “incurred loss” model, which delays recognition until it is probable a loss has been incurred. Therefore, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses. Although we are continuing to evaluate the quantitative and qualitative effects of the CECL model on our estimated credit losses, results of operation and financial position, the adoption of this standard could have a material impact on the Company’s financial statements.ended December 31, 2019.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Recent Sales of Unregistered Securities

None.

Purchases of Equity Securities by the Company and Affiliated Purchasers

The table below sets forth information regarding the Company’s purchases of its common stock during its fiscal quarter ended September 30, 2019:March 31, 2020:
 
Total Number
of Shares
Purchased (1)
 
Weighted
Average
Price Paid
per Share (1)
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (2)
 
Approximate Dollar Value
of Shares that May 
Yet Be Purchased
Under the Plans or
Programs (2)
July 1, 2019 - July 31, 201916,131
 $20.24
10,000
 $11,303,137
August 1, 2019 - August 31, 201926,405
 19.57
25,000
 10,814,015
September 1, 2019 - September 30, 201920,846
 19.37
20,000
 10,428,804
Total63,382
 $19.67
55,000
 $10,428,804
 
Total Number
of Shares
Purchased (1)
 
Weighted
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (2)
 
Approximate Dollar Value
of Shares that May 
Yet Be Purchased
Under the Plans or
Programs (2)
January 1, 2020 - January 31, 202062,961
 $25.16

 $10,428,804
February 1, 2020 - February 29, 202030,036
 22.65
10,000
 10,209,025
March 1, 2020 - March 31, 202020,731
 15.17
20,000
 9,908,986
Total113,728
 $22.68
30,000
 $9,908,986
(1) 
There were 8,38283,728 shares of treasury stock acquired in connection with the exercise, net settlement, cancellation or vesting of equity awards included in the total number of shares purchased reflected in the table above. These shares were not part of a publicly announced plan or program.
(2) 
On October 16, 2018, the Board approved an additional share repurchase program of up to $5 million. On July 15, 2019, the Board approved an additionala share repurchase program of up to $10 million. Under this authorization, purchases of shares may be made at the discretion of management from time to time in the open market or through negotiated transactions, as well as purchases of shares or the options to acquire shares subject to common stock incentive compensation award agreements from officers, directors or employees of the Company.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.


ITEM 6. EXHIBITS


Exhibit No.    Description




31.1
31.2
32
101The following materials from TriState Capital Holdings, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2019,March 31, 2020, formatted in XBRL: (i) the Unaudited Condensed Consolidated Statements of Financial Condition, (ii) the Unaudited Condensed Consolidated Statements of Income, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Income, (iv) the Unaudited Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Unaudited Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Unaudited Condensed Consolidated Financial Statements.*
* This information is deemed furnished, not filed.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


TRISTATE CAPITAL HOLDINGS, INC.
  
By/s/ James F. Getz
 James F. Getz
 Chairman, President and Chief Executive Officer
  
By/s/ David J. Demas
 David J. Demas
 Chief Financial Officer


Date: November 5, 2019May 11, 2020


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