TriState Capital Holdings, Inc.

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.

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?

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.