TriState Capital Holdings, Inc.
Q4 2017 Earnings Call Transcript

Published: 25 Jan 2018

[Operator:]

Good morning, everyone, and welcome to the TriState Capital Holdings conference call to discuss financial results for the three months ended December 31, 2017. All participants will be in 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 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 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 in this call, comparable GAAP measures and reconciliations can be found in TriState Capital's earnings release, which is available on its website at tristatecapitalbank.com. Representing TriState Capital today is Jim Getz, Chairman, President and Chief Executive Officer. He will be joined by David Demas, Executive Vice President and Chief Financial Officer for the question-and-answer session. At this time, I would like to turn the conference over to Mr. Getz.

[James Getz:]

Good morning. And thank you for joining us. I'd like to begin by mentioning that this investor conference call is David Demas' first in his CFO role that he assumed on January 1. As most of you know, David joined TriState Capital last summer as Executive Vice President as part of the CFO succession plan we announced in August. We could not be more pleased with how he, our Vice Chairman Mark Sullivan and our entire finance team have handled the transition. And we're already benefiting from David's leadership and expertise, having advised some of the largest and most successful financial firms in the nation. I must say that David's timing is impeccable as TriState Capital's CFO when he presided over the closing of this company's strongest fourth-quarter, the most successful year since our May 2013 IPO. In fact, they were our best ever with record quarterly and full year earnings. These results are the product of the effective execution of our strategy to grow TriState Capital as a company in order to bring value to our shareholders through enhanced earnings. We believe our financial performance to this point is evident that our strategy is working. Over the last five years, we've generated impressive compound annual growth rates on a number of key metrics. And 2017 year-over-year growth mirrors these trends as we maintain momentum. Assets grew at a five-year compound annual growth rate of 18% and are up 22% in the past year. Revenue grew at a 17% five-year compound annual growth rate and is up 14% year-over-year. In 2012, non-interest income made up 8% of total revenue. In 2017, that percentage grew to nearly 34%, reflecting our focus on diversifying our revenue streams. Net income increased at a 29% five-year compound annual growth rate and 33% year-over-year. And earnings per share of $1.32 for 2017 represents a 23% compound annual growth rate over the five years and is up 31% from 2016. We've achieved this growth by maintaining our entrepreneurial mindset and client-focused culture, while balancing the risk management and financial discipline more commonly associated with mature financial service companies. For example, we have achieved exceptional credit metrics. Non-performing loans totaled $3 million in 2017, representing just 8 basis points of the bank's more than $4 billion in loans. Adverse-rated credits totaled less than $30 million, representing just 71 basis points of total loans. Net charge-offs of less than $4 million in 2017 represented just 10 basis points of average loans. From a financial discipline perspective, at the same time that we generated double-digit earnings expansion, TriState Capital also made significant investments in people, infrastructure, distribution, technology and product. As a result, we expect our current infrastructure to support a much larger bank balance sheet and asset management complex than we have today. We made significant investments in technology, including in various proprietary systems focused on expanding our relationships, making it easier for clients to do business with us and enhancing our risk management capabilities. We've also continuously made investments in distribution, allowing us to reach more clients on a national basis with a more comprehensive offering of services and products. However, our most important investments have been those which we have made in our people. In 2012, prior to our IPO, TriState Capital had 119 full-time employees. Today, we've nearly doubled the size of our team to 230. The team is driving profitable growth with net income per average employee up 74% compared to 2012. Revenue per average employee grew to more than $597,000 in 2017, more than twice the level generated by our peers. Overall, we're continuing to see the benefits of operating leverage with TriState Capital Bank's efficiency ratio declining by 378 basis points from 2016 to 57.39% for 2017. We expect to drive continued improvement in the bank efficiency ratio to our mid-50s target range through scalability as non-interest expense growth continues to moderate and revenue growth continues to accelerate. Our financial services distribution network, asset-sensitive strategy, pipelines for our three businesses and our further enhanced funding mechanism gives us confidence in our ability to achieve continued growth. Over the next two years, our goals include the following

[Operator:]

[Operator Instructions]. The first question comes from Michael Perito of KBW. Please go ahead.

[Michael Perito:]

Good morning, gentlemen.

[Terrence Curtin:]

Good morning, Michael.

[Michael Perito:]

Couple of questions for me. I wanted to maybe start on the expense side. You guys saw a little bit of a bump quarter-on-quarter. I saw some broad commentary in the release, but I was wondering if you can maybe give us a little bit more color on what drove the increase and whether you kind of expect that quarterly expense run rate to track in the early part of next year.

[David Demas:]

Michael, it's David. Let me take the first crack at that and then I'll ask Jim to add any color. As you know, we're a pay-for-performance culture. We've made investments over the past couple of years in our distribution network, as Jim mentioned, in our people, in our technology. We're realizing the benefits of those investments and it's all scalable as we continue to grow. What you will see us do is focus on operating leverage, growing the top line at a pace that's meaningfully different than expense growth. We see the efficiency ratio improving somewhere around 200 to 300 basis points year-on-year. I think you can expect to see expense growth somewhere between 12% and 14% for the year. And I think we'll build that expense over the year. Expenses will start the year somewhere in the $24 million range through the first quarter.

[James Getz:]

Mike, what I would add to that is a great practical observation. The growth that we paid for – and most of that expense uptick was compensation related. The growth that we paid for in the fourth quarter set us up nicely going into 2018.

[Michael Perito:]

Perfect. Thank you. And then, secondly, I wanted to touch on your comment, Jim, about the expectations for organic revenue growth at Chartwell of double-digits. I guess, what gives you kind of the confidence in that? You've seen some nice growth, but not quite at that rate over the last few quarters. So, I guess, it would seem like you expect it to accelerate. I just wonder what the drivers are of that expectation.

[James Getz:]

I would expect, seeing what we're picking up, particularly in the last two quarters, the momentum that we have in our BB product and in the Mid-Cap Value particularly, leads us to come to that conclusion. And then, we did outline to you the Columbia acquisition that will be accretive out of the gate and throw off about a couple million dollars' worth of revenue.

[Michael Perito:]

Perfect.

[James Getz:]

And we expect to close in the first half of the year, Mike.

[Michael Perito:]

Got it. Thanks.

[Operator:]

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

[Matt Olney:]

Hey, thanks. Good morning, guys.

[James Getz:]

Good morning, Matt,

[Matt Olney:]

I want to start on the loan growth side. Pretty impressive results in the fourth quarter. Can you talk about what you're seeing so far in the first quarter and bigger picture as you think about the loan mix longer-term? What do you expect in the next few years between private banking and commercial real estate and C&I?

[James Getz:]

I would expect – and looking at that from a growth perspective, going into the next couple of years that it won't be unusual for the private banking to continue to grow at the accelerated pace that we've seen recently. So, I think you could count on that growing from a 25% to a 35% pace into the next couple of years, Matt. It's now at about 54% of the portfolio. It wouldn't surprise me that this time next year we're not sitting with it around 57%, 58% of the portfolio, pushing on 60% of the portfolio. We don't really anticipate the commercial real estate portfolio being much more than where it is today, in the range of 30%, 32%. We do expect the commercial and industrial segment to be growing handily into the low 20s over the next two years. From a pricing standpoint, to be quite honest, we're not seeing any sign of positive trends upward at all on the pricing of our loan portfolio. The private banking staying around 200 to 225 over 30-day LIBOR. You're looking at the C&I around 240 and you're looking at the commercial real estate around 260. But there isn't any sign of life from a pricing standpoint, at least what we're seeing in our markets.

[Matt Olney:]

Okay. That's helpful, Jim. As far as the impact on TriState from the December Fed rate hike, any impact you can capture, tell us about, in the fourth quarter. And, I guess, more importantly, can you help us out and provide some outlook as far as the margin, more near-term, as a result of the December Fed rate hike? Thanks.

[David Demas:]

Matt, as you know, we're mostly a LIBOR-based book. And so, that rate increase we started to see build before the Fed actually increased rates. Looking forward, I think we plan two to three rate hikes next year – or this year, actually, probably March, June and December. And I would say that our NIM – I don't anticipate any further compression. You might see it build a little bit, so I would say either flat to slightly up for the year.

[Matt Olney:]

Got it. Thank you.

[Operator:]

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

[Russell Gunther:]

Hey, good morning, guys.

[James Getz:]

Good morning, Russell.

[Russell Gunther:]

Just want to touch on asset quality. Clearly, a very good year in 2017. I'm just curious, your thoughts looking forward given the expected continued robust loan growth, particularly perhaps touching on the C&I and traditional CRE space?

[James Getz:]

We have really spent a considerable amount of time and money perfecting our risk management process here at TSC. And we feel very comfortable with where things are. It's almost impossible to believe it's going to improve any. In fact, it's almost mathematically impossible to. But at the end of the day, we don't expect – we clearly expect it to continue into 2018 and 2019. The advantage that we do have is the risk profile of this loan portfolio, with right now 54% of it in loans secured by marketable securities and that's a power machine that's growing pretty handily for us. We expect the commercial side of the business to grow probably double what you'll see from the rest of the banking marketplace because we're really pretty well positioned now, having been in most of these markets for almost ten years or more at this point, with the type of seasoned personnel that we have there. And that's been giving us a very – a tremendous advantage. So, we don't expect that you're going to be seeing much growth in our adverse-rated credits over the next few quarters. So, it will be a relatively stable type of situation. As you see here, you have about $3 million of non-performing loans. And that $3 million is performing as agreed at the moment.

[Russell Gunther:]

That's helpful. And I think in the past, you guys have talked about an 8 to 10 basis point of average loans provision expense, but have certainly outperformed that in the last couple of years. Is that still a fairly conservative way to think about it?

[David Demas:]

Matt, I think it is. I think our range is a little broader. It's probably 5 to 10 basis points, but 8 to 10 basis points certainly works as well.

[Russell Gunther:]

Okay. And then, if I could sneak one last in, just given the outlook for your very strong loan growth and thoughts around continuing to build out the investment management business, just update us on your thoughts about current capital levels here.

[James Getz:]

Sure. We've always taken very seriously our stewardship of capital deployment for our shareholders. The majority of the people that work at our company own shares. And we really function as an owner-operated company and dilution is something that we attempt to avoid. And we have historically. The last time, we raised equity capital was in May of 2013 when we took the company public. We raised $66 million of capital. And just look at what we've accomplished from a balance sheet and an income statement standpoint with that money. Back at the end of 2012, we had a balance sheet of around $2 billion. Today, we have a $4.8 billion balance sheet. All, I must note, is of the organic growth. And off-balance-sheet, we have an $8.3 billion money management firm. We paid $62 million for Chartwell; $15 million for Killen. And then, look at the income statement. 2012, we had net income of $10.7 million. And today, we're reporting net income of $38 million. And we accomplished all this with double-digit EPS growth for the past four years. And of those four full years, 2014 was the lowest. EPS growth was up some 15%. So, to answer your question directly, we would consider raising capital if it enhances the balance sheet in a prudent manner and adds to the double-digit momentum on the EPS that the company continues to experience. So, obviously, we have a lot of faith in our success.

[Operator:]

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

[Matt Olney:]

Yeah. Just to follow up on the expense guidance in 2018, does that include the pending acquisition from the Columbia assets or would that be additive to that number?

[David Demas:]

Matt, if I understand the question correctly, you're asking whether Columbia's expenses are in the numbers I gave you?

[Matt Olney:]

Correct.

[David Demas:]

They are.

[Matt Olney:]

Okay. Going back to the Columbia asset acquisition, the size is relatively small, Jim, from what you've highlighted previously. Can you tell us more about what was so compelling about these assets and these professionals, given the relatively small size?

[James Getz:]

Okay. A couple of observations that I would make, Matt. We're going to be able to pay for this internally, okay? So, the earnings that we're generating, I would say, will take care of this. We were able to get it at an advantageous price, 6.3 times EBITDA. And it's a great fit. And we believe we have some significant upside. And a lot of the upside revolves around the individual that has been working with this product lineup for some time in the Taft-Hartley area. He, I believe, is going to bring a lot to the table for Chartwell Investment Partners from the sales standpoint. He's essentially had a limited product situation there at the company. He's very well-seasoned. He has a lot of experience. It will complement our book of business. This is very much of a modest contribution to our bottom line at this point. But what it does is it also enhances the amount of fixed income assets that we have under management. What it brings to the table is a $600 million or more of high-grade fixed income. Gives us higher credibility and $400 million of large-cap core equity and about $2.2 million of revenue. And it's in the Taft-Hartley space that we've already perfected a presence and now will have a larger presence. And the individual that's joining us, his relationships are with some of the most major labor unions throughout the country.

[Matt Olney:]

Okay, Jim. That's helpful. Thank you.

[James Getz:]

So, this is really a growth situation well beyond $1.1 billion and the $2 million of revenue we're talking about here. We believe we will begin to feel the impact of that in the second half of the year.

[Operator:]

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

[Bryce Rowe:]

Thank you. Jim, just wanted to, I guess, clarify some of the goals that you mentioned in the prepared remarks. You talked about 15% to 25% net income and loan growth. So, was just curious, what kind of timeframe we're talking about there. Was that just 2018 or was that over a more extended period of time? And then, do you have specific EPS growth goals? Would they fit with that net income goal or would they be lower?

[James Getz:]

Here's the observation that I would make. I personally – and you'll find, in putting a company together, like we have here from scratch essentially over the past ten years, you really don't feel confident giving people numbers that go beyond 24 months. So, I would say to you, Bryce, that we have a very high level of confidence that we will be within those parameters that I went over with you in 2018 and 2019, okay? And what I will tell you is, just look at the track record that we've built from the time of the IPO forward and look at the past four years, okay? And you'll see that that double-digit, 15% or higher, we've actually delivered on. In fact, 2014 was the lowest point. The EPS was up 15%. All the others had been in the 20s. So, it's just a fulfillment of our track record for the next 24 months. So, like I said earlier, we have a lot of faith in our success. And we've learned a lot from our mistakes that you learn when you build a business. You learn more from your mistakes than your success.

[Bryce Rowe:]

That's helpful, Jim. I appreciate the commentary. And I appreciate the commentary around clearly not wanting to dilute shareholders since you guys are all large shareholders of TriState. And maybe just to follow-up on some of the capital discussion there. Are there certain capital ratios that you are looking at, whether it be total risk base or Tier 1 that would kind of trigger a common equity raise? Or should we try to think about that in another way?

[James Getz:]

I think you want to look closely at Tier 1, which we closed, I believe it was 725, okay? Since we've been able to get the relief from Basel III back in the January of 2015 on the private banking portfolio, it's really Tier 1 that's been impacted handily by our growth. But keep in mind, to remain well-capitalized, 5% is the number. So, we're still a distance from that 5% number. So, I would say that we would like to enhance that Tier 1. We have – the goals that I've gone over with you are fairly aggressive for the forthcoming year. But Tier 1 is the thing that you should look at, that has our attention. Now, the other issue is that we've been very open about – as Matt Olney was querying on acquisitions, and we're looking at several opportunities that are well beyond what we can finance internally here. So, we would see ourselves potentially going to the market to reach that goal of $15 billion that we've set for Chartwell Investment Partners by 2019. So, I would say it's very practical to believe that we'll do a capital raise in 2018 or 2019. It would be nice to do one that is accretive in conjunction with a larger acquisition than the one we just announced.

[Bryce Rowe:]

Yeah, understood. Thanks for that color. Appreciate it.

[Operator:]

There are no other 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.

[James Getz:]

Thank you. We certainly appreciate your continued commitment to TriState Capital and look forward to working with you into the future. Many happy returns. Thank you.

[Operator:]

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