TriState Capital Holdings, Inc.
Q4 2014 Earnings Call Transcript

Published: 29 Jan 2015

[Operator:]

Good morning and welcome to Tristate Capital earnings conference call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. Now, I would like to turn the conference over to management. Please go ahead.

[Unidentified Company Representative:]

Before turning the call over to Chairman, President and CEO, Jim Getz, we 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 may 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 Tristate capitalbank.com. In addition to Jim Getz, Mark Sullivan, Vice Chairman and CFO will participate in the question-and-answer session. Now, I would like to turn the conference over to Mr. Getz.

[Jim Getz:]

Good morning and thank you for joining us today. We are exceptionally pleased with the superior financial results delivered in 2014, including 33% net income growth and 23% in EPS growth even with two million plus additional average shares outstanding last year. Tristate Capital also organically grew balance 29%, deposits 19% and net interest income 6% for 2014 while our Chartwell Investment Partners subsidiary delivered adjusted EBITDA growth of some 49%. As positive as our 12-months results are, I am keenly aware the numbers we could have put up for the year were not for the second quarter earnings. That said, I am pleased that our people remained squarely focused on servicing clients and achieving profitable and sustainable growth. We continued executing on our strategy for creating long-term value for Tristate Capital shareholders. We put capital to work through a successful investment management acquisition, which not only increases fee and non-interest income, it's a very significant and growing contributor to the company's revenues and earnings per share. It adds an entirely new business line for which we can enhance distribution through our extensive financial intermediary relationships. We expanded the balance sheet in support of our ongoing goal of achieving long-term compound annual loan growth of some 15% in order to drive increasing net interest income dollars and earnings per share. We focused near-term loan growth on lower risk profile lending, maintain asset quality and consequentially kept provision expense as a percentage of loans in line with our historic average. We expanded our deposit base in a meaningful manner. We continue to build our highly asset sensitive balance sheet designed to profit from any increase in the rate environment. And we maintained our scalable branchless business model and expanded our financial service distribution network to facilitate the growth of our commercial banking, private banking and investment management businesses. In all, we are very pleased with how executing our strategy and delivering on our commitments to shareholders has translated into our financial results in 2014. Net income for the year increased 24% from 2013 or 33% excluding the one-time increase to the Chartwell earnout accrual. Earnings per share for the year increased 15% to $0.55 or 23% excluding one-time increase for the earnout accrual to $0.59. Together, our Tristate Capital Bank and Chartwell Investment Partners businesses generated total revenue of some $96 million in 2014, an increase of 44% from the year prior. Revenue also grew to 3.65% of average assets last year, an increase of 58 basis points from 2013 With Chartwell management fees, 2014 consolidated non-interest income grew to nearly $32 million, up from less than $6 million in 2013. Non-interest income with just 10 months of investment management fees in 2014, represented more than 32% of total 2014 revenue and 34% of fourth quarter revenue. This compares to an average of 26% for $1 billion to $5 billion asset commercial banks. As a percentage of average earning assets, Tristate Capital's non-interest income grew to 1.20% in 2014, which is 96 basis points greater than the year before. Net interest income totaled $65.7 million in 2014, increasing by $3.9 million or 6% from the year prior. The increase was primarily driven by 8% growth in total loan interest income from the increase in private banking and commercial real estate lending. Net interest margin was 2.62% in 2014, compared to 2.92% in 2013. In the fourth quarter of 2014, NIM stabilized as compared to linked quarter, adjusted for the non-accrual loan that was paid in full. NIM continues to reflect our current focus on making lower risk profile and floating rate loans the primary driver of growth in lending and net interest income dollars. By design, net interest margin has been outpaced by growth in net interest income, non-interest income and total earnings as well as EPS, which increased 23% last year to $0.59 per diluted share, adjusted for the Chartwell earnout accrual. We are delivering net interest income growth even as we maintain high levels of floating rate loans at 83% and what we believe to be one of the most highly asset sensitive balance sheets in banking. Our internal model demonstrates that 100 basis point interest rate shock would result in an approximately 5% increase in net interest income. Our Tristate Capital Bank subsidiary grew total loans by 29% to $2.4 billion at the end of 2014, supporting our goal of achieving long-term compound annual growth of 15%. Tristate Capital's unique private banking channel continues to be the bank's greatest source of loan growth. These loans are primarily backed by marketable securities naturally enhancing the risk profile of our loan portfolio. Accordingly, pricing in market marketable securities backed loans continues to average 225 basis points over 30-day LIBOR. Private banking channel loans are up nearly 74% at the end of 2013. These loans to higher net worth individuals are primarily sourced through our growing network of financial intermediaries, which now numbers some 90 firms nationwide. Commercial real estate lending continues to exhibit reasonable pricing and credit support and has remained a growth driver for us. Commercial real estate loan balances are up 33% from the year before. Pricing on commercial real estate loans continues at levels that allow us to add to our portfolio and enhance diversity as well as offset the even more competitive commercial and industrial lending environment. Now let's discuss the dynamics of the loan portfolio. As of 12/31/2013, we had a total loan balance of some $1.860 billion. We originated in 2014 some $951 million of loans. We had loan payoffs of some $372 million of loans. We had lines of credit paid down by about $40 million, plus at the end of the day, we had a net loan balance up some $539 million. So the entire loan portfolio was up some 29%. If you look through the portfolio, you will see that the commercial and industrial loans were actually down some 8% leaving a balance of some $677 million. Commercial real estate was up 33%, balanced $733 million and private banking was up some 74%, balance of $989 million. We continue to grow our relationships and distribution channels. As evidence of that, we have a strong loan pipeline of about $200 million in new originations that we expect to close in the first quarter 2015. As many of you know, over the past year the proportion of private equity backed shared national credits in our portfolio has decreased due to reduced new originations and increased attrition of these credits, as well as continuing growth of our loan portfolio in other commercial, industrial, private banking and commercial real estate lending. Private equity backed shared national credits declined to 5.4% of total outstandings at the end of 2014 from 11.5% at the end of 2013, down some $85 million. In terms of asset quality, we are pleased with our 2014 credit metrics. Net charge-offs to average loans were 0.41%. Nonperforming assets represented 1.11% of total assets at year-end. Provision expense was 0.47% of average loans in 2014, in line with the year prior. As we mentioned a few moments ago, in the fourth quarter we saw a full payoff of a previously nonperforming loan, which led the reversal of the specific reserve for that credit. This reversal combined with bank's overall asset quality, led us to book a negative provision expense in the fourth quarter. Those of you who have been following us for some time know that we periodically see short-term volatility in provision expense which on an annual basis has consistently tracked to historical levels as it did not 2014. From 2010 through 2013, our full year provision has averaged 0.46% of average total loans and ranged between 40 and 53 basis points. With the continued growth in the lower risk profile lending through Tristate Capital's private banking channel, we expect this full-year average to trend down over time. Deposit gathering also continues to be a highlight for our bank, though it's often overshadowed by our success in growing the asset side of the balance sheet. We have consistently been able to gather deposits in order to meet clients' needs and our funding profile and 2014 was no exception. Our 19% deposit growth have balances to $2.3 billion even as we lowered deposit funding costs by 10 basis points. Looking ahead, over the mid to long terms, we intend to substantially find loan growth through non-brokered deposit gathering. To that end, we have assembled a dedicated team of bankers with proven records of institutional deposit gathering success at some of the largest and most respected financial service companies in the nation. This sales team had three individuals by the end of 2014 and we expect to add a fourth this year. Their mandate is to bring in new seven-figured non-brokered deposit accounts. We see pricing for these funds in line with our total cost of deposits, if not slightly more attractive to us. We also see abundant opportunity for developing durable relationships with depositors nationwide, particularly there is currently maintained multimillion dollar balances in institutional money market funds paying nominal interest and facing regulatory challenges such as established corporations, family offices and insurance companies. Today, Tristate Capital Holdings and the bank continue to operate at well capitalized regulatory capital levels. Given current capital, the earnings power of the bank and Chartwell and anticipated loan and deposit growth, we expect to operate at well capitalized levels throughout all 2015. On tax expense of 2014 our effective rate was 29% for the fourth quarter and 30% for the full year, including the benefit of energy tax credits, fully and tax-exempt income. We anticipate a higher rate in 2015 as our non-bank Chartwell business provides a larger percentage of the holding company's consolidated taxable income. Turning to our investment management business. Chartwell has not only met our expectations in 2014, but exceeded them. Credit goes to Chartwell's investment management and sales team, which continued their profitable growth momentum since we closed the acquisition in March, collaborating with our private bankers and commercial lenders to begin leveraging Tristate Capital's financial intermediary relationships. As we reported when we announced the deal last January, former owners of Chartwell would be eligible to earn post closing contingent consideration. You remember that the earnout is six times incremental Chartwell adjusted EBITDA growth for 12 months of 2014 in excess of 2013 adjusted EBITDA. When we announced the deal, we projected Chartwell's adjusted EBITDA to grow by about 44% in 2014. In October, we reported that the investment management business might exceed the 12 month projection by year end. And we are pleased to report that it grew 49% in 2014, more than $8.7 million. The total payment is approximately $17 million and our option, up to 60% of the amount maybe paid in Tristate Capital common stock. In reviewing our reportable segment tables, keep in mind that Chartwell investment management financial data represents 10 months results as the transaction closed in March. As buyers, we could not be happier with the terms of the transaction and Chartwell's first 10 months of performance as part of Tristate Capital Holdings. When we struck the deal a little over a local year ago, publicly listed asset managers were trading at an average of more than 14 times EBITDA. Pure play investment managers with assets under management under $25 billion were trading at more than 11 times EBITDA. The total value of our Chartwell acquisition was seven times its adjusted EBITDA for 2014. Chartwell's ability to earn more than $8.7 million in adjusted EBITDA in just the first year of integration with our distribution network, together with Tristate Capital Bank tangible book value per share of $9.02 makes a potent combination underscoring why we believe the stock the company repurchased in the fourth quarter at an average cost of $9.94 per share was such strong value proposition. Thanks to our financial services distribution capability, the investment management and private banking are emerging as the engine of future earnings for this company. Combined, they represent approximately 50% of total revenues in each of the last three quarters of 2014. Investment management fees alone represented 29% of total revenue in the fourth quarter, growing 3.5% to $7.7 million in the last three months of the year. Importantly, Tristate Capital is one of only a handful of banks of any size driving more than 15% of revenue from investment management, let alone upwards of 30%. Chartwell's assets under management grew to $7.7 billion from $7.6 billion on September 30 and $7.5 billion at the end of 2013. Assets under management growth in 2014 reflects $936 million in new business and new flows from existing accounts, as well as $450 million in market appreciation which offset outflows of $1.1 billion. Outflows in 2014 were primarily due to a myriad of investment decisions by two ongoing clients who continue to maintain very significant funds with Chartwell. As we mentioned in our July conference call, one client transferred $250 million in second quarter to an additional sub-advisory manager being added at the time, which is a normal reallocation. The other notable outflow was $281 million in the fourth quarter by an institutional client eliminating a strategy previously offered its investors. Again these remain very significant clients and outflows were offset by inflows from new and existing accounts. The weighted average investment fee rate was 37 basis points in the fourth quarter and we continue to see opportunities for expanding margins as we build out Chartwell's distribution through our financial intermediary network to the retail clients, while the institutional business continues to drive new business and inflows. At the end of the day, what allows us to attract and retain investment management clients, is Chartwell's highly credible performance. Its track record, as of December 31, included five of Chartwell's 12 investment disciplines beat their benchmarks on one year performance and a sixth matched the benchmark. Nine of the 12 beat their benchmarks on three-year performance and 10 out of the 12 beat their benchmarks on five-year performance. Chartwell is currently doing business with some 16 financial intermediaries as we continue to leverage Tristate Capital's national referral network and corporate banking clients for the benefit of the investment management business. Looking ahead, Chartwell has a strong pipeline of more than $100 million in assets to be funded in the first quarter. Clearly the Chartwell team did an outstanding job of maintaining its profitable growth record in 2014. In addition to key hires and revenue-generating positions at Chartwell, we believe Tristate Capital's extensive financial services distribution experience and network can be used to further accelerate investment management fee growth and we will be focusing considerable energy on this front in 2015. I began my remarks this morning by outlining how we executed on our growth strategy in order to drive superior financial results in 2014. More important, of course, is what executing on strategy means for the future. We believe Tristate Capital Bank remains well positioned to deliver continued EPS growth for our shareholders. This includes growing net interest income dollars to help the organic expansion of our loan portfolio as well as investment management fee growth, all while maintaining our growth oriented culture, scalable business model and highly asset sensitive balance sheet. That concludes my prepared remarks and now I will ask Mark Sullivan, our Vice Chairman and CFO to join me for Q&A. Operator, please open the lines for questions.

[Operator:]

[Operator Instructions]. The first question comes from Michael Perito with KBW.

[Michael Perito:]

Hi. Good morning, everybody.

[Jim Getz:]

Good morning, Mike.

[Michael Perito:]

Jim, on the capital strategy, I guess heading into 2015, I know loan growth is obviously [indiscernible] above everything else, but can you maybe give us a little bit more of your thoughts on how you are thinking about new capital in terms of buybacks and loan growth and kind of balancing that out as we go forward here? I think you have about a third of your previous authorization left. I am just curious of what your updated there are.

[Jim Getz:]

Mike, as I mentioned, let's talk about the buybacks first. As I mentioned in the call, we look at the stock as undervalued. Not just for the company to buy it back, but you have seems many insiders aggressively buying the stock consistently over the past several months, not once, on multiple times. And that's one of the reasons that I outlined to you earlier, the valuation of Chartwell. From my perspective, that's not even valued into the stock at all. So we see ourselves and I am not going to give you a timeline, but we see ourselves clearly from the company standpoint, buying back stock and using the allocation that we have been authorized by the Board to do. From a capital standpoint, if you referring to capital raise, the bank and the holding company continue to be well capitalized. We believe with the earnings power of the bank and Chartwell and the dissipated loan growth we expect to operate at well capitalized levels through 2015 and we don't expect to have to raise additional capital in 2015.

[Michael Perito:]

All right. Thanks. Helpful and then just another question on your deposit pricing strategy. Rates are low, at least for now. It seems like they are going to be low for a majority of next year. But just curious as to how you guys are starting to think about where you want to place your deposits and once rates do start to rise in order to fund that loan growth with the core deposit as you mentioned in your prepared remarks?

[Mark Sullivan:]

Yes. Mike, Mark Sullivan here. We can get into more of a discussion on the NIM, but to directly answer your question, we have started to lengthen our funding in deposits and putting on two and three year CDs. In the past month, we put on close to $20 million in two and three year CDs. So we are lengthening in anticipation of an increasing rates environment. Certainly if not in the second half of 2015, as the consensus expects, certainly by 2016. So we definitely are, with a highly asset sensitive balance sheet, we are definitely cognizant of that.

[Michael Perito:]

Okay. Thank you.

[Jim Getz:]

Mike, if you look at the CDs as of the end of the year, I think we are around 36% in term type site and we are looking to expand that.

[Michael Perito:]

Okay. Thanks, guys.

[Operator:]

Thank you and the next question comes from Matt Olney with Stephens.

[Matt Olney:]

Hi. Thanks. Good morning, guys.

[Jim Getz:]

Hi. Good morning, Matt.

[Matt Olney:]

You mentioned the private equity sponsors mix, I believe about $130 million as of December 31. Can you give us an update as to what you sold in the fourth quarter relative to the par value that was on your books? Were there any gains or losses? And secondly, is it still reasonable to assume that the target to get that next to nothing is June 30?

[Jim Getz:]

Right. We are aggressively focused on moving these credits out of the company. At the end of the year, there were 26 and they were 5.4% of the loan portfolio, which is about, as you said, $130 million. It was 11.5% of the loan portfolio at the end of 2013, with some 39 credits. We have not taken any type of loss on the portfolio at all. And what you understand in this rate environment, the market is helping us out a lot because these companies are coming up for refinancing and there is, as you have seen in looking at the banks that you follow, Matt, there has been tremendous growth where there has been growth in the banking world and commercial and industrial. And banks are aggressively financing these companies. So by attrition, we are losing a lot of these entities and then we are aggressively selling them in the marketplace and there seems to be demand. So with regard to June 30, I can't promise you 100% every one of these credits will be out of here, but what I can promise you is that the percentage shall be meaningfully lower than it is today at 5.4% of the portfolio, but we are hoping that we can get all these out of here by year-end.

[Matt Olney:]

And Jim, what about the net loan growth number over the next few quarters, as you target to exit some of these loans and we think more about capital levels? How do think about the net loan growth number over the next few quarters?

[Jim Getz:]

I think the best comparison that I could give to you is to look back over the last four quarters. Think about the sale of these loans, okay and us taking them off the books and we have replaced them pretty handily in the type of loan growth we have had the 29%. Now I don't expect our loan growth to be at 29% this year. But I do expect our loan growth to be in line with the consistent goal that we had of 15% loan growth and with that type of loan growth and what we expect to realize from the net income of Chartwell and of the bank, we clearly feel that we will not have to be in the marketplace from a capital standpoint in 2015. I think we probably would be looking and planning to do something in the first or second quarter of 2016.

[Matt Olney:]

And within the private banking segment, I believe that loan growth in 2014 was north of 70%.

[Jim Getz:]

That's right. It was 74%.

[Matt Olney:]

But if I take out the acquired loans, I think we are close to 35% level in 2014? Is that a good expectations for 2015 for just the private banking loans?

[Jim Getz:]

I think you are right on. It will be 35% to 40%.

[Matt Olney:]

Okay and then one last question. There was some language in the press release that talked about the provision expense. As a percent of loans, historically it has been at 40 to 50 bip range, I believe, over the last few years. But given your change of loan mix over the last few years, any commentary you have, Jim, as far as provisions in the future relative to historical levels?

[Mark Sullivan:]

Yes. Matt, we would expect, it's been 40% to 53% as a range. We would expect to be at the bottom end of that range as we look forward.

[Matt Olney:]

Okay. Thank you.

[Operator:]

Thank you and the next question comes from John Moran with Macquarie.

[John Moran:]

Hi, guys.

[Jim Getz:]

Good morning, John.

[John Moran:]

Just two quick ones for Mark. One, maybe following up on a little bit more detail around the margin. I know you mentioned that you are lengthening out some funding. It sounds like the PD stuff is still coming on two at a quarter over LIBOR. CRE still coming on in the threes. Is it fair to say that and obviously we saw it on a core basis this quarter, the 2.50% level is still in terms of your thinking sustainable here?

[Mark Sullivan:]

Yes. John, when we add to the NIM, recall in our third quarter call, we expected that NIM was stabilized at 2.45% to 2.50% range and it did. It was actually 2.49% when you adjust for the deferred interest that we received on a nonperforming loan that was paid off in full. So the 2.61% really normalizes, if you will at 2.49%, right about where we expected it. And we would expect to remain stabilized in 2015 in 2.40% to 2.50% range. And as you say, the yield on the loan portfolio is really stabilized and the compression is more likely to come on the funding side, particularly as we add more two and three year CDs. But the real thing to keep in mind is, when we talk about NIM at Tristate, it's really that our outsized growth, both in loans and investment management fees, will outpace any NIM compression and we will continue to deliver strong growth in net income and earnings per share. And that's really our focus.

[John Moran:]

Okay. That is helpful. Thanks. And then together ticky-tack financial model question. You guys saw you expect a higher tax rate in 2015, just given that more is coming out of the investment management operations. Could you put maybe a finer point on that?

[Jim Getz:]

Sure. In 2014, we were able to reduce our rate with [indiscernible] income and significantly with energy credits. Looking ahead to 2015, we really don't have any plan on using credit investment at this time and we also have Chartwell becoming an increasing percentage of our taxable income. So we would expect to move closer to the statutory rate in 2015, John.

[John Moran:]

Okay and then Jim, you alluded to some of this in your prepared remarks. I think it sounds like Chartwell's now selling to 16 out of 90 of the intermediaries on the private banking channels. If you can give maybe a quick update on the retail distribution build and what the expectation might be or an updated expectation now that you have seen 10 months out of Chartwell? Where do you think you could actually build [indiscernible] and where you think you can take that margin up to over the next, say, 12 to 18 months as you continue to build out the distribution there?

[Jim Getz:]

We are going in a new year, John, with an effective sales force in place. We have a sales manager and we have two experienced salesmen that were previously at Chartwell and we have added two experienced salesmen that we have recently recruited in the marketplace and we are in the midst of making an offer to another salesperson. So we have these folks located at central spots throughout the United States and we anticipate that we are going to effectively have very substantial growth on the retail side going into the new year. If you look at the retail balance that they have in place now, the company has $7.7 billion of assets. The retail balance is around $650 million, $675 million that they have. It's overflow from some of the things that they have done in the past and we are going to be utilizing that as a nucleus to moving forward a foundation in that regard. We expect that each of these salesmen will produce and we are talking about fluctuating type product, anywhere from $50 million to $100 million of activity this year, to compliment the base that's already put in place. And keep in mind, Chartwell has a very effective institutional sales group. You probably noticed in the flow numbers and we have alluded to it in the presentation, they had some unfortunate situations happen this year where, as I have gone over there, performance was stellar, but they got reallocated to bring in another manager and then they had stellar performance and the party determined they no longer wanted that discipline. So they lost a substantial amount of institutional assets that way. But the wonderful thing about that is, these were assets that were at a much lower fee price than even the weighted average fee that they had. So we anticipate that 37 basis points over the next couple years, you can readily see some movement afoot to have it going up 10%, 15% or more over the next couple of years, which would be very helpful to the general franchise. But keep in mind that the institutional business is still a meaningful part and it's a mature book of business and in fact we have innumerable numbers of Taft-Hartley plans and sub advisory type relationships that we have going on there too. So they have got to essentially complement each other.

[John Moran:]

Got it. But just to and I hear 100% what you are saying here, but I just wanted to make sure that I am understanding. There is still kind of an expectation or glide path that if the institutional business is chugging along at 37 basis points, this retail business would be meaningfully higher than that. And so I think you 10% to 15% kind of increase in terms of --

[Jim Getz:]

You are looking at the meaningful, for example. We had two mutual funds out there. Now one is in, what I would call, the incubation stage, okay. And the other one has about $135 million in it. Or if you look at the one it has $135 million, you are looking at providing the company with 60 basis points. Okay. But I would say, in general, it's going to around 10 to 15 basis points, if you are looking for numbers of how it will assist in creating better margins for the company.

[John Moran:]

Great. That is really helpful. Thanks, guys.

[Jim Getz:]

Great. Thank you.

[Operator:]

Thank you and the next question comes from Bryce Rowe with Robert W Baird.

[Bryce Rowe:]

Hi. Great. Thank you. I just have a couple of questions. Just one to follow-up on the capital comment, Jim. You have talked about being well capitalized throughout 2015 with some projected or potential capital action in early 2016. I just wanted to get a feel for what the flavor of that capital action might be, given that total risk based capital is at 11% now and I guess with growth is going to down. So just maybe a comment on your appetite for more common equity or more debt to supplement capital in 2016?

[Jim Getz:]

We are going to avoid as much as possible and it's all according to the environment we move into at that point. You tend to look at it and say, okay, can you get, as you are aware, we raised $35 million of subordinated debt at what then was a very reasonable price in May 2015. And we were pleased with that because we did not have to dilute shareholders. And I am not particularly interested in us diluting shareholders. So if we, in the beginning of 2016 can reasonably do the same thing that we did in 2014, we will repeat it again. Okay. And so we are going to look at all options that are available at that stage of the game. And you can't really judge what your decision is until you reach that point, but dilution is clearly something on our mind. Mark, did you have a comment?

[Mark Sullivan:]

Yes. Bryce, I would also just point out, when you look at the 11% on risk based today and our option at the end of the first quarter, we have the ability to issue up to $10 million roughly, 60% of the $17 million payout in shares. And if we choose to do that, that would obviously give us more runway as well. So I just wanted to point that out.

[Bryce Rowe:]

Okay. Any thought as to how you are thinking about that today?

[Mark Sullivan:]

Why don't you ask us in March?

[Bryce Rowe:]

Okay. Fair enough. And then just one more follow up on the capital question. Is now the targeted total risk-based capital ratio come early 2016?

[Mark Sullivan:]

I think as we go into 2016, we should be somewhere in that 10.15%, 10.25%, 10.30% range. But that can vary based on some assumptions in our models. But clearly sometime in Q1, no later than Q2 2016, we will look to develop some type of strategy on capital enhancement.

[Bryce Rowe:]

Okay. Great and then on Chartwell, maybe just talk about, you have talked over the last couple of quarters about supplementing the product offerings there with a potential acquisition. So any update there would be helpful for us. Thanks.

[Jim Getz:]

We have spoken and met with multiple parties and what we have been looking for companies that would complement their book of business but be clearly under the Chartwell monocle, okay. As you are probably aware, they don't have a tax-free business. So we are looking at some tax-free managers. We are looking at some alternative fixed income managers. The base of assets there is about little over $2 billion in fixed income. We would like to give that a little bit more credibility and we are looking at some equity players that potentially could complement that business also. So we are actively in the marketplace, but I want to point out the courtship for Chartwell was almost two years, okay and we want to make sure it's the right fit for all parties involved and Tim Riddle, who is the head Chief Executive Officer at Chartwell is very intimately involved in these discussions and some of his people too. So we are working on it and you will be the first people we will notify at the time that it occurs. But we are active in the marketplace.

[Bryce Rowe:]

Great. Thank you.

[Operator:]

Thank you and we have follow up question from Michael Perito with KBW.

[Michael Perito:]

Hi, guys. Thanks for taking the follow-up. I don't want to labor on the PE SNC book. I know you guys are working hard to dwindle it down. But just, I remember a couple of quarters ago when you had the credit impact the Q2 result, I believe, it was an energy service and credits and Jim, I think you said there is 27 credits left in that portfolio. I just wondered if there is another exposure to energy remaining of size?

[Jim Getz:]

We have in place -- there are three energy-related credits that we have at the company and they are not all shared national credits. And if you want, I don't mind going over them at all. Generally, I won't mention name of the companies at all, but none of these credits are in any type of payment default at all. And the total, there is three loans, there is $21 million of outstandings. None of these loans are to companies that are engaged in the exploratory end of the business. It's purely servicing. The first one that I will talk to you about is in fact a shared national credit. It's a provider of nondestructive testing, inspection, cleaning services for the tubular goods and drill tools that are used there in the marketplace for drilling. It has a very strong balance sheet. It's revenue this year for 2014 appears to be up over 13% and the senior leverage is around two times. They have been compliance with all their covenants. The news on this is, they have accepted an offer from a strategic buyer and this credit itself, standing at some $7.1 million will not be on the books by the end of the quarter. Okay.

[Michael Perito:]

Okay.

[Jim Getz:]

So that's one that will be readily moving on. The second one is a club deal, but it is a shared national credit because of the fact that it's three or more banks and over $20 million. It's a company that's provides capital equipment in oil and gas and mining exploration. Total outstandings are $4.6 million. This company has $75 million of revenue that they recognized in 2014 with an adjust EBITDA of $4.4 million. We anticipate violation of the leverage covenant at year-end when we get all the necessary documents and things along that line. We are very close to the management. We have a lot of confidence in the management here but it's the market. Their backlog is slow and their customers are delaying some commitments. The company is reducing pretty handily their cost and they have retained a consultant. We expect the liquidity to tighten in the second half of the year, particularly. This is a credit we put on non-accrual this quarter with a specific reserve. We consider the reserve to be adequate. We have the credit as a classified credit and the total outstanding here, as I may have mentioned, was $4.6 million. So we have $1 million reserve on it and feel very comfortable that we are adequately reserved on the remaining amount. Now the next one is actually a sole bank deal with a sole company. The company provides services to the oil and gas exploration industry, including roustabout construction, trucking, inspection, maintenance and safety monitoring. They have about $30 million of revenue they recognized in 2014, up about 6.5% for the year. EBITDA of around $4.6 million. Their senior leverage is actually less than 2 times. It's 1.9 times. They are in compliance with all their covenants. They did in the first quarter of 2014, they took their total leverage covenant in the first quarter. The owner made a capital contribution of $1 million to bring it more in line and to pay down our revolver. The management anticipates for 2015 about $5 million EBITDA. The credit facilities are secured by a first lien on all assets as well as the pledge of the borrower's capital stock. The revolver is fully monitored via borrowing based formula which includes accounts receivable and the inventory. The appraisal of the equipment was made in the spring of 2014. The outstandings on this is $9.2million. So that's the whole game that we have in the oil and gas types directly.

[Michael Perito:]

Okay. Thanks. I appreciate all that color. That was very helpful. I guess just your thoughts going forward, I know you said the one credit will likely be gone by the end of the quarter and the other one is on non-accrual status. But I guess just how are you guys thinking high level about the energy space, both from a SNC and sole bank point of view and just going forward?

[Jim Getz:]

At the end of this quarter, we hope to have just two credits. And we don't see ourselves actively putting any more on there until there is more definition to what's going on in that industry.

[Michael Perito:]

Got it. Thanks, guys. I appreciate it.

[Jim Getz:]

Mike, the only thing I would like to point out to, we put it on nonperforming, but like a lot of our non-performers, they have continued to make payments. They haven't missed the payments and we anticipate them to continue to do so throughout 2015.

[Michael Perito:]

Okay. Thanks, guys.

[Operator:]

Thank you and we also have a follow-up question from Matt Olney with Stephens.

[Matt Olney:]

Hi. My question was just addressed a few minutes ago. Thank you.

[Jim Getz:]

I guess you are from the oil patch, Matt.

[Matt Olney:]

Yes, a lot closer. Definitely.

[Operator:]

Thank you and we also have follow-up from John Moran with Macquarie.

[John Moran:]

Hi, guys. Thanks very much for the detail on the energy stuff. The second credit, the club one that actually qualifies as SNC, which should be around [indiscernible], are you guys agent in? Or is that a different lead bank?

[Jim Getz:]

No. It's a different agent. But we are really familiar with the company and have been monitoring. They are very accessible to management here.

[John Moran:]

Okay. Good and it is not one of the agents that was targeted for elimination from the book over time?

[Jim Getz:]

No. Not at all and I would say that this agent has done a very nice job with this company. It's still 25% owned by the family that founded the company back in 80 some years ago and they were paid about $100 million plus for their interest in the company. So they have some wherewithal that they can put money to work and they have done that before, when they have had troubled situations.

[John Moran:]

Prefect. That is a helpful and reassuring. Thanks.

[Operator:]

Thank you and as there are not more questions at the present time, I would like to turn the call back over to management for any closing comments.

[Jim Getz:]

Okay. We thank you very much for being with us today. We thank you all for your continued interest in Tristate Capital and your participation here today. We look forward to keeping you up-to-date on our progress and hosting our next quarterly call with you in April. Have a great day. Thanks.

[Operator:]

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