TriState Capital Holdings, Inc.

Good morning. And thank you for joining us.

I'd like to begin by mentioning that this investor conference call is David Demas' first in his CFO role that he assumed on January 1. As most of you know, David joined TriState Capital last summer as Executive Vice President as part of the CFO succession plan we announced in August.

We could not be more pleased with how he, our Vice Chairman Mark Sullivan and our entire finance team have handled the transition. And we're already benefiting from David's leadership and expertise, having advised some of the largest and most successful financial firms in the nation.

I must say that David's timing is impeccable as TriState Capital's CFO when he presided over the closing of this company's strongest fourth-quarter, the most successful year since our May 2013 IPO. In fact, they were our best ever with record quarterly and full year earnings.

These results are the product of the effective execution of our strategy to grow TriState Capital as a company in order to bring value to our shareholders through enhanced earnings. We believe our financial performance to this point is evident that our strategy is working.

Over the last five years, we've generated impressive compound annual growth rates on a number of key metrics. And 2017 year-over-year growth mirrors these trends as we maintain momentum.

Assets grew at a five-year compound annual growth rate of 18% and are up 22% in the past year. Revenue grew at a 17% five-year compound annual growth rate and is up 14% year-over-year.

In 2012, non-interest income made up 8% of total revenue. In 2017, that percentage grew to nearly 34%, reflecting our focus on diversifying our revenue streams.

Net income increased at a 29% five-year compound annual growth rate and 33% year-over-year. And earnings per share of $1.32 for 2017 represents a 23% compound annual growth rate over the five years and is up 31% from 2016.

We've achieved this growth by maintaining our entrepreneurial mindset and client-focused culture, while balancing the risk management and financial discipline more commonly associated with mature financial service companies. For example, we have achieved exceptional credit metrics.

Non-performing loans totaled $3 million in 2017, representing just 8 basis points of the bank's more than $4 billion in loans. Adverse-rated credits totaled less than $30 million, representing just 71 basis points of total loans.

Net charge-offs of less than $4 million in 2017 represented just 10 basis points of average loans. From a financial discipline perspective, at the same time that we generated double-digit earnings expansion, TriState Capital also made significant investments in people, infrastructure, distribution, technology and product.

As a result, we expect our current infrastructure to support a much larger bank balance sheet and asset management complex than we have today. We made significant investments in technology, including in various proprietary systems focused on expanding our relationships, making it easier for clients to do business with us and enhancing our risk management capabilities.

We've also continuously made investments in distribution, allowing us to reach more clients on a national basis with a more comprehensive offering of services and products. However, our most important investments have been those which we have made in our people.

In 2012, prior to our IPO, TriState Capital had 119 full-time employees. Today, we've nearly doubled the size of our team to 230.

The team is driving profitable growth with net income per average employee up 74% compared to 2012. Revenue per average employee grew to more than $597,000 in 2017, more than twice the level generated by our peers.

Overall, we're continuing to see the benefits of operating leverage with TriState Capital Bank's efficiency ratio declining by 378 basis points from 2016 to 57.39% for 2017. We expect to drive continued improvement in the bank efficiency ratio to our mid-50s target range through scalability as non-interest expense growth continues to moderate and revenue growth continues to accelerate.

Our financial services distribution network, asset-sensitive strategy, pipelines for our three businesses and our further enhanced funding mechanism gives us confidence in our ability to achieve continued growth. Over the next two years, our goals include the following: Continue to grow net income at a double-digit pace, doing so at a rate of 15% to 25% per year; continue to organically grown loans at a double-digit pace, doing so at a rate of 15% to 25% a year; deliver double-digit organic growth of Chartwell revenues even as we continue to evaluate investment management acquisition opportunities; improve operating leverage through disciplined expense management; double treasury management operating account deposits during 2018; surpass $5 billion in bank assets during the second quarter of 2018; surpass $15 billion in assets under management at Chartwell Investment Partners unit during 2019 through a combination of organic and inorganic growth.

Our confidence is further bolstered by a number of macros trending in the company's favor. M&A disruption among commercial banking competitors continues to create opportunities for our producers.

M&A in the asset management space is also creating the opportunity as we continue to evaluate acquisitions for Chartwell. We see many firms that have generated strong product performance, yet cannot reach their full potential because of underinvestment in distribution.

This, as many of you know, is our sweet spot. And it's exactly what we've accomplished with Chartwell and Killen.

The steady pace of Fed rate hikes since the end of 2016 which is widely assumed to continue this year. General economic growth and meaningful business momentum in the US are benefiting the markets we serve.

Stable capital markets, which should benefit Chartwell in particular, as well as our private banking business. And tax reform should also benefit the clientele of all three of our businesses.

Related to tax reform, what item we'd reinforce from yesterday's earnings release is our effective tax rate for this year. We currently expect TriState Capital Holdings effective rate to be approximately 21% for the full year.

Now, I'd like to touch on some 2017 highlights from our business units. At TriState Capital Bank, we achieved 21% growth in total deposits, which were nearly $4 billion at year-end.

That's more than $700 million of new deposits in 2017, funding the asset side of our balance sheet. The sophisticated, multifaceted distribution system we've developed for our liquidity and treasury management services and products is making this and future growth possible.

Our national deposit team is successfully building high-quality relationships, growing average interest-bearing deposits by more than $580 million or 21% in 2017. In addition to serving a growing number of existing clients of our commercial lending, private banking and investment management businesses, this team has excelled at bringing new accounts to the bank.

Also adding to our deposit growth was treasury management where continued investments in our team, capabilities and products are resonating with our clients and prospects, as well as translating to important, low and non-interest-bearing deposit growth. During 2017, we opened nearly double the number of operating accounts we opened in 2016 and increased average non-interest-bearing deposits by 24%.

Average operating account PDA balances in our treasury management operating accounts grew 40% in 2017 compared to 2016. While we're pleased with this solid double-digit growth, we're even more pleased by the momentum we picked up in the fourth quarter and the strong treasury management pipeline we have for 2018.

Our funding success continues to support the exceptional growth of both our commercial and private banking business. For 2017, TriState Capital's banks' total loans increased by 23%, surpassing the $4 billion milestone for the first time as we continue the exceptional rate of organic growth of our high-value unique banking franchise.

Our regional middle-market commercial loans alone grew by more than 15% in 2017. As you know from recent Federal Reserve data, TriState Capital's organic commercial loan growth far outpaced comparable lending for all banks, which increased only about 3.5% last year.

In private banking, our highly differentiated franchise had another exceptional year, providing loans backed by marketable securities and other liquid collateral through a distribution capability that we believe is unparalleled in the industry. Our relationship-focused bankers serve a growing number of high-performing investment advisors and their high net worth clients.

This national referral network is a key component of our company's unique and highly scalable business model. We now work with 165 intermediaries compared to 142 one year ago.

The number of individual financial advisors and trust officers we've done business with has grown to more than 3,300 from about 2,500 at the end of 2016 and the number of active loan accounts has grown to more than 4000 from about 3,100 at the end of 2016. In addition, we saw 32% increase in the number of applications last year compared to 2016.

Private banking loans outstanding grew by 31% in 2017 and comprised 54% of the bank's total loans at year-end, up meaningfully from 51% at the end of 2016. At our investment management business, assets under management grew to $8.3 billion in 2017.

Chartwell's investment performance product mix and distribution capability drew new clients and new funds from existing accounts to our asset manager in 2017. Expanded distribution contributed to the growth in gross retail sales, totaling $614 million in 2017, an increase over the year prior.

Chartwell saw total gross inflows of $1.4 billion during 2017, led by its short duration, BB-rated fixed income strategy and mutual fund. Chartwell's mid-cap value strategy is the top decile performer that is attracting significant inflows.

We also rebranded what was formally known as the Berwyn Cornerstone Fund into and under the leadership of the Chartwell Mid-Cap Value Fund in 2017 as part of the repositioning of our mutual fund complex. We believe the talented investment professionals at Chartwell, who offer a number of products that are difficult to replicate with passive or ETF strategies, will continue to deliver the highly credible performance that will increasingly attract institutional and retail flows to our boutique asset manager.

We also continue to actively evaluate inorganic opportunities to grow this business. In fact, we just signed yesterday a definitive agreement to acquire a team of three professionals at approximately $1 billion plus of client assets under management from Columbia Partners in Maryland.

In a deal that is expected to be minimally, immediately accretive to 2018 earnings, we expect to acquire a mix of high-grade fixed income and large-cap core equity, which generated about $2 million in revenue for 2017. Through this business, we're acquiring a group of loyal, outstanding clients, many of which are of the Taft-Hartley nature.

As many of you know, Taft-Hartley business represents a large portion of Chartwell's client base and we feel this will be a perfect complement to our fixed income business. We will also add three skilled professionals to our team at Chartwell, a senior addition to our institutional distribution team and two equity investment professionals.

We still feel strongly that these individuals will be an excellent fit with our team and provide great cross-sell opportunities to Chartwell's product offerings. Subject to completion of satisfactory due diligence and customary closing conditions, we expect to close this transaction during the first half of 2018.

As with our prior acquisitions, this transaction is structured in order to reward growth in AUM and revenues between closing and December 31 of 2018, while mitigating downside risk to TriState Capital. With contingency consideration, we would expect to pay a multiple of up to about 6.3 times EBITDA.

Together, all three of our businesses form a high-growth financial service company, breaking the conventions of what a company in our industry is supposed to be able to accomplish, and doing so rapidly. With our 2013 IPO, which incidentally was our last equity raise, shareholders entrusted us with $66 million in capital.

We've wasted no time in deploying it efficiently and effectively, closing our $62 million acquisition of Chartwell just ten months later and doing our $15 million Killen Group deal in 2016. In five years, we've grown TriState Capital from a bank with about $2 billion in assets into a financial service company with $4.8 billion in assets and an $8.3 billion assets under management.

Investors who have owned TriState Capital common stock since the IPO have seen their shares appreciate 100% through the end of 2017, outperforming most of the major market and bank indices by a wide margin. For example, the KBW Bank Index was up 82% and the S&P 500 was up less than 65% over the same period.

Notwithstanding those gains, we believe that TriState Capital's shares are undervalued when considering this company's growth prospects and our proven ability to deliver on our commitment to our shareholders. Accordingly, at our regular January meeting, the board authorized the company's buyback of up to an additional $5 million of our shares at management's discretion.

This is in addition to the $23 million of stock we've repurchased since our IPO, which was repurchased at a cost of $13.53 on average per share. Looking ahead, we continue to have a high level of confidence for our performance in 2018 and beyond.

We've made strategic investments throughout TriState Capital, including in technology, infrastructure, products and people to support the continued growth of our company. We have strong pipelines in all three of our businesses and are well positioned to leverage all the positive macros in order to release the full earnings power of this company.

That concludes my prepared remarks this morning. I'll now ask David to join me for Q&A.

Operator, please open the line for questions.

Good morning, gentlemen.

Good morning, Michael.

Couple of questions for me. I wanted to maybe start on the expense side.

You guys saw a little bit of a bump quarter-on-quarter. I saw some broad commentary in the release, but I was wondering if you can maybe give us a little bit more color on what drove the increase and whether you kind of expect that quarterly expense run rate to track in the early part of next year.

Michael, it's David. Let me take the first crack at that and then I'll ask Jim to add any color.

As you know, we're a pay-for-performance culture. We've made investments over the past couple of years in our distribution network, as Jim mentioned, in our people, in our technology.

We're realizing the benefits of those investments and it's all scalable as we continue to grow. What you will see us do is focus on operating leverage, growing the top line at a pace that's meaningfully different than expense growth.

We see the efficiency ratio improving somewhere around 200 to 300 basis points year-on-year. I think you can expect to see expense growth somewhere between 12% and 14% for the year.

And I think we'll build that expense over the year. Expenses will start the year somewhere in the $24 million range through the first quarter.

Mike, what I would add to that is a great practical observation. The growth that we paid for – and most of that expense uptick was compensation related.

The growth that we paid for in the fourth quarter set us up nicely going into 2018.

Perfect. Thank you.

And then, secondly, I wanted to touch on your comment, Jim, about the expectations for organic revenue growth at Chartwell of double-digits. I guess, what gives you kind of the confidence in that?

You've seen some nice growth, but not quite at that rate over the last few quarters. So, I guess, it would seem like you expect it to accelerate.

I just wonder what the drivers are of that expectation.

I would expect, seeing what we're picking up, particularly in the last two quarters, the momentum that we have in our BB product and in the Mid-Cap Value particularly, leads us to come to that conclusion. And then, we did outline to you the Columbia acquisition that will be accretive out of the gate and throw off about a couple million dollars' worth of revenue.

Perfect.

And we expect to close in the first half of the year, Mike.

Got it. Thanks.

Hey, thanks. Good morning, guys.

Good morning, Matt,

I want to start on the loan growth side. Pretty impressive results in the fourth quarter.

Can you talk about what you're seeing so far in the first quarter and bigger picture as you think about the loan mix longer-term? What do you expect in the next few years between private banking and commercial real estate and C&I?

I would expect – and looking at that from a growth perspective, going into the next couple of years that it won't be unusual for the private banking to continue to grow at the accelerated pace that we've seen recently. So, I think you could count on that growing from a 25% to a 35% pace into the next couple of years, Matt.

It's now at about 54% of the portfolio. It wouldn't surprise me that this time next year we're not sitting with it around 57%, 58% of the portfolio, pushing on 60% of the portfolio.

We don't really anticipate the commercial real estate portfolio being much more than where it is today, in the range of 30%, 32%. We do expect the commercial and industrial segment to be growing handily into the low 20s over the next two years.

From a pricing standpoint, to be quite honest, we're not seeing any sign of positive trends upward at all on the pricing of our loan portfolio. The private banking staying around 200 to 225 over 30-day LIBOR.

You're looking at the C&I around 240 and you're looking at the commercial real estate around 260. But there isn't any sign of life from a pricing standpoint, at least what we're seeing in our markets.

Okay. That's helpful, Jim.

As far as the impact on TriState from the December Fed rate hike, any impact you can capture, tell us about, in the fourth quarter. And, I guess, more importantly, can you help us out and provide some outlook as far as the margin, more near-term, as a result of the December Fed rate hike?

Thanks.

Matt, as you know, we're mostly a LIBOR-based book. And so, that rate increase we started to see build before the Fed actually increased rates.

Looking forward, I think we plan two to three rate hikes next year – or this year, actually, probably March, June and December. And I would say that our NIM – I don't anticipate any further compression.

You might see it build a little bit, so I would say either flat to slightly up for the year.

Got it. Thank you.

Hey, good morning, guys.

Good morning, Russell.

Just want to touch on asset quality. Clearly, a very good year in 2017.

I'm just curious, your thoughts looking forward given the expected continued robust loan growth, particularly perhaps touching on the C&I and traditional CRE space?

We have really spent a considerable amount of time and money perfecting our risk management process here at TSC. And we feel very comfortable with where things are.

It's almost impossible to believe it's going to improve any. In fact, it's almost mathematically impossible to.

But at the end of the day, we don't expect – we clearly expect it to continue into 2018 and 2019. The advantage that we do have is the risk profile of this loan portfolio, with right now 54% of it in loans secured by marketable securities and that's a power machine that's growing pretty handily for us.

We expect the commercial side of the business to grow probably double what you'll see from the rest of the banking marketplace because we're really pretty well positioned now, having been in most of these markets for almost ten years or more at this point, with the type of seasoned personnel that we have there. And that's been giving us a very – a tremendous advantage.

So, we don't expect that you're going to be seeing much growth in our adverse-rated credits over the next few quarters. So, it will be a relatively stable type of situation.

As you see here, you have about $3 million of non-performing loans. And that $3 million is performing as agreed at the moment.

That's helpful. And I think in the past, you guys have talked about an 8 to 10 basis point of average loans provision expense, but have certainly outperformed that in the last couple of years.

Is that still a fairly conservative way to think about it?

Matt, I think it is. I think our range is a little broader.

It's probably 5 to 10 basis points, but 8 to 10 basis points certainly works as well.

Okay. And then, if I could sneak one last in, just given the outlook for your very strong loan growth and thoughts around continuing to build out the investment management business, just update us on your thoughts about current capital levels here.

Sure. We've always taken very seriously our stewardship of capital deployment for our shareholders.

The majority of the people that work at our company own shares. And we really function as an owner-operated company and dilution is something that we attempt to avoid.

And we have historically. The last time, we raised equity capital was in May of 2013 when we took the company public.

We raised $66 million of capital. And just look at what we've accomplished from a balance sheet and an income statement standpoint with that money.

Back at the end of 2012, we had a balance sheet of around $2 billion. Today, we have a $4.8 billion balance sheet.

All, I must note, is of the organic growth. And off-balance-sheet, we have an $8.3 billion money management firm.

We paid $62 million for Chartwell; $15 million for Killen. And then, look at the income statement.

2012, we had net income of $10.7 million. And today, we're reporting net income of $38 million.

And we accomplished all this with double-digit EPS growth for the past four years. And of those four full years, 2014 was the lowest.

EPS growth was up some 15%. So, to answer your question directly, we would consider raising capital if it enhances the balance sheet in a prudent manner and adds to the double-digit momentum on the EPS that the company continues to experience.

So, obviously, we have a lot of faith in our success.

Yeah. Just to follow up on the expense guidance in 2018, does that include the pending acquisition from the Columbia assets or would that be additive to that number?

Matt, if I understand the question correctly, you're asking whether Columbia's expenses are in the numbers I gave you?

Correct.

They are.

Okay. Going back to the Columbia asset acquisition, the size is relatively small, Jim, from what you've highlighted previously.

Can you tell us more about what was so compelling about these assets and these professionals, given the relatively small size?

Okay. A couple of observations that I would make, Matt.

We're going to be able to pay for this internally, okay? So, the earnings that we're generating, I would say, will take care of this.

We were able to get it at an advantageous price, 6.3 times EBITDA. And it's a great fit.

And we believe we have some significant upside. And a lot of the upside revolves around the individual that has been working with this product lineup for some time in the Taft-Hartley area.

He, I believe, is going to bring a lot to the table for Chartwell Investment Partners from the sales standpoint. He's essentially had a limited product situation there at the company.

He's very well-seasoned. He has a lot of experience.

It will complement our book of business. This is very much of a modest contribution to our bottom line at this point.

But what it does is it also enhances the amount of fixed income assets that we have under management. What it brings to the table is a $600 million or more of high-grade fixed income.

Gives us higher credibility and $400 million of large-cap core equity and about $2.2 million of revenue. And it's in the Taft-Hartley space that we've already perfected a presence and now will have a larger presence.

And the individual that's joining us, his relationships are with some of the most major labor unions throughout the country.

Okay, Jim. That's helpful.

Thank you.

So, this is really a growth situation well beyond $1.1 billion and the $2 million of revenue we're talking about here. We believe we will begin to feel the impact of that in the second half of the year.

Thank you. Jim, just wanted to, I guess, clarify some of the goals that you mentioned in the prepared remarks.

You talked about 15% to 25% net income and loan growth. So, was just curious, what kind of timeframe we're talking about there.

Was that just 2018 or was that over a more extended period of time? And then, do you have specific EPS growth goals?

Would they fit with that net income goal or would they be lower?

Here's the observation that I would make. I personally – and you'll find, in putting a company together, like we have here from scratch essentially over the past ten years, you really don't feel confident giving people numbers that go beyond 24 months.

So, I would say to you, Bryce, that we have a very high level of confidence that we will be within those parameters that I went over with you in 2018 and 2019, okay? And what I will tell you is, just look at the track record that we've built from the time of the IPO forward and look at the past four years, okay?

And you'll see that that double-digit, 15% or higher, we've actually delivered on. In fact, 2014 was the lowest point.

The EPS was up 15%. All the others had been in the 20s.

So, it's just a fulfillment of our track record for the next 24 months. So, like I said earlier, we have a lot of faith in our success.

And we've learned a lot from our mistakes that you learn when you build a business. You learn more from your mistakes than your success.

That's helpful, Jim. I appreciate the commentary.

And I appreciate the commentary around clearly not wanting to dilute shareholders since you guys are all large shareholders of TriState. And maybe just to follow-up on some of the capital discussion there.

Are there certain capital ratios that you are looking at, whether it be total risk base or Tier 1 that would kind of trigger a common equity raise? Or should we try to think about that in another way?

I think you want to look closely at Tier 1, which we closed, I believe it was 725, okay? Since we've been able to get the relief from Basel III back in the January of 2015 on the private banking portfolio, it's really Tier 1 that's been impacted handily by our growth.

But keep in mind, to remain well-capitalized, 5% is the number. So, we're still a distance from that 5% number.

So, I would say that we would like to enhance that Tier 1. We have – the goals that I've gone over with you are fairly aggressive for the forthcoming year.

But Tier 1 is the thing that you should look at, that has our attention. Now, the other issue is that we've been very open about – as Matt Olney was querying on acquisitions, and we're looking at several opportunities that are well beyond what we can finance internally here.

So, we would see ourselves potentially going to the market to reach that goal of $15 billion that we've set for Chartwell Investment Partners by 2019. So, I would say it's very practical to believe that we'll do a capital raise in 2018 or 2019.

It would be nice to do one that is accretive in conjunction with a larger acquisition than the one we just announced.

Yeah, understood. Thanks for that color.

Appreciate it.

Thank you. We certainly appreciate your continued commitment to TriState Capital and look forward to working with you into the future.

Many happy returns. Thank you.