TriState Capital Holdings, Inc.
Q3 2013 Earnings Call Transcript

Published: 25 Oct 2013

[Operator:]

Good morning, everyone and welcome to the TriState Capital Holdings Inc. Conference Call to discuss the company’s results for the three months ended September 30, 2013, which were released yesterday afternoon. All participants will be in a listen-only mode. (Operator Instructions) 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 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 prospectus filed as part of a Registration Statement on Form S-1 as well as the most recent quarterly report filed on Form 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 from time-to-time and management cannon 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 on 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 tscbank.com. Representing TriState Capital today is Jim Getz, Chairman, President and Chief Executive Officer. Jim will be joined by Mark Sullivan, Vice Chairman and 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:]

Thank you. Good morning and thank you for joining us today. I’d like to start with addressing the significant reduction in earnings per share that we experienced in the third quarter driven by an individual loan. The borrower is a defense contractor which we have maintained a banking relationship with for the past five years. They were negatively impacted by the federal budget sequester earlier this year. The company was a consistent performer with strong cash flow and margins. They had a history of paying down the principal of the loan on a regular basis. The last principal payment was made in August for $1.2 million, of which our share was $260,000. In 2012 alone, it reported revenues in excess of $50 million with net income of approximately $20 million. Early in the third quarter of this year, we became aware of the impact of sequester on the borrower when the company disclosed its June 30 financial results to lenders. At that time, the borrower began discussions with the agent bank on deferment of principal payments until the sequester would end. The account was assigned in August to workout at the agent bank. At that time, we took the necessary steps to classify this loan as substandard, which resulted in a reserve for TriState Capital of $1.3 million. At September 30, our portion in the loan was 22.4% or about $6.5 million. Negotiations continued until October 8 when the company filed for Chapter 11 bankruptcy protection. We have properly charged off $4.3 million and maintained a reserve of $1.3 million. We are carrying the loan at a value of $900,000. As a result of this charge-off and the impact to our loan loss reserve, earnings were adversely impacted by $0.09 per share. We are now working with the agent to recover as much of the proceeds as possible. As a result of this experience in the third quarter, we reviewed our entire loan portfolio of direct and syndicated loans for other clients that might have been impacted by sequester or generally maybe relying on federal contracting revenue. We believe that we have no material risks from this type of exposure. While we are disappointed by the impact of loan loss, we are confident in the overall quality of the loan portfolio and that we are adequately reserved. Now, on a more positive way, in the area of loan growth, our portfolio was up some 2% for the quarter and 9.3% for the past 12 months. The middle market banking channel portfolio was relatively flat for the quarter at a growth rate of 0.3% for the quarter. Let me provide you with some further insight into the first nine months performance in the middle market banking portfolio. If you look at 12/31/2012 versus 09/30/2013 for the past nine months, in the commercial and industrial sector we originated $216 million of loans. We had payoffs of $123 million of loans and lines of credit were paid down by approximately $87 million, so we had a change in our net loan balance of approximately $6.5 million. One the commercial real estate side of the business, we had loan originations of $110 million, loan payoffs of approximately $79 million and we had on the net – in the net loan pay downs area with regard to lines of credit we actually had a positive $15.7 million, we had change in loan balance of $47 million. Our feeling is that the pricing in commercial loans has stabilized our marketplace and that refinancing and restructuring has begun to normalize. On the private banking channel side we continued to see meaningful growth. To give you same type of statistics with regard to private banking, we originated some $157 million of loans in the first nine months of the year. We had payoffs of $79.5 million and we had lines of credit paid down by $6.6 million. So we had a net loan balance of $71.3 million. Loans outstanding are up some 5.9% for the third quarter in private banking and 35% over the past 12 months. We also continued to establish new financial intermediary relationships that are key to our private banking channel success. We added four new referral relationships in the third quarter and 15 year-to-date bringing our total to 72 as of September 30. Illustrating the value of these referral relationships our new intermediaries have already sourced $42 million of private banking channel loans you now see on our balance sheet as of September 30. We continued to reinforce our comfort with our long-term growth continuing at a compound annual growth rate of 15% as we experienced over the period from 2008 through 2012. Form a funding perspective our deposits were up some 6.1% over the past 12 months. We continued to grow our deposit channels to financial institutions, municipalities, corporations, retirement plans and high network individuals. From a financial metrics standpoint our adverse rated assets are at $55.8 million, down some 9% since 09/30/2012. Over the past four years, our provision expense to average loans has averaged each year between 42 to 52 basis points compared to the industry average of 40 basis points to 112 basis points. Year-to-date net interest margin has remained relatively stable, down 10 basis points since 09/30/2012 driven in part by our growth in private bank channel loans. Year-to-date non-interest expense is up 5.7% over the same period last year during a time that we populated our New York office and transitioned to a public company. Year-to-date interest expense is down 17.3% since last year. Year-to-date interest income is up some 3% over the last year months. Year-to-date pretax, pre-provision net revenue was up 6.7% over the same period last year. And our efficiency ratio for 2013 remains stable at 61% consistent with last year this time. We maintain our confidence in the growth and financial dynamics of our business and continue to focus on providing shareholder value. We believe that our business model continues to be well positioned to deal with the current banking business and regulatory environments. With that I welcome Mark Sullivan, our Vice Chairman and CFO to join me for Q&A. Operator, please open the lines.

[Operator:]

Thank you. We will now begin the question-and-answer session. We would ask each participant to limit themselves to one question with one follow-up per person. You may continue to reenter the queue and submit additional questions if you wish. (Operator Instructions) We have a question from John Moran from Macquarie Capital. Please go ahead sir.

[John Moran:]

Hey, good morning guys.

[Jim Getz:]

Good morning, John.

[John Moran:]

Hey, I appreciate the detail, Jim, upfront on the one large credit that kind of migrated here and went south on you. And it sounds like it was out of the shared national credit book and not agented by you guys. Just wondering if you could give us a quick update on where the balances of the snick book are today maybe versus where they were last quarter? And then just to refresh us real quick again on how much of that is sort of agented there versus away?

[Jim Getz:]

This was definitely John a shared national credit. The portfolio today is about $492 million. It’s about 27% of the portfolio and it’s down slightly from this time last quarter.

[John Moran:]

Okay. And then if you could just kind of refresh on how much of that you guys sort of self originating in agent versus how much is that you are kind of not lead on?

[Jim Getz:]

On the shared national credits, we have only a very limited amount that we agent. We do agent the club deals that we have, but not the shared national credits. We have about $124.5 million of club loans at this point.

[Mark Sullivan:]

John, this is Mark Sullivan. One of the things that bears reiterating is when we talk about snicks as it relates to TriState, just a reminder of that, we are there at origination point. None of them are purchased on the secondary market and we use the same underwriting process that we do for a direct loan. Also they are all on our geographic footprints and probably this is importantly is our charge-off experience with the snick aligns with our direct loan experience. In fact, it’s a tad better. And our overall experience past four years is on charge-offs is about 41% and on provisions about 49%. And that’s been a fairly tight band. It’s range from 42% to 52%. So, on an annual basis, it’s performed within again a fairly tight band.

[Operator:]

Our next question is from Christopher McGratty from KBW. Please go ahead sir.

[Christopher McGratty:]

Good morning guys.

[Jim Getz:]

Good morning Chris.

[Christopher McGratty:]

Mark or Jim, the increase in non-accruals in the quarter $1.5 million, was that separate from the snick or is that inclusive of the snick?

[Mark Sullivan:]

That includes it.

[Christopher McGratty:]

Okay. On loan growth, you obviously have had some pay-downs affect net growth in the past few quarters can you speak to near-term expectations for, I guess, net portfolio growth?

[Jim Getz:]

We really – the way we look at this is from a longer term perspectives, but from long-term perspectives, we look at it on an annual basis. If you look 2008 through 2012 with a compound annual growth rate of 15% and you really dig into the weeds there, you will see in 2010 we were totally flat. So we did – we experienced no growth in 2010 at all, but if you look at it from a 5-year period of time we have 15.1% compound annual growth rate. So we are reinforcing our feeling that we believe that, that trend will continue. Granted over the past 12 months, we have had a 9.3% growth in loans outstanding, but we still feel confident that we are going to keep pace with the say 15% over 5-year period of time.

[Operator:]

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

[Matt Olney:]

Hey, good morning guys. It’s Matt Olney from Stephens.

[Jim Getz:]

Good morning Matt.

[Matt Olney:]

Hey, within the commercial middle-market loan book, obviously the growth was a little bit weak this morning you mentioned the pay downs are problematic, but I think you also mentioned low utilization rates from some of your legacy borrowers. Am I understanding that correctly and if so what do you attribute that to?

[Jim Getz:]

The utilization rate is running right now about 47% last quarter, it was in the range of 52%-53% and what you are finding is a lot of these middle market companies are taking the cash off their balance sheet and just paying their debt down. So as I illustrated we had some $86.7 million of line pay downs that cause the utilization to be a lot lower, but it’s essentially them taking cash form the balance sheet and paying down and not maintaining the cash on balance sheet anymore.

[Matt Olney:]

And what would you attribute that to Jim whether it’s seasonality or uncertainty?

[Jim Getz:]

I think its more uncertainty and people wanting to reduce the level of debt that they have on their balance sheets.

[Operator:]

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

[Bryce Rowe:]

Thanks. Good morning. Just a question on the increase in charge-offs here, was there a related interest reversal that’s in the quarter related to that snick loan?

[Mark Sullivan:]

What reversal?

[Bryce Rowe:]

Did you reverse accrued interest there? Did it impact the margin?

[Mark Sullivan:]

We would have wanted non-performing absolutely which I think it was August that we reported as substandard and NPA. And so at that point had - it did not recognize interest income for August. We did not reverse anything prior to August.

[Bryce Rowe:]

Okay so nothing reversed. Mark can you tell me what the average loan yield was on third quarter production or was that loan yield on new production for the quarter?

[Mark Sullivan:]

I will try to have it for the quarter the loan yield for the quarter was 3.91…

[Bryce Rowe:]

Right.

[Mark Sullivan:]

Versus 4 in the prior quarter, but that’s total loan portfolio. I don’t have the breakout of the just the originated yield.

[Bryce Rowe:]

So any feel as to where new loans are being booked today from a pricing perspective?

[Mark Sullivan:]

One thing to keep in mind is the fastest growing area of the bank is private banking. And private banking has a lower yield than C&I and CRE. But again as that grows as a percent of our portfolio it reduces the credit risk within the portfolio as well. And we are more than happy with that trade on.

[Jim Getz:]

Right. Bryce, if you are looking at loans that we are booking today and what the pricing is. Usually on the private banking you are looking around 2.25 over LIBOR. On the C&I based on the financial metrics of the company it can be anywhere from 200 over LIBOR to 300 over LIBOR. And what we are seeing on the commercial side of it is anywhere from 200 to 350 over LIBOR. And these are loans that are – been booked over the past few weeks.

[Operator:]

Our next question is from Chris McGratty [KBW]. Please go ahead.

[Christopher McGratty:]

Yes, sorry, if I got cut off with the follow-ups. Mark on the margin, let me ask the margin question a little differently. How should we be thinking about near-term NIM and also the size of the investment book?

[Mark Sullivan:]

Again the NIM is maintained well in it just about 290-293 range. And again just to reiterate as the private banking continues to be the growth driver within the three areas of the portfolio that has a lower yield, so that will put a little bit pressure on the yield side of the NIM. Again I have said by the lower credit risk profile, but there is also more room for continued reduction in our cost of funds. So I think for that the near-term visibility, they will maintain again in that 285 – 280 to 295 range for the NIM.

[Christopher McGratty:]

Okay, great. And then any help on the expense run rate, is there anything unusual in the accounted $10 million range we have been at, is that fair going forward?

[Mark Sullivan:]

Well, I think the expense range is fairly normalized. The only area that I am aware of was expecting a significant increase and I am sure it’s everyone is and that’s in our benefits program that will obviously be a higher percentage increase than we expect in the rest of the non-interest expense line. I think it was 1.81% of total assets. So we continue to maintain very low cost operating model if you will.

[Christopher McGratty:]

Okay, thanks.

[Operator:]

Our next question is from John Moran from Macquarie Capital. Please go ahead.

[John Moran:]

Hey guys. Thanks for taking the follow-up here. Just real quick one, I wonder if you could touch on the opportunity in New York, how is that progressing, I know that, that was a reasonably new market and I think you had guys that were kind of ramping up pretty quick there, so any kind of color that you could maybe give there and then touch real quick on some of the other regions?

[Jim Getz:]

We couldn’t be more pleased with New York, John. It’s fully staffed now. We have loan oustandings of around $60 million. If you recall, we have indicated that we breakeven at $100 million. And we anticipate that we will be in that as we end the year. If you take a look at the other markets, you may recall that New Jersey was a market that wasn’t quite performing as robust as the others. And for this quarter, it’s really picked up a pretty decent pace. Lot of that and you are probably familiar of the New Jersey economy, lot of that has to do with the some commercial real estate activity that we have seen fairly positive in New Jersey. Most of the payoffs that we have seen unfortunately have occurred in the Pittsburgh, the Cleveland and the Philadelphia markets.

[John Moran:]

Got it, that’s helpful. And then maybe just quick follow-up to that, any sort of outlook on hiring lenders in the pipeline and sort of net adds or anything you can help out with on that front?

[Jim Getz:]

Yes. At this time, John, we see ourselves fully staffed. If you remember, we had indicated to you that we anticipated adding approximately half a dozen people this year. We are at that level. And for the most part, they were income producing people. What we would like to do from an expansion standpoint is first take the New York office to profitability before we look at expanding on the middle market side to any other particular markets. So I wouldn’t anticipate us thinking of doing anything to at the earliest 2015 which we have indicated to you before.

[John Moran:]

Terrific. Thanks very much.

[Operator:]

Next question is from Matt Olney from Stephens. Please go ahead sir.

[Matt Olney:]

Hey, thanks. Just as a follow-up, the private banking loan channel, I think the press release mentioned that the large pay down that affected that number during the quarter. Can you talk more about the near-term expectations within that book? And what’s the average size loan in that book?

[Jim Getz:]

Yes. The loan that was paid down was extraordinary. In fact, we very openly had talked about it before. It was a loan that was secured by about $45 million of collateral. It was the largest loan that we had at the bank and it was exceptional to the book of business. I you look at that book of business, the average loan is around $1 million. The loan-to-value in that portfolio averages around 60%. And we continue to monitor the collateral in a daily basis and I think you are all aware, we have a – we put a system in place plus we have collateral analysts and portfolio managers that are looking at the collateral in a continual basis. And we have had zero losses in this portfolio.

[Matt Olney:]

And Jim, what about expectations of growth in the near-term within that book?

[Jim Getz:]

We feel highly positive going forward. You may recall that at the time of the offering we had about 58 intermediaries. We are pushing on 75 intermediaries at this point. And we don’t see anything stopping us from continuing to grow this business. As I have indicated before we see this as a multi-billion dollar business for the bank. And by the way it does continue to further reduce the risk profile of the bank. If you look at the loan portfolio at the end of September, you will see that about 43%, 44% of the portfolio with C&I, about 28% was commercial real estate and about 29% was private banking. And for the first time private banking reached beyond $500 million. So we are very pleased with the macros we see in that market. And it reinforces the value of having a diversified loan portfolio. So if you really looked at our growth 2007 through mid-2011 it was really driven by the C&I portfolio. And now it’s the private banking, so life is cyclical both in business and in life. And we are pleased with what we are seeing here in general.

[Matt Olney:]

Thank you.

[Operator:]

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

[Jim Getz:]

Since there are no further questions, we would like to thank each of you for joining us today and look forward to communicating with you in the future. Thank you very much and have a good day.

[Operator:]

Thank you. This concludes today’s conference. You may now disconnect your lines.