TriState Capital Holdings, Inc.
Q2 2018 Earnings Call Transcript

Published: 19 Jul 2018

[Operator:]

Good morning, everyone, and welcome to the Tristate Capital Holdings Conference Call to discuss Financial Results for the Three Months ended June 30, 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 the 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 were 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 website at tristatecapitalbank.com. Representing Tristate Capital today is Jim Getz, Chairman, President and Chief Executive Officer. He will be joined by David Demas, Chief Financial Officer for the question-and-answer session. Please note this event is being recorded. At this time, I would like to turn the conference over to Mr. Getz. Please go ahead.

[James Getz:]

Good morning. And thank you for joining us. While we’ve just completed one of TriState Capital's best quarters ever by any measure. We believe the company's highly positive long-term trends are for far more consequential. Our performance is the part of effective and timely execution of our growth strategy across our commercial banking, private banking and investment management businesses. All three of these revenue streams are producing healthy growth and positive momentum continues across the franchise. Five years ago, we reported quarterly results for the first time after our May 2013 initial public offering. What this company can achieve in the next five years is of course more important than what we accomplished over the last five. At the same time, our growth strategy is unchanged from the time of our IPO, and I submit that we are even better positioned for future growth today, given our team, clients, scalable infrastructure, capital and capabilities. Compared to five years ago through the second quarter 2018 TriState Capital has grown assets from $2.2 billion to $5.2 billion, organically expanding the balance sheet by 137%; client assets under management from $0 billion to $9.6 billion; quarterly pre-tax income from under $6 million to $15.6 million, an increase of 161%; and quarterly earnings per share from $0.15 to $0.48, an increase of 220%. This company has also generated year-over-year double-digit earnings per share growth in 17 of the 21 quarters. We raised approximately $70 million in TriState Capital’s 2013 IPO, our last common equity raise, deploying this capital in three immediately accretive investment management acquisitions, while organically growing the Bank's balance sheet by some $3 billion. And with an initial public offering price of $11.50, TriState Capital shares have appreciated by 127% through the end of the second quarter 2018. This compares very favorably to benchmarks with the broad market up less than 70%, U.S. managers up less than 20%, and U.S. banks up less than 80% over the same period. The numbers continue to tell a dramatic story. Whether you measure us over the short-term or share our long-term perspective, TriState Capital has consistently delivered for our common shareholders. We are equally pleased to attract and cultivate talented professionals to this entrepreneurial Company, allowing TriState Capital Bank and Chartwell to deliver an exceptional and sophisticated experience for our clients and prospects nationally. Turning back to the second quarter, let me touch on a few noteworthy items from our business lines. Scalability and operating leverage continue to enhanced profitability. With TriState Capital Bank’s efficiency ratio coming in at 52.38% for the first half of the year, the most important driver of our efficiency ratio in recent years is revenue, which has grown annually to double-digit average rates since the IPO. Going forward, our goal of generally maintaining the Bank efficiency ratio within a low to mid-50s target range remains unchanged. As we continue to invest in future growth drivers, while managing operating expense with discipline. Prior investments and what is now a very robust treasury management our liquidity management franchise continued to pay off, as the bank deposits grew at even faster rate than loans. Total deposit balances are approaching $4.5 billion as we continue to emphasize long-term relationships in those market segments with long-served exceptionally well. Family offices, high net worth individuals’ private investment funds, broker dealers, futures and commodities firms, credit unions and banks around the U.S., as well as middle market enterprises in our footprint are at the core of our treasury management and deposit gathering success story. Our experience serving these customer markets truly sets TriState Capital apart and we view this business as a center of excellence for the benefit of both new and existing clients, consistent with our founding principles within our treasury management business to compete with regional and super-regional financial institutions on sophisticated capability and then win relationships based on exceptional client experience. We make it easy and predictable to do treasury management business with us, which we achieved through our technology, our team and our competitive pricing enabled by our scalable business model. These all differentiate TriState Capital Bank in the marketplace and are resonating with our clients. In the second quarter, average treasury management operating account balances including non-interest checking and low interest swap accounts grew 42% from the year ago period. TriState Capital has long sought to maintain an asset sensitive and LIBOR neutral balance sheet and this continued in second quarter. Well over 90% of our loan portfolios floating rate and impact [ph] to LIBOR are nearly a quarter of our deposits were fixed rate CDs. This allows us significant flexibility in managing interest rate risk and changing market conditions. This is reflected in the second quarter net interest margin of 2.38% which expanded 15 basis points from a year ago period and 3 basis points from the linked quarter. At the same time, as you've likely heard us say before, we are not managing net interest margin and instead focused on net interest income dollars. We look at net interest income dollar growth fueled by organic expansion of high-quality earnings assets as an indicator of risk-adjusted returns. And in fact, we generated record net interest income of nearly $29 million in the second quarter of 2018, an increase for more than 30% from the same period last year. Moving to lending, the bank grew loans organically to a record of $4.6 billion at the end of the second quarter, up 21% from one year prior. TriState Capital's private banking loans, which are backed by marketable securities and other liquid collateral continue to be our fastest growing category of lending. These loans represented more than 54% of our loan portfolio at June 30th, and grew more than 26% over the last 12 months. In addition, the number of private banking loan applications hit a new record in the second quarter of 2018, growing by 37% from the same period last year. And TriState Capital's unparalleled national distribution network now numbers 177 financial intermediaries compared to 153 12 months ago. In commercial lending, we continue to drive double-digit rates of organic growth through middle market relationships in our forward state footprint. Commercial and industrial balances grew by 16% over the last 12 months, slightly ahead of the nearly 14% growth in our commercial real estate balances over the same period. Our commercial real estate relationships were particularly strong contributors to swap fee income in the second quarter, which hit a record $1.9 million. While [indiscernible] use of swaps can vary quarter-to-quarter we're looking and working to generate full year swap fee income for 2018 in line with 2017's $5.4 million. We intend to do so through existing relationships and new commercial real estate lending opportunities. At Chartwell Investment Partners investment performance, product mix and distribution capability continue to attract new clients and funds from around the United States. Chartwell grew client assets under management to more than $9.5 billion at the end of the second quarter, increasing 19% from one year prior including assets acquired in April from Columbia Partners. Second quarter investment management revenue of $9.7 million reflected 3% organic growth from the linked quarter or 9% including recently acquired client assets. Chartwell's weighted average fee rate was 41 basis points in the second quarter, reflecting the lower rate on assets acquired from Columbia Partners, more than half of which was in fixed income as well as other inflows into our fixed income strategies. Excluding recently acquired assets, Chartwell saw a gross inflows of $372 million in the second quarter of 2018 with particular strength from retail in the period as prior investments that expanded retail distribution continue to pay off. From a product perspective, inflows were led by our small and mid-cap value strategies as well as short duration BB rated fixed income. These and other Chartwell strategies continue to deliver strong investment performance through the end of the second quarter, 93% of our asset manager products were ahead of their respective benchmarks for the one year period. 71% were ahead for the three year period and 77% of 13 products were ahead for the five year period. As you may recall, one of our 2018 goals is for Chartwell to realized double-digit revenue growth for the year. This continues to be our full year 2018 goal with client assets acquired from Columbia Partners contributing toward Chartwell's ability to achieve it. The foundation for our confidence in Chartwell's growth potential has been and remains the superior performance its investment professionals deliver for their clients. These results by our active managers have been awarded with net positive inflows for the first six months of 2018. Investment performance coupled with recent additions to the institutional sales team positions Chartwell to accelerate growth in the months ahead. We're looking to enhance institutional close in the back half of 2018, while maintaining the strong retail momentum achieved in the second quarter. As the halfway marked through this year, TriState Capital Bank is on pace toward achieving our 2018 performance goals. All of which are aimed at sustaining our record of delivering double-digit earnings growth to shareholders over the long-term. They include

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Russell Gunther of D. A. Davidson. Please go ahead.

[Russell Gunther:]

Good morning, guys.

[James Getz:]

Good morning, Russell.

[Russell Gunther:]

Wanted to start on the C&I growth this quarter, very nice result. Just hoping you guys could shed a little color on sort of where the growth came from a geography industry perspective. Any color around average loan size and perhaps contributions from shared national credits or participations?

[James Getz:]

Minimal contribution from shared national credits and participations. When you look at it, we've really been blessed by some of the disruption in the marketplace, particularly in Philadelphia and Cleveland with regard to some of the mergers that have occurred with Susquehanna, Nat Penn, First Merit [ph] vaporizing a bit. And we also have found the benefit of our sales staff being more seasoned in many of those areas we now have over 10 years of experience and presence in the marketplace. And the business came overwhelmingly from traditional commercial industrial clients. And these are well established companies. And to be quite honest, you can get a good sense of the -- what's going on in the real market street of main street America with these type of companies. Because at the end of the day, these were the same companies that made them away through the recession, essentially the same management team. And they recognize the vagaries and the problems of excessive inventory, excessive people working at the companies. The companies are in much better shape. The average size loan was for the most part in the range of about $3.5 million.

[Russell Gunther:]

That's great color. Thank you, Jim. And then for my second question, on the expense side of things, you shared your reiteration on the efficiency ratio with the bank. We've also looked at this in the past this sort of expenses to average assets sitting around 2% last couple of quarters. I understand you guys are in growth mode a 10 year old company. Is that focusing on that ratio still makes sense and is around 2% the right number going forward?

[David Demas:]

Russell, it's David, good morning. It is. We tend to focus on operating leverage and efficiency more so than the metric you referenced. But I think you'll see us continue to drive improvement in that ratio as well.

[James Getz:]

I would add one other comment on the operating leverage, Russell. When you look at it, this is a company that operating leverage has improved most handily driven by revenue. And we've been committed like we talked about the treasury management program in place, and we probably over the past 24 months spent about $4.5 million on infrastructure, people and technology there and haven't missed a beat on the earnings end of it. So it's really been the revenue that's helped us out most handily in that regard.

[Russell Gunther:]

Very good. Thank you, both.

[Operator:]

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

[Michael Perito:]

Hi, good morning gentlemen.

[James Getz:]

Good morning, Mike.

[Michael Perito:]

Couple of questions for me, I guess one David, can you talk a little bit about the liquidity on the balance sheet. It looks like you guys might have done a couple things in the quarter I saw that the cash and securities both kind of looked a bit higher both on an average and period end basis. I mean is that -- should we be thinking about that this new kind of liquidity level as a good level for you guys as the balance sheet surpass $5 billion continues to grow or is there something else kind of going on that we should be aware of?

[David Demas:]

No, I think that's right. Mike, we made a concerted effort to put securities on the books earlier in the quarter. And I think you'll see us do that perhaps this quarter as well. So, I think liquidity is something we're focused on, it's something we're continuing to manage and I think you'll see that trend continue.

[Michael Perito:]

Okay. And Jim, the deposit growth was solid in the quarter. I guess, can you give us a little color on kind of how the rate has and fee rates and everything on the treasury management side has compared in actuality to your expectations as you build out the team? And I guess -- or do you guys still feel good about the state of the pipeline even after all the balances brought on this quarter?

[James Getz:]

Let me respond a bit more holistically, because I'm sure a lot of the folks on the call have some questions related to deposits. We have in place, what I would characterize is a multi-fascinated funding mechanism. It's highly efficient and growing today very much in line with the loan demand. And we expect it to grow more dramatically actually into the future and outpace our loan growth. We now have a little over $4.4 billion of deposits. And let me mention, the outlets whether it's $4.4 billion comes from in. What you most have to really keep in mind, what we're doing here is we're building a business. So some of the outlets we have family offices. And these family offices have become a multi-billion dollar business for us in loans and deposits. We've really been quite successful in penetrating the financial service industry. Take a look at where a lot of our asset management business, our private banking business comes from financial services, but a major part of our deposit activity comes from various niches within the financial service industry. On the municipality side, we're doing business with hundreds of municipalities that are buying our CDs at 250 or less throughout Pennsylvania, Ohio, parts of New Jersey and New York. Credit unions, we're doing business with over 1,000 credit unions we are well on our way to making it 2,000 credit unions. And then we've been briefing you consistently on the development of our treasury management business with our middle market companies. And really the way to look at that business today it’s in its very infancy stages and essentially it's positioned to neutralize the competitive edge of some of the outlets that I've just mentioned. And then we're continually looking for niche businesses. And a good example of an emerging one for us would be those of you that are familiar with commercial real estate. The transfer concept of the 10/31 plans that are out there. We just picked up our first client in this regard of some consequence, $35 million account. And if you look at the growth rates, they're really exceptional here from an -- and remember, it's organic. If you look year-over-year, our deposits are up 26%. There are few banks in this country that their deposits have gone up organically 26%. Our non-interest transaction accounts, which is really becoming more and more meaningful to us in treasury management are up 34%. If you look at the treasury management deposit balances they're up 42%. And our financial service deposits are up some 52%. So it's quite meaningful. And let me comment on our pipeline. And if you have a sense of what we have in the works, because the way the loan portfolio is growing, I'm sure some of you will be looking at it next year, and when the year looks well in excess of $5 billion. And if we're going to continue to grow at 20%, 25% we're going to have to have deposits of about $1 billion. Look at the family office area, we have a strong pipeline there. We believe over the next 12 months we'll garner some $300 million treasury management. It's going to help to lower our expense of deposits $600 million. Financial service, we see picking up $1 billion in additional deposits all of this in the next 12 months. And let me review a few numbers that really highlight the quarter at least to me the loan yields are up 29%. And the deposit costs are up about 25 basis points. The loan growth was fully funded by the deposit growth. And take a look at the loan and deposit growth, it's strong, very strong. And the loan deposit ratio has improved quarter-to-quarter as I'm sure some of you have noticed. And look at the efficiency ratio at the bank, the efficiency ratio at the bank is in the low-50s. It certainly not a bad story for the future and the position of the company and that's not mentioning the impact of the pre-tax or the net income numbers on TSC. And personally as a shareholder, I couldn't be more satisfied with the progress this company has made over the past several years, and the groundwork we've laid for the future in the deposit arena.

[Michael Perito:]

Helpful color, Jim. Thank you. I appreciate it.

[Operator:]

[Operator Instructions] Our next question comes from Matt Olney of Stephens. Please go ahead.

[Matt Olney:]

Hi, thanks. Good morning, guys.

[James Getz:]

Good morning.

[David Demas:]

Good morning.

[Matt Olney:]

I wanted to take with the deposit discussion and Jim, I appreciate your points on deposit growth in the quarter. From multiple channels that's something differ than traditional branches. But what details can you give us as far as the cost of summary deposits? And if you look at these deposit channels, how are you viewing the overall deposit beta so far this cycle?

[James Getz:]

Let me talk to you about this cycle. David will comment on the cost of our funds here. We anticipate they're going to continue to go up, like I mentioned, some 25 basis points for the quarter. You have to keep in mind, if you take a look at what the rest of the industry is doing, you have the major banks reporting some of them annualized 2% loan growth, 4% loan growth. We're experiencing considerably more than that. The market is competitive on the cost of funds and we're meeting that competitiveness. But we're generally reducing those expenses through growing this treasury management business. And, I believe that to a degree we could be faulted for only really focusing on this. We started really about two years ago, but it's having that beginning to have a more -- much more meaningful impact on us, as we're moving forward of neutralizing, as I mentioned a moment ago, the cost of those deposits. And you're seeing in the loan to deposit ratios, some improvement and it tells you we have clear access to a lot of deposit activity, but we're only really interested in bringing it in to cover the loan activities that we have going on in place. Now David will mention something about -- specifically about the cost of funds that were experienced.

[David Demas:]

Yes, Matt. So the number you're looking for is 181 at the end of the quarter, which you have to keep in mind is the treasury management initiative we've got going on, will continue to help us moderate that number. The treasury management deposits, I think right now grew $77 million in the quarter and are probably priced at LIBOR or less than 100 or more. So just to give you some context in terms of what we're doing from a deposit perspective.

[Matt Olney:]

Okay, that's very helpful. And then on the investments in the tax credits, I appreciate some of the details in the press release as far as the impact to the 2018 tax rates. As we look into the out year 2019 and beyond, do those tax investments impact those years tax rates, or that’s more just a current calendar your impact?

[James Getz:]

It's mostly a current calendar year impact. And it's tough to forecast those because the solar credits come episodically. We might see one or two deals a year and so we'll do our best to try to give you some guidance on 2019 when we get closer to 2019, but it's most of that credits can be taken this year.

[Matt Olney:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Getz for any 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 to hosting our next quarterly call with you in October. Have a great day.

[Operator:]

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