TriState Capital Holdings, Inc.
Q1 2018 Earnings Call Transcript

Published: 19 Apr 2018

[Operator:]

Good morning, everyone, and welcome to the Tristate Capital Holdings Conference Call to discuss financial results for the three months ended March 31, 2018. All participants will be in listen-only mode. [Operator Instructions] 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 may generally be identified as describing the company's future plans, objectives or goals. Such forward-looking statements are subject to risks 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. For further information about the factors that could affect Tristate Capital's future results, please see the company's most recent annual and quarterly reports filed on Forms 10-K and 10-Q. You should keep in mind that any forward-looking statements made by Tristate Capital speak only as of the date on which they are made. New risks and uncertainties come up from time to time and management cannot predict these events or how they may affect the company. Tristate Capital has no duty to, and does not intend to, update or revise forward-looking statements after the date on which they are made. To the extent non-GAAP financial measures are discussed in this call, comparable GAAP measures and reconciliations can be found in Tristate Capital's earnings release, which is available on its Web site at tristatecapitalbank.com. Representing Tristate Capital today is Jim Getz, Chairman, President and Chief Executive Officer. He will be joined by David Demas, Executive Vice President and Chief Financial Officer for the question-and-answer session. At this time, I would like to turn the conference over to Mr. Getz.

[James Getz:]

Good morning. And thank you for joining us. Our company begins 2018 surrounded by opportunities and is stronger than ever. Tristate Capital's performance is the result of continued execution by what we believe is the best-in-class team as well as the confidence of a growing roster of sophisticated clients we are privilege to serve. Tristate Capital's favorable trend lines continue, and the 2018 goals we shared with you in January are unchanged and fully supported by first quarter results. As Tristate Capital has demonstrated year after year, its business model is designed to profitably grow across different economic cycles and rate environments. This was clearly illustrated in the first quarter, and we expected to remain the same in the quarters and years ahead. Through the end of the first quarter of 2018, the company performed in line with, if not ahead of, our expectations compared to the same period last year. Organic double-digit balance sheet growth continued, with loans up nearly 22% and deposits up nearly 24%. Net interest income hit a new quarterly record and grew by nearly 26% driven by average loan growth and net interest margin expansion during the first quarter and over the last 12 months. Top line growth continued with total revenues up nearly 16%. Operating leverage continued to improve as we continue to make investments for future growth with Tristate Capital Bank's efficiency ratio improved by 351 basis points to below 55%. Bottom line growth continued with pre-tax income up nearly 22% and earnings per share up nearly 39% to $0.36. This marks the 13th consecutive quarter of year-over-year double-digit earnings growth. And maintenance of superior credit metrics continued, with nonperforming loans down to less than $2.5 million or 6 basis points of total loans. Adverse rated credits were down to $29 million or 67 basis points of total loans. Each of our three businesses made significant contributions to Tristate Capital's performance in the first quarter, as the company continues to benefit from its unique combination of branchless middle-market commercial banking, national private banking, and fee revenue-generating investment manager. At Tristate Capital Bank positive results were achieved in each of our business lines. With respect to liquidity, over the last 12 months we organically grew total deposits by $781 billion, totaling $1.1 billion at the end of the first quarter. This growing deposit base encompasses Tristate Capital's relationships with dozens of large family offices, hundreds of high net worth individuals, more than a 100 broker-dealers futures and commodity firms, and other financial service firms. Hundreds of middle-market businesses, some 1,600 credit unions and hundreds of middle-market commercial customers. We've made significant progress in our treasury management growth initiatives and have taken strategic actions to manage our cost of funding using both long-term CDs and liability swaps. This focused effort has begun to payoff in balances and cost of funds. Tristate Capital has long sought to maintain a LIBOR neutral balance sheet, so as the benchmark hits its highest levels in a decade and the spread between LIBOR and the fed funds target rate widen in the first quarter, we benefited and benefited meaningfully. We're actively and aggressively growing our treasury management client base on a national basis through our multifaceted distribution system. This includes direct prospecting by treasury management relationship managers as well as introductions through our commercial banking teams and our private bank teams. Treasury management operating account balances grew 30% from one year ago and first quarter average balances grew 15% from the same period last year. This progress is a result of our top-quality technology customizable solutions and experienced high touch service at very competitive cost structures. At the same time we've enhanced Tristate Capital's liquidity and treasury management capabilities and team. We see superregional and national banks aggressively using comparable products as fee generators, losing touch with the needs of strong middle-market companies. We believe this provides Tristate Capital with a competitive advantage in the marketplace as our products, service and pricing resonate with middle-market depositors, enabling us to build strategic relationships while funding organic loan growth. Moving to lending, average loans grew organically to a record of more than $4 billion in the first quarter of 2018, up $716 million and nearly 21% from the same period last year and $180 million or 4.5% from the linked quarter. This was reflected in record quarterly net interest income of $26 million, which grew by nearly 26% for the year-ago period and almost 6% from the linked quarter. The first three months of 2018 marks one of our best quarters ever in terms of gross loan fundings and client activity. Even with paydown activity reflecting volatility in the deck and capital markets, including U.S equity indices heading into correction territory, the first quarter highlighted the low risk nature of Tristate Capital's private banking loans, which are backed by marketable securities and other liquid collateral. If you recall the first quarter of 2016, the equity markets experienced a similar though less severe correction. At that time, Tristate Capital group private bank loans outstandings by $24 million. By comparison, in the first quarter this year we grew private banking loans by $76 million. This was net of paydowns, some which attribute to clients proactive reductions and balances in connection with market volatility. During periods of market volatility, our advisor focused business model is at its best and we're working most closely with financial intermediaries in our high net worth clients, Tristate Capital's collateral monitoring technology enables us to work proactively with the advisors in our network, positioning them to help their clients manage non purpose margin loan balances. When considering the performance and potential of our national private banking business, the numbers continued to tell the story. These loans grew by just over 3% during the first quarter and nearly 28% over the last 12 months. Private banking loan volume in the first quarter of 2018 grew by about 40% from the same period last year and about a 100% from the first quarter of 2016. We had loan draws on new and existing loans of more than $350 million, our second-highest quarter ever. Private banking loan applications in the first quarter of 2018 grew by about 40% from the same period last year and about a 110% in the first quarter of 2016. Tristate Capital's unparalleled national distribution network now numbers some 171 financial intermediaries compared to 148 a year-ago and a 125 in the first quarter of 2016. All this adds up to a dominant position for us in this line of business and a very strong private banking loan pipeline heading into the second quarter. Given the power of our distribution system, the first quarter does not change our view of the 25% to 30% annual growth potential from this business. Our private banking loans are over-collateralized by well diversified liquid securities, which we monitored daily with Tristate Capital's proprietary technology. In addition to the internal stress testing we undertake regularly on the portfolio, the model is proven during periods of actual market volatility, such as the first quarter of 2016 and 2018. Out of more than 4,800 private banking loan accounts collateralized by marketable securities in the first quarter of 2018, only 28 required cures, all of which were properly satisfying. By comparison, during the first quarter of 2016, 44 loans out of more than 2,300 private bank accounts require cures. Since inception, we've experienced no losses on any private banking loans backed by marketable securities, a robust risk management and distribution system is clearly working as designed and supports our confidence in the continued growth potential of our differentiated private banking business. In commercial lending, we continued to be energized by abundant middle-market relationship opportunities within our regional footprint and expect Tristate Capital to continue organic growth at a pace that it's about three times faster than the industry. Commercial loans totaled $1.96 billion at the end of the first quarter growing $261 million or 15% from one year prior. Net commercial loan growth in the first quarter was $42 million and we have one of our largest funding quarters ever. Importantly, our efforts to expand Tristate Capital's commercial business is resulting in longer-term relationships, smart loan growth, meaningful liquidity management opportunities, significant interest rate swap activity, and a strong reputation that’s making it easier for us to win business. Additionally, our credit products for financial service firms and fund managers such as liquidity facilities and capital call facilities, are gaining momentum. As of the end of the first quarter, we've grown the level of commitments in this category to over $324 million, just as importantly these credit offerings deepen relationships with many firms within our private banking distribution network, while introducing us to new financial intermediaries we can add to that network. We remain disciplined in both origination and underwriting to ensure the commercial portfolio remains diversified well within our risk tolerance. At Chartwell Investment Partners, investment performance, product mix and distribution capability continue to attract new clients and funds in the first quarter. Chartwell grew total assets under management to $8.3 billion at the first quarter, increasing nearly 2% from one year prior. Net positive inflows of $95 billion more than offset market appreciation in the first quarter of 2018. First quarter revenues of $8.9 million reflect the high proportion of gross inflows into lower average fee rate products, particularly fixed income, relative to outflows from higher fee areas and market appreciation and higher fee equity products. Gross inflows of $411 million during the first quarter were led by products, offering access to Chartwell's short duration BB rated fixed income mid-cap value and small-cap value equity strategies. We're very pleased that these and other Chartwell products continue to deliver strong performance. Through the end of the first quarter, 11 of 14 of our asset manager products were ahead of their respective benchmarks for the 1 and 3 year periods and 10 of the 13 products were ahead for the 5-year period. Our investments and expanded distribution continue to help Chartwell drive gross retail sales of $133 million in the first quarter. Today, Chartwell's assets under management totaled more than $9 billion including about $1 billion acquired through our previously announced transaction with Columbia Partners. On a pro forma basis with acquired assets, investment management revenue would have totaled about $9.5 billion in the first quarter. We're very pleased to secure a rate of consents from Columbia's clients of about 99%, which is what we also achieved with our prior asset management acquisitions. Client retention is vital to integration success and the probability of achieving a high rate of consents is key consideration for any asset management acquisition we will consider in the future. Our latest deal closed in April 6, and we expect the all cash transaction to be minimally accretive to 2018 earnings per share. As with our prior acquisitions, this deal was structured to reward growth and mitigate downside risks to Tristate Capital. With contingency consideration, we continue to expect to pay a monopole of about 6.3x EBITDA. We intend to continue executing on our established strategy for expanding our investment management business through a combination of acquired and organic growth. In doing so, we will maintain our emphasis on providing institutional and retail clients, a growing number of actively managed products which are difficult to replicate with passive approaches for exchange traded funds. Looking ahead, we believe Tristate Capital is on pace toward achieving our previously disclosed performance goals all which are aimed at sustaining our record of delivering double-digit earnings growth to our shareholders over the long-term. As a reminder, our 2018 goals include the following

[Operator:]

[Operator Instructions] The first question is from Michael Perito of KBW. Please go ahead.

[Michael Perito:]

Good morning gentlemen.

[James Getz:]

Good morning, Michael.

[David Demas:]

Good morning.

[Michael Perito:]

Couple of questions from me. I wanted to maybe start with David on the margin. I was looking at the transcript from last quarter, and it seems like your outlook commentary was a bit more conservative than the actual performance this quarter. Obviously, the margin moved up very nicely with the interest rate hike. I'm just curious how you guys kind of see the outlook from here? And what the potential positive benefit could be from some other potential rate hikes as some of the deposit stuff you guys are doing is starting to take hold?

[James Getz:]

Mike, how about if I comment first and I will turn it over to David, since this is an important aspect of our business. I noticed this morning that Matt Olney, headed his commentary up by a headline that said, "Impressive NIM expansion has finally arrived." And this has been really a result of decisions we've made over the past two years to develop the sophisticated treasury management system structure and support structure that would compete with the large banks and put us in place a highly experienced sales organization to support it. We anticipate that we will continue to see the impact of this decision into the future, maybe as not as quite as dramatic as you saw in this quarter, but it will continue to have an impact and an influence on the earnings per share. What we really have to focus on also is that with such loan demand we also have a priority of volume and so what we want to do is to combine that volume with the benefits that the treasury management process has been bringing us over the past few months. David?

[David Demas:]

I think you covered it well. You know the other thing that we benefited from, obviously, Mike, is the widening gap between LIBOR and fed funds and we will see what the environment delivers for us in the next couple of quarters.

[Michael Perito:]

Okay, great. And then secondly, Jim, you touched on at the end of your prepared remarks there, but on capital, I was wondering if we can maybe spend a little bit more time there. Obviously, you guys did the preferred offering. It seems like you are still in the market buying back a little stock in the first quarter, and then you mentioned, I think, if I heard you correctly, that if something sizable on the asset management side came along, you would probably have to do some type of common equity alongside of it. And so I'm just curious, I guess, how -- what do you think that the preferred offering kind of afford you from a capital flexibility standpoint today? And secondly, what is kind of the pipeline for maybe one of those larger asset management deals look like at this point in the year?

[James Getz:]

Yes, what we felt most attractive about the preferred -- the perpetual preferred was the fact that it provided us with Tier 1 coverage and also did not diluted the common shareholders. So to be quite honest, we have been very much engaged in -- as we've been communicating in the marketplace looking at opportunities, there's many more opportunities available to us today than there was a year-ago and we're -- we've been pretty aggressive in talking with people. I fully expect that we will meet what we just outlined that there will be a major acquisition, which will complement what we have going on with Chartwell Investment Partners and complement their book of business, complement the people that are there, complement the distribution and that will be completed no later than the end of 2019, just because of what's available in the marketplace. I fully expect that we will also be of the same mindset when we do a transaction and take into account the common shareholders. So I fully expect there will be a combination of potentially some additional perpetual preferred and some common stock and potentially some sub debt that we would be taking into account. Of course, the sub debt doesn't provide you with Tier 1 coverage at all, and whatever we would do would be immediately accretive to the shareholder. The ideal situation would be to doing something in direct conjunction with the acquisition so we could explain clearly the impact. But we feel pretty good about the opportunity and as we've said before earnings per share is quite important and we were looking out for the best interest of what the common shareholder is.

[Michael Perito:]

Great. Thanks for taking my questions.

[Operator:]

The next question is from Matt Olney of Stephens. Please go ahead.

[Matt Olney:]

Hey, thanks. Good morning, guys, and Jim congrats on the margin expansion as you noted, that’s something we’ve been talking about for a while. So it's great to see that.

[James Getz:]

Okay. Maybe since 2006 when we thought about the company.

[Matt Olney:]

Well congrats on that and I wanted to go back to what you were talking about on the M&A front. And I'm curious longer-term how you see the overall revenue mix of Tristate between asset management and the bank. If you do a acquisition on the asset management side, obviously, you would -- that revenue would jump up. So, ideally how do you see the mix breaking out between those two segments within M&A deal?

[James Getz:]

Let’s talk about the bank's first. And the whole theory of what the business is that we’ve put together has been really to continue to have a reduced risk profile, but be able to build and continue to build the earnings power and release the earnings power of this company. And if you take a look at the bank today, we have about $4.4 billion of -- plus of loan outstanding, so we’ve 54% that’s secured by marketable securities. If you take a look at our revenue, we have about $40 million called, $40 million of revenue that’s noninterest, that also helps reduce the risk profile of the bank. I would tell you that, fine, we made this Columbia Investment, there's a couple other smaller opportunities out there, but for the most part we're looking at things that could probably provide us with an additional $20 million, $30 million of revenue. So things of some consequence to the franchise and to the shareholders. So our focus is that the noninterest income will be also a factor in continuing to reduce the risk profile, but continue to be committed to the commercial banking side of the business that provide -- provides us with some vigorish in what you essentially end up with, and this is what we pay attention to. You have three businesses that produce three streams of revenue to the company. Now at certain periods of time, one or two of those streams may be some -- somewhat impaired because of market conditions, the economy whatever, so you can depend on the other stream to provide you with the necessary revenue and vigorish you need to produce the earnings which the shareholders are looking for. So we look at this more as a diversified company with reduced risk profile.

[Matt Olney:]

Okay. That’s helpful. I appreciate the color on that. And then as far as profitability, Jim, you’ve talked about getting to a sustainable 10% ROE in the business in the last three quarters, you've achieved that. And so as you look out from here, in the future, can you talk to us about the next threshold that you view critical on the ROE front, and help us out with the timeframe of what you hope to get there?

[James Getz:]

I think we’re very happy being at 10% at this point. And it would be in our interest to be focused on that, having some modifications upward into the future, but it was meaningful for us to get at this point. So we are -- I’m comfortable with it.

[Matt Olney:]

Thank you. Congratulations.

[James Getz:]

Thanks.

[Operator:]

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

[Russell Gunther:]

Hey, good morning guys.

[James Getz:]

Good morning, Russell.

[Russell Gunther:]

Question on the loan growth. So early innings here in the earnings season, but I have been hearing a lot about increased competition in the markets where you guys operate both from a structure and price perspective. So as you target that kind of 3x industry growth in those core commercial verticals, just give us a little sense about how you’re achieving that and what you're seeing from a competition perspective?

[James Getz:]

The -- what we're observing in the marketplace is that the moment there appears no relief whether on the commercial real estate side or on the commercial industrial side from the standpoint of pricing. What we are beginning to see and maybe we will be the first people to indicate to you that we are beginning to see covenants improving somewhat. We are also beginning to see the return of personal guarantees on the credits. What we're seeing from a loan spread over LIBOR is around 2.45% for C&I, and about 2.60% for CRE. And the private banking state relatively stable between 2% and 2.25%. So I would say that its competitive. It continues to be competitive across CRE and C&I on the commercial side, but we are seeing some improvement in the documentation clearly that makes you have some confidence that the risk profile and reality is coming back to the world a little bit.

[Russell Gunther:]

Okay, great. I appreciate that.

[James Getz:]

And we think growing as you can see, Russell, we've been growing that book of business meaningfully. And I must point out that we're delighted that the C&I business grew at a more higher percentage pace than the commercial real estate did last quarter. And by design we have reduced our C&I exposure to eliminate some private equity related shared national credits over the years and now that C&I is picking up pace for us.

[Russell Gunther:]

I appreciate the color, gentlemen. Happy with the C&I growth as well. I just -- I will use my last question here to take another stab at Mike's margin question. The 2.35% level, again that the comments earlier flat to up. I mean, could we translate that to -- okay, 2.35% is something we're going to try to defend with some potential downside to that or do we think we can defend that with some potential upside to the 2.35% as the funding initiatives continue to bear fruit?

[David Demas:]

So Russell as you’ve heard us talk about for a long time we focus on NII, right? That's what we think is a better indicator of growth in risk-adjusted returns. This widening gap between LIBOR and fed funds is something we did not anticipate, and we don't know where that’s going to go from here. We are quite comfortable with our loan growth, the average balances and the progress we’re making on deposit costs. And so we may see that margin trade flat to up or down a few basis points over the next couple of quarters. I mean, so it’s just hard to predict at the moment.

[Russell Gunther:]

Very good. Thanks for taking my questions, guys.

[Operator:]

The next question is from Matt Schultheis of Boenning & Scattergood. Please go ahead.

[Matt Schultheis:]

Hi. Good morning.

[James Getz:]

Good morning, Matt. How are you today?

[Matt Schultheis:]

I’m well. Thank you. And yourself?

[James Getz:]

Very well.

[Matt Schultheis:]

So a quick question on risk and LIBOR and realizing that there's a very long tail here, but as LIBOR gets phased out, what steps are you doing to make sure that your overall loan yields don't get affected if the replacement does not have the same -- if the underlying index does not have the same nominal rate attached to it?

[David Demas:]

So -- it's David. I will those question. We formed an internal committee and we are starting to monitor and prepare for that change. And we've been watching the developments and so forth. So my sense is we will have more information for you in a quarter or two. But it's something we’re proactively managing.

[Matt Schultheis:]

Okay. Thank you.

[Operator:]

The next question is from Bryce Rowe of Baird. Please go ahead.

[Bryce Rowe:]

Thank you. Good morning.

[James Getz:]

Good morning, Bryce.

[Bryce Rowe:]

Just, I guess, a question on the tax rate. Number one, is this a -- is it a good kind of tax rate to use going forward?

[David Demas:]

Yes, I think it is. I think we will end up somewhere between 21% and 22% for an effective rate for the year.

[Bryce Rowe:]

Okay. That’s helpful. And then just one question, I guess, on loan yields, you guys saw a nice jump in the average loan yield, and clearly that helped drive some of the NIM expansion. Is there anything, any kind of prepayment fees or interest recoveries with -- within the loan yield or is that a good core number to use -- to jump off of going forward? Thanks.

[David Demas:]

It's a solid number. And I think as LIBOR continues to hopefully increase, we will see continued yield expansion.

[Bryce Rowe:]

Thanks great. Thanks, Dave.

[Operator:]

[Operator Instructions] The next question is from Daniel Cardenas of Raymond James. Please go ahead.

[Daniel Cardenas:]

Good morning, guys.

[James Getz:]

Good morning, Dan.

[Daniel Cardenas:]

Just a quick question on how we should be thinking about charge-off levels here on a go forward basis? I mean they’ve been extremely well behaved. Historically in -- we saw recoveries the last couple of quarters, do you kind of expect to see charge-off levels in -- more in line with what we saw last year for the rest of this year?

[David Demas:]

So I think you will see that our allowance will continue to run about 34 basis points of total loans. We are quite comfortable with our credit quality right now. As Jim mentioned earlier, the private banking portfolio continues to make up a bigger share of the total overall portfolio. You may see a charge-off within the year, but nothing that isn't fully reserved.

[Daniel Cardenas:]

Okay, great. Congrats on a great quarter guys.

[David Demas:]

Thank you.

[Operator:]

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

[James Getz:]

Thank you very much. Thank you for all your interest in Tristate Capital and your participation today. We look forward to keeping you up-to-date on our progress and hosting our next quarterly call with you in July. Have a nice day.

[Operator:]

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