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 June 30th, 2021. All participants are currently in a 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 and then one on your touchtone telephones. To withdraw your questions, you may press star and two. In the interest of time, we do ask that you please limit yourselves to one question and a single follow-up. Please note that you may re-enter the question queue if you do have additional questions. Please also note today's 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 and 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 capitals speak only as of the date 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. Tri-State Capital has no duty to and does not intend to update or revise forward-looking statements after the date in which they are made. For further 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 also 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 the most comparable GAAP measures, and reconciliations of the non-GAAP measures can be found on 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. He'll be joined by David DeMis, Chief Financial Officer, and Brian Federoff, President and CEO of Tri-State Capital Bank, and Tim Riddle, Managing Partner and CEO of Chartwell Investment Partners, for the question and answer session. At this time, I would like to turn the conference call over to Mr. Goetz.

Good morning, and thank you for joining us. Tri-State Capital delivered a very strong financial result in the second quarter as each of our businesses made meaningful contributions to our top and bottom lines. We believe Tri-State Capital Bank's 35% organic loan growth annualized from the link 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 $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. Additionally, net income available to common stockholders grew by some 78% annualized from the link quarter and 86% from the second quarter of 2020. We also delivered earnings per share of 41 cents, growing EPS even with a higher share count and preferred dividends from our December 2020 capital raise, continuing our record of efficiently and effectively putting new capital to work through the responsible and meaningful growth of this company. In addition, all this core earnings growth was achieved solely through organic means and with continued modest provision expense. What makes these results possible and 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, a metric you've heard us highlight regularly, was $678,000 in the second quarter on an annualized basis. This is more than twice the level that the median $10 to $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, Chartwell has done everything but slow down. Assets under management of $11.5 billion and annual run rate revenue of $39.9 million at June 30, 2021, each reflect growth of more than 20% from one year prior. In the second quarter, our asset managers' strong performance attracted continued positive net flows. Products like Core, Core Plus, and short-duration BB-rated high yield are attracting flows from new and existing institutional and retail clients seeking enhanced yield with a focus on credit quality and interest rate sensitivity. The combination of asset and revenue growth that we've achieved at Chartwell is further supported by incremental improvement in operating leverage as we continue to benefit from past initiatives to moderate Chartwell's 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 at almost half this rate, generating significant operating leverage. We're particularly proud of the Chartwell team's ability to grow revenues at this clip in the current rate environment, with fixed income representing some 60% of total assets under management. We're thoroughly focused on continued organic growth Chartwell's new business pipeline began the third quarter with more than $65 million in unfunded institutional commitments. We are also investing in product development, including a new Chartwell short-duration high-grade bond fund. This new product leverages the talents of our fixed income team and serves as a complement to our very successful 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 have total confidence in our fixed income team's abilities, and the sales and distribution team is motivated to bring it to market. Meanwhile, Tri-State Capital Bank grew total loans by more than 29% over last year, and nearly 9% during the quarter to $9.3 billion on June 30, 2021. That's annualized growth of 35%, lending to very high-quality clients in the differentiated and attractive markets we've served for years. This exceptional growth continues to be driven by private banking loans, which grew to some $5.7 billion, or nearly 62% of total loans, at the end of the quarter. That's because these loans, which are collateralized by marketable securities, cash value 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 a 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 formidable growth in this business moving forward. Additionally, private banking loan application volume is up 43% from the second quarter of 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 experience to borrowers and their advisors. Commercial loans totaled $3.6 billion at June 30, 2021, up 15% from one 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. Commercial and industrial lending was down from the link quarter as new originations and draws on lines of credit and growth in equipment finance production were offset by amortization and pay downs. 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 our CRE and CNI portfolios remain well diversified, have grown solely by organic means, and have strong pipelines. Our private banking business, which made up 61.5% 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 costs. Credit quality has long been a differentiator for tri-state capital, and we further improved our metrics in the second quarter. We reduced adverse-rated credits by some 33 percent 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. Non-performing assets totaled 12 basis points of total assets, and net charge-offs were just 10 basis points of average total loans. Importantly, the second quarter charge-off activity was previously reserved for in prior periods. Our significant loan growth 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 are managing against excess liquidity by timing our pipeline and putting our liquidity to work in high-quality assets. Deposit growth during the second quarter fully funded our loan and 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 30, 2020, and now make up 22% of total deposits. We're excited about our continued addition of meaningful and long-term client relationships. These deposits support our efforts to effectively manage deposit costs, which we reduced by six basis points during the quarter. This, in turn, contributed to our third consecutive quarter of net interest margin expansion, up another four basis points from the first three 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 Tri-State Capital's 22nd consecutive quarter of 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 as 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 non-interest income driven by our strong investment management fees and solid swap fees during the quarter. Excluding securities gains and losses, NII and non-interest income combined to generate record quarterly total revenue of $57.7 million. This reflects an increase of 10% from the link quarter, or 41% annualized, which we believe will further differentiate Tri-State Capital's latest results from similar size 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 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, and $11 billion, respectively. We are enhancing net income consequentially in a low-interest rate environment driven by our penetration of niche markets, our well-positioned distribution capabilities, and high-quality client service delivered by motivated professionals who are 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 to the bottom line on a consistent basis. We enter the second half of the year with strong confidence and healthy pipelines across all three 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 continuing to generate positive net asset inflows and expand segment profit margins at Chartwell, and continuing to grow net interest income dollars, all while maintaining our hallmark superior asset quality. That concludes my prepared remarks. I 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 one using a touch-tone telephone. To withdraw your questions, you may press star and two. In the interest of time, we once again do ask that you please limit yourselves to one question and a single follow-up. Please note that you may re-enter the question queue if you have additional questions. Once again, that is star and then one to join the queue. And our first question today comes from Michael Pareto from KBW. Please go ahead with your question.