Q4 2019 Earnings Call
As we continue to add critical mass through responsible organic growth. We further enhance the strength of our balance sheet and our ability to invest that our business for the benefit of all our own stakeholders at Chartwell Investment Partners client assets under management expanded during the the quarter and the year to nine point seven billion dollars as we engage with New Jersey existing clients benefit from our managers strong investment performance.
Try Steakhouse little drove record net interest income and non-interest income growth pushing total 2019 Revenue up 11% for the prior-year are a good girl top-line growth also continued to outpace expenses, even as we strategically invest in our business pre-tax income grew at a double-digit pace of 14% in 2019 and gaap earnings per share grew by 4% to a dollar $89 for the year.
As noted in our earnings release these results were impacted by approximately $0.03 per share and expenses which were associated with Advanced due diligence on an investment management acquisition candidate. These conversations concluded before a definitive agreement was reached we remain fully committed to our previously disclosed strategy to grow Chartwell through a combination of organic and acquired means we will continue to actively evaluate potential candidates for acquisition and importantly will only consider those which meet all of our Lounge area including cultural compatibility credible investment performance complimentary investment products and immediate earnings per share accretion.
In the meantime shark World continues to contribute at least 20% to try state capitals total revenue with Investment Management fees comprising 69,000 set of non-interest income last year through the end of the fourth quarter Chartwells active investment strategies also continued to deliver Superior performance 55% of its products out performed their respective benchmarks for the one year. Ninety 2% were ahead for three year performance and 75% were ahead for five year performance.
This track record along with our unique product offering and outstanding distribution capability is attracting new business during the fourth quarter Chartwell recorded new business a new flows from a listing accounts with approximately $326, which along with Market appreciation of 303 million dollars more than offset outflows off as a result Chartwell grew assets under management by nearly 6% to nine point seven billion dollars last year outpacing publicly traded traditional asset managers in the US which reported median organic assets under management growth of about 1%
the pipeline
Continues to be healthy as it's ever been and we look forward to continuing to convert this pipeline into assets under management through 2020.
Turning to Chartwells revenues in 2019 investment fees of just over $36 million dollars. Simply did not meet our organic growth goal, but long-term, we believe we have the investment management Talent sales and distribution capability and infrastructure to achieve top-line growth that's aligned with our expectations down. In the meantime. We're mindful of the need to balance invest in Chartwells future growth with expense discipline. This business has been quite profitable since our entry into the space in 2013. And in 2019, we began taking active measures to measurably and meaningfully enhance Chartwells contributions to earnings Chartwell lowered segment expenses by more than 2% in 2019 for the year before excluding acquisition-related costs in addition segment compensation and benefit expenses were lower birth.
2019
Overall by the end of the last year chart will had reduced its annual expense run rate by more than two million dollars, which were will be more fully reflected in the 2020 results.
Tristate Capital Bank our Commercial Business continues to thrive middle-market commercial loan balances approached three billion dollars a year end and increase the 27% from 1 years prior and 35% annualized from September 30th. 2019. And Commercial and Industrial lens surpassed a billion dollars for the first time the end of 2019 growing by 38% last year.
Commercial real estate loans total of 1.8 billion increasing 22% in 2019, even with this impressive performance as a percentage of total loans seem lending declined to 27% at your end origination activity was very strong during the fourth quarter with about a hundred and eighty eight million dollars from seeing eye and about a hundred thirty-four million from commercial real estate as you saw from our average balance sheet much of our fourth quarter production took place in December in addition. The impact of declining interest rates related to the FED funds Target rate Cuts in late September and October are reflected in our fourth quarter results, given the timing of production and the more stable current interest rate environment. We expect the full benefit of our record fourth-quarter loan growth to be realized the net interest income in 2020.
we remain
Very well positioned to continue our Commercial Banking success in the current environment. We're encouraged by our C 9 c r e pipelines and we expect to continue to deliver strong commercial loan growth during twenty-twenty our private banking business achieved exceptional results with the portfolio growing by 29% We are the nation service provider of marketable Securities based lending with tri state capital private banking loans offered through our Xfinity network of 213 Financial intermediary firms and over 60,000 individual advisors. We made the Strategic investment in people technology and Klein experience to secure our Market position. And we continue to build the relationships with New Jersey new advisors to our Network. We now have the business development team of about thirty individuals dedicated to Growing the national private banking business by the end of 2019.
They're working with more than three.
Allison individual advisors and Trust officers with about 1,200 doing multiple transactions for their clients when our platform last year.
Turning briefly to Cecil and its implementation this year while there are many factors in how it applies to our business. There are two I mentioned in particular the first is that well over half of our loans are in tri state capitals portfolio of private banking loans collateralized by marketable Securities. It's some 56% this portfolio has favorable treatment under regulatory Capital requirements and current a triple L. Methodology. Similarly. Cecil will not require a reserve for credit loss in this birth folio going forward. The second factor is our rate and level of new Loan Production and growth in the commercial part of our lending business.
The calculations for provision amounts under Cecil are much more impacted by new Loan Production and growth than the pre-existing a triple L methodology. In addition while Arthur's lending has picked up pace our commercial real estate lending continues to be a significant source of growth. We expect to continue our history of double-digit loan growth in these businesses with a continued focus on strong asset quality overall our current efforts that implementing Cecil lead us to anticipate that our total allowance will be between $23 off 25 basis points of total loans outstanding provision expenses expected to be between four and half and five and half million for the year separately. We expect a 2020 tax up between 15 and 16%
Our national deposit franchise has been successful in keeping Pace with our exceptional loan growth deposits grew organically by nearly one point six billion dollars last year through engagement new and existing clients and diversified channels. Overall. We continue to maintain flexibility and pricing deposits as evidenced by our approving funding costs in the first quarter in the fourth quarter. Our total cost of funds for all deposits and interest bearing liabilities average 1.93% in the fourth quarter a 25 basis-point improve from the links third quarter.
Borrower swop fee income continue to be healthy in the final quarter 2019 totaling some three point four million dollars in bringing 2019 swap 5 to 11 million as we continue to grow the population of clients who want access to this product to partner with their Term Loan facilities, as you know, this type of activity is largely dead by the rate environment. However, it continues to strengthen as we integrate it more indelibly into our growing lending business in 2019 24% of swap these calls from private banking clients prepared to 12% of the year before after we invested very effectively in the offering capability and client experience in 2018.
We have built this company to last through a strategy of responsible growth emphasizing client-focused disciplined soundness and profitability under the guidance of experienced leadership team and board of directors. We are pleased to announce that a new independent director Audrey Dunning joined the tri state capital board last week Audrey is the founder and CEO of a m p growth growth advisers and she has spent much of her career focused on information technology and digital transformation Consulting. What are you currently sits in the office directors for the Pittsburgh branch of the Federal Reserve Bank of Cleveland and also has passed Bank board experience tristate Capital will surely benefit from her experience and counsel. We are highly motivated by the opportunities. We see ahead and encouraged by the performance. We're building in 2020. We focus on the following goals.
growing total revenue at a double-digit
Over 2019 growing pre tax income at a double-digit pace growing loans at a double-digit pace of 15 to 25% growing turbo posits that a double-digit pace of 15 to 25% growing Chartwell gross client inflows by 25% or more from 2019 es 1.8 $1,000 improving Chartwells adjusted ebitda. Margin by at least four hundred basis points from last year's 21% excluding acquisition-related expenses. I'm getting Chartwells strong investment performance relative the benchmarks and maintain strong asset quality metrics.
These 2020 goals are based wholly on our ganic road and do not take into account the contributions of any Investment Management acquisition. We may undertake based on our pipeline a position in each of the markets. We serve the talent and infrastructure we have in place today and our continued focus on responsible Investments and expense discipline Tri-State. She was very well positioned for strong and profitable growth in 2020 and Beyond operator that concludes my remarks. Would you please open the lines right now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw from the question, please press * then two, please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. The first question comes from Michael Goldberg.
burrito
Please go ahead.
Hey, good morning, guys. Happy New Year. Happy New Year.
So a couple of questions one just on the loan growth expectations for 20 28 deposits as well. As you know, fifteen or twenty five percent obviously a fairly wide range. I know his stomach. We you know, you've always said the way it kind of think about it as a 15% Taylor but it would seem like recent performance would at least make us think that we have to rethink that a little bit near-term and I was just wondering, you know, if you could discuss kind of where the pipelines are and and maybe what some of the things that you could occur in 2020 for you to be at either end of that range that you provided the other 25 or fifteen when thinking about loaner Department.
Like we we wanted to provide you with a reasonable guideline based in our assessment of the wage Marketplace. We obviously had an extraordinary quarter in the fourth quarter. I wish I could say we're we could guarantee you we could replicate that on a on a consistent basis as you're probably aware of the second and fourth quarter are normally our strongest quarters, if you look at our business in general and so what we wanted to do is to give a broad spectrum. I would tell you everyone sitting around the table here with me would be disappointed if we had 15% growth in these particular markets. I would say from a longer-term forecasts. I would fully expect wage.
next year that
Would be seeing over 60% of this loan portfolio being in the private banking category and I believe that you'll continue to see the commercial real estate group, but it'll stay in the range of 30% or maybe slightly less than that. And the rest will be the commercial and Industrial length. So we expect that. We're going to have a very strong year as we look at our middle-market Marketplace. We see the companies with fairly strong cash cash flow and we see their inventories relatively low and as we look at private banking, we've really broadened that distribution Network and we're into a lot more opportunities at this point, and we see that continuing to grow at Birth.
base of the 20
5 to 30% range
That's really helpful to thank you. And then just secondly if I just want to confirm and ask a follow-up on Cecil, so I heard you correctly Jim. So you will no longer be carrying a reserve against the page banking loans under once you adopt Cecil, is that correct?
Like there's no requirement to as you know, we've talked about the regulatory requirements under Basel three and Jim mentioned the methodology the current methodology under Cecil. There is a permission called the Practical expedient which also applies to these types of loans. And so we are not required to carry any Capital against those loans. However, we do put you know, sixty basis points against them just out of a a note of caution. So so so even once you adopt Cecil you guys and I know the loss brakes are low in the collateralized and I don't think you're the reserve is all that significant number today, but you'll still be putting something against these loans. Even if it's a modest amount even though you don't have to want to adopt exactly. Yes.
The next question is from Steve Moss of B Riley, please go ahead.
Just want to start on the acquisition front. You know, what do you think Jim the potential for clean acquisition is this year?
I communicate to last year that I've felt very strongly we could get get one done in in 2019. I feel just as strong we're disappointed that what we had worked on did not come to fruition and Tim riddle. Who's the CEO of our money management firm and I spent a consequential amount of time on it. We obviously also spent a meaningful amount of money on it. But at the end we recognize that it that particular situation would not work for us and what walked away I will tell you Steve that the market there's an awful lot of properties on the on the market at this particular time. We've been looking at multiple ones and we have a couple that we're looking at very closely.
Right right now.
So the opportunities are there. It's just a question of finding the right opportunity. So I'm optimistic off but also disappointed that we weren't able to complete the acquisition that we looked at.
But we walked away for the right reasons. Okay, that's helpful. And then my follow-up here just on on Capitol, you know, obviously still plenty Capital to support growth, but given the growth in the acquisition Dynamic just kind of wondering what your thoughts are and potential needs.
Steve good morning. We have the necessary little liquidity in capital to pull off an acquisition without needing to go to the capital markets. And so there's no need to do so and but, you know will continue to monitor closely as we move through the year and as we as acquisition targets present themselves.
Okay. Thank you very much.
As a reminder, if you would like to enter the question to please press * then 1 and you may re-enter the question queue. If you have additional questions, the next question is from that page of Stevens, please go ahead. Hey thanks gud morning guys. Wanted to focus on the outlook for operating expenses and and the growth behind that perhaps you gave us some guidance on that in the repaired remarks. I just missed it, but just give us some commentary about your expectations for expense growth in in 2020.
Sure, man, you didn't miss it. We didn't provide guidance. I don't believe we're going to continue to make the necessary Investments as we always have in people process and Technology to drive growth in the business. We're very focused on driving operating leverage growth year-over-year as we sit here today. I would tell you that the bank efficiency ratio will probably come in somewhere around fifty three to 55% for 2020. We're going to work hard to come in under that range, but that's our most likely scenario at this point.
Got it.
Okay, that's helpful. And then the follow-up. I'm curious your expectation on the loan yields in the near-term and I'm looking for just a general update on pricing you're seeing through your your various major products private banking Theory and and and I and obviously trying to appreciate if that kind of stays put here kind of what type of inflection am going to see on the loan yields side. Thanks. So long pricing, assuming no fed changes this year. So Stable Market, we're protecting their commercial and Industrial loans will price Libor plus 225 to 250 over Libor cre commercial real estate will price at Libor plus 235-2275 and private banking will be live War + 1250.
Okay, that's helpful. Thank you.
The next question is from Ryan Griffin of d a Davidson, please go ahead.
Hey, good morning guys. This is Russell Gunther. How are you morning Russell morning?
I wanted to Quick follow-up on the expense question. Just ask and David. I appreciate the comment for the bank efficiency Wonder though. If you could comment you've also thought about this from a basset perspective as well as a court expense growth percentage of perspective and was hopeful you could share your related thoughts on those metrics as well.
Yes, sir, Russell, we don't as you know, we've talked about it. We don't really focus on expense to average assets that's you know, somewhere between 160 and 2 depending upon the quarter and the year, We are focused on driving operating leverage, you know, we put it go out there last year to keep expense growth at 10% or less. We almost did it we would have that had we not had the with the acquisition related expenses one-time expenses. And so we're targeting something around 10 or or slightly below that again this year and that's all that that's I think we've got a reasonable chance of hitting that
I appreciate it David and then
After my second question guys, you know, thanks for the color on expectations for where loan yields are expected to reprice would be interested in your thoughts around the liability side of the bed sheet as well, you know continue tracking it in the treasury management deposit product and your ability to lower the overall cost of funds. Yeah. I I I think Russell give you the the right perspective on it. I think we ought to give you some colors. We see it on the quarter that we just came out of because we could not be more pleased of how this company responded and what I would consider somewhat of a a challenged environment with the loan portfolio that's well-positioned to avoid interest rate risk and what you saw and and I think this quarter that we're in right now will be dead.
much more robust quarter
From a learning standpoint where as as long as the interest rates remain relatively relatively stable and what I believe you saw in the second quarter off or the fourth quarter was the real power of our distribution system. The numbers were truly volume driven and you clearly see the full won't see the full impact until the first quarter is complete but think of what's reflected here you had end up 2% quarter-over-quarter, despite a 10 basis-point compression in the name. You had continued strong strong swap be income you had lower taxes that were driven by historical tax credits that were originated by our commercial real estate Bankers who put on loans these the the loans that they put on that put off.
storico tax credit
It's all had would it be very strong cash flow? We had a broad-based world-class loan growth. And and even if you look at em, well the assets under management growth outpaced the marketplaces. I noted in the presentation and we were able to sustain the prior quarter's revenue and off of the bottom line while we had negative cash flows from the front of the Berwyn income fund which is our highest price product and the growth especially offset much of the margin compression and I note that our cost of funds dropped by 37 basis points and we had robust deposit growth. This franchise is now well-established. It's functioning at all cylinders, and I think this quarter really reflects probably one of the more difficult quarters that wage
we've had in that regard in the
Comedy continue to grow pretty handily and showed what its power is and I I think you're going to see it even more reflected in the the quarter that we're in right now.
Very good Jim David. Thank you both.
The next question is a follow-up from Matt only only of Stevens, please go ahead. Yeah. I just wanted to Circle back on the whole O'Neill discussion David. And if I look at those ranges, you gave me back to your various major products and I apply that to the pricing of your more recent loan mix. I'm showing that loan yields should be very close to them flecked down here and that's assuming liebeler is unchanged which is obviously a important variable but am I thinking about that ride that that loan email should be very close to stabilizing and and even inflicting hear of the next court. Yeah. I think that's right Matt, you know, we don't we don't spend a lot of time talking about them you've heard us and and why we don't do that, but if you just focus on him for a second wage, Jim talked about being able to drive meaningful deposit cost reduction overall for the year. We drove 51 basis points of cost reduction there and net interest margin for 9 a.m.
He was $197 for the year.
On average. It was 183 on average for the fourth quarter given the backdrop of a flat, you know fed environment and assuming the relationship between librarian continues to hold it, you know ten to Fifteen basis points. We seen em, and about 180 this year. So you are right. We're reaching that point.
Okay, that's that's helpful. And then more of a modeling question for you David, I guess obviously the loan growth will drive the size of the balance sheet, but but for Securities and forth balances, how should we be thinking about forecasting this I think both those are around 6% of average Ernie assets. Is it a reasonable expectation that you should remain each around 6% of average or any assets as you grow the loan book and twenty-twenty. They they will I would say 6 to 8, we have brunch and holding cash because we haven't liked the rate environment. But as we grow this bank, we need to continue to grow on balance sheet liquidity. And so we've been very focused on the investment book early this year. We've made some purchases here in the first quarter and you will see us continue to to build that booked for the investment booked over the course of the year.
Okay, great.
Call for me. Thank you guys.
The next question is from building of Titan Capital Management, please go ahead. Thank you that's tied up in capital. But would you please discuss wage? Yeah, roughly nine million jump in in the adverse credits and and what led to that.
Yeah, I'd be more than glad to go over that with you Bill. What what the challenge the that we have is our adverse ready credits are very very low for a seven and a half billion dollar bank. So anytime you have any type of modification it'll be most noted but let me let me found out what drove that and we also should give you a sense of what's going on within the context of that portfolio. It was essentially a month or two loans both secured by real estate. One of one of them is a little over two $2000000 loan that's secured by real estate and the assignment of an endowment fund and the other the other one and these were both 6 raided credits and now there's seven rated their special mention. They are not dead.
substandard credits and the other one is uh
A real estate loan 7.3 million dollars and it's so bank. So Bank deal where the where the only party involved in it, and it's secured by real estate both. These are paying as as agreed. I can point out to you that we don't have a single commercial loan. No, it's not paying as agreed. But I also would like to point out to you that during this quarter which you didn't see substandard loans decreased to a point 1 million. So are substandard loans are now four point nine million. Our non-performing loans remained at just a bulb 8880 $3,000 Oreo remained exactly the same no change in our non-performing assets were not changed for the quarter either.
Thank you. And then we understand correctly that under under Cecil. The provision will will move up to something in the neighborhood of about 1.25 million per quarter versus your 750 this quarter. So essentially around in air.
No, the yeah, so what Jim mentioned 4 and 1/2 to 5 and 1/2 million dollars of provision this year under Cecil is what we're thinking at the moment. That's our that's our best offer best view of how the year will play out. It's obviously going to to change as loans build over the over the course of the quarter and you know as we as we continue to to move through the year, but that's that's our estimate at this point.
The next question is a follow-up from Russell Gunther of d a Davidson, please go ahead.
Yeah, thanks guys for the follow-up on the Cecil front as well. Do you guys have an estimated Day One impact that will see in the first quarter Russell. We're still fine-tuning off of the data and running some back tests. And so we're not going to put out a number just yet, but it's going to be very modest relative to Capital. It will not be we're not anticipating. It will be a material wage.
Okay, great that was it for me. Thanks, David.
This concludes our question-and-answer session. I would like to turn the conference back over to Jim gets for closing remarks. Thank you very much for your continued interest and tri state capital and your participation today. We look forward to updating you on our first quarter results in April . Have a good day. The conference is now concluded. Thank you for attending today's country station. You may now disconnect.