TriState Capital Holdings, Inc.
Q1 2017 Earnings Call Transcript

Published: 21 Apr 2017

[Operator:]

Good morning everyone. And welcome to TriState Capital Holdings Conference Call to discuss the Financial Results for the Three Months Ended March 31, 2017. 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 the 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 and 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 and annual and quarterly reports, filed on the Forms 10-K and 10-Q. You should keep in mind that any forward-looking statements made by TriState Capital speak only as of the date on, which they are made. New risks and uncertainties come up from time-to-time and management cannot predict these events or how they may affect the Company. TriState Capital has no duty to, and does not intend to, update or revise forward-looking statements after the date on which they are made. To the extent non-GAAP financial measures are discussed on this call, comparable GAAP measures and reconciliations can be found in TriState Capital’s earnings release, which is available on the website 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. And please note that the 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 today. TriState Capital finds itself well positioned for a very strong 2017 as our compelling financial metrics illustrate financial metrics illustrate. We had our best first quarter ever. Private banking experienced meaningful growth in the first three months of the year. The commercial bank outpaced the industry in growth, and Chartwell Investment Partners delivered exceptional investment performance that should generate momentum for future quarters. All these businesses combined to drive revenue to record first quarter levels. Our highly motivated and entrepreneurial team continues to deliver on all fronts year-in and year-out, and we believe we are in a very favorable position to leverage our first quarter success throughout the year for a strong 2017. Before we take a closer look at some highly positive trends we're seeing, I'd like first to touch on a few earnings highlights from the recent quarter. Net income grew more than 28% compared to the first quarter of 2016, and earnings per share increased 24% compared to the first quarter of 2016. On a yearly basis from 2012 through the end of 2016, TriState Capital has generated compounded annual growth of 21% for earnings per share and 28% for net income available to shareholders. At the end of the day, this is how we manage – measure our success year after year. Importantly, total assets crossed the $4 billion threshold during the recent quarter, reaching $4.1 billion at March 31. In just four years, we've nearly doubled our asset size through strategic organic growth. First quarter 2017 net interest income was nearly $21 million, an all-time high for us, and 14% improve from the year ago period. Net interest margin for the quarter of 2.24% was 8 basis points higher than the linked fourth quarter as our highly asset sensitive balance sheet benefited from December's increase in the Fed fund's target rate. Our balance sheet remains well positioned to take advantage of interest rate increases, and we saw that in action following the December rate increase by the Federal Reserve. As of March 31, 89% of our loan portfolio and 42% of our securities portfolio were floating rate. As a reminder, the bulk of our loans reset on the first of each month, so we expect to see the favorable impact of the March rate increase in the second quarter. The increase in success of our treasury and liquidity management offerings are well positioned to further enhance the asset sensitivity of the balance sheet by growing cost-effective long-term funding. Non-interest income, largely represent a Chartwell Investment management fees accounted for more than 35% of total revenue for TriState Capital this quarter. At $11.4 million, non-interest income was 28% higher than first quarter 2016. Our first quarter record net interest income and non-interest income combined generate total revenue of $32.3 million. Quarterly revenue grew 18% compared to the first three months of 2016 and more than doubled since the Company's 2013 IPO. These results are the product of a unique and diversified business model and financial service distribution capability that is focused on consistently delivering robust earnings. All three of our business lines, private banking, commercial banking and investment management, continue to provide increasingly diverse and complementary sources of revenue to the Company. TriState Capital Bank’s loan growth continues at a formidable pace, up more than $640.5 million or 22% from a year ago. Balances topped $3.5 billion at quarter end, pushing total assets over the $4 billion threshold and our pipeline is very healthy. TriState Capital's private banking business delivered the best quarter we've ever had with net production of – best first quarter we've ever had with net production of more than $101 million. Private banking loans outstanding at March 31 totaled $1.8 billion representing 34% year-over-year growth. In addition, in the first quarter, new applications by perspective high net worth clients grew by more than 50% versus the same period last year. Private banking channel lending reflects the growing breadth and depth of our distribution capability. Our national referral network of financial intermediaries is up some 148 firms from 125 in the first quarter 2016 and 142 at the end of the linked fourth quarter. This relationship-driven distribution strategy provides us with access to tens of thousands of independent financial advisors, wealth managers, trust companies and others who can refer and recommend our banking investment management offerings to clients. We are continuing to move quickly to maximize our competitive advantage in this market. TriState Capital Bank's regional middle market commercial lending business continues to build on its important and well-defined niche through our offices in Pennsylvania, Ohio, New Jersey and New York. Commercial loan balances have increased by 11% over the last 12 months, resulting from our focused effort to grow strong and enduring relationship opportunities in our very attractive markets. We also continue to take advantage of disruptions caused by acquisitions of relationship banks by larger financial institutions, and so a healthy origination activity in both commercial real estate and commercial and industrial lending in the first quarter of 2017. Heading into the second quarter, we feel highly confident about our commercial loan growth. Currently, we have a pipeline of about $67 million in commercial and industrial loans and $50 million in commercial real estate. That's about $117 million in new commercial loans that we anticipate closing before the end of the second quarter. As we grow our lending portfolio, we continue to maintain superior asset quality metrics, which distinguish TriState Capital Bank from peers in the industry. Our ability to source lending opportunities with strong sponsors and build key relationships is showing returns not only in growing loan volumes but also in our credit performance. Further, our risk management discipline and our strategy for driving a significant portion of our above peer loan growth for marketable securities-backed lending continue to improve credit metrics that were already very favorable. Over the last 12 months, adverse-rated credits declined 83 basis points to just 1.13% of total loans. Non-performing loans declined 33 basis points to just 0.40% of total loans versus the recent peer average of 1.13% for $3 billion to $5 billion banks. And non-performing assets declined 22 basis points just 0.45% of total assets versus the recent peer average of 0.93%. As of today, we had zero delinquencies 30 days or more. All non-performing loans are paying as agreed. Also in the first quarter of 2017, the bank took a net charge-off of $2.8 million or 0.33% of average total loans. These charge-offs are attributed to a pair of non- performing commercial and industrial loans we've discussed with you on other occasions as recently as January. One charge-off of about $2.2 million is associated with a loan originated in 2011 with a value-added refractory business, which has material sales to the construction and metal processing industries. The other, a charge-off of about $675,000 was for a loan originated in 2008 with designer and marketer of branded niche products for exercise equipment, travel accessories and gifts. These two borrowers are paying as agreed. As you saw in our financial statements, there was no impact on first quarter 2017 earnings from these charge-offs because they were fully reserved in prior periods. We continue to be pleased with our credit quality over the last several years. On the other side of balance sheet, our investments in dedicated relationship managers, capabilities and distribution to expand treasury and liquidity management offerings continue to gain positive momentum, with existing and new clients of TriState Capital Bank. In the first quarter alone our relationship managers brought a record $267 million of non- broker deposits on board. Given our continued success on this front, we paid down broker deposits of $236 million during the first quarter. This brought our traditional broker deposits down to 11% of total deposits as of March 31, 2017. Consequentially, our loan-to-deposit ratio increased and net deposit growth from the end of 2016 was modest, but this was all by design. We took advantage of our relationship-based liquidity to extend duration and push down traditional broker deposits and we supplemented this with FHLB borrowings to support our strong loan growth. We believe the relationship-based deposit-gathering distribution capability we have built up over the past several years can sustain its positive momentum. Our Chartwell Investment Partners business continued to contribute meaningfully to revenue and earnings in the first quarter. Assets under management at quarter end were $8.2 billion up slightly compared to $8.1 billion as of December 31, 2016, thanks to new business and market appreciation. Our boutique asset manager-generated investment management fees of $9.3 million, 33% greater than the first quarter of 2016. As a reminder, we closed on our acquisition of the Killen Group early in the second quarter of 2016. On an annualized run-rate basis, revenues were up nearly 23% from the year-ago quarter. Chartwell generated EBITDA of $2.5 million and contributed net income of $1.2 million during the first quarter or more tha 15% of TriState Capital’s consolidated net income. In terms of investment performance, our Chartwell and Berwyn strategies did exceptionally well in the first quarter. 8 of 15 Chartwell and Berwyn investment disciplines beat their benchmarks on year-to-date performance. 10 of 15 disciplines beat their benchmarks on three year performance and 9 of 14 disciplines beat the benchmarks on five year performance. We’ve been very pleased by the talent and products we've brought into our Chartwell business through organic and inquisitive means, including the successful acquisition of the Killen Group, adviser to the Berwyn funds, and we continue to assess M&A opportunities in the asset management space. TriState Capital Bank continues to maintain robust capital strength fueled by capital generated through our own banking and investment management subsidiaries, and we continue to evaluate opportunities to repurchase shares under our share repurchase program as we've done in recent quarters. At the end of the first quarter, we had $7.6 million of repurchase authority, remaining under this program. Since our May 2000 IPO, we've repurchased 1.4 million shares for approximately $16 million at an average cost of $11.32 per share. On the heals of an excellent first quarter I can tell you that our team is energized and hard at work, already doing the first few weeks of the second quarter. As pleased as we are with the highly differentiated and profitable growth we've been able to deliver to date, we're even more excited what we think we can achieve in the years ahead. That concludes my prepared remarks. I'll now ask Vice Chair and CFO, Mark Sullivan, to join me for Q&A. Operator, please open the line for questions.

[Operator:]

Thank you, sir. [Operator Instructions] The first question today will be Russell Gunther with D.A. Davidson. Please go ahead with your question.

[Russell Gunther:]

Hi good morning guys.

[Jim Getz:]

Good morning Russell.

[Russell Gunther:]

First question is on loan growth. Really a standout quarter, but I was hoping to get some comments on your expectations for the C&I portfolio going forward.

[Jim Getz:]

Right. We might not have been as clear as we could have been in the script, but we gave you a sense of the direction that, that book of business is heading. It's now approximately 17% of our outstandings. We expect it to be in the 20s at the end of the year. We already have booked for the first – for the second quarter, and we are in the month of April. We're in the process of documenting about $67 million of loans for the second quarter compared to about $49 million for commercial real estate at this point.

[Russell Gunther:]

I’d appreciate.

[Jim Getz:]

We are very positive about that picking up some momentum here. And you may recall, as you go and explore our past, that years 2007, when we started the bank, through about mid-2012, this was the driver of growth in the Company.

[Russell Gunther:]

All right, Jim, I appreciate that. And then just my second question relates to the margin. So and I say basis point picked up this quarter. You mentioned the bulk of loans resetting the first of the month, and so we should get that full quarter impact from the March hike. What are your expectations for your ability to capture that rate hike? It sounds like some progress was made on the funding side this quarter. Is 8 basis points the way to think about sequential margin next quarter or have you seen that shaking out?

[Mark Sullivan:]

Yes, good morning, Russell, Mark here. Yes, the NIM being paid for the – on the linked quarter basis, when we look forward, the NIM growth probably won't be quite as robust as it was in Q1 as we start to strategically deploy some of that margin to attract significant long-term relationship deposits. So looking forward, I'd say with an additional rate increase, our NIM should be in the 2.30s range, but probably more importantly focusing on net interest income. For the year, it's on target to be up mid-20% range from 2016.

[Russell Gunther:]

Thanks for taking my question.

[Operator:]

The next question of today is going to be Michael Perito with KBW. Please go ahead with your question.

[Michael Perito:]

Hey, Jim, Mark good morning.

[Jim Getz:]

Good morning, Michael.

[Michael Perito:]

Question on the expenses in the first quarter, you saw kind of a nice dip based on the quarterly run rate in the back half of last year. But I know you guys are still kind of actively looking to add on the sales force both internal and externally. So just curious if you can give any outlook commentary around what your expectations are for expenses over the balance of the year here?

[Mark Sullivan:]

Sure, Mike. I would say the consensus estimate for the year is still a good guideline. Q1 came in a bit lower. We had some favorable variances as mainly due to timing.

[Michael Perito:]

Okay. The expectations are the expenses will pick up a little starting in the second quarter?

[Jim Getz:]

Exactly. I think we gave guidance at about 22. So I'd say 22.5 and then growing each quarter from there.

[Michael Perito:]

Okay. And Mark, in terms of the kind of deposit shift that occurred in the quarter, was that – what was the timing of that occurrence? Was it later in the quarter, earlier in the quarter end? And then maybe a follow-up for Jim on deposits, what are the expectations, I guess, for total deposit growth over the balance of the year? I know last quarter was the first quarter you guys saw deposit growth outpaced loan growth. Is there still more remixing to come? Or do you think that that you could kind of get back to that matched funding growth rate for the rest of the year?

[Mark Sullivan:]

Let me give you all the details on this. To be candid from a strategic standpoint up until about two years ago, our real focus was on the asset side of the balance sheet and now we're spending, over the past two years, we're putting a lot more resources to work on the liability side. And so this wasn't something that just all of a sudden occurred in the first quarter. We've been working at it, really concentrated focus for the past two years. But in quarter one, we moved to reduce our traditional broker deposit portfolio by approximately $260 million, most of which was contractually indexed to the Fed funds rate as evidenced now that the FOMC might increase rates sooner and more quickly than previously thought. And in replacing each deposits, we enacted a clear well-thought-out strategy. We increased our FHLB borrowings by about $105 million at rates that were actually generally 10 to 20 basis points advantageous to our divested broker deposits portfolio when taking into consideration, the FHLB dividend that we received. We generated significant net increases of about $216 million and nonbrokered DDA and MMDAs at competitive rates. We competitively priced nonbrokered CDs to grow balances of about a net $60 million and extend the liability duration again ahead of the Fed rate increase. And in the short-term, we acknowledge increases to both our FHLB borrowings in our loan-to-deposit ratio. But in the coming quarters, we fully expect to reduce both meaningfully as our efforts to attract low-cost and noninterest-bearing treasury management transactions, demand and savings accounts where we control pricing and relationship at what we believe will be lower, relative costs continuing to produce results. And in doing all these, we also funded about $136 million of loans, so we are pleased that how this is working and the response that we're even seeing coming in, in the second quarter are people are now in place for a couple of years now. And as we've expressed before, we are building this treasury management business. So I would – it won't be even, but I would say that you could potentially see a repeat performance by the end of the year of where there's a slight divergence where the deposit growth is greater than the loan growth. I also point out that if you go back a year ago, our loan deposit ratio in the end of the first quarter last year was 105. It's obviously 106 now. I don't know if that answers fully your question, Michael?

[Michael Perito:]

It does. And then just on the timing of that shift, was it earlier in the quarter or later in the quarter?

[Mark Sullivan:]

It was throughout the quarter. It spreaded throughout the quarter.

[Michael Perito:]

Okay. Very helpful. Thank you.

[Jim Getz:]

Thanks.

[Operator:]

Our next question of today is going to be Matt Olney with Stephens. Please go ahead with your questions.

[Matt Olney:]

Hey, thanks. Good morning, guys.

[Mark Sullivan:]

Good morning.

[Jim Getz:]

Good morning.

[Matt Olney:]

First question for Mark. Mark, can you just clarify your comments on the NII being up in the mid-20% range? Was this for expectations for full year 2017? And if so, I think that's a higher level than last time you mentioned 20% increase so anything you can tell us as far as kind of which changed since January?

[Mark Sullivan:]

Yes, that comparison, Matt, is full year 2017 to full year 2016. And I would say we said 20%, it's more 20% to 25% increase for 2017.

[Matt Olney:]

And Mark, is that a reflection? I'm just getting the March Fed funds increase above your expectations?

[Mark Sullivan:]

Sure. Absolutely, that impacted our original forecast.

[Matt Olney:]

Okay. And then as a follow-up, private banking loans. Jim, you mentioned the growth in the first quarter was some of the best quote you've ever seen before in the first quarter for that segment?

[Jim Getz:]

That’s right.

[Matt Olney:]

I think you talked about that segment grow in the past 25%, 30% on a year-over-year basis. Is that still a pretty good expectation or is it getting more challenging to grow that level now that we're getting to much larger numbers?

[Jim Getz:]

Now we fully expect that we're going to see a 30% to 35% growth this year as exemplified by the production that we saw in the first quarter, and the pipeline there is really strong. As you can see, we are putting 5, 6 additional intermediaries on. We're getting better market penetration. So this is going to be a driver for multiple years in the future of the company.

[Matt Olney:]

Okay. Thank you.

[Operator:]

[Operator Instructions] Our next question is going to be Bryce Rowe with Baird. Please go ahead with your question.

[Bryce Rowe:]

Thank you, good morning.

[Jim Getz:]

Good morning, Bryce.

[Mark Sullivan:]

Hi, Bryce.

[Bryce Rowe:]

Jim, I appreciate the commentary for quarter – second quarter to-date C&I and CRE commitment, our origination volume. Just curious, from a net basis, are you seeing some payoffs, repayments that could impact the growth originations so far this quarter? And then also, I was curious what kind of pricing you're seeing on that new business?

[Jim Getz:]

Sure. First of all, if you look at the first quarter, what we experienced was, to be candid with you, payoffs in both the commercial real estate and the C&I portfolio higher than we had anticipated. I think the net was about $36 million for those portfolios. C&I was down about $1 million – $1.5 million, but we fully – we're not seeing the level of payoffs and do not anticipate the level of payoffs this quarter. We saw some payoffs that occurred in the first quarter that we anticipated would be in the second quarter. So you're going to see, we believe, a much more robust commercial lending growth in the second quarter. With regard to current pricing on the C&I loans, we're seeing these are loans that were originating right now 2.25% to 2.75% over 30-day LIBOR and the pricing on the commercial real estate is around 2.25% to 3% over LIBOR.

[Bryce Rowe:]

Okay. And then I had one more question on, I guess, swap fees for the quarter, Mark. I think last quarter – last quarter's conference call, you talked about essentially being able to maybe generate $6 million to $7 million of swap fees in 2017. I was curious what it was here in the first quarter. And do you still expect swap fees can be that strong here in 2017? Thanks.

[Mark Sullivan:]

Sure, Bryce. Yes, in terms of the previous swap fee income, it was actually very comparable to Q4, a little over $1 million. I had thought it might be a little bit more robust and we still think that it will pick up each quarter as we go forward, particularly if we do see more action from the Fed in terms of increases. One of the things causing volatility is the credit value adjustment and it causes financial reporting volatility quarter-to-quarter based on a notional value of the swap portfolio and movement in the mid-range of the yield curve. So that puts some volatility in the numbers, the net number as well.

[Bryce Rowe:]

Great. Thank you very much.

[Mark Sullivan:]

Thanks.

[Operator:]

Our next question is a follow-up from Michael Perito with KBW. Please go ahead.

[Michael Perito:]

Hey, guys. Just a couple of follow-ups, thanks for taking. One, on the loan growth just kind of putting everything that's said today together and sorry if this is very obvious, but I just want to confirm. I mean it sounds like for the C&I balances has a percentage of the mix to grow like that and the private banking growth that you're talking about. I mean, it sounds like for most of the year here, you've probably moved a little bit above that kind of 15% long-term cumulative growth that you guys are targeting. Is that a fair comment?

[Jim Getz:]

I think here in the second quarter, that's a fair comment.

[Michael Perito:]

Okay. Thanks. And then secondly, one of your larger competitors but one of your bank competitors in this mid-cap group announced that they were selling their investment management business yesterday, and I was just curious if you can maybe provide some updated thoughts on kind of what you think the merits of the business are. And obviously, there's challenges on the active management side, but kind of how you think that Chartwell is positioned to kind of battle those challenges as we move to 2017?

[Jim Getz:]

You have to look at, Mike, each asset management entity as a unique operation in itself. And what you really have to do to evaluate Chartwell and what you are essentially alluding to is the amount of money and there's no question. Overwhelmingly, money is moving into passive management, and we're an active manager. So you're essentially saying with UMB doing what they've recently done is just a message that you're going to see among a lot of institutions. So we didn't work to acquire and work with the Chartwell folks for one year or two years. We bought that company to have an impact ongoing of noninterest income and reduce the risk profile of the traditional bank here. And what they stand out, you really have to dissect carefully the product lineup that they have because that’s unique from ETFs and indexing, quite unique in a sense. You take a look and you're probably aware from what you're doing right now today, small-cap growth. We've had some challenges there in performance of small-cap growth. And if you look at the short-term numbers that, thanks to Sterik [ph] who just joined us, he's done a gentleman's job of turning that rattles small-cap is in demand in the marketplace and it's in demand is active management. On the growth side, the same with small-cap value, our folks at Chartwell have done a tremendous job, Dave Dalrymple and his team there of managing that money there, performance numbers are highly credible, Andy Toburen is running the Short Duration High Yield Fund, you don't find many high-yield products out there that are around the 2-year duration relatively liquid in the marketplace. There's only two or three of them, so it's somewhat -- we're talking about products that are somewhat esoteric that aren’t readily duplicable with regard to the indexing or the ETF. So we are fully committed to this company. We're going to continue to grow it. We're going to put more resources to work on it. The company's now celebrating its 20th anniversary, we feel very positive about it. It's going to be a major part of this company going forward.

[Michael Perito:]

Great. That’s helpful. Thanks for taking my questions, guys.

[Jim Getz:]

Great.

[Operator:]

This will conclude the question-and-answer session. I would like to hand the conference back over to Jim Getz for any closing remarks.

[Jim Getz:]

Thank you for everyone for attending. Really appreciate your continued interest and commitment to TriState Capital Bank. Have a great weekend.

[Operator:]

Ladies and gentlemen, the conference has now concluded. Thank you all for attending today's presentation. And you may now disconnect your lines.