TriState Capital Holdings, Inc.
Q4 2020 Earnings Call Transcript

Published: 28 Jan 2021

[Operator:]

Good morning, everyone, and welcome to the TriState Capital Holdings Conference Call to discuss financial results for the three months ended December 31, 2020. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. Before turning the call over to management, I would like to remind everyone, that today's call may contain forward-looking statements, related to TriState Capital that reflect 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, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those currently anticipated.

[Jim Getz:]

Good morning and thank you for joining us. 2020 was a defining year for TriState Capital. Total revenue, net interest income and non-interest income reached their highest annual levels in the company's history. We grew total loans and deposits by double-digit rates for the seventh consecutive year, as both our private banking and commercial banking businesses responded in exceptional ways to meet our clients' needs. Our Chartwell Investment partners' asset manager, delivered strong performance during the year and leveraged its excellent distribution capability to grow assets under management and dramatically improve its profitability in 2020. I'm very proud of how our three businesses and each member of this company work together during an extraordinary year to deliver for our clients and shareholders. The results of their efforts proved what we have long said that this company is designed to outperform in any environment. And while 2020 created challenges never seen before, it also significantly accelerated the growth and progress of many significant parts of our business. Bolstered by the additional capital we secured in 2020, we are well positioned for meaningful success in 2021.

[Brian Fetterolf:]

Great. Thanks, Jim. Good morning everyone. As Jim mentioned, we wanted to share with you a deeper dive into our bank technology strategy and investment approach including what we have planned for 2021. These are also included in the financial goals that Jim shared this morning. As a quick backdrop to investment decision process, we always start with addressing why what and how or as our favorite phrase from Jim would be what needs to exist to make it happen. I reordered these a bit here for this presentation though. So to start off why do we invest in technology? It's important to note that our clients in financial intermediary network are at the heart of every decision that we make. We are constantly driven to meet and exceed their needs and expectations and to find every feasible way to accomplish this. So we prioritize our investments that provide clients with the user experience and level of personal interactions as they prefer, help them to more effectively manage their business and financial lives and make it increasingly easier for them to do business with us, refer business to us and engage more meaningfully with us. Our high-performing team and culture are major differentiators for us to achieve these standards of client experience. We're always looking for ways to improve our ability to personally engage with our clients on meaningful needs and through a continuous process improvement. We accomplished this guided by our continuous goal for best-in-class scalable operating and risk management platforms to not only protect and benefit our own business, but also those of our clients and relationships as well.

[Jim Getz:]

Thank you, Brian. We are well-positioned to deliver even stronger performance moving forward as we sustain our investments in the proprietary technology and superior talent that distinguish us from peers and the industry. TriState Capital was built to endure and we firmly believe that this company's best years lie ahead. I'd now ask the operator to open up the lines for questions and answers. Operator?

[Operator:]

We will now begin the question-and-answer session. The first question comes from Matt Olney of Stephens. Please go ahead.

[Matt Olney:]

Great. Thanks. Good morning, guys.

[Jim Getz:]

Good morning, Matt.

[Matt Olney:]

So to start with I guess with the adoption of CECL would love to hear more about expectations for provision expense in 2021. And obviously it's going to be a function of loan growth. But just want to understand other acute factors that could impact this especially with the unique loan portfolio that TriState has with the private banking loans? Thanks.

[David Demas:]

Yes. Matt, we're pleased with how our investment in the talent and our unique culture in terms of our approach to credit pays dividends in terms of the strong credit quality we have. Because of that discipline and the investments we make we expect our annual credit costs will remain well below peers. Our allowance as Jim had indicated just below $35 million at year end. We've not seen any notable defaults or losses emerged to-date. And as Jim indicated our clients continue to navigate the current mix of economy quite well. And so while we remain comfortable with our credit book and are proud of the history of only $34 million of charge-offs in the past 10 years. We want to continue to make sure that we're well-positioned to handle any potential issue with respect to the economy and things that may emerge. We provided guidance in 2020 with respect to provisions primarily because of CECL implementation and our election to defer that implementation. I don't think we're going to provide concrete guidance this year. I would tell you that we would expect credit cost to be significantly lower in 2021 versus 2020 and the primary factors that we focus on in driving that determination are anticipated improvements in unemployment and anticipated improvements in GDP.

[Jim Getz:]

Matt, this is Jim. I would also indicate to you that as one of our financial performance goals we noted that we foresee the loan portfolio growing 15% to 20%. And we fully believe that the private banking portfolio make up about 60% of this portfolio at the end of the year.

[Matt Olney:]

Okay. That's helpful. Thank you for that. And then, I guess, shifting over to other financials. It looked like the tangible book value per share was higher than my expectations. And I think the consensus as well. Any more color you can give us as far as the tangible book value per share as of 12/31? And is there any more incremental dilution or impact from the capital raise in 1Q, or are these fully captured in the 4Q number?

[David Demas:]

Now it should be fully captured in the 4Q number Matt. What will change between Q4 and Q1 is the number of average shares outstanding which will impact some of those calculations. The average shares outstanding will probably move up near 32 million shares outstanding for the first quarter versus what was probably closer to 29 million in Q4.

[Matt Olney:]

Okay. Thank you very much.

[Operator:]

The next question is from Daniel Tamayo of Raymond James. Please go ahead.

[Daniel Tamayo:]

Good morning, guys. Thanks for taking my question. Just wanted to talk about the margin -- net interest margin. You saw some nice expansion in the fourth quarter with deposit costs coming down and loan yields hanging in there as you mentioned that they would. Can you talk about what you expect to see from here kind of assuming a similar rate environment? Do you still expect to be able to get back to the 170% range by the end of the year?

[David Demas:]

Daniel, we do. As you saw, we were able to deliver on what we shared with you last quarter which was margin expansion in the fourth quarter. I think, Jim mentioned that margin expanded 7 basis points. Even in this flat environment, we do see expansion in 2021, primarily driven by deposit cost reduction. So we were at about 67 basis points on deposit costs in the fourth quarter. We see that dropping to low 50s by year-end and anticipate the average for the year will be somewhere around 55 basis points. On NIM specifically, we see a NIM of approximately 170 basis points by year-end for the bank and probably in the mid-160s for the holding company.

[Brian Fetterolf:]

Yes. And I would just add to that. Obviously, NIM is a function of asset size, as well as deposit size, as well as the rate, right? So, obviously, I think, what we've demonstrated in 2020 was our ability to raise liquidity when we wanted it, and then, also, to manage those levels of liquidity by working really highly engaged with our clients. So our goal in 2021 is to continue to match liquidity with our ability to put it to work, but yet really meaningfully grow our deposit franchises we have. So, I think, there are two levers there that we demonstrated in the fourth quarter that we'll continue to be really good at in 2021.

[Daniel Tamayo:]

That's terrific. This is more of a modeling question, but the other non-interest expense line ticked up a little bit more than I expected in the quarter. What was in that that was the driver of that increase?

[David Demas:]

So, Daniel, if you allow me to step back and just put expenses in context for the year, then I'd be happy to answer your question. It's important to start with the mandate we set out for ourselves at the beginning of the year, which was to keep expense growth under 10%. We were able to do that. We achieved the lowest expense rate growth in our company's history since 2013. We were able to do that, while making investments to build and grow our company, invest in people and technology, focused on regulatory compliance and delivering a distinctive client experience. Revenue was a bit challenged in 2020, which led to some higher efficiency ratios. But with the growth in revenue that we anticipate and our focus to drive operating leverage in 2021, we expect to grow expenses by about 10% to 12% and naturally drive a lot of operating leverage, which will improve the efficiency ratio and the ratio of non-interest expenses to average assets. With respect to other expenses, specifically, there are a couple of things in there. The provision for unfunded credit costs, given the CECL implementation drove some of that increase expenses associated with the tax credits, as you highlighted in your piece last night, drove some of those increases. COVID-19-related expenses drove some of those increases. And then to a much smaller extent, fees associated with running a larger investment portfolio and volume-driven loan expenses drove some of that increase as well.

[Jim Getz:]

Dan, this is Jim. What you want to keep in mind is that, we're still building this company for the future stone by stone. So you'll notice on our income statement we -- and it's the reason why we -- Brian just went over what he did with you. We highlight ongoing technology. And for our business to continue to grow dramatically, we really have to gear up the technology that we need to put in place, along with the people and that's where we're investing at this time. You'll see the expense on compensation having gone up. We've hired about 39 new people this year alone, but we're also investing in the robotics that Brian indicated that we can complete a lot of the mundane tasks that the people have been completing in the past. When we put this company together and started doing this private banking business, it was a paper-driven business. Now, it's a technology-driven business, thanks to the investments that we've made. And you take a look at our growth that we're experiencing on the commercial side. We've linked up with the right partner in Fiserv and we're actually partially underwriting their investment in the development of a new system for our commercial lending area. And all that's contained within the technology number that you see in front of you there.

[Daniel Tamayo:]

That's sounds really helpful. Appreciate it.

[Operator:]

The next question is from Michael Perito of KBW. Please go ahead.

[Michael Perito:]

Hey, good morning, guys. Happy New Year.

[Jim Getz:]

Happy New Year.

[Michael Perito:]

I appreciate all the color so far. I think, it's an interesting discussion right the technology investments, but the future scalability of it all. And I know, David you mentioned that you guys expect to improve the efficiency ratio. And I think that makes sense when you kind of look at everything you laid out but that also doesn't seem like the maybe the best metric to kind of look at the company relative to peers right because of the AUM business, which I know runs a little higher. So I'm just curious, if you can maybe spend a second telling us a little bit more about how you think some of the scalability that you guys expect to experience in 2021 should impact some other return metrics like ROA and ROE? And how we should think about the improvement in this year?

[David Demas:]

So Mike, as we think about ROA and ROE we'll likely see ROE increase before ROA. We believe that yields on interest-bearing assets will be range bound for a period of time here, particularly as we grow investments at a similar rate as loans. Earnings will grow from sort of what we describe as our responsible growth strategy and will generate a return on the capital that we were able to raise in 2020 and deploy that capital. Jim mentioned that we are a growing company. And you need to keep in mind that, the lag of return, there's a lag in the return on that growth. So if you think about the contributions of sort of a solid loan book, it takes time for that revenue to materialize. Obviously, the increases over time pay for the cost of client acquisition, capital provisioning for CECL, as well as the cost of growing liquidity to fund all of this. This will increase over time. The sub-debt expense is also a component of interest expense and it takes time to deploy that. So we've got the economics of a growing bank as Jim pointed out a minute ago, and some of the expense structure that we've put in place in 2020 will pay dividends in 2021. So, ROE improvement before ROA, and I think if we'd just – I'd take you back to Jim's goals for the year in terms of revenue growth expense growth and what we plan to do in terms of the balance sheet.

[Michael Perito:]

Fair. Understood. And then just a clarification question on the 10% to 12% expense growth for the year, are you guys assuming that off of kind of like $123 million-ish jump right here on 2020, or are there any other adjustments we should be mindful of?

[David Demas:]

No. I think if you just took our annual expenses for 2020, and grew that by low double digits as Jim indicated that's what we'd expect for the year.

[Michael Perito:]

Got it. Great. Thank you guys.

[David Demas:]

Thanks.

[Operator:]

The next question comes from Steve Moss of B. Riley Securities. Please go ahead.

[Steve Moss:]

Good morning, guys.

[Jim Getz:]

Good morning, Steve.

[David Demas:]

Hey, Steve.

[Steve Moss:]

Just on the loan growth guidance here 15% to 20%, a little bit below kind of what you've done last couple of years. And even relative to this past quarter. Just kind of curious, if you give some color as to how to think about that? I heard you Jim when you said, business – the private loan should get to 60%, but just kind of curious as to how you think about the pipeline and growth over the course of the year?

[Brian Fetterolf:]

Yeah. I think – this is Brian. I think that 15% to 20% is probably, a very safe baseline number, but we would expect to probably push that more in the 20% to 25% range. But I think another way to think about 15% to 20% is probably on an average loan growth basis. So as we look at that more on growing that across the year. But we believe that we have probably the best loan growth opportunities that we've ever had as we approach the next year. So we would not – we would expect to be over that 20% number. Again, I think, if we look at 15% to 20% revenue we'll certainly get part of that from the margin expansion we talked about. Obviously, we'll put some additional money to work on the investment side and then growing the loans over 20% support that revenue growth.

[Steve Moss:]

Okay, that's helpful. And then in terms of just maybe following up on the reserve ratio and credit costs here. I hear you guys on the economy improving to help drive the provision expense down. Just kind of how do we think about maybe debt reserve ratio heading back towards what we saw pre-COVID in terms of maybe how long it will take to get back towards those levels?

[Brian Fetterolf:]

So, I think we're -- yes, I think we're looking at a very sort of flat economy. And I think from a reserve perspective I think in 2022 or 2021 as David mentioned, right? So, that's going to be a multiyear process from our perspective. We're not necessarily in a rush to do any of this. But again the loans we put on in 2021 again this -- and probably revert back to your answer from last time. That private bank loans we will continue to look to grow 25% to 30%. So, out of that number that we gave to you that 15% to 25% loan growth, significant part of that will be on the private bank side. And then on the commercial side, the loans that we put on this year, we think we'll be favorable under CECL treatment. So, we would expect that this is going to be a pretty modest year from a contribution, but -- so we'll start obviously reducing the percent of loans -- provision to loans a bit through our growth because that will probably come on a bit slower. And then -- but in terms of actual releases I think we're looking at a longer period. I don't know David if you wanted to add to that?

[David Demas:]

No, I agree. If you're targeting your comment to releases, I don't think you'll see us release reserves for a while.

[Brian Fetterolf:]

Yes. But from an average annual credit cost we would expect to continue to outperform relative to peers for sure.

[Jim Getz:]

Yes. You want to keep in mind what our historical track record has been with regard to credit, Steve. We haven't had a single net charge-off in the past three years. And in the past five years, it's been $2.6 million. And then if you look back to the recession, it was $37 million. So, we have a pretty credible track record in that regard that the underwriting system that we put in place is really delivered to us and we continue to have confidence in that.

[Steve Moss:]

Right. Well, thank you very much. I appreciate all the color.

[Jim Getz:]

Thank you.

[Operator:]

The next question is from Russell Gunther of D.A. Davidson. Please go ahead.

[Russell Gunther:]

Good morning guys.

[Jim Getz:]

Good morning.

[Russell Gunther:]

So, on Chartwell, nice finish to the year. I was just wondering if you could share your revenue expectations for 2021 for that fee vertical and what the drivers would be.

[Jim Getz:]

Yes. What you're going to see there clearly is the fact that their distribution network continues to perform. They have credible investment performance. Most of the flows that we reflected to you in the presentation came into our short duration high-yield product and also the value products that we have in place at the company. So, we anticipate a very robust year there based on performance, the quality of the distribution network, and the client base that we've been able to establish both on the retail and the institutional side. If you look at the retail side of the business, it's now over 20% of the assets and it was immaterial when we acquired the company in 2014. And you look at the institutional side of the business and it continues to grow pretty handily that $115 million that I mentioned will be -- should be converted over in the next 60 days and come into this quarter.

[David Demas:]

Russell just to put some numbers behind themes that Jim shared with you. Chartwell was able to reduce our expenses by 12% in 2020. And at the same time their net income in 2020 was up 15% year-over-year. Their run rate revenue right now is on pace to be about $36 million for 2021. So they had a great 2020 and they're set up for a great 2021.

[Russell Gunther:]

Jim and David thank you for that. And then just for my final question. Hoping you could talk a little bit about trends within your commercial portfolios both C&I and CRE and what drivers of growth for 2021 would be there? Thank you.

[Brian Fetterolf:]

Yes. Thanks Russell. I think if we look at what we were able to do in '20 and to roll that forward in 2021 we'd be pretty happy particularly the second half of that. So on the C&I side, we would probably continue to see a significant portion of the growth driven by equipment finance and fund finance. And these are where agile products growing industry, growing demand where we can engage pretty quickly and use our expertise and networks to engage with clients. Certainly we want to be there to continue to grow our fundamental C&I business as well. I think it's really going to be around finding when people you want to focus on yet making a transition and when they're comfortable to do that. But in terms of our clients by the way, I mean again, I think Jim mentioned it in his script I mean we've been inspired and just really impressed with how our commercial clients have managed their businesses, as well as their real estate development. So I think that there are certainly significant opportunities with our existing portfolio to grow along with our clients, as well as we come out of this. So we're excited by those 3. So those are probably the three primary drivers on the commercial real estate side. We're still very excited about the opportunities that our key clients have in the geographies and the markets and again that includes sort of all of Ohio, Pennsylvania, New Jersey, New York and some contiguous states. So as we work with our known clients or in our known prospects so it's a pretty exclusive group of people that we work with certainly sponsor-driven. They are liquid and they're finding significant opportunities in this environment. So asset classes or loan types, property types probably similar to what you're going to see other places. We continue to focus on, industrial flex, multifamily and we might see some opportunistic investments for our clients and other places. But we're fundamentally engaged with them on fundamentally new business. I mean good -- the other good part is, we're really committed to keeping the loans that we have from a refinance perspective and continue to keep adding the portfolio. So the activity we need to generate in 2021 even though we are seeing it being a more competitive environment than '20. We're still optimistic that we can minimize our payoffs and where more growth falls to the net side. So I think that's where we're going to be able to have strong growth in 2021.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Getz for closing remarks.

[Jim Getz:]

Thank you very much for your continued interest in TriState capital and your participation today. We look forward to updating you on our first quarter results in April. Have a great day.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.