Earnings Call Transcript - RJF Q3 2021

Operator, Operator

Good morning, everyone, and thank you for joining a joint call with Raymond James Financial and TriState Capital Holdings. This call is being recorded and a replay will be available on the Investor Relations page of the Company's website at www.raymondjames.com and investors.tristatecapitalbank.com. Now, I'll turn the conference call over to Kristie Waugh, Head of Investor Relations at Raymond James Financial.

Kristie Waugh, Head of Investor Relations, Raymond James Financial

Good morning. Thank you, Jamie. Thank you everyone for joining us as we discuss Raymond James Financial announced acquisition of TriState Capital Holdings. With us on the call today are Raymond James Chairman and CEO, Paul Reilly; CFO, Paul Shoukry; and Jim Getz, Chairman and CEO of TriState Capital Holdings. Also available during the Q&A portion of the call are David Demas, TriState Capital CFO; Brian Fetterolf, President and CEO of TriState Capital Bank; and Tim Riddle, Chartwell Investment Partners' CEO. The presentation being reviewed this morning is available on Raymond James Investor Relations websites. Following the prepared remarks, the operator will open the line for questions. Statements included in this communication which are not historical in nature are intended to be and are hereby identified as forward-looking statements for purposes of the Safe Harbor provided by Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934. These statements include, but are not limited to, statements about the benefits of the proposed acquisition of TriState Capital by Raymond James, including future financial and operating results, including the anticipated effects of the transaction on Raymond James' and TriState Capital's respective earnings, statements related to the expected timing of the completion of the transaction, Raymond James' plans post-transaction, objectives, expectations, intentions, and other statements that are not historical facts. Forward-looking statements may be identified by terminology such as may, will, should, schedule, plans, intends, anticipates, expects, believes, estimates, potential, or continue or negatives of such terms or other comparable terminology. All forward-looking statements are subject to risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of Raymond James or TriState Capital to differ materially from any results expressed or implied by such forward-looking statements. Such factors include the ones listed in yesterday's press release concerning the transaction. Additional factors which could affect future results for Raymond James and TriState Capital can be found in Raymond James' annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K; and TriState Capital's annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K in each case filed with the SEC and available on SEC's website at www.sec.gov. Raymond James and TriState Capital disclaim any obligation and do not intend to update or revise any forward-looking statements contained in this communication, which speak only as of the date hereof whether as a result of new information, future events or otherwise, except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties caution should be exercised against placing undue reliance on such statements. Now, I'm pleased to turn the call over to TriState Capital Holdings' Chairman and CEO, Jim Getz. Mr. Getz?

Jim Getz, Chairman and CEO, TriState Capital Holdings

Thank you very much, Kristie. Good morning and thank you for joining us. I'd like to personally welcome Paul Reilly and Paul Shoukry to Pittsburgh. It's an honor and a pleasure to have you with us. While the third quarter results we reported yesterday will not be the focus of our comments today, we believe that they are indicative of the performance that attracted the attention of Raymond James in the first place. Once again, each of our asset management, private banking, and commercial banking businesses contributed to strong organic growth in quarterly revenue, net interest income, net income, and net income available to common shareholders as well as the 69% increase in earnings per share over the same period last year. At Chartwell Investment Partners, our team's performance continued to attract positive net inflows, totaling some $499 million from institutional and retail clients year-to-date along with double digit organic growth in assets under management and revenue. TriState Capital's middle-market commercial lending team also continued to deliver differentiated results with nearly 15% full year organic growth over the last 12 months. And we continue to enhance TriState Capital's position as the nation's leading independent provider of private banking securities-based loans, primarily collateralized by marketable securities. These loans grew organically by 39% over the last 12 months to surpass $6 billion or 63% of total loans. Our national distribution network for this offering also continued to grow, numbering 322 independent investment advisory firms, trust companies, broker dealers, regional securities firms, family offices, insurance companies, and other financial intermediaries. Our agile and responsive funding mechanism continues to perform as designed, including our national treasury and liquidity management services for sophisticated clients. Treasury management deposit account balances were up more than $1 billion during the past 12 months and $2.45 billion since we launched the offering. Overall, TriState Capital has continued to deliver profitable and responsible organic growth, and we fully expect this record of success to continue. In fact, we expect to further accelerate our progress in partnership with our friends at Raymond James. So now, let's discuss the announcement we made jointly with Raymond James yesterday afternoon. We believe the transaction is an extraordinary opportunity for all of our stakeholders. For our clients, there are many clear benefits. They will continue to be served by the same talented people our clients deal with on a daily basis as TriState Capital and Chartwell will continue to operate independently within Raymond James. The technology we've invested heavily in will remain in place, including what we've deployed to provide an exceptional client experience. In addition, we believe the combination of our balance sheets will provide ample capital and liquidity to meet our clients' needs through commercial and securities-backed lending. Furthermore, Raymond James will bring us additional resources to continue investing in people, products and technology to help us further strengthen our client relationships. For our common stockholders, this transaction provides full and fair pricing not only reflecting TriState Capital's high growth trajectory since its 2007 founding, but the foundation we have built to realize its growth potential in the years ahead. By receiving the vast majority of the purchase price in RJF common stock, we have partnered with a company that has generated strong returns for its shareholders since going public in 1983. For our employees, we intend to maintain the entire workforce of TriState Capital and Chartwell, joining a partner that shares our commitment to responsive client service, rewarding results and the entrepreneurial mindset that enabled us to attract some of the best in the business to our organization. Very importantly, we can also take tremendous pride in the opportunity to be part of a larger organization. It is one of the most highly regarded diversified financial services companies in the nation. Raymond James shares our most important core values, including independence, a long-term perspective, integrity, and putting clients squarely at the center of everything we do and every decision we make. We could not be more pleased to be partnering with Raymond James to take TriState Capital and Chartwell to the next level of success. So, it is my pleasure to introduce Chairman and Chief Executive Officer of Raymond James, Paul Reilly.

Paul Reilly, Chairman and CEO, Raymond James Financial

Thank you, Jim, and I can't tell you how excited I am to be here with you in Pittsburgh alongside your management team to discuss this transaction, which will bring together two strong franchises that always put clients first and make decisions for the long term. As we discussed at our Analyst and Investor Day in June, investing in long-term profitable growth has always been how we prioritize our utilization of capital. And this announcement further reinforces our commitment to utilizing our strong capital position to drive attractive returns for shareholders. While we have primarily grown organically, we make acquisitions only on a very selective basis. When we have the conviction that the combination of the two firms will make each other stronger, which we are confident will be the case when TriState Capital and Chartwell join the Raymond James family. The primary reason we've been successful at acquiring and integrating firms is because we have stayed true to our acquisition criteria. The transaction first and foremost has to be a strong cultural fit, has to have a great strategic reason, and has to make financial sense for our shareholders. I'm pleased to say that TriState Capital checks all those boxes, first and foremost starting with the culture. Similar to our own, TriState has a terrific client-centric franchise focused on serving clients with premier banking and asset management services. They value independence and have an entrepreneurial culture and energy that has propelled their consistent success. We've known each other for a while, first as our largest deposit client. But over the last few years, we worked closely with the firm and admired its leadership position in offering securities-based lending or SBLs through a scalable and robust technology platform. And in addition to what Jim has already mentioned, we believe there are many strategic benefits to both firms in this combination and I'll outline a few in a minute. Beginning on Slide 4, I appreciate some of you listening may not be familiar with Raymond James. So let me provide a quick overview. Raymond James is a leading diversified financial services company. We are an S&P 500 and Fortune 400 company. 10 years ago we set out to be the premier alternative to Wall Street, which means we wanted to keep a regional boutique family-oriented firm reflecting our culture, yet grow to a size and scale that we can compete with the largest providers in our industry and provide the absolute best service and solutions to our advisors and clients. Our primary business is our Private Client Group or PCG, where we serve more than 8,400 financial advisors in the U.S., Canada, and the U.K. who manage more than $1.2 trillion in client assets through multiple affiliation options. PCG is by far our largest business accounting for two thirds of our revenue and closer to 80% if you include ancillary revenues related to asset management and banking services to those clients. So this business is really the lifeblood of most everything we do. Our other businesses include a capital markets business, which serves clients with M&A activity, equity and debt underwriting, and equity and fixed income sales and trading. Our bank subsidiary Raymond James Bank has assets of nearly $35 billion serving corporate and PCG clients. Our asset management subsidiary, Carillon Tower Advisers, which operates a multi-boutique structure and manages retail and institutional fixed income and equity strategies of approximately $69 billion. We always strive to be extremely well-capitalized and have over two times the regulatory capital to be considered well-capitalized and have a strong investment-grade credit rating including an A-minus rating with Fitch. TriState Capital on Slide 5, there's a quick snapshot of their business which Jim introduced at the beginning of the call. The firm has had a strong growth trajectory since inception. TriState Capital has annualized net revenues of $244 million and a pre-tax income of $92 million, representing a 38% pretax margin. The firm operates an efficient bank model with total assets of $12 billion and total loans of nearly $10 billion. In the past I've joked that Raymond James has one branch and two ATMs and no plans to double either. And I'm happy to say TriState is one of the only banks in the country that keeps me honest on that statement, as they don't have any branches or ATMs. TriState Capital is a leading provider of securities-based lending and has a terrific digital lending platform and robust risk management and technology system. Lastly, Chartwell Investment Partners, the firm's asset management business, has assets under management of approximately $11 billion, which will fit nicely under Carillon Tower Advisers' multi-boutique model. Moving to Slide 6, there are several key benefits to this combination. First, as I mentioned earlier, we are culturally aligned with strong values and a shared client focus, which makes TriState Capital a leader in the attractive and high-growth securities-based lending business, generating tremendous growth enabled by its innovative digital lending technology platform and supported by a robust risk and collateral management technology system. Additionally, through the client cash suite program, Raymond James has a stable and large deposit base that can provide TriState with relatively low-cost funding to fuel its high growth levels. Through a second bank charter, TriState will remain separately branded. Raymond James can provide internal FDIC insurance deposit capacity to Raymond James Private Client Group clients. Also TriState Capital diversifies Raymond James' funding sources through its treasury management and liquidity management services for its sophisticated clients. Next, TriState Capital has an excellent track record for maintaining strong credit quality across its private banking and commercial lending portfolios. Lastly, Carillon Tower Advisers and Chartwell Investment Partners are complementary asset management businesses and will leverage Carillon Tower Advisers' multi-boutique structure to increase scale, drive distribution and realize operational and marketing synergies. Moving to Slide 7, Raymond James is a firm centered on core values. We have always put clients first. We act with integrity. We're conservative and we take a long-term view and we value our independence, and the TriState Capital family shares these values, which we always knew, but that became even more evident as we went through the due diligence process together. TriState Capital has an incredible management team, which is evident across every business and function in the organization. Under the continued leadership of Jim Getz, TriState will continue to operate autonomously, keeping their brand name, their client relationships, their pricing decisions, their dedicated employees, their offices, their separate client technology, their separate data systems and their separate bank subsidiary. We will preserve TriState's independence to ensure they maintain the entrepreneurial spirit that has been instilled by Jim and the entire management team. TriState will serve their independent clients and will not serve on the Raymond James platform. Moving to Slide 8, through its investment banking business, TriState Capital is a leading provider of securities-based loans to financial advisors. They have relationships with financial advisors as numerous broker-dealers, RIA custodians, trust companies, and other financial intermediaries. We know and value the SBL business as Raymond James Bank provides SBL exclusively to our Private Client Group clients. Both firms have enjoyed tremendous growth in these portfolios over the past several years. As most of you know, SBL loans are fully collateralized by marketable securities and have zero percent risk weight, resulting in excellent risk-adjusted returns. TriState Capital's SBL balances grew at a compounded 29% annual rate from 2016 to 2020, and actually accelerated that growth year-to-date. Similarly, Raymond James' SBL balances grew rapidly during the same period. Looking at the pro forma combined loan mix, SBLs grow from 21% of Raymond James' total loan portfolio as of June 30th to 33% on a pro forma basis, including TriState Capital's loan balances. Again, this is a very attractive asset class providing excellent risk-adjusted returns with significant headroom for more growth at Raymond James and across the industry. On Slide 9, TriState Capital's leading digital lending platform and robust collateral management technology systems have supported strong loan growth in a reasonable and scalable manner. This technology is a true differentiator in the marketplace bolstering TriState's dominance in the SBL business. On Slide 10, this combination provides significant deposit and capital synergies. As of June 30, Raymond James had approximately $63 billion in its clients' domestic cash suite balances. The vast majority of those balances are held at the Raymond James Bank Deposit Program or RJBDP where clients' cash balances are swept into interest bearing deposit accounts at RJ Bank and various third-party banks. By sweeping cash into RJBDP, clients receive higher aggregate FDIC insurance by spreading those deposits across multiple banks within the program. RJBDP is a source of relatively low-cost, stable deposits for RJ Bank, and relied upon to fund its asset growth. As of June 30, $29 billion was swept into Raymond James Bank, which has a weighted average cost of deposits of 8 basis points, which includes a small amount of higher cost deposit sources. TriState Capital has deposits of approximately $10.3 billion and has a weighted average cost of 41 basis points. While we both share the objective to continue to strengthen and grow the independent deposit franchise, a portion of the current and future deposits is expected to be replaced by lower-cost RJBDP balances, helping fund TriState's rapid growth in a more profitable manner. Furthermore, having a second bank charter can provide more internal FDIC insurance deposit capability to Raymond James' Private Client Group clients, which is especially valuable in this environment where demand for deposits from unaffiliated banks has meaningfully declined over the past 12 months. Turning to Slide 11, TriState Capital's deposits, which are sourced through numerous client relationships, would diversify funding sources for Raymond James, which will become particularly valuable when deposits become precious in our industry again. TriState has also invested heavily in technology to support its treasury management business, which is led by 13 dedicated and experienced professionals and serve nearly 500 clients. On Slide 12, as the slide shows, both firms have a history of strong credit quality. TriState Capital's highly experienced lending and credit management teams combined with its disciplined loan approval processes and collateral monitoring system have led to superior credit quality across the entire portfolio, similar to Raymond James Bank. TriState truly has a fantastic commercial lending business, which is primarily sourced directly in select markets and is very relationship focused. Another similarity is both Raymond James Bank and TriState Capital Bank are concentrated in floating-rate assets, with nearly 94% of TriState Capital Bank assets being floating rate, providing significant upside in a rising short-term interest rate environment. Turning to Slide 13, Carillon Tower Advisers and Chartwell Investment Partners will have pro forma combined assets under management of approximately $80 billion and are complementary asset management businesses. Chartwell will operate as a subsidiary of Carillon, while maintaining an independent brand and management, allowing Chartwell to leverage Carillon's multi-boutique structure to increase scale, drive distribution, and realize operational and marketing synergies. Turning to Slide 14, our capital position is strong with well over 2x the required levels of regulatory capital to be considered well-capitalized. This transaction structure and consideration mix allows current TriState Capital shareholders to participate in the future upside while also enabling Raymond James to maintain our strong liquidity and capital positions with expected flexibility to repurchase shares to offset dilution associated with the transaction post closing. We believe this sufficed deployment of liquidity and capital allows for further ability to maintain the dividend policy, buy back stock to offset dilution, and support continued loan growth. We are maintaining our commitment to deploy excess capital to achieve a Tier 1 leverage ratio of approximately 10%, which will be significantly accelerated by this transaction. Now, I will turn the call over to Paul Shoukry to provide an overview of the transaction. Paul?

Paul Shoukry, CFO, Raymond James Financial

Thanks, Paul. It is truly a privilege to be here this morning with the TriState Capital team to discuss this exciting transaction. Turning to some of the details on the transaction on Slide 15. Under the terms of the agreement, Raymond James will acquire TriState Capital in a combination cash and stock transaction. TriState Capital common stockholders will receive $6 cash and 0.25 Raymond James shares for each TriState Capital share, which represents per share consideration of $31.09 based on the closing price of Raymond James common stock on October 19, 2021. Raymond James has entered into an agreement with the sole holder of the TriState Capital Series C perpetual noncumulative convertible non-voting preferred stock pursuant to which the Series C convertible preferred will be converted into common shares at the prescribed exchange ratio and cashed out at $30 per share. The TriState Capital Series A and Series B preferred stock is expected to remain outstanding and be converted into preferred stock of Raymond James. Importantly, as both Jim and Paul explained, TriState Capital will continue operating as a separately branded firm and as a standalone division and subsidiary of Raymond James with Jim Getz remaining as TriState Capital Holdings' Chairman and CEO; Brian Fetterolf remaining as TriState Capital Bank CEO; and Tim Riddle remaining as Chartwell's CEO. Management and approximately 350 associates are expected to remain with the firm in its existing office locations to support TriState Capital's continued growth and maintain their very high service levels. To support this retention, the transaction includes $15 million of two-year retention for certain associates. And importantly many of TriState Capital's employees have existing retention in place currently north of $50 million worth, which will remain in place converting to an equivalent value of Raymond James stock retention post-closing. Both Boards have approved this transaction and this acquisition is subject to customary closing conditions, including regulatory approval and approval by TriState Capital shareholders and is expected to close sometime in 2022. This timing will largely depend on the timing of the regulatory approvals. We project the transaction to be accretive to diluted earnings per share in the first full year post-closing, excluding acquisition-related expenses, and over 8% accretion in diluted earnings per share after the third year. And that assumes the full stock-based consideration issued as part of this transaction. The accretion estimates increase meaningfully by approximately 400 basis points, assuming share repurchases post-closing to offset shares issued as part of the transaction consideration. We believe we would have sufficient capital and liquidity to do so from our available funding sources. So, we will take a balanced approach focused on the long-term just as we always do. Finally, our accretion estimates assume short-term interest rates increase 50 basis points in 2023 and another 50 basis points in 2024 for a total increase of 100 basis points over the next three years. It's important to note that 94% of TriState Capital's assets are floating rate. So this transaction significantly increases our upside exposure to higher short-term interest rates. And we only model that TriState Capital's NIM would increase around 30 basis points to around 2% after the first 100 basis points of rate increases, which is well below their NIM prior to the pandemic. Now, let me flip to Slide 16 to provide a summary of the total consideration. The total consideration for the transaction will be about $354 million of cash and 7.8 million shares of Raymond James stock. At RJF's current stock price this represents total consideration of around $1.1 billion between the cash and the stock. This table also breaks out the components of the capital instruments reflected in this total consideration. Before I hand the call back over to Paul, let me explain our projected impact to our Tier 1 leverage ratio, which we have guided to work down to 10% over time, still twice the regulatory requirement. This transaction meaningfully accelerates our glide path to hitting this goal, as we would expect an impact of about 150 to 200 basis points upon closing based on the current consideration mix. And we would expect around another 100 basis points of incremental impact if we repurchase shares to offset the equity consideration in this transaction, which is our current expectation. So a total impact to our Tier 1 leverage ratio of somewhere around 250 to 300 basis points. But remember, we also expect our capital ratio to grow between now and closing, given our earnings and restrictions on buying back stock between now and closing. So with that, I'll turn the call back over to Paul Reilly.

Paul Reilly, Chairman and CEO, Raymond James Financial

Thanks, Paul. And I know for those of you who followed us a long time, sometimes people think we're too deliberate and we were hoarding capital, but I think we've always said we're going to strike when we think it's a great deal for shareholders in the long term. And we are extremely excited about this transaction and could not be more optimistic about the growth prospects for TriState as part of the Raymond James family. Jim and I are both confident the transaction will yield positive outcomes for TriState Capital's associates and their clients, and that our shareholders will benefit over the long term. I know there's a lot of questions. So with that, I'm going to turn it over to the operator. Operator?

Operator, Operator

Operator provided instructions on how to ask questions. Our first question today comes from Manan Gosalia from Morgan Stanley. Please go ahead with your question.

Manan Gosalia, Analyst, Morgan Stanley

Congrats on the deal. Paul, I was hoping you could talk a little bit more about the benefits from the deal beyond the loan portfolios that are coming on. The premium you're paying and the 8% accretion suggest that there is room for significant growth and synergies between the two businesses. And I know you mentioned some of the synergies on the asset management side and also the digital lending platform and the risk management technology that TriState brings. Can you help us understand what additional synergies you see versus having grown the SBL and the commercial loan portfolio organically?

Paul Reilly, Chairman and CEO, Raymond James Financial

Well, first, I don't think we have the market to grow the SBLs organically because our bank will continue to be there to service the Raymond James clients. TriState is a whole different business serving independent advisers, RIAs and will continue to be separate. And it's kind of one of these unique transactions that you have a high-quality organization that's very fast-growing that needs capital and needs deposits. First, they're going to service their client deposit needs. But beyond that, they need deposits. And we have excess capital and we have excess deposits that we have difficulty deploying at a good cost. So not only do they get low-cost deposits, but we're going to earn a lot higher spread on that cash than we would depositing on our own. And we just see with their growth and our growth, just a tremendous financial opportunity over time. So keeping them independent is important to make sure their independent clients know that their data, their operations and their technology are separate. No different than Carillon Tower, where we have a lot of firms and advisers use our funds that aren't with us, but everything is separate, and they service their clients. TriState will continue to service their clients, but we believe just the financial arbitrage on deposits as they grow will be significant. And so it's just like two organizations doing the same thing, a little different markets with a perfect fit, one meeting capital and deposits and one having excess capital and deposits. And we see tremendous loan growth opportunity at TriState as we do at Raymond James Bank with different markets and different customers.

Manan Gosalia, Analyst, Morgan Stanley

Okay. Great. And then another question I'm getting this morning is why structure the deal with a large equity component, which you will eventually buy back? Are there some restrictions around what you can do with your capital until you buy back the stock? And why not just do more cash right now as opposed to doing stock and then buying back the stock later on?

Paul Reilly, Chairman and CEO, Raymond James Financial

I think it's pretty simple. You have a buyer and a seller, the buyer was happy to use all cash. The seller wanted stock. So, we structured the transaction because that's what they wanted. It shows a long-term commitment by the management team, which are large holders, and Jim is the founder — holding Raymond James stock, which we believe is good for the long term, both retention and management. And we will buy back stock when we're permitted after the transaction closes. By SEC rules, we have restrictions. But we will buy back stock to simulate more of a cash buyback when we can. So we would have been happy to use more cash. It wasn't a restriction. And this was what took to get the transaction done, and we felt that from a retention standpoint, it's better to have them invested in our future also.

Paul Shoukry, CFO, Raymond James Financial

Yes, I think just to reinforce that, this would not be modeled like our typical messaging around buying back stock on an opportunistic basis. This would be a much more deliberate action with a more tailored objective. So it will be pretty quickly following closing, subject to volumes and other things, obviously.

Manan Gosalia, Analyst, Morgan Stanley

Okay. Great. I'll hop back in the queue and congrats again on the deal.

Operator, Operator

Our next question comes from Devin Ryan from JMP Securities. Please go ahead with your question.

Devin Ryan, Analyst, JMP Securities

Congratulations to both sides here on the announcement. I guess just kind of following up on the previous line of questioning. Just trying to get a little bit better sense around TriState's growth over the last year — tremendous momentum at the bank. If we can dig in a little bit more to what drove that, what TriState was doing well. And then as we think about the combination with Raymond James, clearly, you're adding capital, adding resources, adding funding efficiency, could that growth have been even better over the last 12 months if this deal, say, happened a year ago? Was there opportunity left on the table? And thinking about the growth potential moving forward, how should we be modeling that now that we have this combination? And then also, if you can touch just a little bit more on Chartwell and what the opportunities are there specifically — can you accelerate growth? Or is it more just you're providing a more robust platform and infrastructure that they can leverage? How should we think about the ability to actually expand assets and work with more clients there?

Paul Reilly, Chairman and CEO, Raymond James Financial

Devin, a good multipart question. First, the SBL market is a big market. If you look at the industry, marginally, the traditional source of funding can only be used for securities. The SBL market has been the growth market and margin has been pretty flat. It is the preferred financing mechanism for many broker-dealers and independent RIAs, who otherwise either have a one-off bank relationship which isn't technology-driven or efficient, or start their own bank which brings regulatory complexity, or use limited alternatives. TriState saw this trend and created a leading technology where they could go to independent advisers, RIAs and allow them to go onto their platform and efficiently put the loan on, get approval quickly, and have SBLs where there really wasn't another efficient source. They've built a scalable front-end and are focused on back-end processing to approve loans quickly. I think their only limitation has been how fast they can process and how much capital and deposits they need because the market is huge. They've done a great job, but with us providing additional deposit capacity and capital, they could have grown more quickly. Looking forward, now that the technology platform is mature, with additional capital and funding sources they will be able to grow substantially. There's only so much you can do when you're ramping up, too. They're very focused on quality and service to existing clients. Yes, I think the growth opportunity is substantial and we're willing to invest more capital in their investments and technology and growth. The synergy is that two organizations that think the same have opposite needs on capital and liquidity. It will be accretive for everybody.

Paul Shoukry, CFO, Raymond James Financial

As far as Chartwell goes, we think that's an exciting opportunity as well. They have around $11 billion of assets under management. Carillon Tower Advisers has a multi-boutique structure and Chartwell will be able to tap into that distribution to further enhance their client relationships. They have very good products particularly on the fixed income side, including high-grade and high-yield type products, both short and intermediate-term products that have been generating pretty good net flows over the last couple of years. So that will be synergistic with our Carillon Tower Advisers multi-boutique affiliation model, keeping their separate brand and independence just like all the other affiliates under that umbrella.

Devin Ryan, Analyst, JMP Securities

Okay, terrific. And just a real quick follow-up. As you think about the pro forma mix of the bank or the aggregate bank balance sheet with TriState Bank included, is there any consideration of a mix shift? Or are you comfortable SBLs are obviously high quality? On the commercial side, is there any consideration of the pro forma mix evolving and could that dictate how much capital you allocate to allow growth to occur in TriState? Or is it to the extent they see good opportunities, you let them grow as fast as they can?

Paul Shoukry, CFO, Raymond James Financial

We're going to want to continue to facilitate our combined growth, Devin. The thresholds you're referring to were set when our bank was primarily a corporate lender. With the change in mix, SBLs would represent 33% on a pro forma basis of the overall loan mix. Much of our bank and their bank have securities portfolios with very limited credit risk; they have investment-grade corporates in their securities portfolio and our securities portfolio is agency-backed mortgages. Some of those thresholds set 10 to 15 years ago don't apply in the same way now that we're a much more diversified banking institution. Most importantly, Raymond James has always been and will remain a Private Client Group-focused firm, which represents roughly 67% of our revenues. This transaction does not change that mix and nor do we want to change that mix. We will continue to focus first and foremost on the Private Client Group business because that is the lifeblood of almost all of our other businesses and will be part of the lifeblood of TriState Capital as well as we use the deposits. The internal FDIC insurance capacity is a benefit to our clients, particularly in a market where third-party bank demand for deposits has declined.

Operator, Operator

Our next question comes from Steven Chubak from Wolfe Research. Please go ahead with your question.

Steven Chubak, Analyst, Wolfe Research

Congrats on the deal, everybody. Certainly, a really interesting transaction. First, I wanted to start off with a question on the assumptions underpinning some of the merger math or accretion math. I was hoping you could outline what you're assuming in terms of revenue, SBL growth and expense synergies that are underpinning that 8% accretion assumption. And I was hoping to get some insight into how the compensation model works at TriState. As we think about incremental revenue growth, what's a reasonable assumption in terms of the marginal margin for every dollar of revenues?

Paul Shoukry, CFO, Raymond James Financial

Thanks, Steven. We model fairly conservatively. They've had fantastic growth across their SBL and commercial lending portfolios, but we don't straight-line those historical growth rates in our projections. In most of those cases, we're essentially cutting their historical growth rates almost in half, which would actually still be good growth over the next five years given how strong the growth has been. But we wanted to be conservative in our modeling. Your model, Steven, that I saw last night, was reasonable. I think the only major difference was we're factoring in increases in short-term rates starting two years from now in years two and three, 50 basis points each. So we get some uplift there given that 94% of their assets are floating-rate assets. And as far as expense synergies go, it's mostly from the replacement of $3 billion of deposits in year one and then 75% of the funded growth going forward coming from our lower-cost deposit base. But it's important to mention — three years ago, when we first met with Jim, the reason we were talking is because we needed another charter to provide more internal FDIC insurance capacity, and we wanted to diversify our funding sources because just two years ago cash was precious. We believe cash will become precious again. Having a diversified funding source, which TriState has an excellent one, is not something that we want to diminish in value over the next couple of years just to get short-term accretion. We want to continue strengthening their treasury management operation. They've got great technology there and great client relationships. That's going to be an area of focus for us as well as continuing to diversify the funding sources for the firm overall. So we're well positioned when funding becomes scarce again.

Steven Chubak, Analyst, Wolfe Research

Thanks for that perspective, Paul. Since you brought up rates, I'm curious how much the transaction actually increases your overall rate sensitivity? And SBL appetite has historically been much stronger during periods of low rates. How do you handicap the impact that higher rates can actually have on SBL growth going forward?

Paul Shoukry, CFO, Raymond James Financial

That's part of the reason we significantly reduced the growth rate in our projection. In terms of exposure, 94% of their assets are floating rate on the bank balance sheet, so it's pretty straightforward. The parts that are fixed rate are in securities with relatively little duration. So it gives us much more exposure to a higher short-term interest rate environment going forward.

Steven Chubak, Analyst, Wolfe Research

Got it. And just a final one for me on managing conflicts and potential revenue dis-synergies. Recognizing that TriState will operate independently, how do you handicap the risk that TriState clients may be reluctant to partner with one of their largest competitors? And how do you manage the potential conflict for TriState sales personnel getting compensated for marketing SBL product, whereas Raymond James advisers are not? I recognize Raymond James historically has had more of a pull versus push approach to marketing SBL products. How are you mitigating those potential conflicts?

Paul Reilly, Chairman and CEO, Raymond James Financial

We operate in an industry where firms often use each other's products and services. The key for TriState's clients is demonstrating independence. Their operational data, like in Carillon Tower, will remain separate. TriState's salespeople will not be calling on Raymond James advisers. Their brand will remain separate, pricing decisions will be theirs, and client statements will not bear the Raymond James name. We're committed to keeping that independence because if we don't, we'd risk damaging the very business we paid for. Many advisors and firms will see the choice is clear: either build their own capability or utilize an established platform like TriState's. If we do what we say we'll do and preserve independence, we expect clients to remain comfortable.

Operator, Operator

Our next question comes from Alexander Blostein from Goldman Sachs. Please go ahead with your question.

Alexander Blostein, Analyst, Goldman Sachs

Paul, maybe a question on M&A strategy broadly. If you look at the type of deals you guys have done over the last couple of years that were on the smaller side of things and focused more on advisory, investment banking, and some asset management rather than balance-sheet focused transactions, does this signal that you guys are willing to look a bit broader? I assume this takes you out of the acquisition market for a little bit, but just thinking about the type of deals you could contemplate going forward.

Paul Reilly, Chairman and CEO, Raymond James Financial

We haven't changed our focus. We've always prioritized bringing on great advisers and firms, and we'll continue to do that. We've also looked at acquisitions to expand technology and processing capabilities for retirement plans or other platforms that help service advisers. Those deals don't deploy a lot of capital and don't affect Tier 1 ratio much. We haven't looked to acquire banks generally because they don't provide much strategic advantage beyond growing loan portfolios. This transaction is different: it combines a bank charter with a strong technology platform, a high-growth engine, and a management team we value. It needs our capital and cash, which is the kind of deployment we want. So while this was a unique opportunity, it doesn't preclude other targeted acquisitions. We'll remain deliberate.

Paul Shoukry, CFO, Raymond James Financial

While this is a significant transaction for us, we will still have plenty of balance sheet capacity and flexibility to pursue other acquisitions. Unlike a major Private Client Group acquisition, which would have significant integration implications, we're keeping TriState Capital separate where there won't be a technology or systems integration that would be highly disruptive to our technology or operations team. So we're still open for business on the acquisition front, but we'll be patient and run opportunities through our acquisition criteria.

Paul Reilly, Chairman and CEO, Raymond James Financial

To reinforce, we've done similar structures in the U.K. with Charles Stanley. There's limited back-office integration here. TriState will operate independently, and the work is largely around financial reporting and relationship integration. We have the capability and bandwidth if something comes up to react to it, but the integration lift is limited.

Operator, Operator

Our next question comes from Christopher Allen from Compass Point. Please go ahead with your question.

Christopher Allen, Analyst, Compass Point

Congrats on the deal. I was wondering if you could give us some color maybe from the TriState side: what are the barriers to entry for competitors starting up a similar platform?

Jim Getz, Chairman and CEO, TriState Capital Holdings

To be quite honest, we have very limited formidable competition in the marketplace. By that, essentially, there are two other parties we periodically come across. You may have heard of a company called Goldman Sachs; they have an entity that solicits that type of private banking business. And there's The Bancorp, which is out there. But by far, we've been able to get the dominant market share of this business and continue to grow our business dramatically. It's responsible growth. All these loans are over-collateralized, priced to the market on a daily basis and highly liquid. If you take a look at our commercial banking business, we've carved out a niche across the board — Chartwell, commercial banking, and private banking. We have highly experienced individuals, very little turnover, and we've built a foundation of over $12 billion of assets. What we're doing today with Raymond James is not about where we are today; it's about tomorrow and taking this company to a much higher pace leveraging what they've put in place over their history of a very strong balance sheet and income statement.

Paul Reilly, Chairman and CEO, Raymond James Financial

What we were particularly impressed with was the sophistication of their front-end systems to go into multiple advisers and custodial platforms and the robustness of their technology developed over a long period. TriState has focused on speeding up back-end processing and approvals. When you're servicing multiple custodial platforms, that technology has to be custom and integrated. We were impressed with the lead they have and their continued development, which we will support. That technology is a significant barrier to entry.

Jim Getz, Chairman and CEO, TriState Capital Holdings

If you look at our business, this is a company that has historically invested in our clients, our people, our infrastructure and our technology. You can see the amount of money we've been consistently investing in technology — roughly $3.5 million to $4.5 million every single quarter.

Paul Reilly, Chairman and CEO, Raymond James Financial

When you do this on a held-away basis across multiple custodial platforms, each of those is a key account relationship that took years to develop. The expertise within the organization and building the ecosystem to work with third-party custody platforms has taken over a decade. Our technology spend has built on expertise in the business that really separates TriState from others. It would take a long time to replicate that organically.

Operator, Operator

Our next question comes from James Mitchell from Seaport Research Partners. Please go ahead with your question.

James Mitchell, Analyst, Seaport Research Partners

You have $25 billion of client deposits held away at third-party banks and you're targeting replacing $3 billion at TriState. That seems conservative. Is there a reason why you could replace more of that deposit funding more quickly? Or do you want TriState to maintain those relationships for longer-term growth?

Paul Reilly, Chairman and CEO, Raymond James Financial

Their business is relationship-oriented — both loans and deposits. You can’t simply remove deposits without impacting relationships. Where deposits aren't critical to relationships, they'll use our deposits. But where deposits are integral to the lending relationship, they must be maintained. We don't want to damage the franchise for a short-term gain. So while it could be more, we will be deliberate. We used a conservative target, and with their growth we'll deploy more where appropriate. Market dynamics will determine the pace.

James Mitchell, Analyst, Seaport Research Partners

On the flip side, with that $25 billion of client cash and having a second bank charter, does it change how you think about capacity to hold client cash on your or TriState's balance sheet? Could you benefit from rising rates by moving some of that cash onto the balance sheets?

Paul Reilly, Chairman and CEO, Raymond James Financial

We will over time. We haven't changed our strategy. This will give us cash that can generate a good spread as they grow. We're confident they'll use more of that cash, and it should be a fair and conservative benefit. We don't want to be overly aggressive; the market will determine usage.

Paul Shoukry, CFO, Raymond James Financial

Raymond James Bank is also generating strong growth and has significant cash needs. Much of the cash off balance sheet is floating-rate as well. We'll be deliberate and respect TriState's client relationships while building flexibility for any market environment.

Operator, Operator

Our next question comes from Bill Katz from Citigroup. Please go ahead with your question.

Bill Katz, Analyst, Citigroup

Congratulations as well. Just coming back to security-based lending, appreciate that you're going to have separate brands and not calling each other's clients. Paul, is there an opportunity to take TriState's technology and accelerate the de novo opportunity for the Raymond James side for SBL?

Paul Reilly, Chairman and CEO, Raymond James Financial

Yes. We can learn from their front-end technology and some back-end processing and decision-making and apply those lessons to our own technology over time. But we won't simply take TriState's systems and bolt them onto ours because our client reporting and integrations are different. Over time, we'll adopt best-in-class elements from both platforms and migrate where appropriate. Their treasury management systems and some software could also be useful for our bank relationships.

Bill Katz, Analyst, Citigroup

Understood. And then a follow-up: you haven't spent much time talking about treasury services or the opportunity for investment banking. It seems like you'll get opportunities on both. Are there synergies to accelerate market share gains as a result of a more comprehensive set of services that you can offer middle-market clients?

Paul Shoukry, CFO, Raymond James Financial

Absolutely. We recently acquired a firm that serves private equity firms and TriState has a strong fund finance franchise that focuses on those types of firms. We haven't even fully modeled those synergies yet. There's also opportunity through their commercial lending platform to refer investment banking opportunities that they couldn't refer previously. We're excited — while we've focused on SBL and deposit opportunities, there's much more synergy across the combined franchise.

Operator, Operator

Our final question for this morning comes from Kyle Voigt from KBW. Please go ahead with your question.

Kyle Voigt, Analyst, KBW

Just a quick clarification for Paul regarding the expectation for TriState NIM to increase to around 200 basis points with that 100 basis point increase in short-term rates. Does that include the impact of replacing some of those TriState deposits and having 75% of incremental growth funded by RJF deposits? Or is that 200 basis point assumption just using TriState's current funding mix? And for those TriState deposits you expect to keep on balance sheet, how should we think about the deposit beta for those deposits specifically?

Paul Shoukry, CFO, Raymond James Financial

Great question. The 2% NIM expectation should be achievable without the benefit of our deposits; they've achieved similar levels prior to the pandemic with their own deposit base. We haven't given them the benefit of our deposit synergy in that 2% expectation. They do have floors in some of their floating-rate loans, so the benefit to NIM will be back-end weighted for the first 100 basis points. The 75 basis points after the first increase is where we'll see most of the benefit given some loan floors. Regarding deposit beta for TriState deposits, the ones we replace would likely have a higher deposit beta because they are less relationship-oriented than, for example, treasury management deposits. Their future deposit mix will likely have a lower beta given the increased quality of relationship-oriented commercial clients. David or Brian, do you want to add?

David Demas, CFO, TriState Capital

I think Paul's characterization is accurate. We see NIM going to roughly 175 basis points without any movement in rates, and Paul's projection of around 2% NIM on a go-forward basis is accurate. For every 25 basis points in rate move, you'll probably see us pass on 5 to 10 basis points of that to the client and keep the remaining 15 or so.

Brian Fetterolf, President and CEO, TriState Capital Bank

I'd add that over the last couple of years we've focused on diversifying our deposit base, growing through relationships and different products and account types, with a liquidity-as-a-service focus. That results in a deposit base with better characteristics than a pure rate-sensitive base. We're preparing for normalized cash flows in the next few years and expect a favorable beta going forward. Raymond James' deposit sources will certainly enhance that.

Paul Reilly, Chairman and CEO, Raymond James Financial

Let me close with a few comments. This relationship goes back years on a commercial basis and the discussions over a long period of time. We've done extensive due diligence over the last few months. We believe this is just great for both businesses. Jim, as the founder, had no initial interest in a transaction, but as we saw the synergies for both organizations, he became excited for his associates and the family. We feel the same way at Raymond James. We'll have an earnings call next week where more questions may be addressed.

Paul Shoukry, CFO, Raymond James Financial

Just a reminder: because this is a public-to-public transaction, we're limited in terms of answering questions. We're also technically in a quiet period until we release earnings. Send us your questions and we'll try to address them on our earnings call next week.

Paul Reilly, Chairman and CEO, Raymond James Financial

Thank you for joining us on short notice. We did our homework and we wouldn't do any transaction that we didn't believe would be a big boost for the franchise in the long term. Thank you, and we'll talk to you next week.

Operator, Operator

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending.