TriState Capital Holdings, Inc.
Q2 2017 Earnings Call Transcript

Published: 20 Jul 2017

[Operator:]

Good morning everyone, and welcome, to the TriState Capital Holdings Conference Call to discuss Financial Results for the Three Months Ended June 30, 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 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 were 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 today. We are delighted with TriState Capital's performance in the second quarter of 2017, notably, on a year-over-year basis. Total assets grew organically by 22%. Loans grew organically by a record $774 million or nearly 26% with strong contributions across all channels. Even as our loan book nears the $4 billion mark, we cut adverse rated credits for just $34 million and non-performers to less than $8 million. Deposits grew by more than 22% as we match our funding needs to support loan growth. Net interest income grew by a record $3.8 million or nearly 21%. Non-interest, primarily Chartwell Investment management fees represented 34% of total revenue. Total revenue grew by more than 13%, and most importantly, earnings per share grew 21%. While these are all highlights from the last three months, we do not consider the second quarter to be exceptional for TriState Capital given how we execute our highly differentiated growth strategy. Rather these results are emblematic of how we successfully put our shareholders' capital to work in diverse businesses delivering exceptional growth over the long term. Accordingly, we have confidence in a number of milestones targeted in the years ahead for our company. We believe TriState Capital can and should have a billion dollar market cap in the next 24 months, compared to more than $700 million today, and about $400 million a year ago. In the next 12 months, we intend to grow organically past the milestone of $5 billion in bank assets. We will continue to grow total deposits to fund lending with non-interest-bearing deposits beginning to increase in the second half of 2017. We intend to show meaningful non-interest-bearing deposit growth in 2018. For 2017, we expect net interest income to increase by more than 20% over 2016. We intend to complete another highly accretive investment management acquisition in the next 18 to 24 months as part of our plan to significantly expand Chartwell assets under management. For 2017, we believe Chartwell revenues will be in line with last year's investment management fees. As evidenced by our performance this year, TriState Capital continues to achieve critical mass with our infrastructure, resources, and capabilities, which we have built to support a financial institution with banking and investment management business multiple times larger than we have in place today. Today, we are showing even more of the benefits of our operating leverage illustrated by the 460 basis point reduction in TriState Capital Bank's efficiency ratio over the last year to 55% in the second quarter of 2017, right in line with our targeted efficiency ratio range of the mid-to-high 50s. On a consolidated basis, second quarter non-interest expenses were about $22 million, just 2.1% of average assets annualized. Keep in mind this metric includes the expense of the non-bank business, which is a major contributor to our top and bottom lines, though not the balance sheet. Since 2015, our first full calendar year after entering investment management, TriState Capital's annualized non-interest expense ranged from 2.1% to 2.4% of average assets. This compares very favorably to the 2.8% average of bank holding companies with $3 billion to $5 billion in assets. And many of those peers operate without a non-bank business as meaningful as TriState Capital's. The bank's total assets were $4.2 billion at June 30th, 2017, a full $780 million greater than one year ago, and almost double what it was four years ago after our IPO. Our team is very focused on both growing and diversifying our high-quality loan portfolio, and our efforts have been highly productive. June 30th total loans of $3.8 billion were $774 million greater than a year ago. Our quarterly growth was impressive as well, adding $234 million in net loans compared to the prior quarter, an increase of some 6.6%. Private banking loans made up 52% of total loans, as of June 30th, with net production of more than $130 million since March of this year, and more than $530 million since June of 2016. We continue to expect to grow private banking loans by 30% to 35% for full-year 2017, as high net worth clients complete new applications at a record rate. In the first six months of this year, the number of new client applications is in line with the number completed in the entire year 2015. And we are also well ahead of last year's pace. These results clearly illustrate the success of our company's unique and highly scalable business model. Our relationship driven team is connected to a growing national referral network, through which we are able to market TriState Capital Bank in Chartwell to even more clients. This network of financial intermediaries continues to expand and totals some 153 firms, up from 131 a year ago. As we have demonstrated in the past, we are readily able to fund a growth opportunity in both commercial and private banking. For the later, we believe TriState Capital is the premier private bank franchise in the nation today. We intend to further strengthen our unique franchise and widen the defensive moat around TriState Capital's unique non-purpose margin lending business. We expect to continue the growth of the private banking loans using our strategic funding, unrivaled national distribution network, proprietary technology, expertise, and client experience. Our team's focus on growing regional middle market commercial business also continues to pay off as anticipated. Healthy commercial and industrial loan originations led to a $54 million increase in commercial and industrial loans in the second quarter alone. Taking C&I balances to nearly 640 million at June 30th, an increase of 11.5% from a year ago. We've established well-defined niche in the middle market lending, are increasing becoming a financial service partner of choice for select businesses throughout Pennsylvania, Ohio, New Jersey, and New York. Increased M&A activity and our four-state footprint also has created disruption that our team has turned into a relationship building opportunity. With C&I loan growth outpaced commercial rent led real estate lending, as planned CRE lending will remain a major piece of our middle market business. Commercial real estate grew by 49 million to $1.2 billion during the second quarter. We continue to maintain our focus on in-market projects with in-market barrowers. Asset quality remained exceptionally sound even as we continued to profitably expand our loan portfolio compared to one year prior at June 30th 2017. Adverse rated credits declined 99 basis points to just 0.90% of total loans and totaled only $34 million. Non-performing loans declined 43 basis points, just 0.21% of total loans versus the recent average of 0.95% for $3 billion - $5 billion banks. Non-performing loans now totaled less than $8 million. And non-performing assets declined 32 basis points to just 0.27% of total assets versus the recent peer average of 0.81%. Provision expense for the second quarter was $516,000. This reflected the period's significant loan growth particularly in C&I, which requires higher reserve levels in private banking loans. Net charge-offs for the second quarter were approximately $733,000 or 0.08% of average total loans. We took a sole C&I charge off during the second quarter of the million dollars, a majority of which had been previously reserved. As I highlighted earlier, deposits grew 22% over the last year and by more than 6% during the second quarter, promptly putting new liquidity to work in our best growing loan book. To-date, we have already seen the funding benefits from our investments in relationship managers, capabilities and distribution to expand TriState Capital's treasury and liquidity management offerings. As mentioned before, we expect to see a greater portion of future liquidity growth coming from non-interest bearing deposits and operating account balances initially in the second half of this year, but even more meaningfully into 2018 as we work to onboard significant pipeline of new and expanded relationship opportunities that we had been building. In the meantime, our asset sensitive balance sheet remains well positioned to take advantage of continued interest rate increases. At the end of the second quarter, 90% of our loan portfolio and 38% of our securities portfolio were floating rate. The bulk of our loans reset on the first of each month. As you have probably seen many times, our business model is designed to drive growth in net interest income dollars. In the second quarter, net interest margin of 2.23% was essentially flat compared to the link quarter due to the continuing shift in loan mix and the sourcing of strategic deposit relationships. For the quarter, net interest income dollars grew more than 5% to a record $22 million. Margin expansion is expected to resume in the upcoming quarter. Non-interest income, which is largely made up Chartwell investment management fees, was than $11 million in the recent quarter or approximately 34% of TriState Capital's total revenue. While Chartwell Investment Partners' revenue was down slightly in the second quarter year-over-year, it was up more than 12% in the first six months of 2017 verus the first half of last year. This reflects our April 2016 acquisition of The Killen Group's investment management business including The Berwyn Funds and our success in driving the organic growth of those high-performing products. Our highly accretive Chartwell and Killen Group acquisitions have been major drivers of this company's earnings power further diversifying our sources of revenue and lowering the risk profile of the company. Chartwell's assets under management were $8 billion on June 30th, reflecting outflows of $733 million in the second quarter, primarily from small and mid-cap growth equity products, which you'll recall we brought under new leadership last year. We now have the right growth strategy team in place as demonstrated by their performance right out of the gate in late 2016. And we believe we will soon be able to reverse the net redemptions trend with these products. In addition, the growth equity products command a significantly higher weighted average fee rate today than they did last year. Seventy two basis points for Chartwell's growth strategies in the second quarter 2017 compared to just 30 basis points early in 2016. This combined with The Berwyn's strategies acquired last year is a significant contributor to Chartwell's overall weighted average fee rate, climbing to 46 basis points in the second quarter of 2017, up from 36 basis points prior to the Killen acquisition. That's an additional $1 million in revenue for every billion dollars in assets under management. So the new and longstanding accounts Chartwell serves today are clearly stronger and more profitable than they were one year ago. We are very pleased with how the business is running today. Chartwell's inflows totaled $157 million in the second quarter, driven by a combination of our dedicated sales and marketing efforts, our distribution and perhaps most importantly highly credible investment performance against benchmarks and peers. Ten of 15 Chartwell and Berwyn investment disciplines beat their benchmarks on one-year performance. Nine of 15 disciplines beat their benchmarks on three-year performance, and nine of 14 disciplines beat their benchmarks on five-year performance. Not surprisingly, some of our top performing strategies have been some of our most productive on the business development front. For example, Chartwell's mid-cap value fund saw very strong net inflows of $49 million even as the rest of the industry saw significant outflows from domestic mid-cap equity strategies in the second quarter. Chartwell's mid-cap value strategy is a prime beneficiary of the robust retail distribution program we put in place after acquiring a investment management business in 2014. In addition while hybrid strategies across the industry saw billions in net redemptions in the second quarter. The Morningstar five star rated Berwyn Income Fund strategy Buck the Trend with only nominal net outflows. The conservative allocation strategy is highly attractive to clients looking for Berwyn Income Fund's uniquely successful combination of downside protection and upside exposure. And, as the industry enjoyed healthy gains in the bond funds in the second quarter, Chartwell short duration BB rated high yield fixed income strategy took full advantage of that momentum to drive net inflows of $220 million. This strategy has been very much in demand among the new and existing accounts. These three strategies are prime examples of how Chartwell is offering a unique set of investment products with strong track records which are not easily replicated with passive strategies. We clearly see tremendous opportunities to grow Chartwell both organically and through investment management acquisitions. TriState Capital is well on its way to building a fortress national private banking franchise, a world-class investment management business, and a regional middle market commercial bank of choice. We have the tools in place, a highly motivated and talented team of professionals who thrive in our relationship-focused sales-driven culture, an unparalleled distribution network, and a growing base of high-quality clients. We remain very confident about our potential for continued success ahead. Before opening the call to questions and answers, I first want to acknowledge an executive appointment we announced yesterday. Brian Fetterolf, who many of our shareholders already know, was named Chief Executive Officer of TriState Capital Bank subsidiary. He has joined the Board of Directors of the bank and the holding company. Brian is a proven leader who managed many areas of our business since he joined our organization eight years ago. Most recently, since becoming President of the bank in 2015, he lead a talented team of people who are driving superior loan growth and managing the significant expansion of our deposit and territory management capabilities. As President and CEO of the bank, Brain will be responsible for all aspects of the strategy, execution, and performance of the subsidiary. His leadership experience and commitment to TriState Capital will be a great benefit to our company and its shareholders as our company continues to execute its growth strategy. That concludes my prepared remarks. I'll now ask Vice Chairman and CFO Mark Sullivan to join me for questions and answers. Operator, please open the line for questions.

[Operator:]

We will now begin the question and answer session. [Operator Instructions] The first question comes from Michael Perito of KBW. Please go ahead.

[Michael Perito:]

Hi, good morning, Jim and Mark.

[Jim Getz:]

Good morning, Michael.

[Michael Perito:]

Couple of questions, maybe I'll start with Mark on the margin. I appreciate the commentary, Jim, about kind of what you guys are expecting going forward, but maybe if we could just dial in on the current quarter from in here. What do you guys expect? I mean, it seems like non-interest-bearing deposit growth is expected to pick up which will help the overall kind of cost of deposit in terms of the increase. But it looked liked some of the other interest-bearing accounts saw some fairly sizable increases quarter-over-quarter. What are you guys seeing in the marketplace today in terms of pricing on your interesting-bearing deposit instruments, and what are the expectations of that going forward?

[Mark Sullivan:]

Yes, good morning, Mike. Mike, the asset sensitivity we have can be used to drive margin expansion, it could it also be used to secure deposits in a quarter where we want to achieve that type of deposit growth. Our key focus is keeping the NII strong. On a year-to-year basis our NII is up 21%, and 5% for the linked quarter. Having said that, looking forward to Q3, we expect margin expansion similar to what you saw in Q1. So we continue to see the increase in net interest income 20% to 25% range for the full-year.

[Michael Perito:]

Okay. But I guess as it relates specifically to kind of what you're seeing in the marketplace on some of the pricing on your interest-bearing deposits, I mean is there increasing demand from some of commercial clients and of some of your other deposit-type consumers for higher rate? I mean is that something that you guys think you're going to have to continue to battle here or was there something unique in the quarter? Or do you expect it to kind of be choppy; I guess there'll be some quarters where it's up more than last? I'm just trying to get a sense of what the trajectory of those costs will be.

[Mark Sullivan:]

Yes, I mean we feel we addressed that in the current quarter, and that we'll be able to maintain the deposit base with more discipline, if you will, and as we go into Q3. So we don't expect to see the increase in cost of funds Q3 that we saw in Q2.

[Jim Getz:]

This is Jim, Mike. What you want to keep in mind is that the asset base of this company has been growing pretty handily over the past many years. And as you're well aware, this is not the first call that we've had that we've discussed net interest margin. And if you look at the history f our net interest margin, just look at it quarterly NIM compared to same quarter one year prior, if you look over has been compressed or flat since the IPO year, 2013. Just think of that quarter-to-quarter compressed or flat since the IPO year. But if you look at it on a linked quarter basis NIM has expanded only six quarters since the IPO for our company. Yet, if you look at the earnings per share, the EPS has delivered growth in 13 quarters year-over-year since the IPO, and 12 of those quarters were double or triple-digit numbers. And we believe the EPS is the value creation for the shareholder. And as you know, we're investing strongly in the future, yet providing highly attractive double-digit EPS growth on a relatively consistent basis. And I think what you want to keep in mind here, if you even look at the consensus numbers that the analysts have provided us with, we're looking at a consensus of about a 20% - 20%-plus jump this year in EPS, and over a 30% jump next year. And this management team has not challenged that number. So I think you have to put this in perspective as a company, and recognize where the focus is. Now, to answer your question very directly, we have had very meaningful deposit growth while a lot in the industry have not had that in the near term. And much of our deposit growth in the last quarter was back loaded so it did have an impact on the rates that we were paying during the second quarter. You didn't see the full impact in the first quarter, but that is one of the reasons why we feel very strongly that we're going to have a robust third quarter. But keep in mind, the real focus here is net interest income at the end of the day. And our NII over the past year has grown by 21%. And if you look at the entire industry, it's been single-digit numbers.

[Michael Perito:]

Got it, yes, and you guys know I appreciate that. I'm just trying to get some color on some of the deposit stuff. And then maybe following up, my second, Mark, on the expenses, maybe a high level question, you know, the expense front was pretty good in the quarter. Obviously you guys are a high-growth company, but it does seem like you have a lot of scale in place. I mean any thoughts on kind of what you expect over the next 12 months in terms of the expense run rate?

[Mark Sullivan:]

Yes. Mike, I would say the -- similar to last quarter's comments about the run rate. We're really comfortable with the consensus estimate for the year, even though the first half has been somewhat favorably impacted, but I think $23 million is a good quarterly run rate for the second half of the year, and probably percentage ramp up as we go into '18, I can address that better later in the year. But for the second half of the year I think the run rate of 23 probably takes us to consensus for the year.

[Jim Getz:]

And Mike, we don't want you to think we don't love you. We realize this question was on everyone's mind, so we were prepared to answer it.

[Michael Perito:]

I was shocked.

[Operator:]

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

[Matt Olney:]

Hi, thanks. Good morning, guys.

[Jim Getz:]

Good morning.

[Matt Olney:]

In the prepared remarks I believe, Jim, you mentioned that 90% of the loan portfolio was going to be variable. So I'm curious how the execution of the re-pricing of these loans has been over the last few months. What's been the level of pushback within each of your three categories?

[Mark Sullivan:]

We've had no level of pushback whatsoever. I guess by pushback are you meaning that we've seen a decline in what we can get for a loan or the pricing?

[Matt Olney:]

Yes, exactly. And then I guess specifically in the private banking loans, I mean it's somewhat of a newer segment over the last several years…

[Mark Sullivan:]

Actually, to be quite honest with you, that book of business has been quite stable since inception, except there's an aspect of it. And I think we may have talked about it before, where you're seeing a lot of these large wirehouses, groups of their folks are moving to the registered investment advisors, and setting up their own shop. And the wirehouses have had some advantages of having some offshore facilities they provided their high net worth clients to. And we've been responding to our client base as people are transitioning by helping them for a period of time bring those clients over with the idea that the rate would increase at first than them coming over maybe a year-and-a-half or so later. But you're really looking at this book of business being around 2% over 30-day LIBOR. And if you look at what the yield of it, it's close to 3% counting the legacy loans that we have in place; the private banking portfolio is about 3%.

[Matt Olney:]

Got it, okay, thanks for the color; and then as a follow-up, I wanted to ask you about overall capital levels, and because of the impressive loan growth we've seen capital ratios move down the last few quarters. I'm curious how much cushion do you think you have on capital? What do you view as a concerning capital ratio?

[Mark Sullivan:]

Matt, I'd say it's really consistent with the past that the loan growth, a lot of it majority being private banking, gives us some real elbowroom on capital. And with the earnings increase as we go forward really don't see that much pressure on our capital as we go forward. It's really going to be an acquisition with intangible and asset management acquisition that's going to cause us to look at capital and make a determination. But absent an acquisition, forward runway well into '18.

[Matt Olney:]

Okay, thanks, Mark. I'll hop back in the queue.

[Operator:]

The next question comes from Russell Gunther of D.A. Davidson. Please go ahead.

[Russell Gunther:]

Hi, good morning guys.

[Jim Getz:]

Good morning, Russell.

[Russell Gunther:]

Appreciate the color on loan growth in the prepared remarks. It's really nice to see C&I really turn the corner here, if you could just give us some color where the growth came from, both geographically and kind of from a customer sector perspective.

[Jim Getz:]

It came broadly from all of our locations, our five locations. We particularly picked up a meaningful amount of business in Philadelphia region. And as you're probably aware, there's been a lot of disruption there with Susquehanna and Nat Penn acquired by BB&T. So Philadelphia has sort of led the charge. But everyone fully participated. And keep in mind we've been indicating for the past two quarters this would be coming. And this is a result of an investment that we made two-and-a-half years ago in brining people onboard that were purely focused on direct C&I activity. And if you really do a deep dive on the C&I loans you discover that our average size loan has dropped handily, because we're doing essentially sole bank deals at this time in some volume.

[Russell Gunther:]

I appreciate that. And then second question, unrelated. You mentioned expectations for Chartwell, and appreciate the color on the strategy there. I think you're rough guidance calls for a modest pickup in related revenue in the back half of this year. But absent an accretive acquisition in that space, could you talk a little about what the organic revenue opportunity there would be in 2018 based on some of those strategies you laid out earlier.

[Jim Getz:]

Yes, if you -- and unfortunately we had the issue from a flow standpoint of November of '16 loosing the Vanguard account on the gross side, and our performance, as we indicated to everyone was in fact subpar. And you've seen the flows coming out of the growth strategy that both the mid-end and the small cap this year. We believe that that is now stabilized. We believe the current manager there has done a very credible job since he's been with us since October of last year. And he has a very good team backing him up. As you're probably aware, in this business it'd probably take you from the time you recognize your issues till you get it corrected, and that disciple, it'll probably take 24 months. So, we're well into the first year of the recovery before you're going to see some meaningful uptick. But in the interim, we couldn't be more pleased with the quality investment performance of the remainder of the franchise. I went over the numbers with you. We're seeing meaningful flows into the mid cap value product. We've gotten them on some good platforms. We're getting a little bit of response also from the institutional clients, which you don't normally see. And we're really carved out a niche product that Andy Toburen runs at Chartwell, this short-duration high yield that we're consistently seeing good strong, as I illustrated in my comments, flows into that. And we reaffirmed in my comments that we fully expect the company will produce the level of revenue it did in 2016, and keep in mind, this is after loosing almost $3 billion [Technical Difficulty]

[Operator:]

[Operator Instructions] The next question comes from Matt Schultheis of Boenning & Scattergood. Please go ahead.

[Matt Schultheis:]

Good morning.

[Jim Getz:]

Good morning, Matt.

[Matt Schultheis:]

Quick question on the tax credit you took in the quarter, if you could just add any color of where that came from, what that looks like, and if we could expect to see that in the future?

[Jim Getz:]

Yes, Matt. Good morning. The credits, if you look at the first quarter, we were in the low 30s. We had not secured the credits at that time and couldn't recognize them. Similar to prior years, we had both housing and alternative energy credits that we secured in the second quarter. And that's -- it was our appetite, if you will, for this year. So the quarter expense was 26.5. That was also a pickup from the higher rate through one. So a go-forward, 30% is the effective rate we're looking at this year.

[Matt Schultheis:]

And could you add any color regarding risk-adjusted loan pricing in the C&I markets. Is it matching your expectations, is it getting worse as more banks continue to shift from CRE into C&I? So any color you could add there would be appreciated.

[Jim Getz:]

At the moment, Matt, we haven't seen any change whatsoever, it's consistent with prior quarters. So we don't see any movement upward at this point other than obviously LIBOR has changed somewhat, so the return is reflected in the NII you're seeing. But otherwise, we're not seeing much pressure at all either way.

[Matt Schultheis:]

Okay, thank you.

[Operator:]

The next question is from Bryce Rowe of Baird. Please go ahead.

[Bryce Rowe:]

Thank you. Jim and Mark, just wanted to maybe try to get some color around the compared remarks around non-interest-bearing growth in the back half, non-interest-bearing deposit growth in the back half of this year? And into 2018, are there any specific goals that you have internally?

[Jim Getz:]

If you take a look at our balance sheet, you are going to see that our non-interest bearing deposits are minuscule. They are less than 6% on the balance sheet. And probably in retrospect, we should have focused more on treasury management a few years ago and we didn't. And so, about 24 months ago, we recognized the need to build up a major franchise in this area. So in fact, we began making commitments. And we've spent at this point several million dollars on personnel. We've just implemented and put in place in on-boarding clients with a very sophisticated updated system in this regard. So we fully expect to double our non-interest bearing deposits by the end of next year and move this along very rapidly. And this business also brings in lower interest-bearing deposit. So, it'll be in the range of about something that's somewhat over $600 million by the end of next year, and we are beginning to see some real progress. The average balances in our operating accounts in the second quarter is 16, we are around 235 million. And today they are pushing on 300 million. So it's increase of about 25%. We are dealing with that lower number so the percentages look good, but we are really focused on growing that as we grow this franchise and to reduce the expense -- the interest expense in a meaningful manner over the next couple of years. And this is also one of the best times to be doing this because there is a lot of turmoil in the marketplace around treasury management. Particularly with the larger banks because they have been flushed with cash, the deposits aren't as attractive to them any longer. Thus what they are doing is increasing -- converting it from a funding mechanism to non-interest income and raising the fees pretty handedly to the clients. And so, obviously we're focused on the deposits complemented with the non-interest income. So we have a real opportunity here. We have a strong pipeline. And I am just giving you some very practical numbers, but -- that you can count on. But we are confident this is a multi-billion dollar business we are going to be involved in.

[Bryce Rowe:]

Great. That's helpful, Jim. And wanted to follow-up to one of Mike's questions about interest-bearing deposit cost, Mark, just to be clear, so, in the back half of this year maybe even in the third quarter, we shouldn't expect to see much of an increase in terms of funding cost?

[Mark Sullivan:]

Yes, I mean I think that's fair. There will be an increase but not to the degree that you saw in Q2.

[Bryce Rowe:]

Right. Thank you.

[Operator:]

The next question is a follow-up from Matt Olney of Stephens. Please go ahead.

[Matt Olney:]

Hi, thanks. Just one follow-up, at the Investor Day a few weeks ago, I think you had mentioned a goal of yours was to achieve ROE in the fourth quarter of 10%. I just wanted to make sure that's still a reasonable goal in your mind.

[Jim Getz:]

Yes, definitely, it is, Matt. If you look back a year ago, at June 30 16, our ROE was 8.16. This quarter it's 9.27, up over 100 basis points. So, we are still on target to 10 ROE by Q4.

[Matt Olney:]

Okay. That's all from me. Thanks.

[Jim Getz:]

Thank you.

[Operator:]

And the next question is a follow-up from Michael Perito of KBW. Please go ahead.

[Michael Perito:]

Hey, thanks guys for taking follow-up. Just curious now that we've had this kind of first quarter where the C&I portfolio kind of meaningfully expanded, just -- obviously you saw a nice growth across all three segments. I think maybe last quarter, Jim, you had some comments that you expected to see ROE growth to not quite be as robust in C&I and private banking, but just any high level kind of thoughts moving forward about or updated thoughts rather by where you think kind of the loan mix could settle in here for over the three segments over the next 12 months or so?

[Jim Getz:]

Yes. As we have today the private banking, there is nothing that's going to catch with that. So you're probably looking at that to be at the end of the year. It could be as much as 55% of the loan portfolio, up about 3% from where it is at this point. And the reason that I say that, Mike, is that if you look at this company historically, private banking's weakest period of time was the first half of the year, okay, historically, since we have been really working on this. So we expect to have a more robust second half of the year. And to you an illustration of how strongly activity has been if you look at the -- take you back to the second quarter of 2014, we processed 180 applications -- 180 applications and so on secured by marketable securities, this second quarter we processed 600 -- 600, this is by far the strongest first half that we've had and that was just the second quarter numbers -- 600. And if you look at 2015, we've done more in the first half of the year than we did in all 2015 applications. So that's going to be very strong -- I would say just to finish your question, we're hoping to see C&I in the range pushing, going into the new year of about 20% of the loan portfolio and the rest would be in commercial real estate.

[Michael Perito:]

Okay. And do you think it's fair -- I mean I know for the last several years since the IPO, it's kind of always been the overtime 15% kind of loan growth CAGR, target could be little higher, could be a little lower. It seems like though I mean pretty confidently you guys kind of place you were for the next few years, you are going to be a little higher than that, do you think that's a fair statement at this point?

[Jim Getz:]

Like I mentioned at the Investor Day that many of you were at when you put a company together from scratch like we have, you are really look out no more than two years. And I would say that you are probably looking at us with a -- about a 20% loan growth rate for this year and next year.

[Michael Perito:]

Okay, great. Thanks guys.

[Jim Getz:]

If not better. You're welcome.

[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 closing remarks.

[Jim Getz:]

Thank you very much for your continued interest and commitment to our company. We look forward to speaking with you again in October as we discuss our third quarter results. So, thanks again and have a great day.

[Operator:]

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