TriState Capital Holdings, Inc.
Q2 2013 Earnings Call Transcript

Published: 25 Jul 2013

[Operator:]

Good morning, everyone. And welcome to the TriState Capital Holdings Incorporated Conference Call to discuss the company’s result for the three months ended June 30, 2013, which were released yesterday afternoon. All participants will be in a listen-only mode. (Operator Instructions) 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 may generally be identified as described in the company’s future plans, objectives, or goals. Such forward-looking statements are subject to risk 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, I’m sorry, 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 prospectus filed as part of a Registration Statement on Form S-1, as well as its most-recent quarterly report filed on Form 10-Q. You should keep 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 from time to time and management cannon predict these events or how they may affect the company. TriState Capital has no duty and does not intend to update or revise forward-looking statements after the date on which they are made. To the extent on non-GAAP financial measures are discussed in this call. Comparable GAAP measures and reconciliations can be found in TriState Capital earnings release which is available on the website at tscbank.com. Representing TriState Capital today is Jim Getz, Chairman, President and Chief Executive Officer. Jim will be joined by Mark Sullivan, Vice Chair and the Chief Financial Officer for the question-and-answer session. At this time, I would like to turn the conference over to Mr. Getz. Please go ahead, sir.

[Jim Getz:]

Good morning. And thank you for joining us for TriState Capital Banks first investor call. We appreciate your interest in our company and look forward to working with you into the future. We certainly have been pleased with the performance of our stocks since the initial public offering on May 9th. We are also pleased with the results from our first quarter as a public company as illustrate clearly the [instructive sense] with our franchise. Our net income grew more than 35% in the linked quarter and 30% from the year ago quarter. A few brief comments before our Q&A. In brief, our strategy continues to be generating banking activity through two distribution channels. New market companies and private banking clients access through financial intermediaries. We have a focus on serving new market customers with between $5 million and $300 million in revenues. We serve these customers through our representative offices in our five primary markets, the Western Pennsylvania, Eastern Pennsylvania, New Jersey and New York. Through our private banking channels we also serve high net worth individuals on a national basis. These clients are generated by regional securities firms, wealth mangers, family offices, trust companies and other financial intermediaries. Our strategy to exclusively serve our niche customers with a focus on loan and deposit growth has been successful. Over the past 12 months and in June 30, 2010, our deposits grew some 11.5% and now stand at $1.9 billion. At the same time, our cost to funds declined 22 basis points from 0.77% in the last year’s second quarter to 0.55% in this year's second quarter. We are focused on creating and growing low all in cost to private channels without operating through a traditional branch network. Our services primarily include deposits from high net worth individuals, family offices, trust companies, wealth management firms, middle market businesses, financial institutions and municipalities. Our strategy has also driven solid revenue growth. From June 30, 2012 to June 30, 2013 our total loans grew some 11.6%. This growth rate continues to exceed industry performance and is consistent with our five-year compound annual loan growth rate of 15.1% from 2008 to 2012. It also comes from a diverse portfolio. As of June 30, 2013 our loan composition broke down as follows, private banking channel totaled $480 million or 28% of our loans, commercial and industrial totaled $770 million or 44% of our loans, and commercial real estate totaled $490 million or 28% of our loans. In terms of pricing on the private banking side, we are seeing stable pricing, while we are seeing some indications the pressure maybe easing somewhat on the commercial real estate and commercial-industrial side, there is no doubt that competition is still out there though. We have achieved steady growth in loans and deposits at profitable yields and rates in the recent interest rate environment. Therefore, our net interest margin has remained relatively stable while industry-wide net interest margin compression has continued. Our NIM measured some 2.91% for the second quarter 2013 consistent with the range of 2.86% to 3.05% you’d seen over the past six quarters. Growth in both loans and deposits which resulted in a very efficient loan-to-deposit ratio of 93%, you will note that in second quarter our investment securities portfolio grew to some $255.3 million from a $198.5 million at March 31st and $181 million a year ago. The portfolio now has duration of approximately three years with favorable risk ratings averaging AA in addition to our internal underwriting of each purchase. In this year we purchased some $20 million of tax free bonds, meanwhile our portfolio remains modest compared to peers with just 11.6% of assets worth $255 million as of June 30, 2013. Of course, managing our interest rate position in is critical and our balance sheet offers an attractive level of interest rate sensitivity compared to peers. Our assets sensitivity is supported by our predominantly variable rate earnings asset base, 86% of our loans are variable rate and 44% of the bonds in our investment portfolio are floaters. The duration of our deposits also helps us maintain above average asset sensitivity. Over 44% of our deposits are fixed rate significant to deposit. Turning to another important facet of our strategy, our branch distribution system. As we know, all of our businesses conducted through our five representative offices and our nationwide network of financial intermediaries with all support functions managed essentially. Our newest office was opened in New York City in the second half of 2012. So I’d like to update you on our progress there. Since opening new office, we’ve hired the market president, commercial industrial vendor, commercial real estate vendor and our relationship manager focused on deposit gathering, all of whom have begun generating business in this market. We’ve originated $40 million in loans from this office and we continue to build our staff there. We’ve secured profitable new middle-market relationships and financial intermediary relationships since opening this office and expect this market will contribute to our loan growth to become a material portion of our loan portfolio in the future. Turning to credit quality, we can see all the standard ratios in the financial tables included in last night’s earnings release. Second quarter asset quality was stable or flat to first quarter. We did not -- I want to point out that we did not release reserves. The provision expense was low due to the quality of the portfolio. We just like to remind you that 28% of the loan portfolio is of a private banking nature predominantly secured by marketable securities. Our total adversely related rated credits total some $50.4 million at June 30, 2013, classified loans amounted to $30.7 million, and non-performing assets totaled $20.5 million and NPLs increased due to the movement of an individual credit into that category which had been appropriately reserved. Our total non-performing loans measured approximately 1% of total assets which is led by industry standards. We have maintained stable asset quality while growing our loan portfolio significantly over the past several years. This reflects our discipline risk management culture here at TriState. The culture we’ve established here stems at the large part from the fact that there are owner operators. Our board’s ownership totals more than 26.8% of total TriState shares outstanding as of June 30, 2013. This vested interest has shaped our discipline in raising capital and investing in our business. As owners, we seek the highest long-term rate of return on our investment and we managed the business to ensure we achieve that for all of our shareholders. It drives our focus to revenue growth and increase profitability which are both enhanced by disciplined focus on risk management and operating efficiency. At 60% for the second quarter, our efficiency ratio was in line with the year ago quarter also at 60%. We focus on maintaining stable operating cost. We use our distribution and delivery model to grow revenues at a faster pace than expenses. Our 60% efficiency ratio for the quarter steadily improved from just a few years ago. It measured some 72% for 2010. At the same time, we’ve expanded our balance sheet so our ratio of non-interest expenses to assets has improved. For the second quarter of 2013, non-interest expense measured 1.84% of average assets. This compares to1.98% in the year-ago quarter. In summary, our recent quarter results are in line with our successful track record of growth and our strategic plan and business model are structured to faster continued sustainable organic growth into the future. We believe we have the platforms and structures in place to handle multiple of our current loan production and deposit generation for the same low-risk characteristics of our existing portfolios. Combined this with our strong balance sheet and earnings profile, and we believe we are well-positioned for continued profitable growth in coming periods. With that, I welcome Mark Sullivan, our Vice Chairman and Chief Financial Officer to join me for the question-and-answers. Operator, please open the lines.

[Operator:]

(Operator Instructions) We have a question from Chris McGratty from KBW. Please go ahead.

[Chris McGratty:]

Good morning, guys. On the gross side, it looks like year-to-date amount is about 10% market share. Can you talk about pipeline today as you stand in mid-year and whether, I think on the Russia, you’re talking about mid-teens growth for the year whether that’s so achievable?

[Jim Getz:]

Thanks a lot, Chris, and good morning to you. We do believe that it continues to be achievable and we look at it from a full year standpoint and not a single quarter. The private banking continues to be highly robust and the -- one of the real drives of our success. Secondly, the -- with regard to the commercial real estate and commercial industrial loan portfolio, we’ve seen during the first two quarters of the year, a meaningful amount of activity with regard to refinancing and restructuring and repositioning loans in the portfolio. For example, we were running for the quarter growth of about 7.5%, so the very last day the quarter on June 28th and we had about $50 million plus of loans pay-off at that time. So there’s been a lot of activity back and forth, but we believe that we’ll continue at the historic rate of slightly over 15% as we move forward. So we feel fairly comfortable with that number.

[Chris McGratty:]

That was very helpful. Mark, on the margin, you were up some basis points in the quarter. Can you talk about the ability to continue to lower the funding costs? And I notice in the average balance sheet, the securities yield went down considerably, the question is, why don’t you if you can comment there? Thanks.

[Mark Sullivan:]

Yeah. Good morning, Chris. Thank you. Yeah. We feel that margin is pretty much stabilized and should be able to stay within that zone that we’re in now, in that 2.85, 2.90 range and to extend that the yields on the loans continue to with the pay downs, historic ones having a higher rates, so the new volume coming on lower, we expect there is a bit of pressure there, I think we will be able to offset it with cost-to-funds and keep the margin in the zone we’re in now.

[Jim Getz:]

Chris, with regards to the securities portfolio, we took advantage of the market and put a sizable amount of focus on the portfolio in the last quarter.

[Chris McGratty:]

Okay.

[Jim Getz:]

And that cause the yield to go down somewhat.

[Chris McGratty:]

Okay. Thanks.

[Operator:]

Our next question is from Matt Olney from Stephens. Please go ahead.

[Matt Olney:]

Hey. Good morning, guys. Thanks for taking my question. Within the private bank, I know increasing a number of referral partner is important part of the strategy. So is there any update in a number of referral partners you have, I believe there was 57 at the end of the year last year?

[Jim Getz:]

Right. Good morning, Matt. I appreciate your question. We’re looking now at about 70 partners at this time. So we had a pretty robust first six months of the year and if you recall toward the second half of last year, we had put one of our private bankers in place just to work with financial intermediaries to identify the once we were interested in doing business with and that is about pre-meaningfully for us.

[Matt Olney:]

Okay. Thanks for the update there. And as far as the efficiency ratio, with obviously you see the improvement in 2Q. So in your opinion, Jim, we know there’s lot of offering that is potential in this model, is the efficiency ratio, the best way to think about that for your bank going forward or is there another metric, we should be looking at going forward?

[Mark Sullivan:]

Matt, good morning. Mark Sullivan. I would say on the efficiency ratio, I think it is a critical driver and benchmark, particularly in our business model as we continue to add critical mass with the yield and the growth somewhat limiting the revenue to a percentage. That’s a bit behind where we were but I think you will see the efficiency ratio continue to improve as we go out. So we do view it as a solid benchmark for us.

[Jim Getz:]

Matt, to give you a practical example in that regard, you may recall that we are about 18 people last year and today we’re flat. And we do anticipate adding half a dozen people this year and at least half of them are going to be income-producing nature, mostly staffing their office in New York.

[Matt Olney:]

Okay. That’s helpful, Jim. And then lastly, going back to the commercial loan book question, within the growth of the commercial loan book in 2Q, can you give us some color as to how much of that was market share takeaway versus just increased growth within their legacy customers?

[Jim Getz:]

Okay. If you look at just restricting myself to the second quarter, we had new loan originations, actual new loan originations in the commercial and industrial side of $111 million and on the commercial real estate side $36 million. Then we had meaningful new loan activity.

[Operator:]

Our next question is from Bryce Rowe from Robert W. Baird. Please go ahead sir.

[Bryce Rowe:]

Thanks. Good morning. Wanted to just dig in more on some of the Matt’s question here, I appreciate the update on the increase in the referral relationships, Jim. Just wondering if you could talk a little bit about penetration within those referral relationships and capacity for more growth, both in the number of relationships and then again penetration levels within those relationships?

[Jim Getz:]

We’re in the midst of -- it's very appropriate question at this time. We’re in a midst of freehandedly increasing our commitment to that particular market. And right now, we have seven private bankers in place at various locations throughout the United States. This is of national nature of the business. And what we’re doing is developing a middle what we would characterize as the middle office here at the bank, which would believe them a lot of the administrative learning activity that they have been supporting to date so they can interact with the family offices and a various financial intermediaries more directly and do more in a distribution sales-type role. So we expect to be more -- continuing to more effectively grow that business and it will continue to be a very much of a driver of our success. And we found that business to be more stable from the standpoint of people paying the loans off. And there is not as much volatility and activity going through that type of segment of the business. So we’re able to develop this and keep the efficiencies in place and we’re really trying to put this people in more of a sales role. So you can grow at a more dramatic place standpoint as we move forward.

[Bryce Rowe:]

Okay. That’s helpful. Wanted to also ask you about the, I guess, the pipeline for loan growth you mentioned, the accelerated payoff activity in the first half of this year. And it sounded like from your prepared comments that pressure might be easing a bit from a competitive perspective. Wondering how that might affect loan growth in the second half of the year. Are you not expecting quite as much payoff activity as we move forward?

[Jim Getz:]

We obviously did not expect as much pay of activity in the first two quarter as we had experienced. We are hoping that Tsunami is sort of behind us in that regard with preference to the commercial, industrial and the commercial real estate type activity. As I alluded to, you’re hearing a lot from the banking community about pricing pressure. We believe the that’s reached a certain base foundation at this point and don’t believe it were going to be experiencing any more meaningful down swing at this point. So we’re relatively confident if the C&I and CRE activity, the outstandings will increase. We’re running around utilization around 52% at this point of our volumes that we have out and available.

[Bryce Rowe:]

Okay. It’s helpful. And I guess last question, talking about the different regional middle market lending offices. Anything to decipher in terms of activity within this particular regions, there is one weak region, weaker stronger than the other and are there different kind of dynamics at play within these kind of offices?

[Jim Getz:]

Each region is somewhat unique in itself. I have given you some detail on how we were doing in New York as that’s evolving. But I would say and you saw that each numbers reflected certainly in our S1. But the two regions that have been most successful for us and continue to be more successful have been Philadelphia and here in Western Pennsylvania, Pittsburgh and that’s continued that way in the first half of the year. In North Eastern Ohio, Cleveland, we had size full map large percentage of the payoffs were in that particular region. We’re seeing some beginnings of some steady growth in the New Jersey area that has been slow to pick up from inception, slowly been some of the other markets that we’ve experienced. So I would say each has a unique bank to itself but if you look at the nature of the business, Pittsburgh, Philadelphia and Cleveland are more manufacturing, oriented while you find New Jersey servicing related. And if you looked at New York to date the majority of the business that we have but on the books has been in the commercial real estate nature.

[Bryce Rowe:]

Okay. And then just last question for you Mark, in terms of the balance sheet and liquidity on the balance sheet, how should we think about you -- how should we think about you guys managing that liquidity going forward here with some class export growing growth in the second half of the year. Where do you see kind of minimum in terms of putting cash in the balance sheet?

[Mark Sullivan:]

Good morning, Bryce.

[Bryce Rowe:]

Good morning.

[Mark Sullivan:]

I would say again looking at our project composition, we really have a broad base of diverse and stable sources and we really see a steady increase as we have in the past, steady increase in all of those. I don’t feel there is any strong dependency anyone versus the other. I think one other things to keep in mind on when it comes to liquidity is that our relationship with FHLB, we have almost normal at $20 million in loan outstanding, we have capacity of $300 million. So there is a lot of reserve liquidity there as well which we haven’t passed nor do we intend to.

[Bryce Rowe:]

Okay.

[Operator:]

We have question from John Moran from Macquarie Capital. Please go ahead.

[John Moran:]

Hey, good morning, guys.

[Mark Sullivan:]

Good morning, John.

[Jim Getz:]

Good morning, John.

[John Moran:]

So, most of mine have been addressed here at this point. But maybe just a quick follow up on line utilization, I think you guys said it was 53% this quarter. Can you tell us what it was last quarter?

[Jim Getz:]

It was close to that John to 50, it was 50 something or other. I would say a year go was in the -- what do you say, I agree with you John but it’s been varying from 48 to 52 over the past 12 months.

[John Moran:]

Okay.

[Jim Getz:]

So we’ve seen a little bit of an increase but not a lot from a utilization standpoint.

[John Moran:]

Thanks. And then just maybe just a quick update, I know you guys, I think Jim you alluded to wanting to hire about half a dozen folks this year. I think on last week talk, there were 35 folks in kind of RM or lending roles. Is that still the number today or -- it sounds like you made a couple of hires in New York?

[Jim Getz:]

Yeah. We did, not counting the President up there, we have two lenders in place and one deposit gatherers. So yeah, some three additional relationship managers, John, and we’re in the midst of making it offer to another commercial, industrial lender there. And we’re looking for an additional commercial, industrial lender. We thought we won’t have more than in each of our offices -- it’s just traditional, we only have one commercial real estate lender.

[John Moran:]

So in the next quarter, so we can feel that kind of 40 or so for an office lending focus, both lending and deposit focus folks?

[Jim Getz:]

Yeah. That’s exactly, right. We should have that New York office but we’ll staff hopefully by the end of the quarter.

[John Moran:]

Okay. And then last one from me, Jim, I know you guys have expressed interest in possibly doing something on the wealth management side. It would fit well with kind of rest of the franchise, any progress there and thoughts that you might have?

[Jim Getz:]

We have actually -- we have two investment banker’s firms that we’re working with. We’ve actually targeted some 50 companies. We’ve physically met with half of them and I can’t indicate to you that there is any one at this point that we’re real close to getting something done. We sort of in [courtship] period of time and that will continue. But I have been spending meaningful time on this issue since we’ve finished the IPO in May. And we’re still quite hopeful we’ll get something under agreement over the next several months. But it’s uncertain, there is no one that I can really point a figure to and indicate that this is going to happen. We had about more than we continue to be in discussions with.

[John Moran:]

Great. Thanks very much for the update.

[Jim Getz:]

Thank you.

[Operator:]

We have a follow-up question from Chris McGratty from KBW. Please go ahead, sir.

[Chris McGratty:]

Yeah. Mark, a follow up on the security side, I know you talked about the cash position before. How should we think about the -- just the overall size in the investment book, $255 million at the quarter end?

[Mark Sullivan:]

We have filtered up a bit. We had about $20 million in municipal launch, come on the books really at the end of March and into April. And those have helped the majority. We look at them and have really the intent to hold the majority classified in a search. So they did not have any impact on OCI. But I would say we’re fairly comfortable with the portfolio right now. We got $80 million Ginnie Mae stepped up. But in October, we’ll go from 2% to 4%. So I think compared to peer groups, it’s on the lower side but for time being, we’re really more focused on building a long side of the equation.

[Chris McGratty:]

Okay. And then last one, on the one, non-performing that was added, can you give any color surrounding this. This was on the private banking side and the syndicated side and any reserve you may take in that?

[Jim Getz:]

No. Chris, its Jim. This was commercial industrial loan. It had been characterized as a classified loan for quite some time. We determined to move it over to a non-performing loan and reserve, it already been set our points. So we didn’t have any type of impact on the income statement.

[Chris McGratty:]

Okay. Thanks.

[Jim Getz:]

And we feel very comfortable with the reserve that we have on it.

[Operator:]

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

[Jim Getz:]

Thank you very much. We certainly appreciate your continued interest and look forward to working with you over the next few quarters. So have a great day. Thank you.

[Operator:]

That concludes today’s conference. You may now disconnect.