Executives
Jim Getz – President & Chief Executive Officer
Mark Sullivan – Chief Financial Officer
Analysts
Chris McGratty – Keefe Bruyette & Woods
Matt Olney – Stephens Inc.
Bryce Rowe – Robert W. Baird
John Moran – Macquarie Securities
TriState Capital (TSC) Q4 2013 Earnings Call January 30, 2014 8:30 AM ET
Operator
Good morning, everyone, and welcome to the TriState Capital Holdings Conference Call to discuss the financial results for the three months ended December 31, 2013, with a release yesterday afternoon. (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 Captial 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 view the company’s prospectus filed as part of its registration statement on Form S(1) as well as the most recent quarterly report filed on Form 10(q).
You should keep in mind that any forward-looking statements made by TriState Capital speak only as of the date of which they were made. New risks and uncertainties come up from time to time and management cannot predict these events or how they may affect the company. TriState Capital has no duty to and does not intend to update or revise forward-looking statements after the date on which they are made.
To the extent non-GAAP financial measures are discussed in this call comparable GAAP measures and reconciliations can be found in TriState Capital’s earnings release which is available on the website at www.TFCBank.com.
Representing TriState Capital today is Jim Getz, Chairman, President and Chief Executive Officer. Jim will be joined by Mark Sullivan, Vice Chairman and Chief Financial Officer for the question-and-answer session.
At this time I’d like to turn the conference over to Mr. Getz.
Jim Getz
Good morning and thank you for joining us today. We’re very pleased with the financial performance we had to report to our shareholders for Q4. Looking back on 2013, I would sum up the year as one of disciplined execution.
Since we first started sharing our longstanding plans and strategies with public investors through the IPO process we’ve had clear priorities and executed against them in 2013. We maintained our high rate of organic loan growth fueled by both our commercial and private banking channels. We’ve enhanced our risk profile by making our private banking channel an ever larger proportion of our total loan book.
We’ve maintained very strong asset quality with credit metrics in line with our company’s historic trends and superior to peers. We’ve accelerated deposit gathering. We’ve quickly and effectively set plans in motion to execute our strategy to deploying capital and acquiring a successful investment manager to accelerate the income growth. And we’ve maintained our lean and scalable business model.
In Q4 we increased total loans by 21.2% annualized and we continued to reinforce our comfort with our long-term loan growth continuing at a compound annual growth rate of 15% as we’d experienced over the period from 2008 to 2012.
Now, let’s discuss the dynamics of the loan portfolio in 2013. From a macro standpoint we originated some $630 million of new loans. We had loan payoffs of $378 million and we had lines of credit paying down of $33 million. So we had a net loan growth of some $219 million.
Our commercial and industrial portfolio was down some negative 2%. Our commercial real estate portfolio was up 22% and our private banking channel was up some 31%. So we ended the end of the year with $1.861 billion in loans outstanding.
We expect the trends reflected in 2013’s performance to continue in 2014 in the middle market commercial banking channel. We continue to anticipate further growth in the commercial real estate portfolio with improved pricing and loan covenants.
The commercial and industrial loan portfolio has stabilized and should grow somewhat but we’ll struggle for new loan opportunities in a slowly growing economy where many banks and non-banks have sacrificed pricing and structure to gain new business. We believe that there remains a substantial amount of liquidity in the marketplace at the corporate and personal levels, which could begin to drive enhanced growth, merger and acquisition activity over the next 12 to 18 months while the economy gains momentum.
The fact that more than half of our private banking channel loans are backed by marketable securities is one reason for the very favorable credit quality trends in this book. As a result, by growing private banking channel loans at a faster rate than our commercial book we’re naturally enhancing the risk profile of our portfolio.
In Q4 2013 we also continued to establish new financial intermediary relationships which remain essential to private banking channel growth. By year end we were pleased to have 75 of this critical referral relationships up from 57 at the end of 2012 and 46 at the close of 2011.
Even as we drive continued loan growth we’ve maintained our risk management discipline. Back in October no one was more disappointed than I to have to report to fellow shareholders the significant impact of a single commercial loan loss on TriState Capital’s Q3 earnings. That said, as I mentioned at the time we are very tightly managing the entire portfolio and we remain very confident in its quality and the adequacy of our reserves. In fact, our annual loan loss provision of 0.47% of average loans for 2013 was in line with our average trend since 2010.
Another important area of execution worth noting is deposits, which has been somewhat overshadowed by our lending success. We grew deposits 17.5% annualized during Q4 2013. At the same time, average funding costs dropped in the quarter to 54 basis points, playing a key role in our ability to expand our net interest margin for the third consecutive quarter to 2.9% for the last three months of the year. This was actually just about the 2.85% to 2.95% short-term range we indicated on our last call.
We would note again as we said in the past, our emphasis on growing learns from our private banking channel will likely serve to moderately lower our overall asset yields and NIM in the future given the low-risk nature of these credits. In addition to high net worth clients served through our private banking channel, financial institutions, municipalities, corporations and retirement plans are some of the other important sources of deposits for growth for us.
We believe our ability to ratchet up the intensity of TriState Capital’s deposit gathering efforts in 2013 are a good illustration of the integrated responsiveness of our sales and balance sheet management capabilities.
We’ve also executed on our strategy to source and strike a deal to acquire a successful and prudent investment manager, deploying a significant portion of the capital our public shareholders entrusted to us via TriState Capital’s initial public offering in May. Since we announced our agreement to acquire Chartwell three weeks ago we’ve been very pleased with our progress toward closing which we continue to expect late in Q1 2014.
This month we’ve had the pleasure of joining Chartwell’s leaders in meetings and conversations with their major clients, and have characterized those conversations as very productive and positive. As you will recall, affirmative consents are required of certain of Chartwell’s clients as is customary in these transactions. While confidentiality agreements prevent me from giving you a detailed accounting of that process I can tell you that today I’m even more confident and excited about the transaction and remain comfortable with the terms of the agreement and the anticipated timing of the close.
We also executed with our lean and scalable business model in 2013. Q4 noninterest expenses were $11.2 million and about $757,000 of these costs were nonrecurring legal and professional expenses associated with the Chartwell acquisition. Excluding these nonrecurring expenses our efficiency ratio of 58.21% highlighted the operating leverage that’s inherent in our branchless business model. This was a 52 basis point improvement from the linked quarter and a 184 basis point improvement from Q4 2012.
For the full year 2013 pretax income increased 11% over 2012 excluding nonrecurring acquisition expenses of about $845,000 associated with the Chartwell transaction. We completed 2013 with 130 employees, up from 120 at the end of 2012 and nearly all newly created positions were revenue generating roles. For the year compensation and benefits increased less than 2% while total noninterest expense per employee dropped by more than 2% excluding the impact of the Chartwell acquisition costs.
Heading into 2014 we’re very pleased with where TriState Capital Bank’s business is positioned and our confidence and enthusiasm is only bolstered by the diversification and added earnings power that Chartwell should bring to the table this year. Finally we were very happy to be able to more than double earnings to well over $4 million in Q4 even after excluding the favorable net impact of tax savings and acquisition costs in the last three months of 2013.
As we summarized in our earnings release, earnings per share of $0.17 reflected about $0.02 per share of nonrecurring acquisition expenses which were more than offset by a $0.03 income tax reduction achieved through tax credits earned.
With that I’ll welcome Mark Sullivan, our Vice-Chairman and CFO, to join me for questions and answers. Operator, please open the lines for questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. (Operator instructions.) And our first question is from Chris McGratty of KBW. Please go ahead.
Chris McGratty – Keefe Bruyette & Woods
Hey, good morning guys. Mark or Jim, in terms of the balance sheet growth for 2014 if I’ve heard you correctly loan growth should continue at a similar mid-teen growth rate that you talked about last quarter. What should I think about the rest of the earning assets in terms of the (inaudible) mix? My question is basically will cash and securities be used to fund the loan growth or will those grow from kind of December 31st levels with the balance sheet?
Jim Getz
I think you’ll see them probably as a percentage of total assets stay relatively constant. Cash will be used obviously to fund loan growth but it’ll be a continuation of the deposit growth which percentage-wise was actually slightly higher than loan growth. But as a percentage of total assets they should remain about the same.
Chris McGratty – Keefe Bruyette & Woods
Okay. And maybe a comment on the margin – given the emphasis on the private banking can you maybe help us on when loan yield may eventually trough to the bank? Is it sometime later in 2014 and maybe put that into context with overall margin consideration? Thanks.
Jim Getz
I think as we look at the NIM in 2013 it maintained quite well throughout the year. I will say though we have arrived to the point where deposit costs of interest bearing liabilities is going to be difficult to lower it significantly more from where we are right now. And as we decrease the risk profile of the loan portfolio by adding private banking as a higher percentage of the total that will put pressure on the loan yield as we go into ’14. So we do expect NIM pressure in ’14 possibly in the 10 to 15 basis point range.
Chris McGratty – Keefe Bruyette & Woods
That’s helpful. The 10 to 15 basis points of compression you’re talking about, is that off of a full year ’13 or is that off a Q4 level that was a little bit high?
Jim Getz
Off of the Q4 level.
Chris McGratty – Keefe Bruyette & Woods
Okay, thank you.
Operator
Our next question is from Matt Olney at Stephens. Please go ahead.
Matt Olney – Stephens Inc.
Hey, good morning guys, how are you? It’s good to see the loan growth rebound in a strong Q4. From your comments, Jim, it sounds like the competition is still very aggressive within that C&I category. Can you talk more about the competition and as far as what is it that you’re seeing? Is it more of a pricing issue, is it structure? And if you think about it more by market which markets are you seeing the most competition in right now?
Jim Getz
There’s no question that it’s within the context of the commercial and industrial portfolio, and as I may have mentioned that portfolio’s loans outstanding was down a little over 2%. We have taken a position now that we’re willing to potentially compete on the pricing but not on the type of structuring, either very loose covenants that are evolving in the marketplace. We believe that that portfolio will continue to grow for us but not at the pace that we saw in ’08, ’09, ’10, and ’11. If you look at the growth of this company, 2007 through the first half of 2011 was overwhelmingly driven by commercial and industrial and so that’s the advantage we have of diversifying the portfolio.
If you look at the portfolio our commercial real estate portfolio is consequentially smaller than other banks and we’re committed to continuing to grow the private banking book of business. So it’s a value that we have that maybe some others don’t have in the sense that we’re going to be able to diversify our book of business and potentially have even weightings to all three sides. So what I wanted to do was to indicate to you what we’re actually seeing in the market and what actions that we’re taking. So I don’t anticipate the C&I portfolio’s going to be robust next year but I certainly do feel the commercial real estate and the private banking will be.
Matt Olney – Stephens Inc.
Okay, thanks Jim. And then switching gears on the fee income, it was above expectations. Any more details on what’s behind this? I think the press release referred to swap days being elevated in the quarter?
Mark Sullivan
Absolutely. That was really the single driver. We had over $300,000 in swap fees for Q4 and that’s really what drove the increase. The total increase was $400,000; $300,000 of it was swap fees.
Jim Getz
Matt, what I would suggest very simplistically is that if you take a look at the ten-year bond and note what happened to it yesterday. As I was looking at it, it dropped as low as I think it was to 66, 65, something in that range. That is a signal for the swap income as it grows, as it goes up – and just a couple weeks ago it was at 3%. As it goes up you’ll see the swap income increasing where parties are very much interested in putting fixed rate loans, whether it’s commercial real estate, C&I type activity. And we’ll utilize swaps in lieu of putting them on our balance sheet. So I would say if you feel strongly that the ten year is going to go up dramatically in 2014 you’ll see our swap income going up.
Matt Olney – Stephens Inc.
Thanks, guys.
Operator
Our next question is from Bryce Rowe with Robert W. Baird. Please go ahead.
Bryce Rowe – Robert W. Baird
Hi, thanks. Good morning. Jim, I just wanted to get a little more color on the charge-off activity in the quarter. I noticed that you guys booked a recovery – I just wanted to get an understanding for what drove the recovery. And then maybe if you could talk about gross charge-offs versus net?
Mark Sullivan
Well, the recovery for the quarter was only $250,000 and involved a piece of commercial real estate. But in brought in line… Obviously in Q3 we had it higher than expected, but if you look at it for the year with that recovery in Q4, for the year it brought us into sync with our roughly 40 basis points as a percentage of average loans which we’ve consistently been since 2010.
Bryce Rowe – Robert W. Baird
Right, that’s helpful, Mark. That single commercial real estate in recovery, can you talk about how large that might have been?
Mark Sullivan
The total loan outstanding or the amount of the recovery?
Bryce Rowe – Robert W. Baird
The amount of the recovery.
Mark Sullivan
$250,000.
Bryce Rowe – Robert W. Baird
Okay, thank you.
Operator
Our next question is from John Moran with Macquarie. Please go ahead.
John Moran – Macquarie Securities
Hey, good morning guys. Just real quick on tax rate, I know that you guys called out some credits here in the quarter. Can we assume that that’s a one-time thing and we revert back up to kind of 35% in terms of run rate going forward?
Mark Sullivan
Yes, it’s actually not a one-time thing. They’re energy credits and we’ll have a similar amount in ’14 as we had in ’13. We had a net effective of about $900,000 or $0.03 per share. With income being projected higher in 2014 we’re looking at a reduced rate but not to the degree of this year’s. This year was about 31% and we would project around 34% for 2014.
John Moran – Macquarie Securities
So 34% on the year. And then is there going to be kind of a catch-up accrual in Q4 again or is it going to be more…
Jim Getz
No.
John Moran – Macquarie Securities
Okay. Got it.
Jim Getz
We’ll have that throughout the year.
John Moran – Macquarie Securities
Okay, alright. And then shifting gears just on deposits, good growth there. And I think you referenced about 45% of them are fixed rate. I wonder if you could give us the deposit duration or weighted average life.
Jim Getz
John, it’s a little over two years, I mean eighteen months. Overwhelmingly these deposits are one- or two-years certificates of deposit. And I think we went over with you what are the drivers of that during the IPO process. We have today close to 1900 credit unions that buy our CDs for $250,000 or less. We have 230 municipalities that do exactly the same type of thing.
John Moran – Macquarie Securities
Got it. Can I sneak one more in here? Just maybe if you could give us an update on progress in New Jersey and New York. I know New Jersey was a little bit of a fixer-upper in terms of getting personnel in there and then New York was a startup. Anything that you could provide in terms of color in those markets would be great.
Jim Getz
Both New Jersey and New York were stellar performers in 2013, I hope they are in ’14 also. But both those, let’s talk about New York first. We ended the year with about $80 million of loans outstanding. We have a full staff, a complement of staff we’re going into the new year with. We’re very pleased with the quality of individuals that we have in place.
Our President Tom Gilmartin’s done a wonderful job there. Ken Orchard, who handles our office in Princeton there in New Jersey has a full complement of staff in place also. We saw a very positive uptick in that portfolio, the first time in the past 24 months they were up outstanding – about $30 million. So we’re pleased with what we saw in both those regions.
John Moran – Macquarie Securities
Great, thanks very much for the details there guys, helpful.
Operator
Our next question is a follow up from Matt Olney with Stephens. Please go ahead.
Matt Olney – Stephens Inc.
Hi Jim, just as a follow-up on the Chartwell acquisition, any more updates you can give us or commentary on how that deal’s progressing? And are you still expecting that to close during Q1?
Jim Getz
We fully expect it to close during Q2. Like I alluded to… Or it’s Q1. I’m confusing my quarters here, Matt, you’ve got me all shaken up. So it’s during Q1 it will close. We’re hoping it closes sometimes in early March. Secondly I had the opportunity last week to spend several days on the road visiting their major clients, and this opportunity has been very well received. It also reinforced in my mind the high level of professionalism of the Chartwell folks and how their investment performance has been received by their end clients. So I really feel very positive about the opportunities of growth both at Chartwell and at the bank going into the new year.
Matt Olney – Stephens Inc.
Okay, Jim, and then in your prepared remarks you talked about, I believe I wrote down “ratcheting up your deposit gathering efforts.” Can you talk more about that? What types of leverage can you pull? Is this all on pricing and what does that mean for costs of funds going forward?
Jim Getz
We have developed here I believe is a very effective distribution network. And what we’ve done is we’ve put people in place that have very defined job roles and we’ve executed effectively in that regard. So moving into the new year we’re putting in place a group of individuals that’s sole vocation in life is garnishing deposits, and this will be of a national nature. It’ll certainly help us continue to grow the bank.
It’ll be a real focus on obviously non-brokered deposits and so we’re essentially putting a team in place to do that. And they’ll be calling much more actively just for deposits on the same type of intermediaries that we’re working with currently but on a more broad-based type of approach. And I expect to have this team fully in place by the end of Q2.
So we’re doing this to enhance our deposit gathering capabilities, so it won’t be a reliance on upticking the rates or anything along that particular line. It’ll be a focus purely on distribution.
Matt Olney – Stephens Inc.
Thanks, Jim.
Operator
Our next question is a follow-up from Chris McGratty of KBW. Please go ahead.
Chris McGratty – Keefe Bruyette & Woods
Yeah, thanks. Mark, can you provide the absolute yield on the originations in the private banking book during the quarter, and maybe compare that sequentially and also to more new production (inaudible)? Thanks. For Q4.
Jim Getz
You’re looking for the yield? We’ll have to get back to you on the yield. We don’t have the yield. Well, it’s got to be somewhere in the L230, L250 range?
Mark Sullivan
Actually it’s a bit higher than that because you have to keep in mind what we’re putting it on… If you’re looking for what we’re putting them on today they’re going on today around 2.25%, 2.30%. But if you look at the yield of the whole portfolio it’s much higher. But we can get to you with an exact number, Chris; we’ll just contact you after the call here.
Jim Getz
Chris, did you ask what they were for Q4?
Chris McGratty – Keefe Bruyette & Woods
Yeah, I’m just trying to see what the blended yield, what the mix between private banking and the new production.
Jim Getz
What the existing and the new activity is?
Chris McGratty – Keefe Bruyette & Woods
Yep.
Jim Getz
Okay, we can get it to you. It’ll be much higher than 2.5%.
Chris McGratty – Keefe Bruyette & Woods
Okay, that’s fine. And then just a question on the expenses – aside from the charges in the quarter and aside from Chartwell is kind of $10.5 million a fair run rate to start with for 2014?
Mark Sullivan
I’d say that’s reasonably accurate or close, I’d say just a tad higher. One of the questions, I saw some of the attempted adjustments to get to a run rate on our Q4 results and I think a probably accurate but simplified way to look at it was of the $0.17 reported we adjusted $0.01 net of the Chartwell and the tax benefit, so that would take it to $0.16. And with a loan loss provision just under $500,000 compared to a normalized $1.5 million there’s probably another $0.025 to $0.030 there. So $0.135 to $0.140 is the normalized run rate coming out of Q4.
Chris McGratty – Keefe Bruyette & Woods
Okay, so you’re saying the normalized provision is $1.5 million to $2.0 million for this year per quarter?
Mark Sullivan
Our provision expense should be in line with where it’s been the last three years, right around 40 basis points. We hope it might be a tad better but I think that’s reasonable.
Chris McGratty – Keefe Bruyette & Woods
Okay, thanks Mark.
Operator
This concludes our question-and-answer session. I’d like to turn the conference back over to management for any closing remarks.
Jim Getz
Thank you. We truly appreciate you being with us today and look forward to talking with you at some future date. Thank you very much.
Operator
Thank you. This concludes today’s conference. You may now disconnect.
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