Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. TriState Capital Holdings, Inc. (1380846) 10-Q published on Aug 06, 2019 at 10:43 am
Reporting Period: Jun 29, 2019
Our loans are predominantly variable rate loans indexed to 1-month LIBOR and 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. When the financial markets anticipate a rate cut, LIBOR typically decreases in advance of action taken by the Federal Reserve, which compresses and can invert the historical spread between 1-month LIBOR and the Effective Federal Funds Rate. This occurred during the three months ended June 30, 2019, compressing our net interest margin, which impacted 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.
Our total assets as of June 30, 2019, were $6.85 billion, an increase of $810.3 million, or 27.1% on an annualized basis, from December 31, 2018, driven primarily by growth in our loan portfolio and cash and cash equivalents. As of June 30, 2019, our loan portfolio totaled $5.66 billion, an increase of $532.1 million, or 20.9% on an annualized basis, from December 31, 2018. Total investment securities decreased $35.3 million, or 15.3% on an annualized basis, to $431.4 million as of June 30, 2019, from December 31, 2018, primarily as a result of called securities offset by purchases made to continue to strengthen the balance sheet and liquidity of the Bank. Cash and cash equivalents increased $268.3 million to $458.3 million as of June 30, 2019, from December 31, 2018. Our Asset and Liability Committee (“ALCO”) is responsible for managing the investment portfolio and liquidity of the Bank, among other responsibilities. Given the current interest rate curve and overall interest rate environment, 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.
As of June 30, 2019, our total deposits were $5.79 billion, an increase of $736.5 million, or 29.4% annualized, from December 31, 2018. Net borrowings decreased $69.2 million to $335.0 million as of June 30, 2019, from December 31, 2018. Our shareholders’ equity increased $109.6 million to $589.0 million as of June 30, 2019, from December 31, 2018, due primarily to the net proceeds of $77.7 million from our issuance of preferred stock in May 2019 and net income of $29.3 million.
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 June 30, 2019, the Company had a material amount of loans, investment securities, FHLB advances and notional value of derivatives indexed to LIBOR that will mature after 2021. If not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks.
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 for new loans. 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.
The FCA announced in July 2017 that it will no longer persuade or require banks to submit rates for the calculation of the LIBOR after 2021. It is not possible to predict the 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 interbank markets that those LIBOR estimates are based upon has been declining. Accordingly, there is considerable uncertainty regarding the publication of such rates beyond 2021. Whether or not SOFR attains market acceptance as a LIBOR replacement remains in question and the future of LIBOR at this time is uncertain. We have 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 such risks, they could have a material adverse impact on our reputation and on our business, financial condition, results of operations or future prospects.