Q1 2020 Earnings Call

To the extent non-gaap Financial measures are discussed in this call comparable gaap measures and reconciliations can be found in state capitals earnings release, which is available on its website at home Bank. Representing tristate Capital today is Jim gets chairman president and chief executive officer. He will be joined by David demuth Chief Financial Officer for the question in a recession. Please note. This event is being recorded at this time. I would like to turn the conference over to mister guests.

Thank you. Good morning, or hope is that you your family's in your colleagues or safe and sound we appreciate your participation this morning and leave you'll find at our first quarter results demonstrate. Once again, try state capitals proven model and growth strategy. We are entering the current environment and our strongest position ever. This separate differentiate model has perfected over the last fourteen years during good times and bad the actual nature of our business with unwavering focus on sophisticated clients and highly targeted markets has been a consistent performance across different environments found it in 2007 at the beginning of the Great Recession growing the income statement and balance sheet year after year Tri State County. Judge has been profitable and every single quarter since the fourth quarter of 2009.

The balance sheet is pushing.

Billion dollars of assets having surpassed eight billion during the first quarter. We surpassed seven billion just six months ago all through our well-established lines of business and purely organic responsible growth. The balance sheet is strong healthy and liquid Superior Credit metrics are a product of intentional selection of clients Market segment thousand products giving their very attractive risk profile along with a credit team that is as experienced and disciplined as any you'll find in the business are Diversified funding Plattsburgh produced The Record level of over a billion 3 and on balance sheet liquidity, the relationship-driven funding mechanism enabled us to grow deposit balances by 69% off annualized during the first quarter. The balance sheet is also flexible illustrated by the pricing for nearly all of our floating-rate deposits and the interest rate floor is put on more than fifteen wage.

Says the loans both in response to the last month's Cuts in the Target fed funds rate.

Our Chartwell National Investment Management, unit our national private banking business and our regional middle-market business are designed to provide us with diverse revenue streams across operating environments again, they delivered in the first quarter, for example organic net interest income growth was 22% annualized on stable net interest margin and 12 or 3% annualized loan growth at the same time record swap. He's helped the balance Investment Management income that was dampened by March Market volatility authors positive net client asset influence.

Together these three businesses generated record quarterly Revenue organically growing the top line by 15% annualized pre-tax income grew 10% annualized all and a first quarter display that would be exceptional for some financial service companies for tri state capital. It's representative of what this company is built to deliver. This consistent performance comes even as we move most of our employees to remote working environments through their exceptional efforts combined with the system's digital client experience and scalable infrastructure. We've invested in four years. We've been able to help our clients through the historic challenges in the first quarter.

Even as tristate Capital sales and client-facing professionals were limited in meeting face-to-face with clients in recent weeks. I believe this company has never been closer to its clients than the last 45 days. This is not by accident in March. We implemented a proactive plan to communicate with our entire client base ensure that we understood their concerns and needs and address them accordingly as the quality has long been a differentiator for tri state capital and that is never been more important than it is right. Now as many of you know, our company does not serve retail banking customers or Market consumer or traditional Residential Mortgage Loans non-performing loans, and I prostrated credits on March 31st, Thursday actually unchanged from the end of last year. Plz total just $184,000 on a $7 loan portfolio adverse credit app.

adverse rate

Credits the less than $35 in quarters and made up just fifty basis points of total loans. No additional credits were moved to the adverse rated category.

Private banking Lance represented 56% of total loans a quarter in that are primarily collateralized by marketable Securities. These are monitored on a daily basis through our proprietary technology are liquid over collateralized and subject to favorable treatment under regulatory Capital requirements. The private banking portfolio is approaching four billion dollars and grew 24% on annualized basis during the during the first quarter.

Commercial real estate loans total of 1.9 billion dollars increasing 12% annualized during the quarter commercial and Industrial levels had a record 1.2 billion an increase of 39% annualized fourth-quarter roughly $34 million dollars were less than a third of our scene. I grew up in the quarter was attributed to net increased utilization of Revolt partial credit lines as we've grown our portfolio. We should know that we're doing so with very strong and high quality borrowers through our private banking business office tri state capitals. The nation's Premier provider of non purpose margin loans marketed through financial intermediaries. We had extensive engagement with thousands of investment advisors and it's just officers about loan requirements as they managed portfolios and periods of historical volatility as a result limited cure activity was required and this was dead.

Filled in an orderly fashion here today through April fifteen. We require maintenance cures on 616 loans or approximately 7% of our Prime bank accounts compare this to the fourth quarter of 2018 when we require cures on 3% of accounts when volatility was high, but nothing like March of 2020. We still are happy to report that we have not had to force the liquidation of any accounts for clients to meet the other obligations.

For Tri-State Scott capitals private banking Lance. It's important to keep a few data points in mind about the portfolio. The average loan size was less than $500,000 off the median loan-to-value ratio across the portfolio was approximately 40% given the collateral cushion. We maintained beyond the maintenance cure level and the private banking Palm foleo has maintained a zero-loss history since Inception to give you a sense of the demand for this offering from high net-worth clients and Faith estimate advisors and Trust officers. We Market them through look at our applications in the first quarter of 2020 our team process new record 13,000 private banking loan applications where to increase of 65% for the first quarter 2019 when we generated 788 applications.

in March

We process 542 private banking loan applications and in the first 15 days of April, we had three hundred applications benefiting for the past Investments. We met in developing our Digital Love platform that it's allowed financial intermediaries and their clients to easily engage with tri state capital in the current environment.

When the commercial side we have an incredibly strong team serving middle-market clients across our Ford State footprint who know this company our clients and our Market birth beginning in February. We saw the early aspects of the quarantine starting to develop. We began client Outreach efforts to understand the impact of covid-19 situation. We also organized the credit strategy committee comprised of leaders from credit legal Finance operations and compliance so that we could develop responsive wage plants.

We had been talking with every one of our commercial borrowers about their experiences their expectations for the future and any need for additional solutions to help the through the situation. Our lender team is made up of Highly qualified professionals who averaged twenty years of experience about half of them with tri state capital for over five years. They maintain close relationships with each of our clients and are able to make each of these conversations deep and meaningful from these Focus conversations with our commercial clients. We develop customer Solutions where something was needed to help them and connection with this effort through April fifteen. We have developed deferral arrangements with fewer than one hundred loans, totaling $1,378 million dollars and representing less than 6% of our seven billion dollar of total loans.

Review these arrangements as Investments investments in relationships with high-quality organizations. Some of which had backed with us. For more than ten years these Investments our desire to help the weather the storm get back to work when the Seas calm and enable them to succeed in back with us for another decade.

Commercial clients and projects are well-diversified by industry and property type too strong sponsors and relationships. This diversity is also enhanced by the granularity in the portfolio, which is assisted by our preferred hold level of ten million dollars for commercial loan.

The majority of our commercial real estate lending is income producing real estate, including 21% and multi-family or apartment projects. Another 18% is Construction office and at about 11% is in owner-occupied projects.

Within our 1.2 billion dollar portfolio. Our largest lending category is financial services and insurance comprising 30% of scene Islands. Another fifty 3% is in service including Healthcare Waste Management remediation Administration and other service Industries 16% for real estate-related services, such as portfolio and property managers 10% is manufacturing and four percentage transportation, and the remainder is spread across a variety of Industries.

importantly

We have limited to our exposure to some of the front line types of business that may be most immediately impacted by covid-19 social distancing and quarantines. For example, a commercial loan portfolio includes only forty-four million dollars to hotels $18 to related to restaurant operations, 4333 million dollars to senior housing and other healthcare-related real estate and twenty five million to non-renewable energy distribution and production and about three hundred million to project retail component Each of which we have underwritten with strong sponsors support and recourse further. We have maintained our disciplined approach of focusing on commercial lending opportunities with our for State Atlantic region where our team has deep experience in relationships at the same time. We work to keep our commercial loans broadly distributed across these markets dead.

And our Commercial Credit verticals and strategies continue to be aligned with our deposit and treasury medication management verticals and strategies.

Tristate Capital continues to be well-capitalized under regulatory requirements. We review our Capital ratios in the context of our business model and crafts t meaning that we believe that the very strong credit quality of our portfolio and the amount of non-interest income, especially from Chartwell business requires less Capital cushion off as a more efficient use of capital than other five to ten billion dollar acid Banks.

Well, we are comfortable with our cattle level levels at the holding company. We're exploring fixed income opportunities to bolster capital of the bank level to support our ongoing and exceptional loan growth excess liquidity. We're considering a Perpetual preferred offering or subordinated debt, both of which we've executed previously as well as senior notes and intend execute on one of these options this year.

As we noted in. Yes, yesterday's news release tristate Capital elected to defer the implementation of Cecil and accordance with relief provided under the cares act. We conducted a thorough analysis and determined that at this time delaying was right choice for this company continued application of the incurred lost method resulted in reserve levels of 16 of 17.3 million or fifty basis points of our total commercial ends. These levels are nearly identical to what we would have reported had we implemented Cecil in the quarter Georgia state capitals unique loan portfolio, which is 56% collateralized by private banking loans primarily back by marketable Securities will not require a reserve for credit loss under

As I mentioned earlier in my comments until you all of our floating-rate deposits where we priced in March aligned with a line with prevailing Federal Reserve rates and floors are in place. And with the 50% of our total loans active management of interest rate risk is enabled by the deliberate construction of our flexible balance sheet. Most of our deposits are variable rate liquid indices or price at rates set by the bank at our discretion for loans. 93% are floating-rate. I'm primarily indexed the 30-day Libor.

Turning to our investment management business Chartwell generated fees of 7.6 million comprising 57% of non-interest income during the first quarter of 2020 while New Age business a new flows from existing accounts were upset by outflows and Market depreciation. We reported net in flus inflows of $57 during the first call.

Today Chartwell has in excess of $200 and institutional commitments and it's new business pipeline. Most of which we expect to fund before the end of the second quarter long as we shared with you in January last year took active measures to lower expenses by end of last year had reduced its annual expense run rate by more than two million dollars accordingly and also lowered its expenses in the first quarter of 2020 versus both the LinkedIn a year ago. And even improved in the first quarter versus the fourth quarter of 2019. We have confidence in our investment managers unique product offerings and highly credible performance. It's outstanding distribution capability the talented people eating its funds and their ability to attract business. Our goal is to profitably grow this business across operating environments accelerate in this progress when the broader economy and phone number

markets improve

tri state capitals resilient business model was designed to thrive in all operating environments and our first quarter performance underscores the strength of our proven approach. It's just that our company's leadership stands behind fully we believe that shares are dramatically undervalued even in the current market accordingly Executives and directors acquire more than a hundred sixty-seven thousand shares of tristate Capital stock in the first three months of 2020 with 21% of those shares purchased in March month. We have a solid balance sheet ever-growing income statement and robust new business pipelines for our loan deposit and Investment Management offerings, the Strategic ten steps with faith in recent years and months to make this company more Nimble, efficient Innovative and position as well to help lead our clients through the challenges of 2020 from the

position of strength in order to

Continue delivering value to our shareholders over the long term before we open up the call to Q&A. I want to emphasize that we would not be where we are today with talented people. We have across this organization individuals who join Tri tri state capital and Chartwell are successful before they ever walk through our doors. We provide them the entrepreneurial environment the team culture and the resources, they need to flourish and the last 45 days their abilities and commitment. Our clients have never been more apparent to me wrong. I simply could not be prouder of the entire team that I am today that concludes my prepared remarks this morning to join me for Q&A operator. Please open the life. We will 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. Yep.

Draw from the question. Can you please press * then two again as a reminder? Please limit yourself to one question and one follow-up. If you have additional questions, you may re-enter the question queue. The first question is from Michael schiavone ktw, please go ahead.

Good morning, guys. Thanks for taking my question.

So while we understand the lower risk nature of the balance sheet, is there any minimum tangible common equity ratio that the board is comfortable running at?

I would say Mike nothing like that has been clearly established. We in fact review that all the time with the board. I feel comfortable where we are. If that's the question. You're you're asking at this point. We're really focused on Bank Capital levels. If you look across our three businesses, you've got the asset manager which only really requires capital for acquisition purposes to grow grow through acquisition. You've got the private bank, which really only requires capital for leverage purposes. The the banking portfolio does not require an allowance. And so it doesn't require risk-based capital and then you've got the traditional Commercial Bank, which is about three billion dollars of loans that requires traditional risk-based capital. And so we really focused on tier 1 leverage at the bank and we're comfortable with those levels that you know a quarter in as as Jim mentioned dead.

You know, we will we will access the capital markets at some point this year, but we really have a unique holding company much different than the traditional, you know. Five to ten billion dollar institution in that we forgot to businesses from Asset Management in banking and half the bank more than half. The banking business doesn't require risk-based capital and keep in mind the the asset manager throws off approximately Thirty million dollars of Revenue a year.

Okay, that that's helpful. Thank you. And then on the reserve build in the corridor on the commercial book, it was a bit lower than your peers that have reported so far off. Can you provide some detail around the economic assumptions used in your credit models at this time?

Yeah, so let me maybe you start by saying I think you'll agree that our asset quality speaks for itself after quoting underwriting in the past ten years. We've only charged off $37 billion dollars worth of loans in the past five years. We've charged off five million dollars worth of loans. So our asset quality historically has been much better than peers as I mentioned a minute ago off of our bank 56% is marketable Securities based loans over collateralized by those those types of Securities, the remaining portfolio 44% of commercial Industrial and Commercial Real Estate has an allowance that's effectively 57 basis points against those loans, which is comparable to other institutions that are highly highly thought of such as First Republic importantly. We don't have any retail loans. We don't have any credit cards with no mortgages or other retail exposure. That's really driven wage.

Uh Cecil provisions and it's Jim outline. We don't have significant exposure to Industries are currently under stress Hospitality restaurants hotels and energy He also mentioned not actively we've been in touch with every single one of our commercial, uh credit clients in the past 30 days to understand how they're doing and whether they need to seek help through deferral loan payments and I will remind me that we only have $184,000 of non-performing loans. So we've looked at this carefully we've gotten to conclusion both through the Moody Cecil model Thursday. We use and are encouraged Los model that arrives at the same place. We feel good about where we sit. We've been focused on unemployment and GDP to answer your question specifically in terms of the economic drivers that were looking at for both concurred and Cecil and I would expect that you'll see us continue to build reserves in the second quarter, but we feel good about where we are today.

The next question is from season of fear. I lie SE our good morning to start I guess with just you know, where abouts are your funding costs as of March 31st in kind of also in in a related area. You know, what are you thinking about loan spreads these days or where our loan spreads and stuff?

morning, Steve, so as Jim mentioned

Put floors in on a lot of our loans private banking specifically and new commercial loans. And so what we're looking at going to give you some all in numbers all in for commercial loans yields of about thirty-five all in yields for private banking loans of about 275. We will as Jim mentioned carry excess liquidity through the end of the year long pause it cost. We've been able to moderate quite quite well in the quarter some immediate pricing adjustments. And so you'll see deposit cost anywhere from you know off just slightly under Libor to effectively fifteen basis points now so, you know, we we feel good about being able to bend the cost or with respect to the fossils.

Okay, and just with the floors.

Meant to ask how long what's the duration of those floors?

There's there's there's no Direction. They're just there until we we have a significant, you know, a fundamental change in the rate environment. Yeah, they East loans are all demand demand wage and they're set up to meet the client's needs overwhelmingly the you know, we're talking about the the private banking portfolio here, but we're doing the same thing on the commercial inputting floor floors on any of the new loans that we're putting in place and it's about 52% of the loan portfolio as as far as when

Okay, and then with regard to Cecil here, just wondering you know, how do we think about the delay, you know, do you think about going effective April 1st, or you know further further out? Thanks. So the guidance provided for this month, but we really need to the SEC to provide guidance because they've they've you know, that's that's the that's the standard Center and their requirement was that if we delay. If we delay the implementation of Cecil, we would Implement on the earlier date of when the government lists the emergency declaration. So in that quarter or at 12:31 2020 the earlier of those two dates and so it will be implemented either at some point this year or at the very latest at the end of the year.

The next question is from Daniel tomorrow a Raymond James, please go ahead.

Morning, good morning, guys. Can you provide a little more detail on the $378 million of deferred loans just in terms of what what segments does come from?

Yeah, it's pretty it's fairly Diversified in and there's ninety. Ninety two of them. The these are businesses. Keep it keep in mind that essentially the government shut these businesses down and so it's a combination of principal and interest. I forget not forgiveness deferral and it goes there either signed up for three months or six months.

And as we we mentioned we aggressively went out and talked to the clients and communicated to them and were doing that even before this program was introduced.

Okay, thank you. And it's so I'm assuming you did not participate in the in the PPP program and if that's correct, or are you aware if any of your clients did participate in that program with other Banks? Let me explain to you how we participated in.

in the program

This is a company that is really focused on its Target markets our Target markets our middle-market companies, Pennsylvania, Ohio, New Jersey New York with revenues between 10 and 300 million a year. These are not small businesses at all. So we never bothered to pursue being qualified for SGA Lindy. But what we we did do is in fact identify parties that we felt were highly professional would respond Thursday our clients and to be candid with you. We have 52-42 clients that we have positioned with other parties for that for that program that they could participate participate in and we believe that with the funding that's going to be available there probably won't be much more than another dozen dead.

Have have an interest in it at this time. We were able to get everyone for the most part that requested. We got them positioned and funded.

The next question is from Russell Gunther of d a Davidson, please go ahead.

Morning, Rose. Hey, good morning. Hey, good morning, Jim. Good morning, David just follow up on the $378 million of deferrals curious as to how you would expect that number and and volume to Trend in the second quarter and whether you guys are holding any specific reserves for the deferrals.

We're not holding any specific reserves for the deferral and we believe that it won't have any impact on our second quarter.

Like I said, these are folks that we engaged with and understand what their particular needs are and their needs at the time. We're of a cash flow May nature. They may I do essentially close their company down for a period of time until the governor or the president allows them to reopen.

Got it. So I guess Jim just make sure I understand you're saying you would not expect to see you know, the 378 million balance or roughly a hundred loans off to increase in in the second quarter. Um, is that correct?

yeah, I I I I

would say that.

if anything

since we engage them early on in the in the program got it. Okay, great know. Just want to make sure I understood there.

We haven't we have in place right now with the 378.

Okay, thank you for that clarification. And then my second question would also be a follow-up on the commercial Reserve David. You mentioned the 57 basis points and that off reserves would likely continue to build from where they are today. Just curious where you would expect that commercial Reserve to end the year and what that contemplates for, you know, potential loss rates within uh, those those two buckets Russell. I wish I knew we're in very unprecedented times. We're heading into what's uh-uh. We're in what's going to be, you know, a really tough quarter for the US economy. And so we'll just continue to play a quarter-by-quarter will be transparent with you guys as possible just back to your deferral question for a second, you know, we reached out to these customers proactively and early because we didn't want them to

Exhaust all cash reserves before they came to speak with them.

And so we wanted to understand where they stood and and whether they needed to seek deferrals. We've completed all those conversations we feel good about where we stand. But you know, we're going to continue to check in with these people and that might drive more deferrals, you know, maybe another hundred million or so and it may drive some reserves at some point off. So what we'll do is we'll we're going to keep you know talking to these clients understanding where they stand and we'll keep you guys informed as that process continues to evolve.

Again, if you have a question or would like to re-enter the question queue, please press * then 1 the next question is from only a Steven, please go ahead. Hey, thanks for wanting guys off and hey, I hopped on the call a few minutes late. So you may have covered this and send me your prepared remarks, but I want to ask about the the common Equity levels. I guess the schedule book value per share was around Fourteen and half dollars and I was below the forecast and we've seen this with peers this quarter the element Cecil but with a limitation delayed a Tri-State. I was surprised to see the lower tangible book value per share any color any kind of unrealized loss for anything that would help explain where tangent books I used car came in this quarter.

And I would I'd be happy to call you separately. We talked about this a few minutes ago. We talked about how we really focus on Capital levels at the bank because at the holding company, we've got off no to differentiated businesses the bank and the asset manager and the asset manager really only requires capital for acquisition, you know grow through acquisition and you've got the private bank that doesn't require risk-based Capital. So Capital levels really are focused on our Capital levels are really focused on the Commercial Bank, and we really focus on to unlimited's but I'd be happy to give you a call afterwards. We took further about that.

Okay. Yeah, let's follow up on that and then I think you also mentioned an expense initiative at Chartwell that's been ongoing. Can you just remind me about this expansion issue of where we on? This is there more to come and and what's the ultimate goal of profitability in that segment? Thanks. God to give you a little history on.

Sure chart. Well, if you look at we acquired them in March of 14, if you if you look at our fourteen fifteen and sixteen numbers, but they contributed on average about 24% to our earnings at that time. And I would say for the past couple of years the past three years. I was fourteen fifteen and sixteen or Seventeen eighteen and nineteen. It was more at a high single-digit number that point so we had put in place the infrastructure for a much larger acid-base. And so we made some reductions in general expenses and took a few Personnel changes changes there and you're seeing it reflected in the first quarter numbers at this point those changes.

Were made in the third.

fourth quarter of last year

next we have a follow-up from Daniel tomorrow of Raymond James, please go ahead.

Oh, thanks again guys. So just kind of Shifting over to the balance sheet growth. You've had tremendous growth in in that private banking group. How are you thinking about growth from here? I'm I'm kind of through the end of the year or more in the medium-term. Yeah. I I I think we would go by the direction on the goals that we had said before that were looking for our loan portfolio in general to go to to grow by 15 to 25% and we're certainly in line with that in the in the office the first quarter and we expressed you the demand that we saw in the private banking side. So far in the in the month of April has been pretty meaningful with regard to applications. Can you could see that portfolio droad, you know by by a billion to a billion to this this year, you know, again a quarter-to-quarter things could change but that's

That's what it looks like right now.

And do you do you have a an ultimate percentage of the of the overall portfolio? You'd be comfortable letting that that segment run to know? I don't and we what it does is.

It says from a a capital standpoint and secondly and most importantly a risk profile. There's probably not another bank in the country that's pushing a 60% of the loan portfolio. You can count the collateral on a daily basis.

Understood. Thanks. That's all I had. Thanks, Dan.

Next to the follow-up from Steve Moss to see Riley FBR, please go ahead.

Just wanted to try out expenses or a total expenses here. I'm not sure if I missed it. I just wondering what your expense expectations here are for the second quarter after Well Control this quarter.

Steve I would expect the second quarter to probably be very similar to the first, you know, don't imagine that we're going to get back to normal with a lot of travel and entertainment in the second quarter that obviously those costs are much more modest in the Firth. You know, I would remind you that we've got a variable cost structure and so our expenses are likely to stay, you know in line with first-quarter expenses as best we can tell right now.

Okay. Thank you very much. I appreciate that.

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. We certainly appreciate your continued commitment to try State Capitol and look forward to talking with you on the next call.

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