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TriState Capital Holdings, Inc. (NASDAQ:TSC)

Q2 2014 Earnings Conference Call

July 24, 2014 08:30 ET

Executives

Jim Getz - Chairman, President and Chief Executive Officer

Mark Sullivan - Vice Chairman and Chief Financial Officer

Analysts

Chris McGratty - KBW

John Moran – Macquarie Capital

Matt Olney - Stephens

Bryce Rowe - Robert W. Baird

Operator

Good morning, everyone and welcome to the TriState Capital Holdings Conference Call to discuss the financial results for the three months ended June 30, 2014, which were released yesterday afternoon. All participants in this call will be in a listen-only mode. (Operator Instructions)

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 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 most recent annual and quarterly reports 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 tfcbank.com.

Representing TriState Capital today is Jim Getz, Chairman, President and Chief Executive Officer. Jim will be joined by Mark Sullivan, Vice Chairman and Chief Financial Officer for the question-and-answer session.

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

Jim Getz - Chairman, President and Chief Executive Officer

Thank you. Good morning and thank you for joining us today. Strong overall credit quality has been the rule for the profitable double-digit growth of TriState Capital Bank’s loan book. In fact from 2010 through 2013, our full year provision is averaged just 0.46% of average total loans. However, as we have said before, we periodically see short-term volatility in provision expense, which on an annual basis has tracked to historical levels. We are disappointed that this quarter we had a $4.6 million charge-off related to the swift deterioration in our portion of the C&I loan, which was a shared national credit.

In total, provision expense for the quarter was $9.1 million, up $8.5 million from the linked quarter. Second quarter provision was impacted by $5.5 million in charge-offs, which drove provision up by approximately $6.8 million, $1.9 million for loans to upgrade during the quarter and $0.4 million for growth in the private banking and CRE loan portfolios. Once again, it’s useful to note that our annual provision as a percentage of average loans is ranged between 40 and 53 basis points. We believe these are still reasonable guideposts for typical annual provision expense.

The bar associated with the $4.6 million charge-off was an energy service company that provides solid control equipment and support to oil and gas companies drilling horizontal wells in onshore U.S. shale formations. We entered into the relationship in March 2012 through participation in the credit facility to finance the acquisition of the company by two private equity groups. The purchase price was $116 million and the private equity investment was about $49 million. With management rollover equity totaling about $24 million, our portion of the total commitment was $10 million across two facilities totaling $50 million. The company then had strong cash flow leverage of 1.87 times.

In 2013, the company began to experience deteriorating operating performance due to health issues of both the CEO and CFO. A material decline in the level of drilling activity in the Northeast along with the transition of drilling activity across our footprint from a focus on exploration to more production and an increased cost structure both up by the new ownership group in anticipation of higher expected levels of revenue.

In June 2013 the private equity group and company management invested additional equity. In October 2013 a new full-time CEO and CFO were hired due impart to a failed outsourcing effort for cost saving purposes revenue continued to slow in the second half of that year and into the first quarter of 2014. In January and February the private equity group and management expressed willingness to invest significant additional capital to right size the debt and address pressure on cash flow and financial covenants. However, and for the agent bank pushed for a larger equity investment in late March, the private equity group communicated it would not invest additional capital with that broader restructuring of the debt terms.

At that point in the first quarter we put the loan on non-accrual basis. Over the first and second quarters the ownership group invested an additional $2 million support fee, working capital needs of the company bringing the new money investments to approximately $55 million. Then in the second quarter the bank group and management reached an agreement on a restructuring that included significant new money from the ownership group. However, this agreement subsequently felt like when one of the company’s founders unexpectedly changed his mind and elected to exit the company and withdraw further support.

In early June, the agent bank initiated a note sale. During this period of time TriState Capital Bank adopted efforts to work with potential strategic investors and with the bank group regarding alternative solutions that would enable the other members of the bank group to exit the loan or TriState Capital Bank an opportunity to remain in the credit and support new efforts to reposition the company. However, the tight constraints of the note sale were too short. The note sale closed at the end of June and provided TriState Capital with 20% of the $10 million proceeds supplied against the net outstanding balance of $6.6 million. Accordingly we charged off $4.6 million for this loan. TriState Capital has no further credit exposure with the company.

As a result of the charge-offs and the impact to our loan loss reserve second quarter earnings were adversely impacted by $0.16 per share. While we believe the issues associated with this borrowing are unique to the company, we want to provide some visibility into our exposure to the oil and gas sector which is still a very strong industry particularly in Pennsylvania and Ohio. I will note that we do not lend to oil and gas exploration companies, but rather on a limited basis to certain oil and gas service businesses.

At the end of the second quarter we had three loans outstaying with oil and gas related borrowers, totaling $18 million. This represents about 1.4% of our combined C&I and CRE books or less than 1% of the total loans outstanding as of June 30. While we are very disappointed by the impact of the loan loss, we are confident in the overall quality of the loan portfolio and that we are adequately reserved. NPAs declined to 1.08% of total assets as of June 30, 2014, while the allowance for loan losses to total loans was 1.04% at the end of the second quarter.

Now looking ahead, we believe that periodic volatility and provision expense will continue to be moderated by the diverse sources of revenue from our direct C&I activity, commercial real estate lending, private banking channel lending and investment management businesses. We are pleased that we have these diversified sources of growth which have helped to offset the cyclicality in our C&I business. As I have said before, C&Is were historic strength wise and continues to be a key component of our franchise with 15 dedicated lenders who focus solely on this portfolio. Further we are pleased with the diversity within our C&I portfolio, which I will breakdown a little further now.

As you can imagine, our largest concentration because of our footprint is in the management, in the manufacturing segment of the business, which makes up some 11.1% of our portfolio, finance and insurance 6.3%, wholesale trade 2.7%, administration, support, waste remediation services 1.8%, information 1.8%, money 1.8%, real estate, rental and leasing 1.6%, professional scientific tech services 1.4%, and the others such as retail, trade, transportation and warehouse, construction, healthcare and social assistance, accommodations and food services, education services are all meaningfully less than 1%.

Our overall loan portfolio diversity is also reflected in the fact that our shared national credits represented less than 21% of the total loans as of June 30, 2014 down from about 28% one year prior. At the end of the second quarter of 2014, these shared national credits represented about $454 million of our $2.2 billion in loans outstanding. While we are very disappointed in the provision volatility this quarter and the impact from our earnings, we are extremely pleased with many of the other aspects of the company’s operations.

So, let’s move on to some very positive trends at TriState Capital Bank. Within the context of the same quarter, the strong underlying profitability of our business model was evident. TriState Capital Bank achieved record levels of deposits, loans and fee income, which contributed to more than a 41% growth in pre-tax pre-provision net revenue during the quarter. Strong second quarter operating performance demonstrates that we continue to execute our plans for maintaining a high rate of growth driven by both our banking and investment management businesses.

Total revenues grew to $24.7 million in the second quarter of 2014, up 28% from $19.3 million in the first half quarter of 2014 and up 49.2% over $16.6 million in the year ago quarter. Increases in both net interest income and fee income drove our strong revenue performance in the second quarter.

Net interest margin was 2.55% in second quarter of 2014 compared to 2.86% in the first quarter of 2014 and 2.91% in the second quarter of last year. NIM continued to reflect the ongoing shift of our balance sheet toward lower risk earning assets, including the $221 million in marketable securities backed loans required in early April, which carried an average yield of 2.25% consistent with pricing in our legacy private banking channel portfolio. We are also carrying a considerable cash position throughout the quarter in order to develop long-term deposit relationships.

Our cost of interest bearing liabilities remained low averaging 0.54% in the second quarter of 2014 compared to 0.52% in the first quarter of 2014 and 0.65% in the year ago quarter. Non-interest income of $9.1 million more than doubled from the linked quarter and represented 35.2% of total revenue in the second quarter of 2014 compared to well under 10% prior to our first quarter acquisition of Chartwell Investment Partners.

Non-interest expense reflects the first full 13 weeks of costs associated with the Chartwell business acquired in March. Second quarter non-interest expense totaled $15.5 million or 2.34% of average assets on an annualized basis compared to $12.8 million or 2.22% of average assets in the linked quarter and $10 million or 1.84% in the year ago quarter. The second quarter 2014 efficiency ratio as adjusted from the bank was 57.32% compared to 64.11% in the linked quarter and 60.04% in the year ago quarter. This quarter’s efficiency ratio includes the impact of reduced incentive compensation accruals related to the second quarter results.

The scalability of our business model is also illustrated by our average full-time employee metrics, which we monitored. For full-time employee equivalent, our total assets and total revenues were $14.9 million and $554,000 respectively or about three times the average for commercial banks with assets of $1 billion to $3 billion. Pre-tax pre-provision net revenue was a record $9.3 million in the second quarter of 2014 compared to $6.5 million in the linked quarter and $6.6 million in the year ago quarter. As you saw from the yesterday’s news release, the TriState Capital Bank grew deposits by more than 6% annualized during the second quarter of 2014. Deposit costs remained consistent with the linked quarter and were down 13 basis points from a year ago quarter to 0.49%. Since the beginning of the year, deposits are up over $264 million or 27% annualized.

In terms of lending, our performance continues to support TriState Capital’s total loan growth at a long-term compound annual rate of 15%. During the second quarter of 2014, TriState Capital Bank grew total loans by 56.9% annualized at $2.2 billion. As we mentioned in our last Investor Call on April 10, we acquired about 350 marketable securities backed loans with outstandings of $220 million from a financial intermediary in our referral network. Even excluding these private banking channel loans, annualized total loan growth was 11.3% from March 31.

Now, let’s discuss the dynamics of the loan portfolio overall. We had total loans of $1,734,565 on June 30, 2013 and June 30, 2014 some $2.2 billion of loans outstanding, 32% of the loan portfolio was in the C&I category, 28% in commercial real estate, and 40% in private banking. From a change in loan balances, loans outstanding, the C&I portfolio was down $70.2 million or down 9% for the 12-month period. The commercial real estate portfolio was up $144 million or up some 29% for the 12-month period. The private banking channel was up some $396 million or up some 82% through the period of time. Total loans were up $469 million or some 27%.

As we have said before, we continue to expect to grow the C&I portfolio at a slower rate than other lending. This continues to be a function of the slow pace of the economic recovery in a highly competitive marketplace putting pressure on pricing and structure. This trend is offset by TriState Capital shift into higher proportion of commercial real estate and private banking channel lending. In commercial real estate, we continue to expect good growth with consistent pricing and sound loan covenants.

Private banking has been the greatest source of loan growth for TriState Capital over the past 18 months and we expect it will continue to be for the foreseeable future. These loans continue to be primarily backed by marketable securities naturally enhancing the risk profile of our loan portfolio. Pricing of our marketable securities loans continues to generally range between 200 to 250 basis points over LIBOR. Even as we deepen relationships with individual financial intermediaries, we continue to expand our referral network. By June 30, we added 82 financial intermediaries in our financial network, up from 79 as of March 31 and 46 at the close of 2011.

This financial intermediary network has been a major contributor to the success of our private banking channel. In addition, you will remember that when we announced the Chartwell acquisition, we said we were doing the deal as part of our longstanding plan to leverage our national financial service distribution capabilities and experience in the investment management business as well as expand the product offerings that we can provide to our financial intermediary network.

As we shared with you in April, Chartwell performed very well throughout the pre- and post-closing transition, retaining clients and attracting new ones during the first quarter. This continued through the second quarter. Assets under management were $7.9 billion at June 30, 2014 down slightly from $8 billion at the end of the linked quarter and up from $7.5 billion at December 31. As a result of normal reallocation in late May, an ongoing client of Chartwell’s transferred $250 million to another manager.

During the quarter, we essentially made that back from a revenue run rate standpoint through strong market appreciation of $179 million and sizable inflow into our higher income producing small cap value fund. The market appreciation in June came across all of the equity products and higher average fees in the funds transferred now due to reallocation.

In the second quarter, we saw a meaningful growth in three Chartwell’s investment strategies. As we mentioned in our last investor call Chartwell’s small cap value fund added $98 million, new assets in early April bring its total assets to more than $130 million. Another Chartwell product that’s gaining traction is the high yield BB fixed income strategy, which was launched in 2006 and had assets of $763 million by the end of second quarter and approximately 40 new investors for the end of the first quarter. We launched last week the high yield short BB fixed income mutual fund through a registered investment company. That will have shared places trade under the ticker symbols CWFAX and CWFIX. This mutual fund will be primarily distributed through financial intermediaries. And we will make this investment strategy available to a broader market.

On another positive note, First Trust Advisors announced that shareholder approval was received for TriState Capital’s banks, acquisition of Chartwell’s business related to parent’s mutual funds for which Chartwell is a sub-advisor. The First Trust dividend and income fund in the First Trust enhanced equity income fund, we take this as an another assignment marketplace with that positive perception of Chartwell and the acceptance of the transaction. Chartwell continues to deliver highly credible investment performance as well. Its track record as of June 30 included 10 of Chartwell’s 12 investment disciplines beat their benchmarks on a one year performance basis, a 11 of the 12 beat their benchmarks on three year performance and 9 of the 12 beat their benchmarks on 5 year performance.

Chartwell also drove a healthy increase in investment services revenue in the second quarter 2014. As you recall, after we closed the acquisition early March $2.5 million of Chartwell’s $7.3 million in the first quarter revenues was reflected in TriState Capital Bank’s first quarter consolidated non-interest income. Compared to Chartwell’s full first quarter, second quarter investment services revenue grew 2.4% to $7.5 million. We continue to expect the Chartwell acquisition to deliver earnings per share accretion of approximately 25% within 12 months beginning March 2014. This is unchanged from expectations we disclosed in January.

Finally, I would like to touch on the sub-debt placement we completed last month as promised raising $35 million in new capital at the holding company level without dilution to common stockholders. The five year notes were a fixed rate of 5.75%. Effective June 30, we moved $10 million of capital to our TriState Capital Bank subsidiary to make more capital available for future loan growth.

In total since TriState Capital’s inception we have attracted $334 million in capital through our expansion combined with strong earnings generation. As of June 30 we have at least $26 million in available funds remaining at the holding company level to ensure ongoing funding and continued growth and maintenance of well capitalized positions at the holding company and the bank. The underlying profitability and other fundamentals of our business model are very strong. And we are pleased with our success to-date in executing towards the full potential of our franchise. We are moving ahead into the back half of the year with strong pipelines for us. The business today we have more than $120 million of loans in our pipeline moving towards closing at September 30. And Chartwell continues to attract new assets with a solid pace. We expect to continue generating profitable growth with the help of the ratio with non-interest income to total revenue that now exceeds 35%. The scalable expense stays a very strong apple than asset quality and capital was ready.

That concludes my prepared remarks. So now I would ask Mark Sullivan, our Vice Chairman and CFO to join me for Q&A. Operator, if you could open the lines, please.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question will come from Chris McGratty of KBW. Please go ahead.

Chris McGratty - KBW

Hey, good morning to both.

Jim Getz

Good morning, Chris.

Mark Sullivan

Good morning

Chris McGratty - KBW

Jim, I was curious if you missed – with the swapping of the commercial industrial growth for the private banking and obviously it’s probably over time a pretty good risk adjusted trade, but given the low pricing it seems like the margin is going to be pretty depressed for probably long as rates stay low. Can you talk about or maybe it’s for Mark expectations of the margin over the next year, year and a half kind of a range if we see in this kind of rate environment?

Jim Getz

I think when you are looking at NIM in the short and long-term, we have had a look at terms of our overall strategy, Chris and that is it works differently reducing our risk profile with private banking and marketable securities loans leading the way on growth and the C&I being flat to negative for the foreseeable future. So, a decreased NIM is really reflective of that strategy. As we look forward, obviously you had the decrease in – significant decrease in Q2, but this private banking continues to be the engine of our loan growth, it’s going to continue to put downward pressure on loan yield. And also in the third quarter, we will have a full quarter’s worth of interest expense on the subject going forward. Offsetting that we did have excess liquidity in Q1 and particularly in Q2, which we will as we are deploying that, we will have a positive lift in the offset with prior too that I just mentioned. So, I think the bottom line on it is that our outsized growth is going to continue to let our net interest income outrun any NIM compression.

Mark Sullivan

Chris, I think we also want to take into account the shortcomings of a pure net interest margin evaluation. With regard to our business model, it doesn’t take into account the efficiency of the bank, it does not credit adjust and it does not reflect non-interest income. All of which are major factors in the development of the business plan at TriState Capital. We certainly should be held accountable, but it really should be based on growth of earnings per share more than NIM. NIM is certainly a factor that should be taken into account, but the bottom line from our perspective is earnings per share.

Chris McGratty - KBW

Okay, that makes sense. So, lower margins growth in NII and growth earnings per share, can you speak to the efficiency uplift in terms of how it relates to your expense run rate, Mark?

Mark Sullivan

On the efficiency ratio…

Chris McGratty - KBW

Yes. I mean, you mentioned that you had some reversals in the quarter for some incentive comp given the credit issues, but how does the expense run-rate play out over the next call it three quarters?

Mark Sullivan

Yes. I would say we have got to address that efficiency ratio of the bank and then the efficiency ratio of the holding company. In terms of the bank, in short, it dropped to 57.32, so under 60 as we had expected. And I think you continue to see more moderate declines in it at the bank level. Now, when we are looking at the holding company and you look at the impact of Chartwell, Chartwell is running about 25% margin. So, by definition, although it’s expense is a non-interest expense. So as an entity, it runs at about 75% efficiency ratio. So, that’s going to continue to have an upward lift at the holding company level. Our bank continues to have a downward lift. I think you are going to see the – the holding company level will probably maintain some in those mid 60s and the bank in the high 50s.

Chris McGratty - KBW

Great, thanks.

Operator

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

John Moran - Macquarie Capital

Hi, guys.

Jim Getz

Good morning, John.

John Moran – Macquarie Capital

I just want to – I appreciate the narrative around the credit and kind of the one-off nature of the energy guy there. Just wondering if this quarter’s results include the SNCC review, I know that’s an annual thing and some folks would kind of have those results now, some folks are kind of waiting a little bit, it seems. And was there anything – something you guys are obviously taking a really hard look at the SNCC book and kind of moving some things around, downgrading stuff, anything that sort of changed in terms of how you are thinking about that business?

Jim Getz

Yes. To answer your question, yes, the quarter does reflect the SNCC review, we got the SNCC review in about two weeks ago. Now, I think the answer to your full question, I think we want to remember what the definition of the shared national credit is. It’s a loan that is $20 million or more and three or more banks participating, okay. And you want to think about the footprint we are in of Pennsylvania, Ohio, New Jersey, New York, and the type of credits that are available, where we have focused on $10 million to $300 million of revenue. There is about 125 companies in these states and we are looking to cultivate these companies and sometimes from a risk management standpoint, we have internally put in place a credit limit of $10 million. Now, we currently – to answer your question directly, we are currently on the portfolio of $454 million outstanding, so we are 21% of the total loans outstanding of the bank. There are 90 loans and the average outstanding is about $5 million.

Now, to go forward, here is the way we look at shared national credits from the perspective of TriState Capital Bank going forward. It is a rapidly declining asset class. If you go back to 2012, it made up 40% of our loan outstandings, 2013 – June 30, 2013, it was 30% and today it’s 21%. So, the numbers tell the story to a great extent. This is a portfolio that’s been closely monitored. We are exiting at every refinancing opportunity. It’s no longer strategically important to the asset growth of the company into the future. The credits that are being pursued are a result of the desire to have a multi-product relationship with the entity, that’s whether it’s with Chartwell deposits, treasury management. TriState Capital Bank is not chasing the market. The trends today are towards higher leverage, lower amortization and lesser or fewer covenants. We are not doing dividend recap loans, which are plentiful. We are avoiding private equity related transactions. So, the future of this company is being driven by direct C&I loans, footprint commercial real estate, not type of land development cash flow positively, private banking and we are driving the growth of our non-interest income through Chartwell. And I also want to point out that some 25% of our shared national credits that we currently have here of the 90 credits at some type of deposit relationship with us in the seven figure level.

John Moran - Macquarie Capital

Great, I appreciate the additional color there. I will shift gears kind of over to the loan purchase on the private banking side kind of an interesting transaction, do you guys view that as I mean, obviously it’s kind of one-off, you are not going to get one of those every quarter, but are there other opportunities for that kind of acquisition in your network, where maybe somebody has been doing that business, but they realized you have a better mousetrap or are they just lack scale or what have you, if you can give us a little bit more on that, that might help too? Thanks.

Jim Getz

Right. There are other opportunities in the marketplace. We are not currently pursuing one at this time. In that particular situation, the intermediary wanted to centralize all its loan activity with one party and move everything they have in the past toward that party. So, that was part of essentially keen into their distribution network, but there are multiple opportunities out there for us to take advantage of in that regard. So, I would be surprised that we had an opportunity over the next 18 months to take advantage of that.

John Moran - Macquarie Capital

That’s good. Thanks for taking the questions guys.

Operator

(Operator Instructions) The next question will come from Matt Olney of Stephens. Please go ahead.

Matt Olney - Stephens

Hi, thanks. Good morning guys. I want to go back to the credit quality, beyond the large individual credits, they experienced the charge-off to provision 2Q. Can you talk more about the core trends in the quarter as it relates to upgrades and downgrades?

Jim Getz

We had eight downgrades during the quarter and we had two upgrades during the quarter. The two upgrades were $11 million and the downgrades were $54 million and the downgrades included the shared national credits.

Matt Olney - Stephens

And in the prepared remarks and I believe you have referenced your expectation for future provision and charge-offs as it relates to historical performance, can you detail that for us again?

Jim Getz

Yes, what we are focused on is that our annual provision as a percentage of average loans has consistently ranged between 40 and 53 basis points. We believe that these are still reasonable guideposts for typical annual provision.

Matt Olney - Stephens

And with you commentary on the SNCC portfolio when was the last time you originated a shared national credit where you will not be agent?

Jim Getz

Probably within the past six weeks or so and a lot of that relates to what I mentioned keep in mind our footprint, keep in mind our internal limit of $10 million, our shared national credits average about $5 million in size. And our offices are in major metropolitan areas throughout the United States. So by going over this outline I am not indicating to you that we will never ever do a shared national credit again what I am indicating to you is this is a rapidly declining percentage of the loan portfolio and it’s quickly moving to less than 10% of the portfolio.

Matt Olney - Stephens

So I guess if you are originating some of the shared national credits, can you kind of talk to us about how the credit review process within these SNCCs has changed over last few years?

Jim Getz

Okay. First of all, we have never - we have nothing in the portfolio today subsidiary that was ever purchased. We are always part of the origination group. These shared national credits are predominantly focused on two individuals that we have, it’s a company that has extensive background in handling these types of credits. Every single one of them is in your footprint. As I mentioned earlier 25% of them we had some level of a deposit relationship. We have been saying underwriting criteria as the direct one. For example, I highlighted the fact when we did loan that we wrote-off this quarter and had a leverage ratio of 1.86%. All these ones that we are even entertaining, we will have total leverage 4% or less. So these are not highly leveraged transactions where we have geared suddenly away from doing anything related to the private equity arena.

Matt Olney - Stephens

So within that commentary, Jim has anything changed I guess over the last few years?

Jim Getz

We have been filing suite in that matter over the last few years. If you are asking me directly has anything changed in the last few days as it related to this transaction? We are not happy of the impact it’s had on earnings per share at all. And what we have done is we have made a couple sound moves that I consider we put together and reemphasized some basics on guidelines with regard to reviewing these credits and what was – and what’s acceptable and what isn’t. We have revamped somewhat on our Senior Loan Committee. We have added our Chief Risk Officer to the Senior Loan Committee. Bill Schenck, our Vice Chairman is working closely with Tom Grodoman and the review of these portfolios. And I think you will see many of these loans are being refinanced in the marketplace based on better terms and better yield. So I think you are going to see this portfolio certainly dropping over the next six months in the range closer to 15%.

Matt Olney - Stephens

Okay. Thanks for the color. I appreciate it.

Operator

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

Jim Getz

Good morning, Bryce.

Bryce Rowe - Robert W. Baird

Hi, thank you. Just a question about the composition of the loan portfolio and Jim, kind of where you see it going from here in the next 12 months, understanding that you are deemphasizing the C&I portion given the competitive conditions and deemphasizing the shared national credit to a certain extent, where do you think the private banking portfolio is as a percentage of the loan portfolio and let’s call it 12 months. And then the second follow-up question would be where on average are you underwriting commercial real estate loans in terms of the rate? Thank you.

Jim Getz

Okay, first of all on the private banking growth, it’s today about 40% of the portfolio to be quite candidate from a rate standpoint. We’ve never been under any pressure that the rates we are getting on this or anywhere from 2% to 2.5% over LIBOR. I expect that this portfolio will clearly be pressing on $1 billion that’s slightly over by the end of the year. Moving over towards the commercial real estate what we have noticed recently is a clear improvement in covenants. It’s almost something coming from the ancient pass, their guarantees now occurring on these particular portfolios. We are seeing rates in excess of 300 basis points over LIBOR, so we are seeing clear improvement today that makes up about 28% of our portfolio, which is meaningfully less than most other banks. I would see that ranging anywhere from where it is today probably up to 32%, 33% of the portfolio.

Bryce Rowe – Robert W. Baird

Okay, that’s very helpful, Thank you, Jim.

Jim Getz

You’re welcome.

Operator

And the next question will be a follow-up from John Moran of Macquarie Capital. Please go ahead.

John Moran – Macquarie Capital

Yes, how is it going again? Just a real quick Jim, I wanted to come back the Chartwell, capture rate this quarter I think was 38 basis points kind of just up 40, can you remind us again where you think that can go to and give us a quick update in terms of the – I know that you are real focused on sort of strategic priorities there in terms of kind of building out some form of retail distribution and maybe an update on the timing there? Thanks.

Jim Getz

Okay, great. First of all, I think you can count on this company having consistently improving margins over time as the nature of the business begins to develop and it’s complemented with some retail trust. Right now, we pointed out to – it was around 38 basis points, but a good example of what could happen with the small cap fund that was not really providing much marginal return to the company prior to it picking up about $100 million in April and now was providing a much more return to the company in the 60 basis point criteria. So what you will see is a clear development here. Now, don’t get the impression that we are looking to deemphasize the institutional business. We are looking for this to be a robust franchise and we are asking ourselves what needs to exist to take this company from $8 billion to $20 billion over the next three to four years. This is not a capital intensive business like the bank, like growing the private banking loans or things around that particular line. The basic infrastructure is in place today as you can see by the performance numbers both short and long-term this is a company with top-notch investment professionals and management in West. What the challenge is like any – like other investment managers is to enhance distribution, to broaden distribution that’s where our focus is today.

Now, we acquired this company in early March of this year. At this point we have provided introductions and worked with them to get them in front of about 20 of our clients at this time whether that client be a referral from our commercial lending area, referral from the private banking area we have made presentations, which takes a good time because you have to deal with gatekeepers of the various financial intermediaries like you are going to be seeing some impact by the fourth quarter of this year where we will see some growth that will enhance the margins of this business. And one of the most expensive aspects of this business is the compensation we have that all in place today with the investment professionals. We will be enhancing some product initiatives to deploy better to the retail sector like the BB mutual fund that we just kicked off this month, so we really feel very good. We are looking to get it out to the 80 some financial intermediaries that we have in place. We are working with the distribution network currently at Chartwell. We are looking to enhance that. We are putting internal sales operations in place from an efficiency standpoint to work highly optimistic of what we can do moving forward here.

John Moran - Macquarie Capital

That’s helpful. Thanks. And then maybe Mark just one quick ticky-tack kind of model question, tax rate this quarter obviously ran low on performance, is 33ish, 34ish still the right way to be thinking about that going forward?

Mark Sullivan

Yes, I think if you look back at 2013 we entered the managing credits and we have 31% effective rate and they are about the same amount of the credits this year. We are probably going to be more targeting around 32% for ’14.

John Moran - Macquarie Capital

Great. Thanks very much guys.

Operator

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

Jim Getz - Chairman, President and Chief Executive Officer

Thank you very much. And thank you for your continued interest in TriState Capital and your participation today. We look forward to keeping you up-to-date on our progress and hosting our next earnings call in October. Have a good day.

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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Source: TriState Capital Holdings' (TSC) CEO Jim Getz on Q2 2014 Results - Earnings Call Transcript

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