Q2 2021 TriState Capital Holdings Inc Earnings Call
[music].
Good morning, everyone and welcome to the Tristate Capital Holdings Conference call to discuss financial results for the 3 months ended June 30th 2021.
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Before turning the call over to management I would like to remind everyone that today's call may contain forward looking statements related to tristate capital of that reflect tristate capital's current views with respect to among other things future events and the company's financial performance as well as the Companys future plans objectives.
Or goals.
Such forward looking statements are subject to risks and the.
Thompson and uncertainties that could cause actual results of our outcomes to differ materially from those currently anticipated.
These forward looking statements are made pursuant for the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
You should keep in mind that any forward looking statements made by Tristate capital speak only as of the day on which they are made.
New risks and uncertainties come up from time to time and management cannot predict these events or how they may affect the company.
Tristate capital has no duty to and does not intend to update or revise forward looking statements. After the date on which they are made.
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 with the Securities and Exchange Commission.
Okay.
Please also note that annualized information referenced in this presentation is not predictive of future performance, which may differ materially from the annualized information.
To the extent of non-GAAP financial measures are discussed in this call. They will be presented with the most comparable GAAP measures and reconciliations of the non-GAAP measures can be found on tristate Capital's earnings release, which is available on its website at Tristate capital Bank Dot com.
Representing Tristate capital Holdings today is Jim Getz Chairman here.
He will be joined by David the mess.
Chief Financial Officer, and Brian Fedorov, President and CEO of Tristate capital Bank, and Tim Riddle, managing partner and CEO of Chartwell investment partners for.
For the question and answer session.
At this time I would like to turn the conference call over to Mr. Getz.
Good morning, and thank you for joining us.
Tristate capital delivered the very strong financial result in the second quarter as each of our businesses made meaningful contributions to our top and bottom lines. We believe tristate capital bank's 35% organic loan growth annualized from the linked quarter will be truly exceptional relative to peers.
And the industry.
And our Chartwell investment partners business also delivered differentiating organic growth with double digit annual growth in assets under management in the quarter to a record of $11.5 billion collectively our loans deposits and assets under management reached an all time highs.
This growth helped us to generate record levels of quarterly revenue pre tax pre provision net revenue pre tax income and net income available to common stockholders and Additionally, net income available to common stockholders grew by some 78% annualized from the linked quarter and 86.
Percent from the second quarter of 2020.
We also delivered earnings per share of <unk> 41.
Growing EPS, even with a higher share count and preferred dividends from our December 2020 capital rates, continuing our record of efficiently and effectively putting new capital to work through the responsible and meaningful growth of this company.
In addition, all of these core earnings growth was achieved solely through organic means and with continued modest provision expense.
What makes these results possible on what differentiates this company from competitors large and small is our people.
We now have more than $23 billion in on balance sheet assets and client assets under management as our team's impeccable reputation for client service expertise and results continue to attract new business and grow existing relationships.
Revenue per employee metric you've heard us highly.
Highlight regularly was $678000 in the second quarter on an annualized basis.
This is more than twice the level that the median $10.1 billion $20 billion asset bank generated.
Based on most recent quarter data.
Our agile business model combined with our culture of valuing each individual's contributions and focus on building. The best team has driven our collective performance at this level.
We're expanding our scalability and responsiveness through further investments in technology designed to support our people and enhance their ability to provide best in class service to our clients.
We are investing in our client engagement experience and offerings to position us for enhanced market share and profitability, all while maintaining our operating leverage.
We believe these investments will in turn support continued earnings growth and long term value creation for our shareholders.
Following its breakout performance in the first quarter.
<unk> has done everything but slow down.
Assets under management of the $11.5 billion of annual run rate revenue of $39.9 million at June 32021, each reflect growth of more than 20% from 1 year prior.
In the second quarter, our asset manager of strong performance attract the continued positive net flows products like core core plus and short duration double B rated high yield are attracting flows from new and existing institutional and retail clients seeking enhanced yield with the focus on credit quality and interest.
Rate sensitivity.
The combination of asset and revenue growth that we've achieved the chartwell is further supported by incremental improvement in operating leverage as we continue to benefit from past initiatives. The moderate chartwell segment expenses, while continuing to invest in new products marketing and distribution.
Year to date investment management fees have grown at 20% year over year, while expenses have grown on almost half of this rate generating significant operating leverage we are particularly proud of the chartwell team's ability to grow revenues of this clip and the current rate environment with fixed income representing some 60%.
Of total assets under management.
We are thoroughly focused on continued organic growth charge.
<unk> new business pipeline began in the third quarter with more than $65 million in unfunded institutional commitments.
We're also investing in product development, including our new Chartwell short duration high grade Bond fund this new product leverages the talents of our fixed income team and services of complement to our very successful of short duration high yield strategy.
Which has grown to represent more than 25% of AUM.
Chartwell sees significant retail and institutional demand for this new short duration product we of total confidence on our fixed income teams the abilities and the sales and distribution team is motivated to bring it to market.
Meanwhile, Tristate capital Bank grew total loans by more than 29% over last year and nearly 9% during the quarter to $9.3 billion on June 32021.
That's annualized growth of 35% lending to very high quality clients, and the differentiated and attractive markets, which serve for years.
Exceptional growth continues to be driven by private banking loans, which grew to some $5.7 billion of nearly 62% of total loans at the end of the quarter.
That's because these loans, which are collateralized by marketable securities cash.
Cash value of life insurance policies from select issuers and other liquid assets are an excellent and timely solution for many high net worth borrowers across all economic and market cycles, especially the current environment.
With the referral network of 292 financial intermediaries, including independent financial Advisors Trust companies family offices broker dealers regional securities firms and insurance companies.
We expect to continue dominating market share and driving for middleware growth in this business moving forward.
Additionally, private banking loan application volume is up 43% from the second quarter 2020, and reached a new record level. We expect continued growth. Although we continue to focus our origination efforts on where we can deliver the most meaningful benefits and experienced of borrowers and their advisers.
Okay.
Yes.
Commercial loans totaled $3.6 billion at June 32021 of 15% from 1 year prior and 2% from March 31.
Commercial real estate loans grew nearly 16% annualized while totaling just 25% of total loans as we continue to partner with what we believe.
Are some of the highest quality and most experienced sponsors in our markets.
And industrial lending was down from the linked quarter as new originations and draws on lines of credit and growth in equipment finance production were offset by amortization on paydowns.
This activity in the C&I book is reflective of seasonal trends and temporary supply chain dynamics, but we are optimistic about the second half of the year.
Both of our CRE and C&I portfolios remain well diversified have grown solely by organic means and have strong pipelines.
Okay.
Our private banking business, which made up 61.5 percentage of total loans at the end of the second quarter as well as the high quality nature of our commercial banking relationships continue to favorably impact our asset quality metrics and credit cost.
Credit quality has long been a differentiator for tristate capital and we further improved our metrics in the second quarter, we reduced adverse rated credits by some 33% compared to the linked first quarter on our $9.3 billion book of loans, we reported just $34 million of adverse.
Rated credits or 37 basis points of total loans nonperforming assets totaled 12 basis points of total assets and net charge offs were just 10 basis points of the average total loans importantly, the second quarter charge off activity was previously reserved for in prior periods.
Yes.
Our significant loan growth of allows for improved profitability and deployment of liquidity, which continues to be readily available and inexpensive. Our team has done a tremendous job with liquidity management, ensuring that we're managing against excess liquidity by timing of our pipeline and putting our liquidity to work in high <unk>.
Quality assets the.
Deposit growth during the second quarter fully funded our loan on an investment growth with record deposits of more than $10.2 billion at quarter end, reflecting 30% growth over the last 12 months and 10% during the quarter.
Treasury management deposits doubled from June 32020, and now make up 22% of total deposits were excited about our continued addition of meaningful and long term client relationships.
These deposits to support our efforts to effectively manage deposit costs, which we reduced by 6 basis points during the quarter.
This in turn contributed to our third consecutive quarter of net interest margin expansion up another 4 basis points from the first 3 months of the year.
Second quarter 2021, NII grew to a record $42.9 million up 28% over the second quarter of last year, marking tristate capital's 22nd consecutive quarter of the annual net interest income growth.
This is the result of the high quality and robust volume, we're achieving particularly in private banking. We currently view responsible volume growth is the primary driver of net interest income expansion in 2021, as we position for favorable profitability when rates do rise.
NII was complemented by record noninterest income driven by our strong investment management fees and solid.
Solid swap fees during the quarter exclude.
Excluding securities gains and losses NII of noninterest income combined to generate record quarterly total revenue of $57.7 million. This reflects an increase of 10% from the linked quarter were 41% annualized which we believe will further differentiate tri state.
Capital's latest results from similar sized peers and industry overall.
Looking ahead, we remain focused on measuring our performance through operating leverage and growing revenue at a faster clip than operating expenses. Our expenses were in line with our expectations and reflective of the investments we're making in people technology.
Clients and the products.
Against the backdrop of the challenging economic environment, we showed what our company is capable of.
Loans deposits and total assets each cross significant thresholds during the quarter.
Surpassing 9 billion 10 billion $11 billion respectively.
We are enhancing net income consequentially in a low interest rate environment, driven by our penetration of the net niche markets are well positioned distribution capabilities and high quality client service delivered by motivated professionals, we're focused on effective execution.
This company has reached critical mass providing it with the flexibility to continue investing meaningfully for the future and providing impactful earnings for the bottom line on a consistent basis.
We entered the second half of the year with strong confidence and healthy pipelines across all 3 of our business lines.
For year 2021, we remain keenly focused on growing each of total revenue loans and deposits at 15% to 20% rate over 2020.
Managing annual expense growth to a low double digit rate.
And to generate positive net asset inflows and expand segment profit margins of chartwell and continuing to grow net interest income dollars all.
All while maintaining our hallmark superior asset quality.
That concludes my prepared remarks, I'd now ask the operator to open the lines for Q&A.
Ladies and gentlemen at this point, we will begin the question and answer session. Once again in order to ask a question. Please press star and then 1 easing of Touchtone telephone.
For all your questions you May press star 2.
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Once again that is star and then 1 to join the queue.
And on.
Our first question today comes from Michael Perito from <unk>. Please go ahead with your question.
Okay.
Hey, everybody good morning.
Good morning, Mike.
I wanted to start with kind of a high level question.
Jim on the you had the deposit growth and really improvement over the last few years has been really notable on.
And I guess, Mike My question is as we book ahead, I mean, obviously the the rate environment is hard to predict but I mean, I think consensus outlook seemed to be factoring some rate hikes at some point in the next 24 months and I'm curious if you guys just have any high level thoughts on on how the deposit portfolio Mike.
Perform in that type of environment relative to your performance in the past I mean, it seems like the relationships.
<unk> are a little bit stronger over the over the last few years for some of the debt.
On the hiring efforts that you've made and then obviously the the banking environment is of holes is a bit more digital now than it was for 5 years ago. So just curious if you guys of any high level thoughts on on on how our expectations about how that might perform.
If we do get some type of rate increasing environment.
Okay.
Michael Let me make a couple of general comments, and then I'm going to turn it over to Brian Federer of Who's the CEO of <unk>.
Of our bank.
What youre seeing is the result of some 15 years of really focusing on each aspect of this business and it's been coming to fruition.
Slowly over the period period of the years and what do you want to keep in mind as I mentioned almost in every single 1 of these reports that we've put highly experienced sophisticated individuals in place and they have for us on the liquidity side built a very sophisticated.
Added funding mechanism and its working.
<unk>.
We can control of the flows that come in place through the relationships, we have and have in place and if you were to look at the turnover that we have our relationship managers.
The non existent in that that regard and these are people that had a great deal of experience in their prior life and we're leveraging off that and seeing the results today and these numbers. So I would suggest to you the better times are yet to come Brian.
Yeah. Thanks, Thanks, Jim touched on followed that last statement there but.
Yes, I would agree with Jim's characterization.
We're looking.
Looking forward very optimistically, we're in.
As Jim mentioned with built in over 15 years, you can look at the last 2 years.
And in particular to see the diversification of that growth.
Treasury management, obviously as we pointed out has doubled in the last year.
And that's just 1 segment, but obviously service based deposits being a key piece of our forward strategy.
Relationship deposits being the broadest piece and as Jim indicated.
The people that we've brought in half of those key relationships and get and keep in mind that this the national <unk>.
Deposit gathering capability. So we think that that provides us.
Huge scale, but we're super focused right now on being debt or meaningfully for existing clients to grow with them and we are seeing our existing clients grow and attracting new clients as well.
And with the.
On the technology investments, we're making again, we look at this as very.
Barry Timeless.
Technology investments the obsolescence is low which allows us to continue to build better and better service capabilities of products for clients. So we're attracting new clients at the fastest rate we've ever had but to your point. We are building for 2 years from now and our deposit pipeline and portfolio.
Got it.
And then just as my.
My follow on question, maybe a question for Jim for Tim just on Chartwell revenues are up nicely quarter over quarter year on year.
It is.
If the market cooperates is it fair enough. Thank you.
This business is kind of on.
Our high single digit.
Got it.
Revenue growth type of business at this point with all of the investments you made and can you just remind us also what.
The M&A landscape and appetite is in the AUR.
The business at this point as well.
Michael Let me.
Comment.
With.
With regard to your question generally and then I'll turn it over to.
Tim.
I'd take you back to March of 2020, and the condition of the market drove chartwells assets down to $7.7 billion, we determined at that time, Tim and myself and a lot of lot of others.
We were going to solely focus on bringing chartwell back from that level and now as you can see today. It has $11.5 billion we've been.
Usually successful and I would see us.
At some point.
As we go into the new year of being much more aggressive in that market. There is.
A lot of opportunities that are available there, but we wanted to get our own captive infrastructure back in shape.
<unk> strongly and I think you can see by the flows.
The net the net income it's delivering the revenue growth debt.
It's having having an impact Tim.
Yes, Michael.
First of all good morning.
We would we're certainly captive to the.
The market environment.
Well no, but we would certainly expect with exceptional results that we've been able to achieve particularly on the fixed income side and with the unique type of products that we have available to both the institutional on the retail market.
Again <unk>.
Revenue growth.
<unk>.
As you had indicated is certainly something that we believe is achievable.
Not only in the second half of the year, but going forward as well and as Jim indicated.
We're solely focused on organic growth of the franchise and we will continue to look but obviously in this environment there could be.
On the opportunity that presents itself in.
We would be open to that but we're certainly not leading with our chin.
Our job is to grow chartwell organically.
Okay.
Got it.
Thanks, Tim and thank you guys for taking my questions.
Right.
Our next question comes from Daniel Tamayo from Raymond James. Please go ahead with your question.
Good morning, guys.
Danny.
Just wanted to follow up on your balance sheet growth commentary I think you reiterated what you've said in the past about 15% to 20% growth for loans and deposits. This year, if I heard that correctly.
It looks like loan growth already about 13% in deposit growth already 20% for the year.
Is that just conservative commentary or you think that youre expecting a slowdown in the second half there.
Yeah.
Yes, this is Brian Hey, Dani.
We I would say I mean.
Obviously year over year, our third and fourth quarters last year were pretty impressed.
Impressive.
Quarters as well so we'll probably.
Look at it from an average balance perspective in the spot, but overall, we remain optimistic on the the second half the second quarter and the fourth quarter.
For seasonal historically those have been sort of our strongest quarters. So we're not surprised of the second quarter performed so well, but we I think we indicated even the last quarter that we would expect to be at the higher end of that 15% to 20% range.
Net debt it looks like Thats, where were going to be able to pull through.
Continue to be optimistic on the private bank side.
Seeing.
Sort of.
So very strong market acceptance and sort of our distribution and our internal client engagement efforts continue to grow that so we don't see any slowdown there in the commercial side, we think we'll we'll.
Pick up a bit as we indicated between the supply chain loosening on the equipment finance.
And some fund finance aspects so.
We still think 15 to 20 is the right place to direct us, but at the top end of that would be the right place.
Okay.
And then maybe for Gary.
<unk> talked in the past about.
The NIM expansion getting up to the mid to high 100, Sixty's by the end of the year.
We've seen obviously some.
Some pressure on the 10 year just wanted to see if that's still how youre thinking about it when the current rate environment.
<unk>.
Rates to rise from here to get back to that mid to high 100 <unk>.
Danny we still believe that as we've long said, we're more focused on net interest income growth.
Through sort of a reasonable.
Reasonable and risk manage.
In loans and investments.
Building durable relationships and matching liquidity with the needs.
As we will be on the franchise.
We were pleased that we were able to expand NIM in the quarter and we see that expansion continuing for the rest of the year.
Primarily be driven by deposit cost reductions as we manage deposit balances in line with the opportunities for deploying that liquidity.
We believe that we'll be able to achieve further cost reductions in that category as we continue to grow deposits and as we've shared with you at the beginning of the year. We would again expect debt the NIM will be somewhere in the mid to high 100 <unk> by yearend.
Okay, Great you know it.
It might be a good place to add real quickly just from a tenure perspective, certainly it's a metric that we watch it but we think that.
So again, if you roll it over to the swap revenue opportunity we've demonstrated we can.
Work with the swap market in all markets and all rate curves.
Flat.
Steepening in the inverted, but we're pretty happy with where the end.
There is right now it gives us a lot of opportunities our clients the super engaged at these levels. So we think that we.
So in some respects the stock sometimes trades, obviously with.
On the industry in the round the tenure because of everybody's exposure to that yes.
We would say we have for more opportunities.
And that kind of environment. So.
Obviously, that's separate from the NIM question, but from that from a revenue perspective, we're happy where we are and obviously.
Net per turmoil as well.
That's great color I appreciate it thanks guys.
Our next question comes from Matt Olney from Stephens. Please go ahead with your question.
Thanks, Good morning, I wanted to go back to the discussion around deposits.
As you mentioned the banks made tremendous progress lowering deposit costs and really growing the treasury management business.
We will see more of the benefits of that with higher rates, but I guess, given the floating rate nature of Tri states assets.
I'm curious what the appetite of is at this point to start considering locking in some longer term funding on.
Of the liability side. Thanks.
Matt Good morning, we certainly talk about that regularly it's something we're looking out of evaluating but.
But we've not done anything at scale yet.
We continue to be quite pleased with the Treasury management growth that those balances of 20% of our total deposits now, which we just started that business for 5 years ago. So we'll certainly continue to look at that.
Effort to drive total return to the shareholder.
And what date you with any strategy, we employ on a on a go forward basis.
Yes.
I would just add to that.
Obviously, we look at the deposit portfolio.
As an opportunity I mean, it's obviously weight of fund the lending part of our business but.
Again, just take a brief.
I'll take for for relationship.
Building right and so some of our time deposits might be what clients are expecting some of it will be what we want what we'd like to do so it's a bit of them at this point.
It's a it's a market where.
Our clients are not.
Requesting that so that puts us in the spot where we get to design the product mix.
And at this point as David mentioned, we are and.
And we think we have the right product mix at this point, but we're watching it consistently.
Putting our own forecast together on the.
Yes, what we think would happen and when it would make sense.
Yeah.
Okay.
Helpful.
And then.
Any update on on the loan floors I think the press release mentioned that 94% of the loans are floating and index of 30 days just remind us how.
Lack of the floors are currently and any commentary you can provide on how many fed fund hikes, we'd have to see to get about those floors.
Yeah.
Yes, great.
It's less than 2 so there's a bit of of difference on the floor of levels.
The different loan product types, but the.
In 2 fed rate moves we would be through the floors on average fundamentally the so.
So it's it's.
<unk>.
It's been a significant contributor to the business over the last 12 months, but as we continue to add.
New loan originations and how.
How were approaching.
Spreads in Florida going forward.
It would be about 2 rate moves.
So you look at the whole loan portfolio.
Thank you.
Okay.
Our next question comes from Steve Moss from B Riley FBR. Please go ahead with your question.
Hi, good morning.
Good morning, Steve for good morning, Steve.
Maybe just start off with the.
The loan mixture of crossover 60% this quarter for private banking loans, just kind of curious where are you thinking that mix ends up by.
By year end here.
Yeah.
Sorry, just to clarify you mean.
A portion of growth or just overall portfolio.
The overall portfolio.
Definitely any color on growth would be good to just because of August mentioned seems very stronger.
Great. So yes.
Yes, we continue to grow into the mid 6 fees.
From a portfolio composition perspective as you see.
Seeing when we say, 15% to 20% we're talking about.
The private bank, obviously, a larger base and then.
The growing at not quite double but.
Our premium.
Multiple of the commercial side, so that will continue to.
Grow.
I think the second quarter is probably a bit.
<unk>.
Probably a bigger difference between the rates of growth for the third quarter will probably be a bit more reflective.
But I think what we have talked about the commercial cycle on 12% on the private bank on 25% so.
Thanks again for us for the 10 to 12.
Okay, Great. That's helpful and then in terms of just.
Loan pricing these days I'm just wondering.
If you can give any update on where spreads are for.
For commercial loans commercial.
Commercial real estate and also of the private banking loans.
Yes, so I think.
From our guidance perspective from last time, we were on our.
I think we are probably still on the same place.
Our CRE loans from a yield perspective sort of that 3% to $3.75 range.
C&I loans sort of the 2 and a half to 3 in the quarter range and private bank loans.
Probably a 2% to 3% range. So those are from a yield perspective, where we are seeing.
<unk> seen things come in now.
Okay.
Great. Thank you very much I appreciate that.
Great.
And our next question comes from Russell Gunther from D. A Davidson. Please go ahead with your question.
Hey, good morning, guys good.
Joining Ralph on Florida.
Just a quick follow up on the C&I expectations for the back half of the year.
State your comments on the prepared remarks, and the Q&A, but.
If you could give some color on on what's driving the optimism in the back half I know equipment finance the seasonally strong in <unk>, but any.
Any other color in terms of order of magnitude for growth and what the drivers are there.
Yes.
<unk>.
<unk>.
I think for I mean.
If you look at our again right of.
Growth expectations of our goals for the commercial side probably.
Slightly lower than we've had in past years, so that.
Of 12% growth rate.
It is probably optimistic for a lot of people it's probably.
Middle of the road for Us so pleased but not satisfied with that just just from a point of perspective, but.
But yes, the first half of the year.
We're continuing to see good production on the commercial real estate side, I mean, I would say that we've actually seen a little bit from on.
On the anticipated idiosyncratic payoff perspective on commercial real estate, where some of our clients not looking to sell we're offered.
Some pretty significant opportunities so.
We've lost that balance in the short term, but those are clients that debt.
We work with very significantly and we see them redeploying debt.
That capital into new opportunities. So we'll be there with them to grow that piece back, but overall the commercial real estate.
We're confident in our ability to continue to grow that of positive sense with our.
With our clients and then the fund finance if we look at it we're only about 200 million borrowed against about $600 million in commitments.
So we see a significant opportunity for that to take off from the second half of the year.
So we continue to grow that business very nicely and we'd like who were working with but we see.
More opportunities and just timing of.
Where theyre going to put capital to work in the second half so that will be positive and then as we indicated second half usually better for equipment finance anyway.
For the supply chain fees and things of that nature. The deals that we've already won that will fund in the third and fourth quarter.
That will be positive so the.
Those are the the fundamental aspects I mean, nothing really I think we are.
Nothing exceptional pretty consistent themes.
Themes that we've had in.
Over the year, just coming to play in the second half of the year, but overall, we're very optimistic about how our clients and prospects are performing.
Again, if you look at our I mean, we obviously.
<unk> provided deferral activity, but we are as of today, we will be down we're down to the 2 loans that are still on the deferral program.
From $20 million.
So again the way that our clients have managed through this on our growing actually.
Through the 'twenty 1 'twenty 2 time frame is very strong so.
We're optimistic about our ability to grow with our existing clients as well as attract new ones.
I appreciate the color Bryan Thank you.
And then just switching gears for the last question to expenses you guys reiterated the 10% to 12% expectation for this year.
Continue to plan for the future and continued franchise investment and.
Items like travel and entertainment might begin to normalize is that of range that you expect to be able to maintain over a longer term or are there near term plans for the business businesses that we could push that range higher going forward.
Let me yes.
Jim Getz, let me, let me comment first.
This is probably 1 of the only times in this type of call that Youll hear this.
This expense growth has always been by design.
Our expenses clearly reflect our continued investment in our people our infrastructure, our technology and our clients well.
Moving towards the towards the future and we are doing is as you noticed in this this quarter's numbers, while our profit margins are expanding so that's what I meant in the end of my presentation. When we talked about critical mass we've reached that critical mass level that we're going to be able to continue to do.
That and invest in the future well we're providing.
Our profitable franchise to our shareholders.
Okay.
Yes, the Russell, let me just add some color commentary to that so year over year, we've grown our revenue of 16% the balance sheets for 1 of 26 and expenses as you note are growing at about 14 and a half.
This supports our overall goal of positive operating leverage.
Importantly, the overall efficiency ratio for the bank has slightly improved from the comparing the year to date results over the prior year as has the noninterest expense to average asset ratio the efficiency ratio stands at 51% year to date and noninterest expense is about 126.
Our ROE or return on equity of steadily and substantially improved in each of the last 4 quarters now stands at $2.37 on a spot basis as of the most recent quarter as we put the capital that we've raised in 2 different reasons last year to work. We believe we can continue can continue to drive Roe.
<unk> in the quarters ahead.
What this tells US is that the investments, we're making the Jim pointed out are driving better execution, and making our business more efficient and effective the tells us that we're making good investments let.
Let me give you some color on the primary drivers of expense growth..1 is people compensation cost is up 20% year over year in technology and data services is up 44% year over year.
The growth rate on these 2 expenses should moderate somewhat in the second half of the year hiring was minimized the last year's second quarter in light of the early stages of the pandemic.
Whereas this year, we have frontloaded that hiring and you know.
At the beginning of the year, coupled with strong financial results driving incentive.
The incentive accrual increases, but that hiring pace should moderate somewhat in the second half of.
In the area of technology and data, we delayed our innovation and development spend through the second quarter of 2020 again in light of the pandemic of began implementing more robust development in the second half of last year and that continues into 'twenty 1.
For technology and data on a full year basis, I would say the year over year comparison should be somewhere in the low to mid 20% range down from 44% what youre seeing right now.
Other expenses is also something that grew very modestly in the quarter. It's.
Driven by growth growth on our unfunded loan commitments.
That's expenses categorized differently than the funded on balance sheet loans.
Through the reserves in the income statement, so just simply a function of growth.
We still intend to drive positive operating leverage growing revenue faster than expenses and we are driving to keep expense growth to 12% year over year. We've got work to do to get there, but we will not sacrifice our long term objectives, and we will continue to focus on serving our clients well.
Yes, I'll just add we're.
The thing Jim.
Jim David summed it up well.
We're excited about where we're going we've continued to we took about a 4 week hiatus last year, just to see where things would.
Sort of level out in the second quarter, but.
Absent that for us for weeks, we've continued to invest in the business understanding where the the opportunities are and again as we sit here around the table. We are as optimistic as we ever have been in.
All of the lines of the business thing.
Jim some of them earlier, we couldnt be more happy with what we're showing here in this makes sense to keep investing in this and staying ahead of it and rewarding not only.
Paying up for both rewarding investors and rewarding our clients for continuing to grow with us.
Thank you all for taking my questions on the detailed response.
Thank you.
Okay.
And ladies and gentlemen, we have a follow up from Matt Olney from Stephens. Please go ahead with your follow up.
Yes, thanks for taking the follow up.
I guess as I speak with investors it seems like the market's very concerned about Tri states impact.
Higher short term rates and we talked earlier about the floor as it could be of potential headwind for at least the first few rate hikes, but I guess, taking a step back I'm curious what you would expect from the banks net interest margin.
On the first few rate hikes, I guess, if I look at the 10-Q disclosure around the shock analysis. My assumption is that the bank does expect to the initial downward moving the margin with the first few rate hikes, but would love to hear any commentary you can you can add to that.
So Matt we just followed the dot plot right and so the dot plot would suggest theres 2 raises sometime in 'twenty 3 but as I just look at our forecast for the next 2 years, which obviously is very preliminary we.
We see modest expansion throughout that period so.
We're not tied to the 10 year, we're tied to short rates as you point out but between deposit cost moderation things that we're studying in terms of sort of fixing rates for a longer period of time and just the ability to deploy the liquidity quickly into income producing assets we.
See modest expansion through the next 2 years.
I think from a cost of deposits perspective, the 1 thing that's not modeled in there.
Is again from a client perspective, our goal is to work with.
Every product that they would need and our goal is to own their entire relationship. So we have a blend of noninterest bearing and interest bearing deposits with them but.
If you look at the service side of the business and you look at like our Treasury management business I think we've talked about it before in a normalized rate environment. Our goal is to run that business on the rate side at a LIBOR equivalent of -100 basis points of LIBOR LIBOR.
Whatever index do you want to pick.
100 basis points so if.
If you think about here, where obviously there is no LIBOR -100, so we think that Theres a lot of protection built into the existing business, which is a natural hedge.
Obviously the way we built it and then obviously as he talked before with opportunities for us to build in term deposits and some other things as we get closer but that breakeven point is is pretty important as you would know and so absent.
No.
The real client demand for.
Probably a little early in that process, but again, a lot of natural hedges built into the business that maybe werent as robust in the 2018 timeframe.
And within the deposit balance can you remind us what percentage of those are are indexed and how would you expect that to change if at all over the next few years. So if you look at.
Overall, I mean, we talked about it in the in the release, we talked about 60% of whatever the 60% of non time interest bearing deposits.
Linked to the FF for some some equivalent.
Index. So if we look at overall, it's about it comes out to about 21% of total deposits that would be.
Index in that way so.
The moderating that pretty significantly at 1 point, we were probably more on that 45% range. So.
We think again of good diversification across the portfolio deposit portfolio.
I mean, we still like that from a pricing perspective and.
Yes. The building, it's the source of a lot of sophisticated relationships with us who we have the.
Private bank relationships with in other lending aspects so.
So we're happy with that.
On that component of the portfolio, but it's a good measure of where we continue to.
Diversify the the deposit base on the pricing base.
Okay, that's great Brian Thanks for that and then I guess the last question is around is around capital and I'm looking at the leverage ratio at the bank and I think we're now at call. It $7.34, and I think we saw the capital raised last year, when we got down to that 7% level. So we would love to hear any updated thoughts you have on.
On addressing the capital needs of the bank, especially given the strong outlook for for loan growth from here.
Yeah, Matt as you pointed out we've grown the balance sheet at the higher end of our expectations. This year of strong growth and we expect that to continue.
We've worked hard to put the capital raise last year to used in high quality, new loans and increased balance sheet liquidity in the investment portfolio, we're striving to get that close to 50 of our gift that the 15% of our close now I talked a little earlier about our of our OE return on equity we're pleased with the $10.37, we built.
We have more room to improve that in the coming quarters and thats up from 6.5%. This time last year, so great improvement there on the cash.
We've raised is now deployed and starting to generate meaningful returns.
We continue to be very thoughtful and flexible around capital strategies, we don't necessarily need to raise capital before year end and we define starting 'twenty 2 with the current levels on in terms of the balance sheet composition of loan growth and where our capital sits.
<unk> said that we'll continue to look at opportunities to raise capital in what we would describe as a very economical on most efficient way with the continued focus on the shareholder.
Given the market conditions sub debt could be of very attractive form of that additional capital given where rates are and as you know you raise debt at the holding company push it down to the banking accounts is tier 1 so no immediate plans to access the capital markets, but it's something we're looking at as the coming quarters.
Lay out I think of would add Matt.
Yes.
Tim used the statement of what our primary job is our mission is and so we saw it as obviously, having raised $200 million.
Pretty rapid.
Time period in 2020 again, taking them.
At the moment in time to realize that we're going to have some pretty significant growth opportunities.
Which we would consider of better than the market are better than the industry and we knew that we needed to take that time to invest in so we can be there for those opportunities. So we're certainly bring those to bear and we viewed it as part of our job on a risk adjusted basis responsible growth basis to deploy that capital as quickly as possible to basic.
<unk> covered the the lag of.
On on.
On capital raises so we're very happy with where we've done it if you look at the asset growth relative to for example of the loans.
The deposit ratio was 91% is clearly reflective of our ability to raise deposits and deploy that into other assets those assets.
Asset mix could give us some flexibility as well.
Is how we look at funding the loans at any particular time.
We've talked about it before it from an investment perspective, staying very high quality and relatively short duration. So again, our goal is to be as agile as possible between funding and capital and asset and balance sheet management. So we have some flexibility in there as David pointed out timing, but certainly being on.
Opportunistic we have some historic opportunities too.
Ahead on the growth side, probably the capital if we wanted to pursue that.
And the sub debt space and otherwise just to manage our balance sheet.
Okay. Thanks, guys Thats all from me congrats on the quarter.
Thanks, Matt.
Thanks very much.
Sure.
And ladies and gentlemen, with that we'll conclude today's question and answer session I'd like to turn the floor back over to management for any closing remarks, okay.
Thank you very much for your continued interest in Tristate capital and your participation today.
Certainly look forward to updating you on the third quarter results in October have a great day.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending you may now disconnect your lines.