TriState Capital Holdings, Inc.
Q1 2021 Earnings Call Transcript

Published: 22 Apr 2021

[Operator:]

Good morning, everyone and welcome to the TriState Capital Holdings Conference Call to discuss financial results for the 3 months ended March 31, 2021. Please also note that today’s event is being recorded. Before turning the call over to management, I’d like to remind everyone that today’s call may contain forward-looking statements related to TriState Capital that reflects TriState Capital’s current views with respect to among other things, future events and the company’s financial performance as well as the company’s future plans, objectives or goals. Such forward-looking statements are subject to risks and assumptions and uncertainties that could cause actual results or outcomes to differ materially from those currently anticipated. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

[Jim Getz:]

Good morning and thank you for joining us. TriState Capital’s first quarter performance underscores the earnings power and potential of this company, which today operates a $10 billion plus bank and an $11 billion plus asset management firm. All three of our businesses have been built on our capabilities and distribution strength to drive strong demand for our client-focused products and services, which are in turn delivering continued and meaningful organic growth. We again delivered record net interest income and total revenue during the quarter as well as all-time high pre-tax income, assets under management, loans and deposits. The performance enabled us to grow first quarter 2021 net income by 28% from the linked quarter and 26% over the same period last year. These results were achieved, thanks to the trust and confidence of our clients, which they place in us and the unrelenting efforts of our talented investment management, private banking and commercial banking teams.

[Tim Riddle:]

Thank you, Jim. Chartwell’s first quarter performance and our optimism about our ability to continue growing revenues and our contributions to TriState Capital’s earnings are based on the strengths of our investment performance, client relationships and distribution capabilities. The majority of our $940 million in AUM growth during the quarter or 54% of it resulted from positive net flows from existing accounts and from new business. So, while AUM benefited from the market’s tailwind in Q1, our ability to generate new business and net flows from existing client relationships were the primary drivers of AUM growth. We don’t believe many active managers will be able to make that claim. We also made strategic decisions to enhance Chartwell’s operating leverage and segment profitability. These efforts began well before the onset of the pandemic and continued throughout 2020. As a reminder, by the end of 2019, we had taken active measures, which reduced our annual expense run-rate by more than $2 million. For the full year 2020, Chartwell’s expenses were down a full $4 million year-over-year. The efforts we have made to-date have been very successful and we believe positioned us well to deliver profitable growth at an even greater rate moving forward. In fact, with the team and infrastructure in place today, we believe we can grow Chartwell’s AUM and revenue by another 50% or so. Now, that confidence is supported by the success of our unparalleled distribution team and by TriState Capital’s continued commitment to investing in distribution. We are also continuously developing new products and new avenues to deliver those products to our clients and to prospective clients.

[Jim Getz:]

Thank you, Tim. Turning to TriState Capital Bank, total loans grew by 23% over last year to $8.5 billion on March 31, 2021. Growth continues to be led by our highly differentiated private banking business. We are the nation’s leading provider of marketable securities backed loans distributed through independent financial advisers, trust companies, family offices and regional securities firms, and we now have 265 financial intermediaries in our referral network. Private banking loans reached a record of $5.1 billion at quarter end and now make up 59% of total loans. And first quarter private banking loan application volume hit a new record level in 2021, up some 44% for the same period last year. Commercial loans are up nearly 15% year-over-year as our end-market commercial real estate lending more than offset pay-downs on revolving credit lines in our commercial and industrial portfolio during the first quarter. As a reminder, we are coming off record C&I growth in the fourth quarter of $136 million. So over the last 6 months, we have increased commercial and industrial lending by $110 million or 10%. Our commercial real estate and C&I portfolios industrial lending by $110 million or 10%. Our commercial real estate and C&I portfolios remain well diversified with strong pipelines. New CRE and C&I originations in the first quarter continue to be primarily with our longstanding relationships. This commercial loan growth is truly organic, high-quality, middle-market growth as we do not offer PPP or any small business products. For example, with C&I, our single largest borrower category remains financial services and insurance, representing some 32% of commercial and industrial loans. This includes our investment fund finance offering, including call lines of credit and net asset values of credit. And we see excellent C&I growth opportunities in this industry vertical alone. There are some periods like the first quarter where there maybe timing differences in pay-downs of lines based on capital calls made in prior quarters. Also of note, many of our financial services company borrowers are members of TriState Capital’s intermediary network, offering our private banking loans to their high net worth clients.

[Operator:]

Our first question today comes from Matt Olney from Stephens.

[Matt Olney:]

Hi, great. Thanks. Good morning guys.

[Jim Getz:]

Good morning Matt.

[Matt Olney:]

I want to start on the net interest margin, and I appreciate your expectations from here. I think you mentioned last call that you have to be at that 160 margin by the end of the year, and it looks like we made some good progress here in the first quarter at the holding company. Would love to hear any updated thoughts around that?

[David Demas:]

Matt, good morning, it’s David. As you saw, we were able to deliver on some of the improvement that we talked about with this group last fall and then again in January in terms of margin expansion. And we see that continuing to occur in the current rate environment. The expansion is primarily driven by our deposit cost reduction, and we have made great progress there. We were at 59 basis points on deposit costs upon spot basis at year end that dropped to 48 basis points again on the spot basis at the end of the first quarter. We believe we will continue to see improvement in deposit costs and wind the year somewhere in the low-40s on a spot basis. As you saw our NIM continue to expand from 153 at year end to 159 at the end of first quarter and with deposit costs coming down, and with our – the floors that we have got in place and what we believe is a benign interest rate environment, you will see continued improvement from here. And NIM will be in the mid to high-160s by year end at the holding company and a little bit higher than that at the bank.

[Matt Olney:]

Okay. Perfect. That’s helpful, David. And then I am also curious at this point how you are managing the balance sheet around liquidity and securities, I think on an average basis, we saw liquidity move down, securities move up. Would love to understand kind of how you are thinking about that as you move through the year?

[Brian Fetterolf:]

Well, I think just on real quick, this is Brian. I think we are doing a really good job of highlighting the structural, really the structural alignment of the funding mechanism and then the asset deployment aspects of the company. So last year, obviously, you have seen a lot happen within the funding base and not only responding to what we thought we wanted in liquidity, but also responding to our best clients and making sure that we had rooming capacity for them. And so we have been able to, through a lot of communications, sales management and prioritization, make sure that we are really aligning our sort of what we would call it agile funding mechanism with our ability to do that. So, that predictability, I think, allows us to make some better use or more efficient use of the balance sheet. So David, if you want to?

[David Demas:]

Yes. So, we have – Matt, been focused on bringing cash balances down and deploying the liquidity we had and built last year into longer term higher returning assets, right? So we have built a fair amount of liquidity in the investment portfolio, which is high grade, AA, agency, U.S. government securities that are fully pledgeable at the Fed and creates a lot of liquidity for us. And so we have moved it from cash to other parts of the balance sheet, but we will continue to focus on the liquidity of the overall balance sheet as we move through the year.

[Matt Olney:]

Okay, I will step back in the queue. Thank you.

[Operator:]

Our next question comes from Daniel Tamayo from Raymond James. Please go ahead with your question.

[Daniel Tamayo:]

Good morning everybody.

[Jim Getz:]

Good morning Daniel.

[Daniel Tamayo:]

Good morning Jim. Maybe we talk about deposit growth, just quickly, very strong in the quarter. You touched on in the release, the drivers there with the liquidity management business. But maybe you can give a little more detail there about what’s driving that strong deposit growth and then expectations going forward? Obviously, including the environment with – as you just touched on excess liquidity and everything else? Thanks.

[Brian Fetterolf:]

Yes. Yes. So thanks. So we are, I think, pretty pleased with the first quarter. If you look at fourth quarter last year and first quarter of this year, if you put them together a 6-month time period, we think are pretty representative of what we want to be doing sort of yes as we approach this more stable environment. But – and that – I would guess we would classify that as meaningful growth, meaningful clients and meaningful business. So, pretty diversified across the platform actually in those 2 quarters. Treasury management was – so our service based offerings that drive liquidity balances were a very significant driver of the deposit growth within the first quarter from a balance perspective and some new relationships, which are – we are pretty excited about. And our national sales business and the family office business, both contributing in smaller account sizes, but with more names. So, we are trying to really grow our relationships at this time and sort of build for the future, if you will, and taking advantage of that. But if you look our overall expectations will be our service based offerings will be somewhere in the range of 40% to 50% of our deposit growth this year. So, we did see probably a little bit more on the service base originations in the first quarter. But if you look at fourth quarter, first quarter, I think that’s a pretty good balance there, 40% to 50% on the TM and service based side.

[Jim Getz:]

Dan, this is Jim. What you are asking really falls in line with the whole nature of this company from time of inception. We wanted to be consistently reducing the risk profile. So, at this point, as you heard earlier, we are close to about 60% of our loans being loans secured by marketable securities. They are actually priced every single day and valued. So, we have a good understanding of what the nature of the collateral is in 60% of that portfolio. But more importantly, this situation where we have been able to garnish deposits, we have taken advantage of to build up the investment portfolio, which continues to lower the risk profile. If you look back a couple of quarters, you will see we took a very meaningful gain in that portfolio of some $3.8 million and took it out of corporates and put it into agencies. And that’s what we have been consistently doing. And as David pointed out, we have an average rating of AA plus, but we also have a short duration on that of 4.3 years. So we are really been able to create an appropriate environment for the type of circumstances that we find ourselves in.

[Daniel Tamayo:]

Terrific, that’s great color. Thanks. And then maybe switching over to Chartwell, so you have had some nice expansion of EBITDA margins over the last few quarters, you had just mentioned the 50% AUM and revenue growth. Maybe do you think you can continue to see EBITDA margins expand in that business? And then if you can touch on the timing of the 50% growth expectations within that business? Thanks.

[Tim Riddle:]

Sure. This is Tim. In terms of the EBITDA margin, we would expect that to expand from here. We have obviously put a great deal of time and effort in on, again, controlling the expenses across the board within Chartwell. And again, with our success and continued success in, again, new business and inflows from existing accounts, that naturally will expand that EBITDA margin as time goes by. In terms of the growing of the AUM and the revenues by 50% from here, again, that we could accomplish that task. If in fact, the market cooperates, and we continue to expand, again, new product offerings. And as I had indicated, also opening up new areas where we can distribute those products. But that could happen over the course of the next, say, 3 years to perhaps 5 years.

[Daniel Tamayo:]

Thanks for taking my question.

[Operator:]

And our next question comes from Russell Gunther from D.A. Davidson. Please go ahead with your question.

[Russell Gunther:]

Hey, good morning guys.

[Jim Getz:]

Good morning Russell.

[Russell Gunther:]

Bigger picture question to start. You could just give us an update on sort of where the financial intermediary network stands today. And just curious how that’s trended over the past year, trying to get a sense for has the pandemic slowed the growth rate of on-boarding new relationships and as the economy reopens and people travel again, does that provide a bigger run rate to bring more folks on board, just appreciate some general thoughts there?

[Brian Fetterolf:]

Yes. Thanks, Russell. I think overall, we are continuing to increase that number to the mid-260 range. And certainly, we are very pleased with that type of growth. It’s one of our actually larger growth quarters. Our applications are – did hit a record number. We are up 44% year-over-year, same quarter. And so we are seeing, I would say, continued success from our distribution platform and as well as just increased awareness and demand and acceptance around what we are doing here. So, it’s probably unprecedented in terms of our – the opportunity that we have. And I guess, accordingly, we are really focusing on our meaningful business, making sure that we are there for our most meaningful clients. And making sure that sort of our – yes, the additions to the platform or relationships that we know we can serve really well at a premier level. But overall, to your point, we are seeing I would say unprecedented opportunity within the channel.

[Russell Gunther:]

I appreciate it, Brian. Thank you for the update. And then switching gears a little bit, you guys gave some good color on the C&I dynamics this quarter. Just looking for a general update on the equipment finance vertical expectations for growth there going forward? Thank you.

[Brian Fetterolf:]

Yes, sure. So I mean, I think we are very happy with, again, both the private bank production in the first quarter, again, when you put fourth quarter and first quarter together, record production and again, same thing on our commercial side, right. So overall, I guess our distribution capabilities, our internal ability to meet client expectations will be there for our clients, I would say, again, that is in a historic high level right now. On the commercial side, as we pointed out, I think in the release, if you look at the fourth quarter, first quarter, we are pretty happy with $100 million plus growth on just, again, we are talking to the C&I side. So, we are happy with that. We did increase our equipment finance and the fund finance verticals of centers of excellence to make sure that we were – had opportunities with good clients sort of in all environments. And those are more agile products that did well last year, from a growth perspective. And in the first quarter period a bit of normalization around that fourth quarter into the first quarter. But as we look forward, we are very positive on growth of both of those businesses. And I think as we get into the recovery economy, we are very excited about our prospects within traditional C&I. So we have again, focused a bit on that fund finance, equipment finance space in the last 12 months to 24 months. And as we move forward from here, we know that those are working really well, and we are really excited what we think we can do in traditional C&I. And again, this is the time when we really stand out to people, which is we will have to be more thoughtful when you are originating new C&I relationships. That’s what we are the best at, that’s what our people are the best at. So, we are excited about how we are going to differentiate ourselves sort of over the next 12 months to 24 months. And again, we think that as the market opens a little bit as you were talking about just our ability to meet with people a little bit more and convey that in person, not just over the phone or by video, will help our distribution efforts, getting that message really felt by clients and prospects.

[Operator:]

Our next question comes from Steve Moss from B. Riley Securities. Please go ahead with your questions.

[Unidentified Analyst:]

Hi everyone. This is Gage Schwartzman, Steve’s associate sub and in firm today. How is everyone doing?

[Jim Getz:]

Good morning. Welcome.

[Unidentified Analyst:]

So I wanted to start out on credit here. The NPAs picked up, $13 million of that was for the 2 CRE loans. I am sort of curious, can we see any build in reserves moving forward from here due to that or I am also sort of curious what the time line is to get some of those loans off of deferrals? Thank you.

[Brian Fetterolf:]

So if I understood, I think, maybe 2 questions. In terms of the NPAs and provision and then the deferral trajectory from here. So, I think on the provisions, we feel that we are adequately reserved or well reserved at this point. And we don’t see any trends that are referenced by those, as we indicated, those are unique circumstances. So, we will see anything that those NPAs will really reflect on the broader portfolio. And I will let David give some further guidance. But on the deferral basis, as we indicated, were 8 loans, $62 million. We are scheduled to reduce that pretty significantly again here over the next 1 quarter to 2 quarters. So, we are really happy and pleased, I guess, inspired, if you will, by the performance of the loans that we had in the deferral portfolio. So again, the quality of people we worked with just really on demonstration here as those people manage their businesses and properties through that. But David, if you wanted to give more guidance on provision, I guess?

[David Demas:]

Yes, sure. I would be happy to, Brian. So we are very pleased with the investments we have made in talent and our credit culture, and it continues to pay dividends. We believe that those investments will keep our annual credit costs well below our peer group. Brian has talked about the fact that we haven’t seen any notable trends here. And while we remain comfortable with our reserve levels and our credit book, CECL is a bit unique, and the future volatility of CECL with any potential macroeconomic issues that may emerge in the short – in the medium-term is in terms of dealing with the pandemic. We are in sort of a transitionary period and factors such as losses across the entire banking sector, as loans come off deferral and need and a repayment status. Things that are macroeconomic variables like commercial real estate, price indexes, vacancy rates, and the underlying weaknesses mask or cloak, some of the – that are plucked by current fiscal policy. You also have potential tax policy in here, right? So there is just a lot going on with respect to what the CECL model needs to absorb and process. And so we feel good about where we are right now. We don’t see any further losses emerging, but we’re going to be very cautious and prudent before we release any reserves at this point.

[Unidentified Analyst:]

Okay, got it. Yes, that’s super helpful. And just on – it seems like you guys are putting a lot more money into investment securities here. Sort of curious, looking forward, are you guys looking to continue that trend? And also what are the current yields looking like on investment securities? Thank you.

[David Demas:]

So the current investment portfolio is, as Jim mentioned, AA+ rated – average duration of about 4.3 years, agency securities that are seeing some repayments now, but those repayments will slow, and the overall yield will continue to improve. We’re probably somewhere around 170, 175 overall yield of the portfolio at the moment. I expect that to pick up a little bit as prepayments slow here over the course of the next few months.

[Unidentified Analyst:]

Thank you. Thanks for taking my questions. I will pass it off.

[Operator:]

Our next question comes from Michael Perito from KBW. Please go ahead with your question.

[Michael Perito:]

Hey, good morning. Good to have you all on this morning. I had a question for Tim. I appreciate you being on today and giving us the update on Chartwell. I was wondering if you could maybe expand a little bit on your expectations for the your kind of weighted average fee rate going forward. It looked like it took a very modest step down in the quarter. Is that due to mix and some of the trust AUM growth you were talking about or is that just the timing issue on revenue recognition? Just any expanded thoughts there that you’re willing to share?

[Tim Riddle:]

Sure, Michael. How are you?

[Michael Perito:]

Good.

[Tim Riddle:]

It is all about the mix. So when you take a look at where we had a lot of success in Q1 in terms of not only flows, but also in terms of new business, a lot of that was on the fixed income side, slightly lower fee, obviously. So that’s what drives that average fee rate that, again, might move around a basis point or 2, given the flow and the mix of the new business through the quarter.

[Michael Perito:]

Got it.

[Jim Getz:]

Mike you want to keep in mind, this is Jim. That when we acquired Chartwell in 2014, the average weighted fee was 25 basis points and now it’s 35%. You’re aware we had put in place a family of mutual funds and the yield on those mutual funds to the company is higher. And that, to an extent, drove that business. And if you look at the portfolio itself, it was overwhelmingly when we acquired an institutional business that’s much more competitive. Now over 20% of it is retail, so that – what that $35 million is probably going to be a pretty solid number. It will rotate between $33 million and $36 million or $37 million, but it’s not going to get much better than that. And the portfolio, the whole portfolio, the AUM has been diversified meaningfully. If you look at it, now it’s about 57% fixed income, while before, it was probably not much more than 15% when we bought the company. And in environments that you find that you experience like we have last year, it added stability to the company.

[Michael Perito:]

Makes sense. Thank you guys for that. And then as my follow-up, maybe a question for David, I apologize if I missed this earlier in the call, but I feel like the last couple of quarters here, I’ve been so in darts at the Board on this FDIC insurance expense. I was just wondering if you have any clarity in kind of where that – when and where that might settle into a more normalized run rate moving forward here, especially with the strong deposit growth that you guys are continuing to see?

[David Demas:]

Sure, Mike. So let me put some context to it. The FDIC insurance expense was on an annualized basis, 4 basis points on average assets in the first quarter. That’s down from about 8 basis points in the fourth and down from about 13 in the third of last year. I think we have shared with us previously that because we’ve crested over the $10 billion mark, the methodology in terms of calculating that, that insurance premium is different, and we get the benefit of our private banking loan portfolio, the lower risk nature of that portfolio in terms of the calculation. So you will see the insurance premiums tick up slightly from here based on growth. But where we sit right now is probably a pretty good run rate of where we will go through the year, obviously, adjusting a little bit for growth. But that moved from the third quarter to the fourth when we were able to apply for the first time. And then to the first, most of that transition is now behind us, and this will start to normalize from here.

[Michael Perito:]

Got it. So we’re growing off of kind of the $1.1 million because the new methodology makes the back half of last year, a little less relevant from a calculation standpoint?

[David Demas:]

Exactly.

[Michael Perito:]

Got it. Well, it’s good to hear from you all. Thanks for taking my questions.

[Jim Getz:]

Okay. Take care.

[Operator:]

Our next question is a follow-up from Matt Olney from Stephens. Please go ahead with your follow-up.

[Matt Olney:]

Hi. Yes. Thanks for taking my follow-up. Just want to circle back on the expense discussion we were just having and just taking a step back, operating expenses were sequentially low in the first quarter, and you mentioned FDIC insurance is one of the reasons the guidance of 10% to 12% growth in 2021 was maintained and implies quite a bit of ramp from these bubbles in the first quarter. Would love to hear more about kind of where you expect to see that ramp in which categories? Thanks.

[David Demas:]

So Matt, we – you think about our growth last year and our ability to manage expenses to about 10%, we were able to continue to make significant investments last year as we built technology people, processes, regulatory compliance, all to support what we view as responsible growth by the organization. For this year, our goals continue to be annual growth of loans and deposits of 15% to 20% and revenue of 15% to 20%. To support that responsible growth, we need to continue to make investments in people, process and technology. So that’s where you’ll see the primary drivers being in compensation and technology-related expenses. We believe we can focus on driving that – those continued investments and keeping expense growth under 12%. You’ll naturally see as we move through the year, improvements in operating leverage, operating efficiency ratio, the non-interest expense to average assets ratio and return on equity, which is above 9 for the quarter, and we believe we will get that to double digits by the end of the year. So responsible growth, a lot of investments we’re making in people and technology to support that growth, regulatory compliance-related type items. And we feel good about the projection that Jim had in his remarks of 10% to 12%.

[Jim Getz:]

Yes. And I would just add, around the client engagement, client experience piece. A lot of those are aligned with the risk management side. But a lot of the people and automation and technology that we’re putting in place we will absolutely enhance the client experience. So we will reduce manual touches to more automated touches. So we’re freeing up our people to focus on higher level client engagement and more meaningful engagement. And also, as you can see, sort of our T&E and other client engagement expenses fairly low in the quarter. Our hope certainly is that we’re finding ways to continue to engage with clients in person or more meaningfully over the future. So we will certainly see some increases as we do that as well.

[Matt Olney:]

Okay. That’s helpful. And just a few more housekeeping questions here, I guess, more on the modeling front. It looks like in the first quarter, the diluted share count was a little bit lower than expected, but a higher preferred dividend. David, I think we kind of talked about this a few months. Just kind of remind me of the puts and takes on that in the first quarter and how we should be thinking about that moving forward?

[David Demas:]

Yes. Matt, as a recovering account, I sometimes find there is an inverse relationship between the amount of disclosure and its usefulness. We will continue to provide this table on Page 14 to you each quarter. Diluted common shares are about 32.2 million shares, that should stay relatively stable. The biggest change this quarter was the share count of restricted stock, the amount which was dilutive. That fluctuates with the market price and how much – what shares are in the money. With the improvement in the TriState market price, the restricted stock, more shares became dilutive. And so absent any significant change in terms of restricted stock for the remainder of the year, the diluted common share count should stay around 32.2 million, maybe a little higher or lower just based on market fluctuations. So we will continue to provide this disclosure and continue to try to provide transparency and clarity here.

[Matt Olney:]

And on the preferred dividend side, I think it was around $5 million this quarter. How will that fluctuate throughout the year?

[David Demas:]

That will stay relatively consistent as well. It will grow slightly quarter-to-quarter to the extent that Stone Point elects to receive the dividend in additional shares versus cash. To date, they have done that. They have elected additional shares. But the overall dividend should stay relatively stable at the first quarter levels.

[Matt Olney:]

Okay. And then just lastly, David, on the effective tax rate, I would let you know kind of how you are thinking about that this year?

[David Demas:]

So we’re a little higher than we had hoped to be in the first quarter, but we still believe we can get that down to 17%, 18% through the year. We’ve got a couple of credits on the horizon that potentially will help us get there if we’re able to execute and transact on those and so guidance of 17% to 18% still holds.

[Matt Olney:]

Okay, perfect. I am all said. Nice quarter. Thank you.

[Jim Getz:]

Thank you.

[Operator:]

And ladies and gentlemen, I am showing no additional questions. I’d like to turn the conference back over to management for any closing remarks.

[Jim Getz:]

Thank you very much for your continued interest in TriState Capital and your participation today. We all look forward to updating you on our second quarter results in July. Have a great day. Thanks.

[Operator:]

And ladies and gentlemen, with that, we will conclude today’s conference call. We do thank you for attending. You may now disconnect your lines.