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Edited Transcript of TSC earnings conference call or presentation 17-Oct-19 12:30pm GMT

Q3 2019 TriState Capital Holdings Inc Earnings Call Pittsburgh Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of TriState Capital Holdings Inc earnings conference call or presentation Thursday, October 17, 2019 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David J. Demas TriState Capital Holdings, Inc. - CFO * James Francis Getz TriState Capital Holdings, Inc. - Chairman, President & CEO ================================================================================ Conference Call Participants ================================================================================ * Matthew Covington Olney Stephens Inc., Research Division - MD * Michael Perito Keefe, Bruyette, & Woods, Inc., Research Division - Analyst * Russell Elliott Teasdale Gunther D.A. Davidson & Co., Research Division - VP & Senior Research Analyst * Stephen M. Moss B. Riley FBR, Inc., Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, everyone, and welcome to the TriState Capital Holdings' Conference Call to discuss financial results for the 3 months ended September 30, 2019. (Operator Instructions) 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 TriState Capital that may generally be identified as describing the company's future plans, objectives or goals. Such forward-looking statements are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those anticipated. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 on Forms 10-K and 10-Q. You should keep in mind that any forward-looking statements made by TriState 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. 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. To the extent, non-GAAP financial measures are discussed in this call, comparable GAAP measures and reconciliations can be found in TriState Capital's earnings release, which is available on its website at tristatecapitalbank.com. Representing TriState Capital today is Jim Getz, Chairman, President and Chief Executive Officer. He will be joined by David Demas, Chief Financial Officer, for the question-and-answer session. At this time, I would like to turn the conference over to Mr. Getz. -------------------------------------------------------------------------------- James Francis Getz, TriState Capital Holdings, Inc. - Chairman, President & CEO [2] -------------------------------------------------------------------------------- Good morning, and thank you for joining us. We're delighted to share our latest quarterly results with you this morning, not only because the milestones achieved and record-setting metrics delivered, but more importantly, because we believe, TriState Capital's performance is indicative of the company's commitment to execution, long-term growth potential and the confidence we have in 2020 and beyond. Our third quarter results clearly demonstrate the robust earnings power the company would build when it's designed to deliver growth and value in a variety of economic and rate environments. Continued organic loan growth propelled us over our $7 billion asset target, which you may recall was one of the financial performance goals we set for 2019. Total loans surpassed the $6 billion threshold for the first time, up 26% from 1 year prior. Loan growth was fully funded by 28% deposit growth compared to 1 year ago, total deposits also crossed the $6 billion mark and our loan-to-deposit ratio was under 100% for the second consecutive quarter. Net interest income reached the record level for the quarter supported by double-digit organic growth in both private banking and middle market commercial banking loans, which are up 28% and 24% respectively over the past 12 months. At the same time, our income statement is not solely dependent on spread income and is capable of producing strong earnings growth even in the current low LIBOR and short-term interest rate environment. Noninterest income continues to represent 30% of total revenue with fees reaching new record levels for the quarter and first 9 months of the year. We're very pleased with how our private banking, commercial banking and investment management businesses are working together to deliver strong, top and bottom line results. Third quarter revenue totaled a record $47 million, up more than 11% from 1 year prior. Through the first 9 months of the year, total revenue grew to a record $133 million, up more than 10% from the prior year. We continue to invest in our business with operating expenses in line with our stated single-digit annual growth rate goal for full year 2019. At the same time, the scalability of the business is evident in the bank's improving efficiency ratio, which is also in line with our low 50s goal for this year. Revenues pushed pretax income to new record highs for both the quarter and the first 9 months of the year, on pace with our 15% to 25% pretax income growth target for full year 2019. Our strong top line results flow through the bottom line. Earnings per share of $0.50 grew more than 6% from the $0.47 the company reported in the linked second quarter, that's an annualized 25% increase in earnings. The financial performance is the result of 3 businesses working in concert to drive differentiated and profitable growth, illustrating the flexibility and resilience of our unique model. Our private banking business delivered one of its best all-around quarters to date, as we fortified TriState Capital Bank's position as the nation's premier provider of marketable-securities-backed loans through financial advisers. Through private banking, we provide products, experience and solutions to high-net-worth individuals, trusts and businesses nationwide accessed through a network of financial intermediary firms, which we have spent years cultivating and now numbers some 207. Year-to-date, we have closed new private banking loans with over 1,000 individual advisers, who we had not worked with before 2019. Private banking loan balances totaled nearly $3.4 billion at quarter end, representing 56% of total loans and reflecting growth of 28% during the past 12 months. And the number of third quarter private banking loan applications we received increased over 26% for the same period in 2018. About half of these applications are coming through our digital loan platform and this continues to increase every quarter. We built this digital lending platform for the investment advisers, trust officers and other intermediaries we work with to help them more effectively and easily serve the high-net-worth clients. We expect to attract even more applications through this platform in future periods. Our middle market commercial banking business continues to have exceptional growth with total commercial loan balances at period end growing to $2.7 billion, an increase of 24% from September 30, 2018. Commercial and industrial loans grew by nearly 29% during the past 12 months approaching $1 billion. C&I originations remain strong, totaling approximately $104 million in the third quarter. Our C&I growth reflects the addition of high-quality relationship managers to our team and enhancements to our capabilities including more agile products like equipment finance. Commercial real estate loans totaled $1.7 billion, growing 22% from 1 year prior and comprising about 28% of total loans. CRE loan origination activity remains strong as well, totaling $121 million in the third quarter. Credit quality metrics remain pristine and, in fact, improved even further during the third quarter. Strong asset quality has become a hallmark of our performance and reflects the high-touch nature of the relationship we've developed with our clients as well as the disciplined underwriting standards of our team employees. Pipelines for our middle market commercial lending business continue to be robust, and we expect continued strong loan growth in the fourth quarter. Loan growth remains fully funded by our deposit franchise including our sophisticated liquidity and treasury management offering. We now have more than 500 treasury management clients including deposit-only and payments processing relationships with an essential need for TriState Capital's offering. Treasury deposit -- treasury management deposit account balances surpassed $1 billion threshold during the third quarter. Year-to-date, we've grown treasury management deposits by approximately $450 million and look forward to achieving our goals of adding $500 million in treasury management deposits during 2019. We continue to maintain flexibility in pricing deposits. Less than 30% of our deposits are of a term nature with the 7 months' duration. Just over half are of an institutional nature and repriced with the Federal Reserve rates or other indices. The remainder, approximately 20%, are at our discretion. Our total cost of funds for all deposits and interest-bearing liabilities improved during the third quarter, averaging 2.27%. We are very pleased with our ability to lower our cost of funds by a full 15 basis points compared to 2.42% in the linked second quarter, as we continue to focus on gathering lower cost deposits. As you may have noted, our third quarter news release, fees from interest rates swaps exceeded $4 million during the third quarter. We believe, borrower swap fee income will remain healthy in the $2.5 million to $3.5 million range for the fourth quarter. While borrower swap activity is largely triggered by the rate environment, our relationship managers worked methodically to maximize this fee income opportunity. A prime example is our success in building demand beyond our traditional commercial real estate borrowers within our large and growing private banking client base. In the third quarter alone, more than 20% of our swap fees were generated from private banking relationships. The majority of our noninterest income is generated by Chartwell Investment Partners subsidiary, which grew assets under management by 1.4% to $9.6 billion during the third quarter. Investment management fees for the third quarter totaled $8.9 million, down approximately 9% year-over-year. While we no longer expect to achieve our full year 2019 organic growth goal for Chartwell revenues, we believe, our unique products, strong investment performance and outstanding distribution capabilities continue to gather positive momentum. Chartwell's active investment strategies continue to deliver superior performance through the end of the third quarter. 71% of its products outperformed the respective benchmarks for the year-to-date period, 57% of its products were ahead for 1-year performance, 85% were ahead for 3-year performance and 75% were ahead for 5-year performance. This level of performance has been key to our ability to attract new business through the third quarter of 2019. Chartwell has attracted about $200 million of institutional new business. This compares to $169 million of institutional new business during all 2018. Overall, we are seeing a better environment on the institutional side of the business, and one of which we are in a strong position to take advantage of, in part, because of the refinements we've made to distribution and the experienced team we have assembled. Today, Chartwell's institutional new business pipeline is the strongest it's ever been. We believe investors are increasingly searching for proven, actively managed products to generate returns in this low-rate environment and Chartwell's track record and strategies that are difficult to replicate passively are capturing their attention. Products like our short-duration BB-rated high-yields and our mid-cap value strategy shine through here, and we believe, we have good opportunities within this search activity. At September 30, we had more than $80 million of institutional commitments that are anticipated to fund in the fourth quarter of 2019. In addition, we have considerably more new business in the pipeline that we are actively pursuing today, and we aim to win more than our fair share in the months ahead. We're also gaining on the retail side of our investment management business, expanding our relationships with financial and registered investment advisers, who are increasingly attracted to the unique and high-performing products we offer. We've generated approximately $351 million in gross retail sales through September 30, 2019. As with our institutional business, our retail pipeline is strong as it's ever been. As most of you know, we are actively evaluating opportunities to put our capital to work, to grow investment management through a strategic acquisition that would help us take assets under management above $15 billion. Those efforts continue unabated, and as always, we only pursue deals that will be immediately accretive to TriState Capital shareholders, are a strong cultural fit and provide complementary products offerings. TriState Capital's leadership has invested in its success and remains focused on building long-term value for shareholders. During the first 9 months of 2019, about a dozen senior executives and Board members, each made significant acquisitions of TriState Capital common stock, totaling in excess of $8 million. The strong earnings we reported in the third quarter and year-to-date reflect the effective execution of our engaged and invested management team. Our capital position is strong and enables us to be ready to act on an appropriate acquisition opportunity that may arise. Asset quality remains pristine and continues to differentiate us from peers and the industry. We have a diversified, sophisticated and multifaceted funding mechanism in place. In summary, we are well positioned for continued success in the fourth quarter and in -- onto the future. That concludes my prepared remarks, this morning. I'll now ask David Demas to join me for Q&A. Operator, please open the lines. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question today comes from Russell Gunther with D.A. Davidson. -------------------------------------------------------------------------------- Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [2] -------------------------------------------------------------------------------- I wanted to start on the continued C&I strength you guys have put up. It'd be helpful to get a sense for what the equipment finance vertical contributed this quarter? Perhaps some color on, sort of, pockets of geographic strength and any other thing you'd like to add in terms of how you're able to sustain such strong growth in C&I as well as related asset quality outlook for that loan bucket going forward? -------------------------------------------------------------------------------- James Francis Getz, TriState Capital Holdings, Inc. - Chairman, President & CEO [3] -------------------------------------------------------------------------------- Great. Let's talk about the equipment finance first. We launched that business in January and have seen good growth there so far this year. At September 30, 2019, we had approximately $40 million in that portfolio. But typically that business has its biggest activity in the fourth quarter, Russell, as companies think about equipment needs for the new year. So we'd expect those balances to continue to grow nicely through the remainder of the year. On the C&I front, we see that continuing to grow pretty handily for us over the next couple of years. We have laid the groundwork for this to a great extent during the recession when other banks were looking inwardly we had -- and had their own legacy issues, we had capital and we had funding. So we laid the foundation for this. And we're beginning to reap many of the benefits by the growth that we've been experiencing. We are seeing this growth on C&I across all our regions. Some of it is particularly predominant, what we see developing like in the Philadelphia area, where there's has been just some disruption in the banking arena there with BB&T acquiring Susquehanna and Nat Penn, and we've been able to acquire talent and assets as a result of that. But I would say all 4 of our regions are actively participating here. We now have a group of people that, for the most part, have been with us on average over 10 years. So they're pretty well established, and we expect this continue to grow pretty nicely for us. We have some capital call facilities that we've been picking up as well and that business has been growing pretty nicely, and we have about $75 million outstanding there right now. And we expect it to go up about another $25 million as we go into the new year. -------------------------------------------------------------------------------- Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [4] -------------------------------------------------------------------------------- Great. Jim, I appreciate that. And then just your view on the asset quality outlook within C&I. I understand that favorable dynamics in view of loss content within private banking. But it'd just be helpful to get your sense, your view of perhaps normalized losses within this growing C&I book over the next couple of years. -------------------------------------------------------------------------------- James Francis Getz, TriState Capital Holdings, Inc. - Chairman, President & CEO [5] -------------------------------------------------------------------------------- Well, I'm surprised you don't consider our current loss situation normalized. I'm assuming we're the only bank you'll speak to today that has 0% in nonperforming loans. So it's -- right? It's $185 million -- $184 million in nonperforming loans. We fully anticipate the quality of this portfolio to continue, as you're well aware, over the years, we've invested a considerable amount of money in a top-notch credit analytical staff that we have in place today. And by considerable, I mean, millions of dollars. We have about 23 of them in place now. They're career analysts and they do very detailed scrutiny on the individual credits. They create what I would characterize as positive friction with the relationship managers in the field, and they’ve really provided us with some strength that we value, just like you do in the asset management industry, with security analyst in place. And it differentiates us from many other banks in the sense that they look at their credit staff as an intermediary step to becoming a relationship manager and these are clearly the career people. I think you've probably met Tom Groneman, our Chief Credit Officer. I consider him to be one of the best in the country. You can mention any of our commercial credits to him, and he's quite articulate on every single one of them and that's gone through his staff. So we would say that I don't think our nonperforming loans are going to get any lower than $184,000 with a $6 billion portfolio. But I expect us to be in a very good situation going into the new year that you're not going to see a lot of negative activity there. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- The next question today comes from Michael Perito with KBW. -------------------------------------------------------------------------------- Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [7] -------------------------------------------------------------------------------- I wanted to start on kind of combined Chartwell capital question here. I mean you guys, with the low-risk balance sheet you have, obviously, have some room to have our capital below kind of what we would expect to see peer banks with more traditional portfolios. But as we look at the Chartwell performance over the last 5 or 6 quarters, I think, they have struggled a little bit in the environment. I think the net growth you guys have shown has -- had been solid, but revenues have had kind of a downward tilt and end margins haven't really improved. So I guess the question is with how well the rest of your business is doing currently, does it make more sense to be allocating capital to the growth opportunities there? You guys try to internally improve Chartwell's performance a little bit? Or do you think that kind of allocating capital to Chartwell could help accelerate their improvement by adding scale over time? -------------------------------------------------------------------------------- James Francis Getz, TriState Capital Holdings, Inc. - Chairman, President & CEO [8] -------------------------------------------------------------------------------- Okay. Let me give you a clear and fair perspective on this. There -- if you look at this from the standpoint of what their contribution is for the first 9 months of the year, it's around 19%, okay? So we consider that a meaningful type of contribution. If you look at it holistically, and if you look at it for this quarter, I think it's about 10% in this -- Mike, okay? But you have to ask yourself, why are you in this business and you're in the asset management business because there's recurring fee income and it provides this company with a lot of cash flow, okay? So it really does strengthen the company and provide us with a much higher level of -- a considerably higher level of less risk profile for the company. So we consider it an intricate part of the company. From a performance standpoint, the investment performance really couldn't get much better, okay? So you and I are talking about the financial metric contribution. When we bought this company in March of 2014, the first year -- the previous year that -- it had thrown off $25 million of revenue. This year, the revenue is going to be more in line with 38% -- $38 million. We expect the next quarter because some of the opportunities we see on the sales end of it with the flows are going to look better. It's only been in the past 2 quarters that we've had negative flows here. So we feel really very positive about the business. We're comfortable with the leadership team and the investment team that's in place here. You have to realize that things are not instinct gratification. If you take a look back and I take you back to 2014, 2015, 2016, their contribution was in excess of 25%, okay? 17', 18' and '19, it hasn't been up to that particular level, but either has the industry that they find themselves in. The pricing that we're finding in the marketplace is quite attractive. And we clearly -- I would suggest you, if you dissected their business, you might want to look at the discipline that's been in place around expense management there to match the revenue and retain the growth outlook based on performance and distribution. So you really have to dissect this a bit, and you have to understand that this is a business that has a lot of runway with regard to growth into the future. So we feel to take it to additional critical mass. It is not the wrong thing to do. And the way you can find the marketplace today, it's becoming more of a sellers' market -- more of a buyers' market, I mean, than a sellers' market, and it previously was a sellers' market. So we're pretty comfortable with the commitment strategically that we have made, and we're very comfortable with the 30% of noninterest income that between Chartwell and swap fees are generated here for the consolidated franchise. -------------------------------------------------------------------------------- Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [9] -------------------------------------------------------------------------------- Got it. And then a separate question. Just the comment in the prepared remarks about the swap fee. I think it was -- you expect it to be about $2.5 million to $3.5 million in the fourth quarter. As we kind of think about that line more broadly, I mean, if we are -- do you guys feel that given kind of the expansion that you have done in offering that product beyond the commercial real estate customer base that now it's a decent offset for you guys if we kind of remain in an environment where rates continue to decline and which obviously will have some drag on your margin, that balance can remain a bit elevated in that type of environment and be a little bit more of an offset for the lower margin that you guys have had historically. Is that a fair way to think about it? -------------------------------------------------------------------------------- James Francis Getz, TriState Capital Holdings, Inc. - Chairman, President & CEO [10] -------------------------------------------------------------------------------- The way that I would look at it, I think, it's a fair way, but let me give you a fairer way to look at it. This is a business that does absolutely prosper more in a declining rate environment. But when you've reached that decline and it plateaus for a while, people will continue to have an interest in this because they want to secure the rate for the future. So we would expect to have a fairly robust business here going into the new year with the commercial real estate business complemented by the private banking business, which you saw the private banking business was about 20% of the revenue there. And we're just beginning to penetrate that market at this time. And we also have opportunities there with various loans that we're putting on, sometimes there are some size secured by marketables and the people want to lock in a rate. So it's not unusual, like, the other day we put a loan through and the fee was like $113,000 on it. So it's a -- I wouldn't say, classified as a recurring fee income business like asset management is, but it's got to be pretty consistent in a decline and stable, low interest rate environment. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- The next question today comes from Matt Olney with Stephens. -------------------------------------------------------------------------------- Matthew Covington Olney, Stephens Inc., Research Division - MD [12] -------------------------------------------------------------------------------- Jim, I wanted to start on the private banking business. That's seen some impressive growth in recent years. I think you've noticed part of that growth is from very little competition. But I'm curious what your take is on the discount brokers that are now racing towards 0 commissions. And I think the private banking business the TriState does has some decent size business with some of the discount brokers. So it seems like their model is changing right now. And I'm curious, how you believe these changes in their model could affect the competition for your private banking channel? -------------------------------------------------------------------------------- James Francis Getz, TriState Capital Holdings, Inc. - Chairman, President & CEO [13] -------------------------------------------------------------------------------- Well, from our standpoint, I think, it's a very positive situation because of the fact that maybe more people put securities with them because they can trade their securities for 0. So it would be helpful to our cause if you want to look at that, that way. To be quite candid, I am delighted we're not in that business. We are a for-profit organization here and that's going to be more challenging for them. But at the end, you're probably aware the way these broker-dealers make a lot of their businesses, the free cash flow that goes through the company and the spreads they're able to make by putting it back into the market. Some of them, like an E-Trade, have their own captive bank, the Schwab has their own captive bank, and they're able to deploy a lot of that cash in that manner. So I would say we would see it as a long-term, positive situation as long as those folks can continue to find alternative means of offsetting the level of trading income that they've been experiencing over the past couple of years. But as you're well aware, that level of income has been coming down throughout the broker/dealer marketplace. So I don't see that as having a much of a major impact on our business at all. -------------------------------------------------------------------------------- Matthew Covington Olney, Stephens Inc., Research Division - MD [14] -------------------------------------------------------------------------------- And then Jim, what about the impact of CECL within your loan portfolio? It's very unique with CECL reserve methodology starting next year. I'm curious what the impact will be on your future provisioning? -------------------------------------------------------------------------------- David J. Demas, TriState Capital Holdings, Inc. - CFO [15] -------------------------------------------------------------------------------- Hey Matt, it's David. Stay tuned on CECL. We are preparing to provide a lot more detail and its potential impact on -- in our Form 10-Q, which will be filed in early November. -------------------------------------------------------------------------------- Matthew Covington Olney, Stephens Inc., Research Division - MD [16] -------------------------------------------------------------------------------- Okay. Great. And if I could sneak one more in, David. The tax rates have been volatile so far this year. What's the outlook on the tax rate for the fourth quarter and looking to next year? -------------------------------------------------------------------------------- David J. Demas, TriState Capital Holdings, Inc. - CFO [17] -------------------------------------------------------------------------------- So Matt, as you know, we've routinely evaluated a number of tax planning strategies, historic tax credits as well as alternative energy. And as always, that effective tax rate in any given quarter is the impact of both the timing of that as well as the proportion of consolidated earnings attributable to the bank versus investment management. The change this quarter was driven by an unexpected outlook in terms of a tax credit that may not close now this year, which caught us by surprise. And it was also driven by really strong pretax net income growth. So we see the effective tax rate being somewhere around 15% for the remainder of the year. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- (Operator Instructions) Our next question today comes from Steve Moss with B. Riley FBR. -------------------------------------------------------------------------------- Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [19] -------------------------------------------------------------------------------- I apologize for jumping on late. So if my questions have been asked, I apologize for that. I just -- maybe I'll start on expenses. Any update or outlook you can give on there? And in particular, just the drivers in the compensation line, if that's sticky? -------------------------------------------------------------------------------- David J. Demas, TriState Capital Holdings, Inc. - CFO [20] -------------------------------------------------------------------------------- We've had a focus on operating leverage for a number of years, growing revenue at a meaningfully higher rate than expenses, and we've been able to do this. And to put into context, 2 years ago, we were growing expenses at 17%. Last year, we were growing at 11% to 12%. This year our stated goal is to grow it under 10%, and we're accomplishing that goal so far. And we're going to work hard to continue to grow our expenses less than double-digit pace. This is an organization that is highly motivated by incentive compensation. Virtually, every employee is on some sort of incentive comp program. And so as pretax net income rises and you see the production levels that we're seeing in swap income across the loan book, et cetera, compensation increases and so that increases proportionately in accordance with the growth. So that's really what the driver is for the comp increase this quarter. -------------------------------------------------------------------------------- James Francis Getz, TriState Capital Holdings, Inc. - Chairman, President & CEO [21] -------------------------------------------------------------------------------- Steve, this is Jim. If you look at the financial metrics that we really pay a lot of attention to, you'll see, if you compare the first 9 months of '18 and first 9 months of '19, you will see that our revenue was up 18% and our expenses -- and we'd indicated to folks in January, we expected to have our expenses in a single-digit number for this year and the expenses were up 8%. And we really pay an awful lot of attention to pretax net income because we feel that's the core of the company and you can analyze the core looking at that. And that's up year-to-date for the first 9 months over 20%, and EPS is up about 11%. So that EPS and that pretax is what drives the metrics in a lot of our compensation programs here, to be candid with you. -------------------------------------------------------------------------------- Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [22] -------------------------------------------------------------------------------- Right. That's helpful. And then my second question, just wondering, given the yield curve inversion we saw here in the quarter and the challenges at the end of the quarter, if you could quantify that impact to the margin for the quarter? Any help around that would be great. -------------------------------------------------------------------------------- James Francis Getz, TriState Capital Holdings, Inc. - Chairman, President & CEO [23] -------------------------------------------------------------------------------- Well, I'll let David work to quantify it. But let me talk to you a little bit about our perspective on net interest margin, okay? For the business that we're building, we're building a business where relationships are paramount, and we continue to be gathering relationship deposits to fund our very high-quality borrowers' credit needs. We're also building a business that's much leaner, like, you're probably aware that net interest income doesn't include any type of expenses. And so our noninterest expenses are about 25% to 30% less than other organizations our size. If you take a look at the risk profile, it's not there in the net interest margin. Our earning assets are dramatically different than other institutions and we would argue lower risk in that case. And NIM at our bank and others does not reflect the competitive advantage we enjoy from having a branchless operation. We're also generating about 30% of our revenue from noninterest income that isn't there either. And if you look at our marketable-securities-backed loans, particularly, the large dollar variety, while they're lower in spread, it contributes to our ongoing reductions in our efficiency ratio that's now, for the bank, around 50%. So we also believe, we've been a leader in deposit pricing. And while competitors catch up, we expect our funding cost to moderate through the second half of '19 assuming the Fed funds target rate range is maintained or incrementally lowered in the back half of the year. David, do you want to comment? -------------------------------------------------------------------------------- David J. Demas, TriState Capital Holdings, Inc. - CFO [24] -------------------------------------------------------------------------------- Yes. Steve, as Jim has so well described, it's a business model that he formulated more than 10 years ago that is very agile and can demonstrate good growth and good results in a variety of environments. About 95% of our loan book is variable rate, about 75% of our deposit book is variable rate and so as you've heard Jim talk about, as we've seen the cost of funds come down measurably in the quarter. There are times when effective Fed funds and LIBOR, those 2 relationships get a little bit out of whack when LIBOR is anticipating a Fed cut, which occurred in the quarter. I don't have an exact number, but I would estimate that impact to be somewhere between $600,000 to $800,000 of impact for the third quarter. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- The next question today is a follow-up from Russell Gunther of D.A. Davidson. -------------------------------------------------------------------------------- Russell Elliott Teasdale Gunther, D.A. Davidson & Co., Research Division - VP & Senior Research Analyst [26] -------------------------------------------------------------------------------- Just a bit of a ticky-tacky question, David. I heard you on the recommitment to high single-digit expense growth for this year. Maybe just a little color for modeling purposes on the dynamic going forward within the state capital shares tax, please. -------------------------------------------------------------------------------- David J. Demas, TriState Capital Holdings, Inc. - CFO [27] -------------------------------------------------------------------------------- Sure. So we have the benefit of a onetime item this quarter that we worked very carefully with external advisers. It was a strategy that we identified. We talked to the state of Pennsylvania about it and we are able to prevail on that. I don't expect it to continue and so I expect that we would get back to more historic norms in terms of shares tax expense. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- The next question today comes from Michael Perito with KBW. -------------------------------------------------------------------------------- Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [29] -------------------------------------------------------------------------------- Just first on the -- follow-up on the margin. David just looking through the average balance sheet, the cash balances looked a little elevated. Do you have any insight as to -- has that normalized since, on a period-end basis? And would that presumably add a little, 2 or 3 basis points to the NIM if those were at a more normalized level in the quarter? -------------------------------------------------------------------------------- David J. Demas, TriState Capital Holdings, Inc. - CFO [30] -------------------------------------------------------------------------------- They have normalized, Mike. And as we've, I think, shared with you on the past few -- I think you had a question on this about a quarter or 2 ago. Given where the rate environment is at the moment, we've been staying liquid in short and then the holding cash and cash equivalents versus putting money to work in the investment portfolio right now. So liquidity is strong and it will remain strong, and we really like the balance sheet position at the moment. -------------------------------------------------------------------------------- Michael Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [31] -------------------------------------------------------------------------------- Got it. And then I was wondering, David, can you provide us, I don't know if there's something you have handy, but the incremental assets and liabilities that you're adding to the balance sheet, can you maybe share what the spread or the margin looks like on that relative to kind of the legacy balance sheet? I guess what I'm trying to get at is trying to get a sense of where -- that 75% variable deposits, 95% variable loans, as you guys grow, though, I imagine the incremental funding cost will come down. I'm just trying to get a better sense of that dynamic if you have any figures around that. -------------------------------------------------------------------------------- David J. Demas, TriState Capital Holdings, Inc. - CFO [32] -------------------------------------------------------------------------------- Let me give you some facts and hopefully it gives you enough color. Let me start on deposits. Our CD book is about a 7-month duration right now and the yield on that is about 250 at the moment, where new CDs are being issued somewhere around 180 to 185. And so good pricing opportunities there as that very short CD portfolio matures and reprices. On the loan side, we're putting new C&I loans on somewhere between 215 and 250 over LIBOR, commercial real estate is going on somewhere between 225 and 250, 260 over LIBOR and then private banking is going on at about 150 to 250 over LIBOR. And so that's where pricing stands at the moment. We continue to feel that we've got a really good agile business model and can respond to a variety of interest rates scenarios. -------------------------------------------------------------------------------- Operator [33] -------------------------------------------------------------------------------- This concludes our question-and-answer session. I would like to turn the conference back over to Jim Getz for any closing remarks. -------------------------------------------------------------------------------- James Francis Getz, TriState Capital Holdings, Inc. - Chairman, President & CEO [34] -------------------------------------------------------------------------------- Thank you very much for your continued interest in TriState Capital and your participation today. We look forward to updating you on our fourth quarter and full year 2019 results in January. Have a great day and happy new year. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.