TriState Capital Holdings, Inc.
Q4 2016 Earnings Call Transcript

Published: 26 Jan 2017

[Operator:]

Good morning, everyone and welcome, to TriState Capital Holdings Conference Call to discuss the Financial Results for the Three Months and Year Ended December 31, 2016. 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 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 Web site at tristatecapitalbank.com. Representing TriState Capital today is Jim Getz, Chairman, President and Chief Executive Officer. He will be joined by Mark Sullivan, Vice Chairman and 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.

[Jim Getz:]

Good morning, and thank you, for joining us. We are very pleased to be able to report our strongest fourth quarter results to-date, capping TriState Capital’s best year ever and getting the New Year up to a running start with every aspect of our business firing on all cylinders. And importantly, continuing to grow our customer and product franchise. Total assets exceeded $3.9 billion at the end of 2016, up 19% for the year, and nearly 90% for the end of 2012 just prior to our IPO. Superior loan growth, which has long been a hallmark of TriState Capital continues at a consequential pace. The Company grew loans to $3.4 billion at the end of 2016, up nearly 20% for the year and 107% from just prior to our IPO. Loan growth was outpaced by deposits in 2016, as we begin to see benefits of our recent investments in distribution and sophisticated treasury management capabilities. Deposits reached nearly $3.3 billion, growing 22% since the end of 2015 and 80% from just prior to our IPO. The very robust growth for our balance sheet continues to feel healthy net interest income growth as NII reached record of nearly $75 million in 2016, growing 10% from one year prior, and 30% from 2012. Non-interest income, largely representing Chartwell Investment Management fees, hit a record of nearly $47 million in 2016, representing 38% of total revenues. Non-interest income grew 31% from one year prior and 47% from 2014, our first year after the Chartwell acquisition. From 2012 non-interest income grew more than 650%. Total revenue hit a record $121 million in 2016, reflecting healthy contributions from all of our businesses. Revenues grew more than 17% from one year prior and more than 94% since 2012. In addition, our revenue stream is much more diversified than it was just four years ago. Our very successful 2016 initiatives to drive loan and deposit growth is reflected in fourth quarter non-interest expenses, and specifically, in compensation and benefits expense. The increase in comp and benefits compared to the third quarter was driven by higher incentive compensation at TriState Capital Bank as the team there met and exceeded goals in 2016. In particular, we had very strong loan production at the end of the fourth quarter, and we'll start the revenue from this new production in early 2017. More importantly, in 2016, the Company continued to demonstrate its consistent ability to drive bottom line growth. Net income of nearly $29 million in 2016 was up 27% for one year prior and 168% from 2012. Earnings per share, which is the metric we hold ourselves accountable for when we measure our ability to create shareholder value, was $1.01 in 2016. TriState Capital delivered EPS growth of 26% compared to one year prior. Since 2012 the company has grown EPS nearly 115%. Even as TriState Capital delivered these very strong top and bottom line growth rates, we continue to maintain exquisite asset quality metrics through the end of 2016. While provision expense was $1.2 million in the fourth quarter to reflect specific reserves and two non performing loans originated in 2008 and 2011, we note for the full year provision totaled just $838,000. We were very comfortable with the provisioning we were able to do in the quarter. Non-performing assets at the end of 2016 were just 0.56% of assets, unchanged from one year prior and a reduction of 54 basis points since the end of 2012. Adverse rated credits have declined in a meaningful manner to just 1.25% of total loans, a reduction of 67 basis points from one year prior and 206 basis points since the end of 2012. Again, this is even as we double the size of our loan portfolio over the last four years. We believe TriState Capital's results in 2016 continued to distinguish the Company from its peers, and we expect the drivers of that performance to-date will continue to be to the keys to our success in the future. Importantly, we have a culture that is sales driven and growth oriented. Other companies may say this, but there aren't many in the financial services with a record of driving earnings growth via the top line during the historically low rate environment we've all experienced. While some others spent the last 10 years focused on efficiency initiatives and cost cutting programs in order to stabilize profits, we've grown earnings by investing in talented people who've proven their ability to earn clients' trust and explain -- and expand their books in the toughest operating environment our industry has ever seen. Through this, we have assembled a group of bankers, investment managers, and other professionals that produce more than twice the revenue per employee than peers, which is a metric our entire team is proud of. We built our Company to increase earnings with or without external help from rates. That being said, we certainly welcome the movement toward normalized rate environment, and our highly asset sensitive balance sheet positions us very nicely to profit from such a scenario. In fact, during the fourth quarter, we actually grew floating rate loans as a percentage of total loans to 89%. Another factor we believe is central to our success is our unique business model and distribution capabilities. We have the relationships and the expertise to deliver what a relatively traditional products to clearly define market niches. Private banking loans grew 29% in 2016 compared to year prior. Our unique value proposition is based on the industry expertise, and best-in-class service that we provide for these intermediaries and their clients, as well as the fact that we do not compete with them for these same clients. We continue to expand our distribution network, which has grown to 142 financial intermediaries and we now have loan activity with clients of more than 2,500 advisors from firms. During 2016, alone, we originated marketable securities-backed loans with clients of 782 new advisors. Even with this success, the untapped potential for our fast growing private banking business is illustrated by our penetration within this existing distribution network of financial intermediary firms, which are growing and is still less than 5%. Another of our well defined niches is regional relationship based middle market commercial lending through offices in Pennsylvania, Ohio, New Jersey and New York. In-market commercial real-estate has been a significant driver of total loan growth, and CRA balances totaled $1.1 billion at the end of 2016, increasing 25% from one year prior, inclusive of owner occupied originations which had a balance of $129 million. This growth is a result of our focused effort to grow strong relationship opportunities available to us and our favorable footprint. We are also taking advantage of disruptions caused by acquisitions of relationship banks by larger financial institutions. We created relationships with new clients, and we added highly qualified commercial real estate professionals who were dissatisfied with their prior banks post acquisition. New loan originations totaled $256 million in 2016, up from $211 million in 2015 and $233 million in 2014, inclusive of owner occupied originations. Also, I would like to point out that we currently have no commercial real estate credits in our criticized loan population, and no commercial real estate loans have been downgraded to sub-standard since 2012. On our October earnings call, we noted that we anticipated positive growth in our portfolio of direct commercial and industrial business in the quarters ahead. And in fact for the last three months of 2016, we experienced positive sequential growth of $22 million net of payoffs and pay-downs and have a healthy pipeline headed into 2017. In addition the prospects for new clients, we also believe that our existing portfolio of C&I loans will benefit from accelerated economic growth as quality companies that have been reluctant over past years to make significant investments in their businesses, begin to utilize their debt availability to grow their businesses. As always, though, we remain focused on the things that are actually in our power to control, and we are confident that the progress we have made in 2016 positions us for future growth. Our treasury and liquidity management offerings are an increasingly contributor to TriState Capital’s banks, ability to build strong client relationships, support our loan growth, and enhance overall profitability. Over the last couple of years, we have been growing our investment in relationship managers and capabilities dedicated to growing lower all-in cost relationship deposits through sophisticated yet customized treasury management services. We are seeing excellent demand for these expanded service-based offerings, which are giving us entrée to new client accounts, as well as deepening existing relationships. We're still ramping up this very competitive offering, but it’s already delivering results. The positive trend is illustrated by average deposit balance growth in the fourth quarter of 2016 compared to the same period last year. While interest bearing deposits expanded at an impressive 18% rate, non-interest bearing deposits grew to 2.5 times faster by about 47%. Turning to Chartwell Investment Partners, our boutique asset manager benefited from strong overall performance across investment strategies, as well as revenue from the business acquired from the Killen Group in April of 2016. We believe that $15 million purchase price, or just 5 times Killen's base EBITDA, was an extraordinary value for the quality of the investment team and the product breadth we acquired. We see tremendous upside in putting Chartwell's sales and marketing capabilities to work for the strategies acquired for Killen, especially the Berwyn Income Fund. Earlier this month, some of you may have noted Barron's feature the Berwyn Income Fund and the two rising stars who are co-managing this strategy. Barron’s pointed out these managers I'm quoting now, earned customers in average of 6.8% a year over the past decade, better than 98% of their funds MorningStar peers and with roughly 25% less risk. We're proud to have these gentlemen in all their former Killen colleagues now on-board with our Company. Retail growth at our investment managers supported by the fact that Chartwell is now doing business with more than 2,000 financial advisors, 30 registered investment advisory firms, five regional securities firms, and among the largest wealth managers in the world, four major broker-dealer wire house. As anticipated, Chartwell's investment management fees totaled $37 million for the 12 months of 2016, an increase of 25% over the year prior. Charwell helped push non-interest income to 38% of total revenue with investment management fees alone representing 31% of revenues. We continue to expect Chartwell will deliver positive revenue growth in 2017. Thanks to the entire team of investment professionals we have assembled at Chartwell today, we believe we’re building a premier investment management business. We continue to actively evaluate acquisition opportunities that will bring top investment management talent, and a broader array of products to Chartwell, particularly among fixed income and tax free strategies. As always, we intend to be very disciplined in how we structure price and undertake any future deals. As pleased as we are with TriState Capital's results through 2016, we believe the foundation has been laid to position us for the future. Our focus is to continue growing our earnings in a meaningful manner and by extension our book value. Consistent with this belief, earlier this month, our Board of Directors approved $5 million in additional share buyback authorization in addition to the $3.7 million remaining from the authorization granted in October 2016. Last week, we hosted our national sales meeting in Pittsburgh with representatives across all our business lines and offices. From those sessions and the interactions I had with our people every day, I can tell you that our organization is highly energized and motivated to continue building on the successful foundation that's been laid to-date and accelerate TriState Capital's growth in 2017 and beyond. We have the talent, the distribution capability and the products needed to broaden and deepen penetration within TriState Capital's well defined niche markets. And we believe our business model, differentiated capabilities, and strategy for continued growth, will allow us to continue delivering superior results for our shareholders. That concludes my prepared remarks. So, I'll now ask our Vice Chairman and CFO, Mark Sullivan, to join me for Q&A. Operator, please open the lines.

[Operator:]

We will now begin the question and answer session [Operator Instructions]. The first question comes from John Moran of Macquarie. Please go ahead.

[John Moran:]

Maybe just a quick one for -- Mark, first on the margin outlook with the fed moving in late December. Could you remind us what the Alcoa position is, because I think that’s go around, you have got 5 basis points or so in the first quarter. I am guessing that that’s going to be a little bit bigger this time just given that you’ve got more variable rate loans and you are larger. And then there was kind of give-back over the next couple of quarters. If you could just remind us the dynamics on the liability pricing side of things?

[Mark Sullivan:]

Yes, that’s a very fair assessment, and recollection of what happened in '15 with that rate increase at December '15 -- what happened in '16, and Q1 picked up close to 700,000. I think in a big picture on a year-to-year basis, our NIM in '16 was down 12 basis points. At the same time, our net interest income was up 10% for the year. As we look at '17, NIM should increase about 10 basis points and NII should grow about 20%. And so again, we’ve modeled two rate, and the December '16 increase which we have and then we model for second one in July 1st. And that’s really what's driving that.

[John Moran:]

So plus 10 basis points of margin plus 20% NII, and two rate increases cooked into that?

[Mark Sullivan:]

Correct.

[John Moran:]

And then just the dynamics on the deposit side of things, so we would see like a pop in 1Q and then a slight give-back and then a pop again in the back half of year…

[Mark Sullivan:]

The bulk of that is in Q1 and in Q3.

[John Moran:]

And then second question for me, I just wanted to follow-up on the two -- not that credit is an issue or anything like this, but the two specific reserves. If we could get a little bit more color on those, and then I'll pop out.

[Jim Getz:]

Let me go over these two footprints that occurred in the fourth quarter. In the fourth quarter, we wrote down $2.7 million on non performing loan and added approximately $1 million of reserve for this loan. The borrower was a designer, marketer branded niche products for exercise equipment and travel accessories and gift to markets. The loan balance net of reserves was approximately $2 million at the end of 2016. The loan was originated in May of 2008. We believe there is an opportunity over the next couple of months the Company will be sold. The other loan, we also added $1 million of reserve to another non-performing loan in the fourth quarter. The end market borrower on this C&I loan is a value-add refractory business, which has material sales, the construction and metal processing industries. The loan was originated in October 2011. And as you're probably aware the higher provision expense for the entire year was $866,000.

[John Moran:]

Obviously not, like I said, credit is not an issue, but just wanted to get some detail on those two. I appreciate it.

[Jim Getz:]

And we feel comfortable with the amount of reserve we have on this job.

[Mark Sullivan:]

The key in that is that these aren’t newly arrived, and we’re just seeing them and adding and putting a reserve on. These have been MPA and we’re getting more comfortable with the idea that the reserve should be increased. And again as Jim pointed out, 838,000 for the year plus, and 2.5 basis points of loans outstanding.

[Operator:]

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

[Michael Perito:]

Question on the provision run rate, it was good to see the C&I growth reaccelerate this quarter. If you guys are operating over the assumption that that’s going to continue next year, I mean is it fair to say that the provision might kind of drift a little higher than what was in the last few quarters where the growth has been primarily private banking?

[Jim Getz:]

Yes, I think when you look at the provision and as we look at '17, we’re probably modeling somewhere between 8 basis points and 10 basis points. The key here is hopefully they’ll come in under that as we have the past two years, which has really been negligible with zero and ’15, and as I mentioned 2.5 basis points in '16. But for forecast purposes we’ve elevated but still under 10 basis points.

[Michael Perito:]

And is there any -- the 10 basis point NIM expansion that you spoke to Mark. I mean that solely as it relates to just kind of getting the higher rates and the balance sheet being the same as it is today. I mean, is there any opportunity? I guess, as you look at the mix of the portfolio now that the C&I growth is kind of re-accelerated. And I mean is this -- the levels where the balances are today good barometer for how feel the mix of the portfolio should be going forward. And I guess would that have any potential longer term benefits to the margin at the commercial aspect maybe picks up a little bit?

[Mark Sullivan:]

I think the loan mix is -- you're going to continue to see, even though the C&I is picking up, I think commercial banking together, the C&I and CRE. The primary driver is still going to continue to be private banking as we go forward. And one of the things on the margin is not on the loan yield side, but on the -- looking out on the cost of funds, the deposit side. We've mentioned the effort we’ve had in treasury management and beginning to see the results on that; if you look at our DDA from '15 to '16, interest and non-interest very good, 33%. And what we're seeing is that the value of customer service is more important than any actual quoted rate. So, we're feeling good as we go forward on being able to continue to manage both sides of that NIM equation.

[Jim Getz:]

Mike, if you look at the end of the quarter, the private banking was about 51% of the loan portfolio, commercial real estate was 32%, and about 17% was C&I. That ’17 more than likely will grow to about 20 next year. We don't anticipate encouraging that commercial real estate to go much over 35%. And we continue to see the private banking doing quite well. We have a very strong pipeline for the first quarter here that we're getting on. We obviously are coming off of very good quarter from a balance sheet standpoint.

[Operator:]

[Operator Instructions] Our next question comes from Bryce Rowe of Baird. Please go ahead.

[Bryce Rowe:]

Mark, I was wondering if you could provide us with the swap income or swap fee income for the quarter.

[Mark Sullivan:]

Q4 swap fee income was just under $1 million, so we finished the year at $12.4 million.

[Bryce Rowe:]

And then maybe a couple more questions; number one, with the Chartwell, just trying to figure out going forward, but a good run-rate it was on the fee rate, now that you've had a bit of mix change in terms of the portfolios here at Chartwell?

[Mark Sullivan:]

Yes, the average weighted fee now is about 48 basis points. Lot of that is driven by the Vanguard departing and Killen coming in, and Killen's about 60 basis points. We saw last year about $470 million of positive flows, you take a Vanguard thing out of the picture there coming into our institutional and retail business from existing clients and new clients. So, it was a pretty decent year, Bryce and a year that most of the industry wasn't seeing anything positive coming in at new business.

[Jim Getz:]

Bryce, looking at it as revenue dollars, what you’ve got to look at is that the Vanguard revenue is, as we look at '17, the last Vanguard revenue is washed and offset by the fact that we had eight months of Killen revenue in 2016, and we'll have 12 months in '17. So the base revenue for '17 starting out is really right on top of '16, and then we expect growth from there.

[Bryce Rowe:]

And then last question from me. You guys noted in your prepared remarks the accelerated bonus accrual in the fourth quarter. Just trying to figure out what a good expense run rate might be, operating expense run rate might to be, at TriState Bank?

[Jim Getz:]

I think what we had was the accrual and also to our few other smaller items, but cumulatively, had some impact where Q4 was elevated on the non-interest expense. And I think as we ended up on a normalized about 22.7, which is a bit elevated. And I think 22 a quarter is a good run rate prospectively.

[Operator:]

The next question comes from Matt Napoli of Stephens. Please go ahead.

[Matt Sealy:]

This is Matt Sealy on for Matt Napoli. I want to circle back on the margins. So, little surprised loan yields were down in 4Q with creep up in LIBOR. Anything notable stick out in loan yields during the quarter? And on the private banking loans, how quickly do these reprice?

[Jim Getz:]

Almost all of our LIBOR loans reprice monthly, it's based on the first day of the month. And when you look at Q4, Matt, the LIBOR creep really didn’t start till December 1. So we had one month of the three months where this will be about -- is about 8 basis points increase in December. So, again, I think you will see it in Q1 and I think we are expecting.

[Matt Sealy:]

And on the deposit side, nice growth on the non-interest bearing liabilities, I was impressed in the 4Q. Where does this come from, was this part of the treasury management initiatives and…

[Mark Sullivan:]

It was part of the treasury management initiative that we talked to you about over past couple of quarters, and it is really robust at this time. I wouldn’t be surprised that we had seen, last year the loan growth, which we expect to be fairly substantial outstripped by the deposit growth.

[Matt Sealy:]

And last one from me, as far as M&A outlook, Aberdeen cancellation during the quarter. Does that put you back in the M&A seat, being a little more active looking at other asset managers, and any commentary there?

[Mark Sullivan:]

Yes, we are very active in that footprint, and more and more opportunities are coming to us because of the condition of the fixed income market. And I anticipate that we’ll be able to do something, at least the worse scenario within next 18 months, to complement what we have going on at Chartwell. We have a lot of interest. We have several parties that we’ve been talking to, but there is nothing imminent at all, but there is a lot more interest now because of some of the negativity in the fixed income markets.

[Matt Sealy:]

So you suspect it’d probably be a fixed income type manager?

[Mark Sullivan:]

Yes, exactly. It will be tax exempt and we might have taxable manager that would complement the money that we already have at Chartwell. But a real focus has been consistently on the tax exempt side.

[Operator:]

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Getz for any closing remarks.

[Jim Getz:]

I thank each of you for your continued commitment to the Company. This is the time of celebration here at our Company. The Company was 10 years old in January 22 last Sunday. So, we thank each of you for your support and look to continue to work with you into the future. Thank you.

[Operator:]

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