Acquisition Of Chartwell Investment Partners By TriState Capital Conference Call (Transcript)

Jan. 8.14 | About: TriState Capital (TSC)

TriState Capital Holdings Inc. (NASDAQ:TSC)

Acquisition of Chartwell Investment Partners by TriState Capital Conference Call Transcript

January 8, 2014, 08:30 AM ET

Executives

Jim Getz - Chairman, President and CEO

Mark Sullivan - Vice Chairman and CFO

Analysts

Matt Olney - Stephens

John Moran - Macquarie Capital

Chris McGratty - KBW

Bryce Rowe - Robert W. Baird

Matt Kelley - Sterne Agee

Operator

Good morning everyone and welcome to today’s TriState Capital Holdings Investor Conference Call. Before turning the call over to management, I would like to remind you that this live presentation that will be referenced on this morning’s call has been posted on the company’s website at investors.tristatecapitalbank.com.

As noted on Slide two of the presentation, today’s call may contain forward-looking statements by the Company. These statements 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 currently 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 prospectus filed as part of a Registration Statement on Form S-1 as well as the most recent quarterly report filed on Form 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 their definitions can be found in TriState Capital’s slide presentation. Representing TriState Capital on today’s call are Jim Getz, Chairman, President and Chief Executive Officer and Mark Sullivan, Vice Chairman and Chief Financial Officer.

At this time, I would like to turn the conference over to Mr. Getz.

Jim Getz

Good morning and thank you for joining us on relevantly short notice today. As you know, we’ve been successful in raising capital, most recently with last year’s initial public offering. And we have delivered on our commitment today to execute quickly and put our capitals to work for the shareholders through an investment management acquisition that essentially compliments our business.

Many of us who on TriState Capital’s management team and Board have spent a substantial part of our careers building investment management businesses and financial services distribution companies. We've long held that for TriState Capital the great acquisition would not only give us an immediate boost to fee income but set the stage for sustainable non-interest income growth by leveraging our distribution network and our lean business model. For those of you who’ve been following us for some time, you know that we’ve long been planning to leverage our national financial services distribution capabilities and experience through such an acquisition.

If you would turn to Slide three of our presentation, you’ll see a list of very specific criteria by which we evaluated all the potential candidates for an investment management acquisition. Again, for those of you who have followed us through the IPO these will be very familiar to you. First, any acquisition candidate needed to have proven leaders, talented people at all levels and scalable infrastructure that could contribute to the future growth and prosperity of TriState Capital.

It had to be compatible with the culture here at TriState Capital. Specifically we bring together professionals who have experience with some of the largest and best companies in financial services and given the opportunity and responsibility to be entrepreneurial in building the business. At the same time, a conscientious risk in compliance culture is essential.

We wanted a firm based in our geographic footprint, sufficient critical mass with assets under management with $3 billion to $10 billion and a record growth. We wanted to see credible track record of investment performance and needed to be profitable. We wanted a high level of non-interest income with long-term potential for continued growth. It could not compete with a financial intermediaries to make-up our national referral network for our private banking channel.

In fact, we sort out businesses that offered us meaningful upside by leveraging our distribution capability to maximize the growth potential of the investment management business. The deal had to be immediately accretive to our earnings per share and offer an attractive rate, internal rate of return. As we wanted to take advantage of the business line that by comparison with banking is capital like.

After meeting the team at Chartwell and conducting our due-diligence, it became clear that this firm meets or exceeds every one of our criteria. When it comes to leadership and talent, CEO, Tim Riddle and his partners and associates throughout Chartwell have build a world-class investment manager over the past 17 years. The entire team will be joining us and we believe they will be very important contributors to TriState Capital’s long-term success.

Culturally, Chartwell is an outstanding fit and it will become the center of excellence for TriState Capital’s Investment management business. One of the main attractions to the Chartwell team members is the fact that they are entrepreneurs like us. They built the business from scratch into a proven and successful $7 billion investment management firm. Their firm is based right in our West -- Eastern Pennsylvania regional markets, so it clear met our geographic criteria. At the same time, it serves institutional clients nationwide.

Chartwell clearly has critical mass with assets under management of $7.5 billion with 150 institutional clients, excellent client retention metrics and a demonstrated record of growth. It has a very credible track record of investment performance and I’ll turn back to that in a moment. It’s a solidly profitable firm with estimating EBITDA of $6 million for 2013. It’s also going to contribute to our fee income and further diversify our revenues in the immediate term with estimated total revenues of $25 million for 2013. Again, the Chartwell’s team has been able to consistently grow its business and we believe that together we can accelerate its profitable growth.

Indeed we believe we can accelerate Chartwell’s growth by leveraging both of our organizations, distribution capability. In fact, with Chartwell we believe, we've threaded the needle in identifying a firm with untapped potential focused on institutional clients, which does not compete with and in fact compliments her own successful private banking, channel business and the financial intermediaries we rely upon.

While one would think this should go without saying, given other investment management deals, we think it’s important to emphasize that we expect the transaction to be approximately 25% accretive to TriState Capital’s earnings per share in its first full year. It also offers us an attractive internal rate of return, which we expect to be about 25% and we focused on investment management in general and Chartwell’s specifically because it’s a capital light business and in fact we expect Chartwell will generate capital and liquidity through the bank.

If you turn to Slide four, we've summarized some of the specific terms of the transaction. This will be structured as an asset purchase. We will be utilizing our capital raise at the time of the IPO. The execution of this is part of our business plan, is a purchase price here of $45 million cash at closing. It’s valued at 7.5 times Chartwell’s 2013 adjusted EBITDA of at least $6 million. We've put in place reserves of $13 million placed in escrow, subject to various contingencies.

There is additional performance-based contingent considerations in place that are valued at six times post-closing incremental Chartwell adjusted EBITDA growth. And that will be approximately we believe $15 million, which will be accrued at closing based on the projected growth, in 2014 Chartwell adjusted EBITDA to $8.5 million and this will be payable in the first quarter of 2015 based on actual 2014 Chartwell adjusted EBITDA growth and up to 60% of this maybe paid in TriState Capital bank common stock at our [auction]. At closing, we do anticipate to be in the first quarter of this year.

On Slide five you’ll find a summary of the projected financial impact of the transaction. Year one earnings per share accretion approximately 25%, year one earnings per share of the contribution approximately $0.15, internal rate of return, 25%, the tangible booked value at close $8 – approximately $8.40, and the TE/TA, TA at close 13.5% approximately.

On the next slide, you can see how adding a capital-wide investment management business will immediately improve our risk profile net balance and diversification to our sources of revenue. The revenue mix if you look at TriState Capital Bank today, 93% of our revenues, net interest income and only 7% non-interest income and Chartwell obviously 100% is non-interest income. The projected consolidated company, 67% net interest income, 33% non-interest income.

We also wanted to illustrate to you how we expect to enhance and leverage our distribution capabilities through this transaction, which you can clearly see on Slide seven. TriState will continue to provide loans and deposits. We have an opportunity to provide those loans and deposits to over 150 institutional clients of Chartwell. We will also be effectively cross-selling to our 70-plus financial intermediaries and 500 middle-market companies, Chartwell’s investment capabilities. So TriState will be providing banking services to Chartwell investment services.

If you turn to Slide eight, you can see the record of profitable growth that Chartwell team has delivered over the past three years. It's worth taking a look at the Chartwell assets under management and how its grown from 2011 from $4.8 billion through the end of 2013 approximately $7.5 billion. Now, what you want to keep in mind here with this business is the way the flows actually act. If you look at our weighted -- Chartwell’s weighted average fee is 39 basis points, and the average assets during 2013 was some $6.31 [million].

But we want to look carefully at the flows in 2013, 68% of the flows or approximately $1.6 billion was due to capital appreciation and 32% was new business, some $736 million. But what you really have to do is to take a look at what the drivers of this business was that drove the 68% capital appreciation.

Much of the drivers was the small cap and keeping the cap product that Chartwell has keep in mind the S&P 500 was up some 29% and we want to also dissect the fixed income growth, which is sort of contrary to what you’ve seen happening at many of the money managers through the country like a [Pemco].

Those fixed income assets under management was some $1.2 billion at the end of 2012 and $1.7 billion plus at the end of 2013, making up some 23% of their assets and what you have to keep in mind is the complexion of their client-base, much of these assets were driven by Taft-Hartley plans that are quite often very conservatively allocated with a concentration in fixed income. And secondly, they benefited from their short duration BB high-yield funds that went from some $200 million to $650 million in 2013 and they had very credible performance in their corporate bond funds.

You also want to pay attention to the revenue growth that the company experienced going from some $17.7 billion -- $17.7 million in 2011 to $25 million in 2013. If you look at the flows in 2012, 80% of it was due to appreciation, 20% new business and they had a state pension plan of about $250 million withdrawn where the pension plan was reallocated out of fixed income and the flows were relatively flat in 2011. On the next slide we have a summary of the three years return on a Chartwell’s fund strategies. And you can see here highly incredible three-year performance across all the disciplines.

Moving to Slide 10, you can see the breadth and the types of institutional clients Chartwell serves. They had some more than 150 institutional plan sponsors, public mutual funds, corporations, government entities, Taft-Hartley plans, endowments and foundations.

Finally, I want to turn to Slide 11 and reiterate that because Chartwell’s workforce is so strong from top to bottom, we’re able to offer very comprehensive product set providing multiple investment strategies that can be immediately be offered to financial intermediaries. As all of you are aware, this is a people business and what I want to point out to you is that 40% of all the employees at Chartwell have signed a combination of restrictive and non-solicitation agreements.

The terms, the executives have an ongoing restrictive agreement the non-executives have executed a four-year agreement. We have in place incentive programs that focus on retention, financial performance and investment performance. Again, the entire Chartwell team will remain with the business following the acquisition and we could not be more pleased to have them joining us in 2014.

That concludes our prepared remarks. I’d like to ask the operator to open up the call for any questions that you may have of Mark Sullivan, our CFO and myself. Thank you.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Matt Olney of Stephens. Please go ahead.

Matt Olney - Stephens

Good morning. Congratulate Jim and Mark

Jim Getz

Thank you, Matt.

Matt Olney - Stephens

Hey, Jim, you are mentioning assets of Chartwell about $7.5 billion can you talk more about the distribution upside of growing those assets beyond those levels and what are your thoughts about the speed at which the new products can be rolled out through distribution network?

Jim Getz

Okay. What we’re going to be focused over the next two months is what needs to exist to take this company from $7.5 billion to $20 billion over the next several years. And so, the plan would be to continue to enhance the institutional business that’s currently in place at Chartwell and then build alternative distribution.

And our focus would be on taking their product line up and expanding potentially their client line-up out to financial intermediaries that we would classify as a trust company, a broker dealer, an investment advisor, a family office, essentially leveraging off the network that we've put in place here over the past seven years and expanding that pretty [candidly] to build up the high level of non-interest income that again will by building that up, whether will reduce somewhat further the risk profile of the banks. So, we see Chartwell continuing to successfully grow their institutional business and us working with them to put together a sales for us out to financial intermediaries who essentially diversify their book of business.

Matt Olney - Stephens

And as a follow-up, Jim, I think in the press release you mentioned, expectations for it will be 25% accretive in the first year, which is also about $0.15 to year one. Does this imply you are expecting about $0.60 of earnings over the next year? Those are assuming our industry using consensus forecast when you say that?

Mark Sullivan

Hey Matt, we missed that, could you go over that question once more?

Matt Olney - Stephens

Yes. Sure. So the press release highlights that you expect the acquisition to be about 25% accretive to first year, and that’s also about $0.15 to year one. So, does that imply you’re expecting about $0.60 of earnings over next year or are you just using some type of consensus forecast when you say that?

Mark Sullivan

Matt, this is Mark. Keep in mind the $0.15 accretive is for the first 12 months of post acquisition. So, assuming the first quarter, say March of ’14, that what we’re looking on that $0.15 accretive would be from March ’14 to March ’15. So, sinking it up to calendar earnings would be slightly different. It's roughly, I would say roughly 25% accretive and it’s not significantly different from the 15 month versus 12 month.

Operator

And our next question will come from John Moran of Macquarie Capital. Please go ahead.

John Moran - Macquarie Capital

Hey, guys. How it’s going?

Jim Getz

Good John.

John Moran - Macquarie Capital

Good. So, I think you guys actually addressed most of the questions that I had in the prepared remarks, but just kind of curious on the 25% accretion estimate and it looks like 40% projected EBITDA growth for Chartwell in ’14 versus ’13, how much cross-selling to the new distribution channels that you guys bring is sort of assumed in those numbers or is you know the 25% accretion estimate really just kind of layering Chartwell and their existing growth on top of you guys?

Jim Getz

John, this is Jim. It’s purely layering their existing growth. As you’re probably aware, it takes a while to build effective alternative distribution. And I would say the impact of anything that we’re going to be doing will not be seen to the earliest to the fourth quarter of next year.

John Moran - Macquarie Capital

So, we’d be looking kind of 4Q of ’15 before the distribution was really kind of synced up and they were kind of cross-selling more into your channel?

Jim Getz

Yes. But keep in mind distribution cost something, okay. So, I would say that it will take the full year of 2014 to put in place what we’d like to put place to build the distribution. So it would be most effective in 2015.

John Moran - Macquarie Capital

Got it. Thanks for that. And then -- and then just kind of my second point is an unrelated follow-up. It sounds like 40% of the folks at Chartwell are restricted and that they sold for -- they signed a four-year agreement, did I hear that correctly?

Jim Getz

Yes. There are 19 individuals that are impacted by that and there is about 48 employees there.

John Moran - Macquarie Capital

Great. Thanks very much. Congrats guys.

Jim Getz

Thanks.

Operator

Our next question will come from Chris McGratty of KBW. Please go ahead.

Chris McGratty - KBW

Hey, Good morning, guys.

Jim Getz

Good morning, Chris.

Chris McGratty - KBW

Mark or Jim, can you repeat, I missed the [flow]. You talked about the change in asset management -- assets under management where [you have some new receipts], can you break out again on a consolidated basis what the delta was from flows versus marked depreciation for maybe 2012 and 2013? Thanks.

Mark Sullivan

Yes. We had a hard time in hearing you, but I think what you’re asking me to do is to essentially go over with you once again the flows for 2013.

Chris McGratty - KBW

That’s right.

Mark Sullivan

Okay. 68% of the flows and we’re talking about the difference between $7.5 billion and $5.2 billion. 68% of that was driven by capital appreciation, 32% by new business and to be helpful their average assets under management during 2013 was $6.31 billion and their weighted average fee is 39 basis points. So, if you’re doing a calculation on the money coming in the second half of the year, you just -- you recognize it all hasn’t been there for the full year.

Chris McGratty - KBW

Okay. That’s helpful. That’s what I was looking for. Just as a follow-up on the longer term efficiency of the bank, your low cost of not having branches helps the efficiency but this is a -- we requiring a higher efficiency ratio business. Can you speak to kind of longer term efficiency of the combined company and maybe how this may or may not change I think what your goal were when you went on the road of a one in a ten ROA, ROE? Thanks.

Mark Sullivan

Yes. I think on regard to that Chris, the efficiency immediate impact in '14 would not bring the bank’s standalone efficiency down combined would have a slight upward pull, but similar to TriState, Chartwell’s infrastructure is fully built out as capable of taking on significantly more AUM without adding to their infrastructure. So we would expect in time that over the next two to three years that it would come more in line with TriState as we continue to drop our efficiency ratio as well.

Operator

Our next question will come from Bryce Rowe of Robert W. Baird. Please go ahead.

Bryce Rowe - Robert W. Baird

Thanks. Good morning. Good looking transaction. Congratulations.

Jim Getz

Thank you.

Mark Sullivan

Thank you.

Bryce Rowe - Robert W. Baird

Wanted to ask just about the assumptions behind the growth in EBITDA from '13 to '14, looks like from the presentation goes from roughly $6 million to $8.5 million, is that an operating margin improvement to drive that or is that purely just recognizing the full amount of growth from '13?

Mark Sullivan

It's a combination of both, but primarily a continuation of a run rate from '13, significant business coming in growth in the second half of the year, but there is as the revenues grow, there is a better ratio as well to the bottom line.

Jim Getz

Bryce, you want to keep in mind that this is institutional business and quite often, you get a commitment on a mandate and sometimes it partially comes in, sometimes it all comes in at once, sometimes you get the commitment and the money doesn't come in for 30 days, 60 days, 90 days; things along that line. So it's like a pipe line and obviously and looking at the numbers here, it's had very incredible performance in 2013 and 2012 that allowed them and that will drive additional mandates for them and their new business initiatives on the institutional side in their forthcoming year.

Bryce Rowe - Robert W. Baird

Okay. That's helpful and then an unrelated follow-up question and you may not be able to speak to this, but any kind of initial look into fourth quarter trends at the bank? What to expect when you guys report earnings in few weeks or so?

Jim Getz

We are currently as you are aware, in a quiet period. What I would indicate to you that we would strongly reinforce what you heard at the last conference call and we are committed and believe that we can continue to deliver to the marketplace a compound annual growth rate of 15% over a five-year period of time and we see nothing that prevents us from doing that at this point.

Operator

Our next question will come from Matthew Breese of Sterne Agee. Please go ahead.

Matt Kelley - Sterne Agee

Yes hi. This is actually Matt Kelley. I was just curious was this transaction kind of shopped around an auction or was it a negotiated deal between the two parties?

Jim Getz

Matt, how is everything in Portland and Maine today by the way?

Matt Kelley - Sterne Agee

Probably similar to you folks up there, cold.

Jim Getz

Yes, it's very cold here. This was not shopped around. It wasn't an auction situation. We've been in discussions periodically with Chartwell for the past 24 months. We did even utilize aggressively, we needed a fairness opinion obviously, investment bankers, they just worked together and crafted the deal.

Matt Kelley - Sterne Agee

Okay. And then how the EBITDA margins at Chartwell fluctuated over the last couple of years? As the assets have been building, what's the overall profitability trends been like?

Mark Sullivan

The margin's probably fairly consistently in the 25% range.

Matt Kelley - Sterne Agee

Okay.

Mark Sullivan

Past several years.

Matt Kelley - Sterne Agee

Got it. And then just last question. The relationship between tangible dilution, earnings accretion and thinking about earn back, how do you folks think about the types of asset management deals versus conventional bank deals and how you deploy capital?

Mark Sullivan

Right. We think the important metric is obviously what it does to our earnings and balancing out our income mix that's really the key, although we are very pleased with the metrics and terms of IRR and so forth. There is a tangible book value dilution of about $1.90, roughly 19% dilution and again in an asset management business, we are very comfortable that those metrics are very positive.

Operator

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to management for their closing remarks.

Mark Sullivan

Okay. Thank you for joining us this morning and look forward to working with you over the next several quarters and we will be talking to you at the end of January with regard to the bank's earnings. Thank you very much and enjoy the week.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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