TriState Capital Holdings' (TSC) CEO James Getz on Q2 2016 Results - Earnings Call Transcript

| About: TriState Capital (TSC)

TriState Capital (NASDAQ:TSC)

Q2 2016 Earnings Conference Call

July 21, 2016 08:30 A.M. ET

Executives

James F. Getz - Chairman, President, and CEO

Mark L. Sullivan - Vice Chairman and CFO

Analysts

Matt Olney - Stephens Inc.

John Moran - Macquarie

Michael Perito - Keefe Bruyette & Woods Inc.

Bryce Rowe - Robert W. Baird & Company

Operator

Good morning everyone and welcome to TriState Capital Holdings Conference Call to discuss the financial results for the three months ended June 30, 2016. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [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 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, 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 are made. New risks and uncertainties come up from time to time and management cannot predict these events or how they may affect the Company. 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 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.

James F. Getz

Thank you and good morning and thank you for joining us today. As pleased as we are with TriState Capital's second quarter results, we have been more excited by the very favorable trajectory of the long-term growth trends our company continues to exhibit. Our focus on EPS continues to yield results and we are clearing a number of significant milestones as we execute our growth strategy.

Total loans on June 30th were pushing on $3 billion and earlier this month we actually surpassed 3 billion, just nine and half years after our banks charter. Non-interest income grew to a record of 11.4 million for the quarter or nearly 39% of total revenue aided by successful closing and integration of the Killen Group acquisition into our Chartwell Investment Partners business in late April. And earnings per share reached a record $0.24 up 20% from the year ago quarter.

Importantly these highlights are the product of our disciplined and focused strategy and illustrate a sustained long-term trend. We have consistently grown at an exceptional pace while maintaining outstanding credit quality, excess capital, and investing significantly in the target diversification and sophistication of this company. As an example, second quarter earnings per share was 60% higher in 2016 than just three years ago when we reported quarterly earnings for the first time as a public company. That's compound annual growth rate of 17% per year. This was achieved while enhancing our risk profile and maintaining a highly asset sensitive balance sheet in a sustained low rate environment. In fact this earnings growth has been delivered in spite of 65 basis points of net interest margin compression over the same three year period.

The EPS growth puts us among the top 20% of $3 billion to $5 billion asset banks based on three year performance. Over the same period TriState Capital's loans grew at compound annual growth rate of 20% exceeding roughly 70% of our peers while non-interest income grew at a compound annual rate of 106% better than virtually all of our $3 billion to $5 billion peers. We are extremely pleased with our trajectory.

In light of these favorable long-term growth trends, as you can imagine we believe our stock currently offers a tremendous value. Even with a meaningful appreciation we have had in our shares over the last 12 months, TSC's stock has been trading at a discount of nearly 20 basis points at both the book value and tangible book value of the SNL $1 billion to $5 billion bank index. On a PE basis we trade at 17.3 times compared to the average of 17.7 times from $1 billion to $5 billion banks. We are outperforming yet undervalued even against the averages for these peers.

All these levels we have been pleased to -- at these levels we have been pleased to buyback our own shares during the first half of 2016, an average price of $12.33. Even at more recent levels we would expect to continue repurchasing the stock under the remainder of our buyback program. In a recent meeting with a significant institutional owner of TriState Capital Bank, he said and I quote "I like everything about your company except your valuation". I couldn’t agree more with his assessment or his repeated decision to add to his stake.

We believe our scalable model has proven its power over the past three years as a public company and nearly 10 years as a chartered bank and the path for continued growth is straight ahead. Over time we have reliably demonstrated TriState Capital's superior growth prospects, strong capital position, diversified revenue streams, and consistent year-over-year EPS growth. The result, a $3.5 billion bank and a $10.6 billion money management firm all brought to fruition in the last nine and half years. With that I will run some of the highlights of our business here at the halfway point of 2016.

First execution, we saw on our earnings release that the prices of loans expanded by 13% and 17% respectively during the 12 months. This represents deposit growth of 337 million and loan growth of 443 million. Deposit growth continues to result from our focused investments to build out our distribution network with the addition of talent to our treasury management, financial institutions, and family office deposit efforts. These methods are test specifically with growing key relationships and gathering sticky role cost deposits through combining superior service, industry knowledge, and product sophistication. We are thrilled to have fully self funded our robust loan growth during the quarter with value customer deposits.

On the lending side our project banking and commercial banking teams continued to deliver double-digit growth. Today we serve approximately 3000 private banking clients and 500 minimal record [ph] companies. Private banking loan balances totaled $1.44 billion with 48% of the total loan portfolio at the end of the second quarter. Up nearly 29% from one year prior despite volatile equity markets in this past August, January, February, and June. The markets are volatile, our private bankers worked with financial [indiscernible] clients to key up new margin loans backed by marketable securities and to manage the level of existing balances relative to the comfort levels and fewer requirements.

Then we worked with the clients to patiently fund new loans and increase on existing loans when clients are comfortable with our collateral values given market conditions. We are exceptionally pleased with the performance of our bankers, the financial intermediaries they work with, and their clients. Our growing distribution system continues to deliver. On a gross basis for the second quarter of 2016 we funded $139 million on loans backed by marketable securities. In aggregate we booked more than 400 new loans, a record and an increase of 36% from the linked quarter. We also took in more than 480 new applications pointing to a robust pipeline in the third quarter. Utilization stood at 57% as of June 30th in line with 59% at March 31, 2016.

As in the third quarter 2015 and the first quarter of this year our market securities back lending was tested with a period of increased stock market volatility in June 2016. Once again our risk management process and procedures for non-purpose margin loans worked exactly on plan and since inception we have experienced no losses on any private banking loans backed by marketable securities. We also continued to expand our unique relationship driven distribution channel which allows us to offer private banking loans primarily through tens of thousands of independent financial advisors with whom we do not compete. This national referral metric of financial intermediaries is up to 131 firms from 125 at the end of the first quarter.

Our regional middle-market commercial banking business also continues to see very positive trends. On June 30th commercial balances totaled $1.56 billion up 8.5% from the end of last year's second quarter. Total commercial growth was driven by commercial real estate loans which increased to 988 million at June 30th up 22% from one year prior. You are likely aware of the regulatory guidance for banks that have grown CRE by 50% during the prior 36 months, drive enhanced risk management protocols. We remain within these regulatory guidelines.

Still we have historically utilized and continued improve upon our robust risk management systems and procedures for CRE lending. In our view this gives us a competitive advantage over others who are forced to pull back from commercial real estate. As many other U.S. banks have tripped [ph] they are already meaningfully exceeding those regulatory guidance. We believe this can provide our marketplace with both improving pricing and covenant opportunities that we plan to take advantage of.

With our enhanced risk management, strong borrower relationships, favorable markets, and self generated capital we believe our balance sheet can accommodate commercial real estate loan growth for this foreseeable future. Alongside private banking CRE and direct commercial loans are very important part of our 15% long-term compound annual loan growth goal to which we fully remain committed.

In commercial and industrial lending we saw 221 million in pay offs and pay downs over the last 12 months partially offset by 159 million in new loan originations. Much of these pay downs resulted from managed adjustments to our balance sheet. We continued to think we are going to see positive growth in our portfolio of direct C&I business in the second half of this year.

Overall the company's total loan growth with its emphasis in private banking has contributed to a decline in our net interest margin from 2.39% one year ago to 2.25% in the second quarter of 2016. I will reiterate that our business model was built to continue increasing net interest income dollars through prudent loan and deposit growth that has a strong risk adjusted return at a rate that outpaces margin compression. We don’t believe we are unique in this positioning and we have a proven track record to support it.

Now turning briefly to credit, in the second quarter we again maintained strong asset quality metrics. At the end of the second quarter TriState's non-performing assets measured some 0.59% of total assets, much improved from the 0.89% we reported a year ago. Our MPA's asset ratio also compares very favorably to the average of 1.05% for commercial banks with $3 billion to $5 billion in assets. NPAs total 21 million at June 30, 2016 down some 22% from a year ago as a percentage of total loans outstanding. Adverse rated credits measured 1.89% at June 30th down from 2.21% at the end of last year's second quarter. We continue to believe that asset quality is a comparative source of strength for TriState Capital Bank.

Another hugely important strength and growth for the company is our asset management business Chartwell Investment Partners. Chartwell's second quarter results include two months contribution from our acquisition of the Killen Group and Berwyn Funds [ph]. The acquisition added $2 billion in incremental client assets putting the Chartwell's total assets under management to 10.6 billion at June 30th up some 30% from balances one year earlier. Killen also contributed 1.8 million in investment management fees in May and June bringing total investment management fees to a record $9.4 million. As such TriState Capital's total non-interest income as a percentage of total revenue grew to nearly 39%, well above the 21% average for $3 billion to $5 billion banks for the first quarter of 2016.

As expected the late April acquisition of Killen assets raised Chartwell's overall weighted average fee rate to 39 basis points for the quarter. Likewise Chartwell's combined annualized revenue run rate grew to $41.2 million, up 33% from $30.9 million at March 31st, after organic growth in loan pushed it up by 5.4% from $29.3 million at December 31st. We are pleased with this performance.

During the second quarter Chartwell stayed in close contact with its clients and aggressively pursued new ones while the investment professionals worked to maintain highly credible investment performance. Excluding Killen, new inflows totaled 159 million in the second quarter of 2016 offsetting outflows of 138 million and modest market appreciation of 14 million. We believe this compares very favorably to recent reports from asset managers showing that organic growth of top performers was running at a negative rate.

In addition five of Chartwell's 15 investment disciplines beat their benchmarks on one year performance. Nine beat their benchmarks on three year performance and nine of 15 beat their benchmarks on five year performance. Among these strategies is our newly acquired Berwyn Income Fund, a Morningstar 5 star rated strategy delivering strong year-to-date performance. This conservative allocation fund returned to 4.57% through June 30th beating the major U.S. stock market indexes and its Morningstar benchmark. To the one, three, and five year periods ended June 30, 2016 the Berwyn Income Fund beat its Morningstar moderate risk category benchmark.

Back in December when we first announced our agreements to acquire Killen we explained that their investment strategies and funds had received very limited sales and marketing support. This was a key factor in Killen's declining assets under management which I noted in December had fallen by about $1 billion in the prior 12 months. Assets under management declined by another 227 million in the first four months of 2016 taking average run off to 76 million per month over those periods. We closed the acquisition on April 29th and we promptly slowed the rate of net out flows to just $24 million for the month of June -- month of May, excuse me. By June we turned the corner and had modest positive net inflows of $5 million last month.

After we accomplished this, immediately on closing, Chartwell initiated an aggressive outreach campaign to stem this through updated information about the funds. In May and June we made 2005 internal cost of Killen and Berwyn's existing clients. We wrote 285 in person meetings with registered investment advisors, we made 287 calls to registered investment advisors who have purchased shares in the past for their clients investment accounts, and we sent nearly 600 e-mails to advisors.

We are very optimistic about our ability to continue and accelerate the positive momentum as we expand on the tremendous distribution opportunity Killen presents. With Chartwell's retail channel marketing capability we believe we add significant potential to attract new client assets and accounts to Killen's proven investment products, notably our 5 star rated Berwyn Income Fund.

Now Killen's declining assets under management trend is exactly why we structured the original deal terms with contingent consideration based on the run rate EBITDA at the end of 2016. Protecting TriState from any interim decline and Killen assets under management have given us some time to neutralize the outflows there. Transaction terms are unchanged from December but as a reminder at closing we paid an initial $15 million or five times Killen's base fiscal 2015 EBITDA of some $3 million. Contingent consideration is structured to reward sellers seven times for any EBITDA growth above the 3 million base generated by actual client assets under management at December 31, 2016.

Currently our run rate EBITDA assumption is slightly above $3.5 million for Killen at 12/31/2016. This would result in contingent consideration of approximately $3.7 million combined with the upfront payment of 15 million. We currently estimate the all in transaction value to be 18.7 million or about 5.4 times EBITDA. We currently expect that for the second half of 2016 Killen will contribute approximately $0.04 earnings per share or approximately $0.08 on an annualized basis.

We remain very pleased with the compelling strategic value this acquisition brings to our investment management business, accelerated the growth of Chartwell assets under management, revenue and profitability over the mid and long-term. We continue to look to acquire the asset management arena with a specific focus on tax exempt and international funds to compliment Chartwell's product offerings.

Before we turn it over to questions, one final thought, we remain particularly proud that in spite of the near zero interest rate environment we have experienced for so long, our diversified model, operational platforms, and exceptional talent base have allowed us to consistently achieve significant earnings growth. We are positioned to make money in all market environments. We have performed very well in declining and low rate environments and we remain well positioned for the day when interest rates begin to rise in a meaningful way. That concludes my prepared remarks and now I will ask Mark Sullivan our Vice Chairman and CFO to join me for Q&A. Operator, please open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from Matt Olney of Stephens. Please go ahead.

Matt Olney

Hey, thank you, good morning guys.

James F. Getz

Good morning Matt.

Matt Olney

I want to start on the commercial real estate growth in the loan book, can you talk more about just the new originations at CRE, where mortgage is in, where are the coupons, and any update on the overall deal structure within the CRE originations? Thanks.

James F. Getz

Good, if you take a look at the portfolio it's across all the regions that we are seeing growth in that category. And we have been very pleased with the quality of the loans we are seeing at that time. As you are probably aware Matt, there has been some noise in the press and some commentary on commercial real estate activity and challenges and issues along that particular line. So, that caused us to take a real close look at what we are doing and we are very happy with the progress that we have made with the commercial real estate portfolio.

We have -- highly experienced bankers in place. We are very comfortable with the growth and the origination activity that we have. It is currently yielding about 3.5%, makes up about 32% of our loan portfolio which is meaningfully less than most other banks. But more importantly we took a look at $3 billion to $10 billion banks in assets and in areas where the OCC years ago gave some guidance. 300% ratio on guidance of where they -- and keep in mind it is guidance where they wanted banks to stay within the constraints.

And we took a look at the top 50 banks that are $3 billion to $10 billion in size and asset size. And we saw these ratios all over the place. The top line being some 687.53 ratio and the bottom line looking at the top 50 was 259.74. Obviously under the guidance of the top 50 we are number 45 at the end of the first quarter with 265.22. So we are really pretty comfortable with that. We have not focused on building our construction and development loan, the segment of it at all. We are comfortable with the ratio there and if you look at those top 50 banks the lowest ratios is more than 0.46% [ph]. The highest is 139.84 and we are at 44.78 at the end of the first quarter looking at the statistics.

So we are very comfortable with how we have handled this portfolio. We haven’t had any issues to date over the past couple years. And we believe with the focus on this we have just completed a very satisfactory regulatory examination. There is opportunity because we are under the guidance for us to build this business and to take advantage of what we believe some people will be exiting this business to take advantage of pricing and proper covenants.

Matt Olney

Okay, Jim thanks for that commentary, appreciate that. And I was also going to ask as a follow up about the margins, it looks like it came in quite a bit more than expectations. Can you just address kind of why the margin came in so hard, what was off from your expectations, and then as we look forward where is the margin going to go from here?

James F. Getz

You talked of margin, you are talking about the NIM for the quarter.

Matt Olney

Yes.

James F. Getz

It came in right about where kind of we had expected it. I think whenever we thought NIM and it was in the press release you have to put in context that in the past three years we have had NIM compression of over 60 basis points. At the same time we have grown EPS 17% compound annual growth. So, what we have had is obviously the impact of our volume as always exceeded the decline in rates. And we expect that to continue as we go forward even in this flat rate environment.

Matt Olney

Mark, where do you think that margin is going to migrate to over the next few quarters?

Mark L. Sullivan

I would say assuming no action by the Fed this year I would say we would be in the probably dropped around 220 range.

Operator

The next question is from John Moran of Macquarie. Please go ahead.

John Moran

Hey, good morning guys.

James F. Getz

Good morning John.

John Moran

I am sorry if I missed this in the prepared remarks, but I think last quarter with the volatility that you guys saw early in the quarter was something like 40 of the PB loans required here and you had them all cleaned up in kind of two to three days, I was wondering if you could provide that for anything that happened around Brexit or the volatility that we saw this quarter?

James F. Getz

Yeah, we certainly can. Unfortunately we have to report on this every quarter and now because of the volatility in the market spread out and as you are aware it occurred on June 24th. In this particular situation we only have 7 credits to beat -- and they are all taken care of.

Mark L. Sullivan

Well there were no issues, it was really a minor amount of the portfolio relative to the 40 that you just quoted.

John Moran

Let's say, that is end of the good first point there on the PB business. The other one I had was just the flows at Chartwell continue to be sort of bucking in industry trend, wondered if you had the institutional and retail split and then kind of any update that you had in terms of cross sell into the intermediary channel and how that is going?

James F. Getz

If you look we are really very pleased with the retail growth that we have experienced there. At the time of the acquisition it was about couple hundred million dollars of retail assets there. And from -- generated by a Chartwell to the product line up it is now at about $1 billion and we just completed the acquisition of Killen and that is another 2 billion. So, we now have approximately $3 billion of these assets to their retail oriented with higher fees and rated average fees of 39 basis points will expand as a result of it.

We couldn’t be more pleased by the -- the job our Sales Manager, Ryan Wood and the team have done to get the marketplace focused on this product line. And I gave you some details on the positioning of this -- of the income allocation fund of the Berwyn Fund and what we did to get that positioned in the marketplace. And with the fees on that we believe it will be consequential to us over the next few quarters as we take that up to $2 billion, $3 billion, $4 billion in size. So, that continues to grow very nicely.

On the institutional side we continue to have a high level of confidence from the highly experienced sales team we have there that is run by Mike McCloskey. They have had -- you saw lot of the activity that came in last quarter, much of that was driven by their focus and their expertise of bringing assets in. And as you are probably aware at an institutional market you can get a commitment for a book of business and it takes six to nine months to bring the business to fruition. So we anticipate that continuing to grow very nicely. They are taking care -- they are really focused on the short duration high yield product we have, the mid cap value type products that we have in place.

So, I think we are very well positioned for the remainder of the year and going into the New Year. This is as I have said before we have built there a distribution company with a real focus on marketing. And by neutralizing the situation with that -- fund we proved I believe that we can do that. Because that was just -- it was an excuse for it. It had excellent performance and the shareholders weren’t communicated and didn’t know what they were invested in essentially.

John Moran

Alright, thanks, that is good color. The only other one I had was it sounds like the M&A appetite is essentially unchanged, any update in terms of timing or how far down the field you guys are on some of these products that would be good tuck ins with Chartwell?

James F. Getz

We might be announcing something today but we have been working feverishly on this, Tim Riddle who runs Chartwell and I have spent a lot of time on it. We have a couple of folks that we have been looking at for the past few years but we can't tell you that we have anything that is momentarily pending. What I can tell you is that we have a very high level of confidence that in the next 18 to 24 months we can get something done. But it really matters the quality of the company and the quality of the people there. And so we don’t want to sit forward on that. So, we can't tell you that we have anything pending right now because we don’t.

Operator

[Operator Instructions]. Our next question comes from Michael Perito of KBW. Please go ahead.

Michael Perito

Hey Mark and Jim, good morning. Question on the Chartwell revenues in the quarter, if I look at the AUM and the rate average fee rate, it kind of points to a higher number than what was supported, I guess is that just the timing of the closing of the Killen Group acquisition being that was only in for two months of the quarter? And I guess maybe second question on that, so I guess if AUM and if fee rate were to remain flat in the third quarter with the full Killen acquisition impact, I mean that would mean that the real revenue would have been a little north of 10 million, is that kind of the real way to think about it?

Mark L. Sullivan

Yes, I think as we pointed out the run rate now is about 41 million so little over 30 on the Chartwell and below the 10 on the Killen.

Michael Perito

Okay, got it. Perfect, thanks. And then another question on the provision, can you remind us where you guys reserve on the private banking loans and then maybe also just a comment on kind of your expectation on the reserve level over the next couple of quarters here as that -- as the private banking activity remains kind of the larger proportion of your growth?

James F. Getz

Again the -- our overall ALLL just under 60 right now. There is trespass on the low side but you got the commercial that's little over 100 basis points and blending with the private banking the other blended rate of private banking is 10 basis points now. And we would expect that to continue. So the ALLL should stay in that 55 to 60 range where it is now.

Operator

The next question comes from Bryce Rowe of Baird. Please go ahead.

Bryce Rowe

Thank you. I just wanted to ask about the charge offs for the quarter, Jim I know they are relatively low at just 1.4 million but curious about the source of the charge offs and what bucket of the loan portfolio did they come out?

James F. Getz

This was a C&I loan. It is a company that has been with us since 2008 and we have a letter of intent the company is being sold so we have the details of the sale and we decided it was prudent to take the charge.

Bryce Rowe

Okay, that is helpful. And I just wanted to ask about the cost of the targets to sell some data of increase within the average cost of money market and the average cost of time deposits, what really are you guys seeing from this time forward do you think that will stabilize here or is there still some level of upward pressure given your strong loan growth?

James F. Getz

We have a pretty multifaceted deposit distribution network and what we have been really focusing on as you see that we have a high loan deposit ratio which we were very comfortable with and it came down a bit this quarter. And for the very first time this quarter I think probably in the history of this company we had deposits out strip our loan growth and we were pleased with that.

Now to get to your point on the cost of this, as you are aware over the past few quarters we have been expanding the duration of the deposits, that means that term deposits we are going to pay are little bit more and what we are finding in a -- so that is absolutely the case. Some of it was due to the term deposits, rest of it was due to our focus on bringing money market deposit accounts in here as a stable source of revenue. I may have mentioned that one of the aspects of our deposit focus was 15c3-3 money is essentially a reserve on the securities accounts that the brokerage firms have throughout the country.

So we are essentially leveraging off distribution network and we are bringing a sizable amount of that money in. It is rock solid money. We expect it to be staying here and we have been bringing that in at a little bit of a rate that were higher than the rate that we are currently paying in our money market deposit count which is 40 basis points. We have been bringing most of that money in around 50 basis points.

Now to answer your question on continuing, I think we may have alluded to the fact that we hired a gentleman from a large regional bank recently to put together essentially for us a world class treasury management business. To be candid with you, our treasury management business to date has been, oh, by the way we have treasury management, it hasn’t been something we have focused on but we find it will be a good source of growing fees and more than that of non-interest bearing deposits which if you look at the balance sheet compared to other banks we have less non-interest bearing deposits there.

Many of the banks have legacy issues that they have taken advantage of because of the fact that they have been around a lot longer than we have. But we now believe we can penetrate that market and we can grow that in a meaningful manner that will stabilize the growth to a degree with reference to the interest we are paying on money market deposit accounts. It will be offset by the non-interest bearing accounts. So, we are pretty comfortable that we can stabilize that within the next six months with what we have been putting in place in the first six months of this year.

Operator

The next question comes from Matt Olney of Stephens. Please go ahead.

Matt Olney

Hey guys, just a follow-up on slop [ph] fees, what was the slop fee amount in 2Q and what is the outlook going into 3Q?

James F. Getz

That is 1.2 in second quarter which was basically the same in the first quarter. So 2.4 million for the six months, that is in contrast to 1.6 million for all of 2015. We are seeing in the market the demand, continued demand and the pipeline remains robust.

Matt Olney

And as far as the impact from the Killen Group, I believe you said in the second quarter there was $1.8 million up in investment management fees, do you have what the impact was on the expense side from the Killen Group in 2Q?

James F. Getz

1.2.

Matt Olney

1.2. Okay, thanks a lot.

Operator

The next question is a follow-up from Michael Perito of KBW. Please go ahead.

Michael Perito

Hey, thanks guys. Just a couple of quick milling follow-ups, just on the tax rate is this referring to 33% here, a little over inside of 32.5% here is that kind of the right number to be using going forward or is there any kind of changes you expect over the next balance of the year?

James F. Getz

Yeah, I think what you have Mike is the first quarter we had not solidified an investment tax credit transaction so you saw a higher rate there. We actually have committed to one in this quarter which is why the rate has dropped to 33. And I think in the release we said 34 but I think 33 for modeling because we are continuing to look at opportunities for additional tax credit transactions.

Mark L. Sullivan

So, I think 33 is a good modeling number.

Michael Perito

Okay, perfect. Thanks. And then maybe on the expenses, they came in a little lower than what I was looking for, any help you can provide or thoughts or the terms in the near-term outlook. It does sound like you guys are exchanging people here and there where you see fit. What kind of a good expense growth rate is for your growth company?

James F. Getz

I think as you look forward for Q3 and Q4 second half of the year, obviously compared to the first half we have now added Killen. We will have the full quarter impact. Probably looking at somewhere 20.5 to 21 in expense which is roughly 2.3% to 2.4% of average assets and that is above what we have been historically between 2.2 and 2.4.

Michael Perito

Alright, helpful, thanks guys.

Operator

The next question is a follow-up from Bryce Rowe of Baird. Please go ahead.

Bryce Rowe

Hey, thanks. Wanted to kind of follow-up on Matt Olney's initial question about commercial real estate and Jim wanted to ask about the comment you made in your prepared remarks about potentially improved pricing on commercial real estate given the added regulatory scrutiny. So, have you seen that translate yet into better pricing, did you see better coupons on your originations in the second quarter and maybe with deals in the pipeline are you seeing better opportunities for pricing on commercial real estate credits? Thanks.

James F. Getz

If you look at the portfolio as it stands right now today, the yields like 3.47% okay and that is what's on the books of the company at this point. It includes the FASB [ph] fees also. But when you cut through that and what we are seeing in the market place today it is more in the range of 2.25% to 3% of new activity. So we have not seen that hit the market today. We believe that more and more people because of these ratios are going to be dropping out of the market and our ratio is within guidance and I think we have an opportunity to take advantage of that very clearly. So, to be candid with you, we are not seeing it forcing the pricing up as of yet.

Bryce Rowe

Well, thank you for that.

Operator

There are no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Jim Getz for closing remarks.

James F. Getz

I would like to thank you very much for being with us this morning. We thank all of you for your interest in TriState Capital and your participation today. And we look forward to keeping you up to date on our progress and hosting our next quarterly call in October. Have a great day. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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