This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good morning, everyone, and welcome to the Tri-State Capital Holdings Conference Call to discuss financial results for the three months ended September 30th, 2020. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw from the question queue, please press star then two. We ask that you limit yourself to one question and a follow-up. If you have additional questions, you may re-enter the question queue. Please note this event is being recorded. Before turning the call over to management, I would like to remind everyone that today's call may contain forward-looking statements related to Tri-State Capital that reflect Tri-State Capital's current views with respect to, among other things, future events and the company's financial performance, as well as the company's future plans, objectives, or goals. Such forward-looking statements are subject to risks, assumptions, and uncertainties that could cause actual results or outcomes to differ materially from those currently anticipated. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You should keep in mind that any forward-looking statements made by Tri-State Capital speak only as of the date on which they were made. New risks and uncertainties come up from time to time, and management cannot predict these events or how they may affect the company. Tri-State Capital has no duty to and does not intend to update or revise information about the factors that could affect Tri-State Capital's future results. Please see the company's most recent annual and quarterly reports filed with the Securities and Exchange Commission. Please note that annualized information referenced in this presentation is not predictive of future performance. which may differ materially from annualized information. To the extent non-GAAP financial measures are discussed in this call, they will be presented with their most comparable GAAP measures and reconciliations of the non-GAAP measures can be found in Tri-State Capital's earnings release, which is available on its website at tristatecapitalbank.com. Representing Tri-State Capital Holdings today is Jim Goetz, Chairman and Chief Executive Officer of He will be joined for the question and answer session by Brian Federoff, President and CEO of Tri-State Capital Bank, and David Demas, Chief Financial Officer. At this time, I would like to turn the conference over to Mr. Goetz.
spk10: Good morning, and thank you for joining us. We're very proud of what Tri-State Capital's team has accomplished for our clients and shareholders in these extraordinary times. delivering financial results that reflect the power of our adaptive and scalable franchise. All three of our business lines, investment management, private banking, and commercial banking, are functioning extremely well and growing handily in the atmosphere that we find ourselves operating while maintaining superior asset quality metrics and optimizing our balance sheet. This is a company that is nimble, and has a predisposition toward action and delivering responsible growth. We believe there are many highly positive developments worth discussing, but since we hosted a call just last week to announce our $105 million growth capital raise, I'll keep our prepared remarks brief to provide additional time for discussion during Q&A today. Our third quarter 2020 performance was highlighted by total revenue of nearly $47 million, up from both the linked and year-ago periods, supporting year-to-date revenue growth of more than 6%. Growth in Chartwell assets under management to pre-pandemic levels went very healthy, positive net inflows of client assets and continued strong investment performance. Annualized total deposit growth of 18% during the quarter with 28% growth in strategic treasury management deposits. Annualized loan growth of some 27% during the quarter, with national private banking loans continuing to expand at a strong clip to record levels and commercial growth from very high quality borrowers within our regional footprint. And a continuation of our superior credit metrics, additionally, COVID-19 related deferrals declined more than earlier forecasted to date. Our increased provision brought the allowance within range of our year-end estimate when we intend to adopt the CECL accounting methodology. Today, this company includes a nearly $10 billion asset bank and a $10 billion AUM asset manager. As we continue to manage through this historic low rate environment, The power of our asset management and swap fee generating offerings shines through with non-interest income that made up 28% of revenue for the quarter. Our branchless business model, which serves a regional commercial footprint and clients nationwide through private banking and investment management, is very well positioned for long-term responsible growth. Our Chartwell Investment Management subsidiary is in as strong a position as it's ever been. Assets under management, net flows, and institutional pipelines at Chartwell continue to grow in the third quarter, driven by very solid performance by our strategies relative to industry benchmarks. For the three years ended September 30th, 2020, 77% of our strategies outperformed their relative benchmarks, and 85% outperformed them for a five-year period. Positive net flows are up 3% organically year-to-date. Our institutional new business pipeline, which includes business that has been won but not yet funded, currently exceeds $200 million. Chartwell's annual run rate revenue continues to grow to $34 million as of September 30th. and with strategic decisions made during the past 12 months to reduce expenses for this business segment, Chartwell EBITDA in the last three months hit its highest level in five quarters. Meanwhile, Tri-State Capital Bank again delivered double-digit loan and deposit growth as it continued to expand the number and depth of its banking relationships. Quarterly deposit growth of 18% annualized to more than $8 billion at September 30, 2020, supported a loan-to-deposit ratio of about 93.5%. This deposit growth included expanded Treasury management deposit accounts, which have been an ongoing and strategic focus of our company on a national level, as well as continued progress in broadening the overall client base for our deposit. To that end, cost of deposits averaged 67 basis points during the three months ended September 30, 2020, and overall cost of funds decreased to 77 basis points for the period. We believe our model positions us to be agile in managing interest expense through volumes and rates on existing and new liquidity as we move through the next phases of the recovery. Our private banking business continues to set us apart from peers and the industry in terms of both its contributions to our balance sheet and to our low credit costs. These loans, which made up more than 58% of total loans at September 30th, increased and annualized 39% during the third quarter. Our potential to continue growing this business has been outstanding, as demonstrated by the acceleration of growth in 2020. Our referral network grows consistently each quarter. Private bank loan applications were up 65% during the third quarter and 51% year-over-year to new record levels. We also continue to increase our number of financial intermediary firms, which is now at 235. Our very strong and diversified regional middle market commercial banking business also performed well in the third quarter. Commercial loans grew 2.8% during the quarter. We saw healthy commercial and industrial new loan originations, including our equipment finance offering, offset by amortization payments on the portfolio, and expansion in our fund finance offering related to capital call and liquidity facilities, offset by amortization payments and normal pay downs in the existing portfolio of revolving lines of credit. This resulted in a modest decline in C&I balances from June 30th. Commercial real estate loans grew $103 million, primarily through new fundings for our existing and known clients, showing strong borrower conviction and balance sheets. This growth also reflects lower offsetting reductions from payoffs and paydowns, which, as expected, were approximately 60% of last year's pace. As we outlined last quarter, we have limited exposure to some of the businesses that have been more negatively impacted by COVID-19, including hotels, restaurants, senior housing, and healthcare real estate, non-renewable energy, and retail commercial real estate. These industries together accounted for 5.9% of total loans at September 30th and reflect the strong portfolio management and fundamental underwriting we employ for all lending. We are pleased with the positive trends we've seen with respect to COVID-19 related deferrals. As of October 20th, we had deferral arrangements in place with 48 loans totaling $186 million, representing 2.4% of total loan balances. This is down from the modest levels we updated you on in April and July. The pace of deferral exits is ahead of our earlier forecast, We're proud to be a source of support and stability to our clients as they manage their businesses through the ongoing public health and economic crisis. Tri-State Capital's credit metrics continue to be a major differentiator, and we believe that we become even more evident moving forward in the current economic environment. On our $7.6 billion loan portfolio, non-performing loans of $6.8 million primarily relate to a single CRE loan, which we note was not a part of the deferral program. All loans were paying as agreed, and we reported zero net charge-offs in the third quarter. We increased our allowance for loan losses by 130 percent over the last year and 32 percent during the third quarter to $30.7 million. We believe we've conservatively built general reserves reflecting the differentiated and exceptional quality of our loan portfolio, the majority of which constitutes private banking loans that are primarily collateralized by marketable securities. As we previously shared with you, our estimate for allowance at year end when we intend to adopt CECL is a range between about 30 to $35 million. This would represent about 85 to 105 basis points of commercial loans. With each of our investment management, private banking, and commercial banking businesses performing at very high levels and serving great growing numbers of clients and financial intermediaries, we truly believe the growth opportunities for this company have never been more clear or more attainable than at this moment. We now have the capital needed to seize those opportunities and drive meaningful earnings growth in the future for the benefit of all our shareholders. As we announced last week, Tri-State Capital signed a definitive agreement to raise $105 million in new capital from funds managed by Stone Point Capital. The financial services-focused private equity firm has extensive experience working with best-in-class financial institutions, and we are confident that they understand and fully believe our company's ability to deliver long-term growth. Including this latest investment, which we expect to close in the fourth quarter, we've raised more than $200 million in capital in 2020 alone. During a year when many companies are simply trying to weather the storm, Tri-State Capital is on course to continue a record of execution, growing total assets next year by another $1 to $2 billion, support our exceptional double-digit organic loan growth to sophisticated private banking and commercial clients, continue to invest in the proprietary technology and superior talent that has enabled us to become the dominant independent provider of securities-based lending to financial intermediaries and their high net worth clients, and continue to grow Chartwell Investment Partners organically and opportunistically through acquisition, Ours is a business model that's been built, tested, and refined over the last 14 years to deliver responsible growth in any environment. Our strong and liquid balance sheet, scalable and capital-efficient businesses, and branchless model that serves as a regional and national footprint positions Tri-State Capital to adapt to the exceptional business conditions we're all facing and succeed over the long term. We believe that our evaluation should better reflect our both peer opportunities. Operator, that concludes my prepared remarks. Would you kindly open the lines?
spk00: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then 2. 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 Perito of KBW. Please go ahead.
spk01: Good morning, Michael. Hey, Jim, David, good morning. How are you both? Good. Good. Thanks for taking my questions. I wanted to, you know, obviously we just spoke a little while ago after the capital raise, but I wanted to maybe expand upon the profitability conversation we started. a couple weeks ago, and I guess first I just was curious, can you break out – I know in your – I believe in your segment reporting you don't necessarily look at it this broken out, but can you talk a little bit about kind of what type of ROA that the private banking business is generally putting off today? And then the second part of the question is, what are the levers with rates at zero – you know, we talked about the inflection point on the capital call, but can you maybe give us a little bit more details about what some of the levers are and what some of the drivers are of that profitability inflection point and where, you know, we can maybe expect that number to start trending as we move forward?
spk10: Yeah, Michael, this is Jim. As a result of a few of the communications that we had this morning from the analyst that made my early morning reading, I thought it would be interesting helpful to give you a clear articulation of how we look at this quarter and here from a business perspective that blends into what you're indicating and then it'll give you some specific answers on what your question is. Let me provide you with a couple sound bites of what has been accomplished. You're positioning this company for success in the future. At times, decisions will be made that may impact near-term performance, but have long-term positive implications. Let me give you a couple observations to reinforce this. Look at the commitment that this company's made to technology. We determined on our income statement to really characterize technology very clearly on there, and you'll notice that Over the past several quarters since we initiated this this year, we're spending about $2.5 million on a quarterly basis. And I'm going to give you a little more details of what that has resulted in since there's some concern about the expenses. But note the credit experience that our clients have had, not just for a quarter, not just for a year, for multiple years, our investors have and how the credit experience has been highly positive. We have one non-accrual loan in place in a $7.6 billion loan portfolio. We have $17.7 million of classified loans. And we have, this quarter, no accrual loans, 30 days or more delinquent. But that hasn't been just this quarter. It's been multiple quarters over the years. No bank has comparable organic loan growth or credit metrics quarter after quarter and year after year. And in the 14 years of existence of this company, we've had all of $57 million of net charge-offs. We regret that, but it's a relatively low number relative to the industry. Our extraordinary deposit growth without a branch system is by design from a risk management standpoint and serves as well as an ongoing funding mechanism. Look at the deferrals. Our folks reached out and met with these clients in February and March. And as you note, they've been reduced to 2.4% of the loan portfolio from initially 6%. The investment portfolio We're growing handily as a risk management mechanism. Some of you may have noticed we put forward a gain in that portfolio of some $3.7 million this quarter. Let me tell you what drove that. We made a determination that the corporate bonds in that portfolio were overpriced. We took advantage of the gain and we sold out. at that point, and if you would look at the corporate bond market today, we made a right decision at that point, and what we invested in were governments and reduced meaningfully the risk profile of that portfolio by design. $105 million of additional growth capital was just recently raised. We've raised $200 million of growth capital in the past nine months, all to prepare to position this company going into the new year and into the future. We had significant opportunities have been executed on in the past nine months and reflected in the growth numbers across all three of these businesses. Every once in a while, a business is out of sync, but in this year, all three of these businesses have been robust. The balance sheet As strong as it's ever been, 58% of the loans have liquid collateral that's priced daily and over collateralized. There's probably not a single bank in this country that 58% of their loans are priced every single day and the collateral is liquid and counted. Non-interest income, 28% of our revenue, another reduction of the risk profile. And keep in mind, when we're raising money, whether it be through fee income or interest income, it's not instant gratification. It takes a year to feel the full impact of that money coming in. Costs, they're dropping dramatically. Technology, what we were just talking about is accelerating the growth From a robotics standpoint, we're putting in place robotics in order to supplement the professionals that we have in place on the administrative side of it. We have a commitment to a lending platform that we're helping to fund with Fiserv. And this is a lending platform on the commercial banking side that's three years out to be delivered. And that's how we look at planning in that regard. And the digital lending platform that we have in place is supporting about 60% of our clients at this point. And the next point is quite important, our revenue. Our revenue is up 6% year to date over the past nine months. Assets under management have fully recovered from the March debacle in the marketplace. and growing meaningfully with flows. So the point of what I'm illustrating here is we have in place a strong foundation for the future, a $10 billion bank and a $10 billion money management firm going into 2021 and beyond. And what we ask ourselves, and this is most important, is what needs to exist to take this company from a $10 billion bank $20 billion bank and a $10 billion money management firm to a $50 billion money management firm over the next several years in a responsible manner.
spk07: David? Mike, good morning. I don't have specific numbers to share with you, but let me share with you a couple themes and then let me wrap it up with a comment. First of all, I'm not sure that in all cases people look at the credit quality and the net interest margin together as it relates to private banking. I think that gets disaggregated sometimes, right? So you really need to think about those two together because they really work in unison with one another in terms of the credit quality being a driver of the overall return of that particular business. We've also been very successful in dropping deposit costs meaningfully in private banking this year, and so that's been helpful. And while I don't have specific numbers for you, we are looking at better ways to tell our story in terms of the individual businesses. One of the other stories that I think we can do a better job of telling is the free cash flow that Chartwell is generating. They have added their EBITDA last quarter was $1 million. It's $1.5 million this quarter. We see that going to above $2 million. year, and those EBITDA margins going from sort of high teens to mid-20s next year. And so there are some things that we're working on to think about how to better portray some of the drivers of this business. And so, you know, don't have specific numbers for you today, but stay tuned.
spk08: Yeah. And, Mike, this is Brian. You know, I would add I think the – you know, certainly when we look at it, I mean, we are seeing, you know, improved – Yields and spreads for all in yields across all all the categories commercial private banks So we believe that as cost of deposits in particular comes down cost of funds obviously lagging a bit as we roll in the cost of Capital that we've raised but as you look at those Categories, you know, we think that there are significant levers to enhance our way there and One of those, obviously, is cost deposits. The next is volume management. So we believe that there's a lot of volume management that we'll continue to do within the franchise, particularly over the next two quarters and absorb the liquid to respond to the sort of situation we had going on in the pandemic and just recovery in markets. Another is utilization rates through that business. So utilization rates being a client engagement, client education, so that obviously driving revenue through existing clients who are already on the books will be a significant piece. As Jim mentioned, scalability is huge in the business, so that's a big lever. Really, when we look at ROA, I think if you wanted to say it's a nine-inning game, we're second, third inning in what we think we can drive through the business.
spk01: Okay, great. That was helpful. Thank you all. And then just as a follow-up, kind of saying on a similar topic, just Jim, you mentioned kind of some of the investments and why you guys are making them. But just, you know, if we just look at the model for a second here and just look at the expenses at $31.4 million core in the third quarter, Jim or David or Brian, any thoughts? broader specific thoughts about kind of where we can expect that to trend moving forward. I mean, it would seem like if I'm interpreting your comments correctly, like there was, I don't know if pull forward is the right word, but some investments that you guys felt were necessary to make and we shouldn't necessarily envision expenses, you know, growing at that type of rate, but just any more specifics or detail you could put around the numbers, that would be great.
spk10: I think the one thing, before I turn it over to David, I'd like to point out is the compensation program. And we've talked before that what we have in place here, every individual that works at this company is on some type of formulaic program, and including our relationship managers and the sales personnel at Chartwell. And I was alluding to in my earlier comments that business is brought in, the full implications of that business may take a year or so to come into play, whether it be a loan, a deposit, an investment in one of our funds in that regard. And that's why you see the, what you noticed in the compensation aspect of it, David can address the others or even maybe give you a little more color on the compensation, but obviously we had a very good quarter from the standpoint of raising up assets on the lending side and also in the investment management side, and that impacted us immediately on accruing for year-end bonuses, but it did not... It's not reflected in the income statement as of right now.
spk07: So, Mike, let me touch on a few themes here in terms of expense growth. You heard Jim talk a few minutes ago about our ability to grow Tri-State in the current environment. The growth has driven some expenses higher, as you point out, as we position the company for what we feel is a very strong fourth quarter and strong next year, 2021. And so to put some things in context, one of the primary increases this year compared to last is in the FDIC insurance premium, which was noted in some of the earlier reporting this morning on us. It's a bit distorted. Last year, we received a million dollar credit in conjunction with the FDIC reserves hitting their targeted levels, their thresholds. And so net, net, that expense is up about a million dollars year over year. Another thing that's a bit distortive is the state capital shares tax. Last year, third quarter, we benefited from a tax refund that we received of approximately $700,000. We got a $300,000 expense this quarter, and so net, net, there's about a million dollars swing there. Jim just commented on, and we've shared with you in the past, that we have a highly variable nature of compensation here at Tri-State. Sales employees earn a salary that sticks, and most of their compensation is performance-based. We've had solid results this quarter and this year in swap income, loan growth, and deposit growth. And these sales efforts will drive results in NII, as Jim indicated, in the current quarter, fourth quarter, and next year. We've also incurred some expenses in surge resources to handle some of the operational elements of our growth this year. To keep things in perspective, compensation last year increased meaningfully from the second to third quarter as the formulaic sales targets were achieved. And I might also add that compensation expense this quarter is very similar to the third quarter last year. It's actually a bit lower. Professional fees are higher this year as we've prepared across the $10 billion threshold. We've been very deliberate in our planning and have involved some outside resources to assess our readiness and make sure we're well prepared from a compliance and risk management standpoint. And finally, let me comment on other operating expenses. There's two very important priorities at play here. Employee wellbeing is an absolute priority of ours. We've implemented a number of protocols in the current environment to keep our employees safe, and that's driven some expense increase. We've also been very focused on the wellness of our communities and have meaningfully increased our charitable contributions this year to worthy causes nominated by our employees. And so that's a bit of context in terms of the quarter. As we look forward, you know, if we hit sales targets, you will see compensation, you know, stay at these levels. But most other expenses, that growth should be modest quarter over quarter.
spk01: Got it. So if you guys continue to grow, obviously comp will continue to grow. But some of the jumps elsewhere are, you know, certainly should be behind you, although not necessarily that the numbers will revert back down. It's just the growth rates should drop off pretty significantly. That's exactly it. Okay. Excellent. Thank you guys very much. I appreciate all the color. Thanks.
spk00: The next question is from Matt Olney of Stevens. Please go ahead.
spk04: Hey, great. Thanks. Good morning, everybody. I wanted to go to credits. And your allowance levels are now at $30 million, which I think is the lower end of that CECL adoption range we've discussed now for a few quarters. So with that, do you think this allowance bill that we've seen in the last few quarters is now complete for the most part? Just trying to get a better idea of what the future provision expense will look like over the next few quarters. Thanks.
spk07: Matt, good morning. Jim and Brian have both talked about credit quality here a little bit this morning. Our credit quality and our business model, we think, speaks for itself. Over the past 14 years, Tri-State has only charged off $57 million of loans. We're very pleased with the overall credit portfolio, which is driven by a seasoned team and a lot of focus on strength of sponsor. Classified credits are still very low, and we're very pleased with the progression of the deferrals, as Jim pointed out. We've also heard Jim comment on the fact that we're in line with the estimate on CECL as of December 31st. We believe, looking into 2021, that it will be a better year economically, and the CECL models will reflect a more favorable environment. And so we believe provisions will come down meaningfully next year as we look to, you know, improvement in the economy.
spk08: Are you referring to things like mortgage tax?
spk04: Got it. Okay, thanks. And then what about the interest-bearing deposits, those bottomed back in 2015 around 50 bps? Can you talk about the ability to kind of get that down to similar levels over the next few quarters?
spk07: Sorry, Matt, I want some feedback. Could you repeat that, please?
spk04: Sorry, can you hear me okay? Yeah.
spk07: Yeah, we can hear you now. There was some other noise in the background for some reason.
spk04: I'm sorry. Andrew, sparing deposit costs. You've talked about bringing those down the next few quarters and having some more room to go. Back in 2014-15 timeframe, I think that bottomed around 50 bps or so. Just curious if you think you can get down to similar levels again this cycle. Obviously, it's a much bigger balance sheet. Just looking for some puts and takes about if you can get down to similar levels again this cycle.
spk07: I'm going to give you the shortest answer on one of these calls. We think we can, yes. Okay. Great. Thank you.
spk00: Again, if you have a question, please press star then 1. The next question is from Daniel Camayo of Raymond James. Please go ahead.
spk02: Hey, good morning, guys. How are you? I just wanted to kind of follow up a little bit or talk a little bit more about the margin. You've talked about hoping to get back to the 170 range by the end of next year. And in the release, you mentioned that you should see expansion starting here in the fourth quarter. But can you just talk a little bit about what type of interest rate assumptions are in that? And then if what you would see, and you touched on this on the capital call last month, but what you would see or what you would expect with no kind of change to the current interest rate environment?
spk07: So, Danny, maybe I'll start, and then I'll ask Brian to comment on sort of where loan yields are for the current book and new loans we're putting on. And so, you know, we had some NIM compression from 152 to 146 during the quarter. You know, our deposit teams are out there working on relationships that take time to develop and, you know, in areas like treasury management and private banking. And we had opportunities to add some large relationships this quarter, and so we took advantage of that. We really feel we're poised for good growth in the quarter, fourth quarter, and next year, and that includes expansion of NIMH. And we raised the capital and liquidity this year, and it takes some time to put that to work. The subordinated debt will get more fully deployed here soon. We've raised a lot of liquidity and deposits. That will get put to use in loan growth and to a lesser extent in the bond portfolio. And we will continue to review discretionary price deposits and make adjustments where warranted. And so... I think we've shared with you in the past, a year from now, we expect our NIM to be somewhere in the 170 range. And in terms of current pricing, maybe I'll ask Brian to join me and comment on that.
spk08: Yeah, thanks. Yeah, I think, again, staying on the deposit side, obviously, we do look at 2020 as – We look at it in terms of providing us a couple opportunities for acceleration, just like other industries have. One thing that's accelerated, we believe, is our ability to answer the question, how do you fund loan growth in $1.5 to $2 billion range per year? I think that 2020 showed a lot of people how exactly we do that. The timing of those things, obviously, we think we're pretty efficient about it. We dealt with, obviously, some exogenous events that aren't normalized business situations in 2020, but we think as we look forward here, again, our ability to be agile and efficient in timing deposits coming on in concert with the opportunities for us in the loan growth and the investment side will continue to improve. So that's just the volume side, which we're estimating is sort of probably five base points of NIM in the third quarter. When you look at that, plus our normals, what we do believe we can do on the pricing side and just the composition, including through treasury management and continue to work with our clients, which will be a premium to market, but obviously market coming in and premiums are relative. So we believe we can sustain the brand, sustain the client names we've built here. and still improve the cost of deposits. And then, as David said, cost of funds continues to sort of spread out as we deploy the capital. On the loan side, I think we're seeing, generally speaking, you know, we're pretty happy with the cost of, you know, the yields that we're getting between floors and spreads at this point. You know, we're seeing consistent with last quarter. You know, our C&I loans probably in the, you know, 250, 275 to three and a quarter range You know, CRE is probably in the 3.25 to 3.75 range, and private banking is in the 2.25 to 2.90 range. You know, again, all in yields with floors and spreads. So we think it's a pretty favorable environment right now to be in the markets where we are to work with our existing clients. We're getting good opportunities. They have high conviction, and we're getting, correspondingly, good pricing at this point in the cycle. So we do look at that as some of the levers for NIM expansion in the next four quarters.
spk02: That's great. Thank you for all the color there. And then changing gears here just quickly, if you could give as much detail as you're able to on the composition of the remaining deferrals. Thanks.
spk08: Yeah, so as we look at it again, 2.4%, we have a bit of, it's still sort of a two-thirds CRE composition as we roll through the fourth quarter here. As we look forward to getting through the fourth quarter, it probably will shift mainly into CRE. We expect that to be under 1% of total loans as we exit the quarter. But what we are pleased with Again, we didn't set up the deferral program as a risk management tool per se. It was a way to work with our clients, and I think as Jim characterized it in the first quarter, it was a way for us to invest alongside our clients to help bridge them to a more stabilized economy. We're pleased with the way they have managed their businesses and that they're able to return to normal loan payments. And this is just anecdotal. I don't have... you have total numbers on you, but for you, but we do have a number of clients that are actually repaying the deferred balances, which is promising and also a testament of sort of the conviction of type of clients that we work with. So that suggests obviously cash flows are good. Their conviction is high to meet the obligations and they're seeing a bit of a normalized business environment, but composition here, pretty similar to what we talked about for two thirds real estate, one third, But, again, that will shift a little bit primarily to CRE as we exit the year. But we'll end up with a much smaller number, obviously, as total loans as we get through the quarter.
spk02: Great. Thank you.
spk00: The next question is from Russell Gunther of DA Davidson. Please go ahead.
spk09: Good morning, guys. I just wanted to follow up on the CNI conversation. Appreciate the color about the dynamics at play this quarter. Could you touch on catalysts for growth in that loan vertical going forward? I think equipment finance typically has a good 4Q, but any additional color there would be appreciated.
spk08: Yeah, I mean, you picked up well. Third quarter was pretty good for growth. equipment finance. Fourth quarter is generally a good quarter for equipment finance. I mean, we obviously look at ways to continue to spread that across the year, but we expect the fourth quarter of this year to be another solid one for equipment finance. If you look at the second quarter to third quarter, a bit of that, as we indicated, was our loan growth there was offset a bit by obviously some amortization payments. paydowns on the revolvers were primarily in our fund finance business, really. And so that's fairly idiosyncratic. We had a nice balance in there at the end of the second quarter, and a number of those just got paid down at the same time in the third quarter. So we expect utilization there to pick up in the fourth quarter. Overall, we look at more of a normalized average outstanding rate in that business, particularly as we continue to grow it. And we look at our fund finance business combined with our liquidity facilities and our broker-dealer and other financial institution business is probably approaching $600 million in commitments. As we continue to grow that and have a bit more of a normalized, consistent, constant outstanding there, that'll provide a little bit more on the average assets outstanding basis. Those are levers of growth, but I will say we are probably more performing better than expected on even traditional CNI business. So we are seeing opportunities with existing businesses that are looking to move banking relationships with some of their other banks, either focus internally or just reposition their focus in business. So again, in this middle market space where we do really well, some of the really large banks are potentially losing focus on some of these middle market clients. And so we are seeing opportunities in our traditional C&I more than I think we would have expected two quarters ago.
spk09: I appreciate the color there, Brian. Thank you. And then just my only remaining question is a ticky tacky one on the tax rate outlook for the fourth quarter. Thank you.
spk07: Russell, happy to try to answer that question. You know, as we've shared with you, we strive to have an effective tax rate somewhere in the mid-teens. The tax rate is driven in part by tax credits, which, as we've shared, happen episodically. It's been a quiet year on that front. There may be an opportunity or two here in the fourth quarter that will develop. We'll have to see if that holds true and see how things progress from here. And so We continue to strive for a tax rate in the mid-teens, and we'll see if we're able to get there by year-end or not.
spk00: The next question is a follow-up from Matt Oney of Stevens. Please go ahead.
spk04: Thanks for taking the follow-up. Just wanted to drill down more on loan yields. I think the overall yields are now 249. I think it was Brian that gave us the pricing by loan type. I'm having a hard time reconciling these various ranges to the overall loan yields of 249. What am I missing? Is there some notable exception pricing? I'm just having a hard time appreciating why the yields are where they are versus the ranges that Brian gave us.
spk08: Yeah, I mean, I think part of that obviously is, you know, we're talking about new business coming on relative to, you know, the historic block, which obviously we're, you know, tail wagging dog sort of thing, right? So, you know, we're making meaningful contributions every quarter. And when we're growing $400 million a quarter, we're certainly, you know, that lever becomes more powerful and we'll have a continued bigger impact on there. You know, with those four opportunities, for example, that we did put in on the private bank business and some other businesses historically, you know, those are being deployed on the commercial side and are pretty standard in the market at this point. So, you know, again, we believe we'll see yields continue to, you know, push up a bit from here. But, again, it's, you know, the new contributions to yield obviously take some time to change the overall complexity or, you know, the overall makeup of the loan yield. So... But we're certainly not seeing, you know, not going to see compression of that loan yield. It's pretty stabilized at this point with, you know, forward upward motion there.
spk04: Is there any color you can give us on what the new and renewed loan yields were in the third quarter of the growth that you guys had?
spk08: Yeah, well, those, I mean, those yields that I gave you are pretty indicative of that. So, you know, on the CNI side, again, you know, I mean, obviously fairly general and broad for a variety of reasons, but $250 to $3.25 on the CNI side, $335 to $375 on the CRE side primarily. Some are higher than that. And then on the private bank side, $2.25 to $290 type range. So to your point, there will be some idiosyncratic things that happen, again, in a quarter. you know, within each of those businesses, but those are averages, you know, average range that we think are, you know, pretty indicative of what's coming on. So, again, that, you know, even in a quarter where we did $400 million, but we're talking about $400 million on an $8 billion book, right? So it'll take some time to continue to make those adjustments.
spk04: Okay. Thanks, Brian. And then shifting over to Chartwell, saw some really good improvements in this quarter. Revenue and EBITDA, it sounds like you expect incremental improvements even from here. I think the margin moving from 15% to 25% and quarterly EBITDA moving up to $2 million, those would each be really good improvements to see. Any more color on timing of when you expect this or details of how you expect to get there? Thanks.
spk10: A lot of it, Matt, has to do with the perfection of the distribution model that we have in place there now. As I had mentioned, we currently have over $200 million of institutional business that should be converted in the fourth quarter. It's a little more difficult converting this business quickly because most of the people we're dealing with are working remotely, but Both the institution and the retail sales force have done a tremendous job in a difficult environment that we find ourselves in. The retail business is about a little over 20% of the assets. So you're going to continue to see a lot of positive activity coming out of Chartwell. Just look at the type of investment performance that we have. And that's what these folks are selling. And, you know, we have a pretty broadly quality investment performance. So we're looking forward to a successful year. Tim and his team have really done a nice job. And I believe you'll see the EBITDA continuing to improve along with revenue growth over the next several quarters.
spk04: Okay. That's all for me. Thank you.
spk00: The next question comes from Joe of Benning and Scattergood. Please go ahead.
spk03: Good morning. Just a quick question on the incremental cost as we reach the $10 billion asset threshold. Do you have a rough idea of what that might be, or are there some other opportunities to perhaps offset some of those costs?
spk07: So, Joe, those costs are largely one time in nature, right? They were costs to prepare to get over $10 billion. They were costs to do, you know, gap analysis and assessments, making sure we've got the right, you know, systems in place from a compliance, from a regulatory risk management perspective, capital management and the other models that they will start to focus on as we cross $10 billion. And so those are more one-time in nature. As we get above $10 billion, I would remind folks that we don't have a retail franchise, right? And so interchange fees and some of the other costs will not be as impactful to us as to a typical bank that crosses $10 billion. And we don't have a retail franchise, and so some of the other costs – just won't be all that impactful. So we're actually looking forward to crossing $10 billion and hope to be there soon.
spk08: Yeah, and I think I would just add, so that certainly shows up on the professional fees and maybe some of the other expense. I think as we look at some of the other adjustments that we've made, we've added a lot of, we have added people to the team. I think we're excited about the contributions that everyone is bringing that we've added on. If we've taken a run at it, we've continued to expand the expertise of the team. People are not just contributing within a vertical. Everybody's really contributing to make us better. I think as David said, we're excited about the return on the investment and getting over $10 billion. We're actually really excited about the the talent and people, as well as some of the technology we've added to get over there. So it will be a good return, but a lot of that will be one-time charges, particularly on the professional fees and OPEX, other expenses.
spk03: My other question is just so the FDIC insurance expense, there was nothing funky or elevated with this quarter. That's a good run right here, or could this somehow moderate it?
spk07: You'll see some modest moderation, some slight moderation. You know, the average balances, as average balances sort of settle in, you'll see some moderation there. You know, there was quite a growth here in the past quarter or two in terms of some of those balances and the way they came on, but that'll change. And I think I shared earlier that The comparison year over year is a little bit tough because of the, you know, the refund last year by the FDIC. But, you know, the pace of growth in the FDIC insurance premium should level off from here.
spk08: And obviously, yeah, average assets obviously unique this year, particularly the last two quarters being driven more by liquidity than loans, right? So we went, you know, we were down at 91% loan to deposit. You know, again, that average assets being the fundamental base of FDIC insurance will continue to use those deposits and sort of, you know, within the business, within the growth we're expecting over the next, you know, two quarters and so. So I think, you know, as you pointed out, the rate of growth in the FDIC insurance will slow, particularly compared to revenue growth.
spk10: Thank you.
spk00: This concludes our question and answer session. I would like to turn the conference back over to Jim Goetz for closing remarks.
spk10: Thank you very much for your interest in Tri-State Capital and your participation today. We look forward to updating you on our fourth quarter and full year results in January. Have a great day.
spk00: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer