Triumph Financial Inc (TFIN) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Triumph Bancorp fourth-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Luke Wyse, Vice President Finance and Investor Relations. Sir, you may begin.

Good morning. Welcome to the Triumph Bancorp conference call to discuss our fourth-quarter and 2016 annual financial results. I am Luke Wyse, and I would like to thank you for joining us this morning. I will go over a few housekeeping items and then hand it over to Aaron Graft, our CEO, to lead the presentation.

Triumph Bancorp filed its fourth-quarter and 2016 annual earnings release last evening, as well as a slide deck, and these items will form the substance of our call this morning. If needed, copies of the earnings release and slide deck are available on the Investor Relations section of our website, www.triumphbancorp.com or by calling our Investor Relations department at 214-365-6936.

To begin, I would like to offer a few reminders. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We intend such statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the act. We caution you that forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results or more events may differ materially from those expressed in or suggested by the forward-looking statements. Any forward-looking statements made by Triumph on this call speak only as of the date thereof. New risks and uncertainties come up from time to time, and it is impossible for Triumph to predict these events or how they may be affect it. Triumph has no obligation and does not intend to update any forward-looking statements after the date thereof, except as required by applicable law.

On this call, we may discuss a number of financial results, a number of financial measures considered to be non-GAAP under SEC rules. Reconciliations of these financial measures with GAAP are included in the earnings release and slide deck filed last evening. At the conclusion of our remarks, we will open the telephone lines for Q&A.

With those reminders, I would like to turn the call over to Aaron. Aaron?

Thank you, Luke. We are pleased to report on our 2016 year-end and more specifically our fourth-quarter results. I will give you some general thoughts, hit five specific things I think are relevant to our investors, and then talk about our M&A activities, as well as our thoughts about 2017. Bryce will cover the financial results more in-depth, and then we are happy to take your questions.

So, without further ado, my general assessment is that the fourth quarter represents another step in our journey forward. Our earnings grew and our asset quality improved. This is always a positive, but we have many steps yet to go forward in our journey and we want to take bigger and bigger steps. That is our goal for 2017 to go farther faster, and I believe the groundwork for that has been laid.

Now on to the five specific point I think investors should care about. First, the ColoEast transaction has performed in line with our financial and operational expectations. We are realizing the expected cost savings in this transaction. The operational integration is going as expected, and we successfully completed the ColoEast core system conversion during the fourth quarter.

Second, total loan growth is in line with our expectations. Our loan portfolio grew organically by $68 million in the fourth quarter, representing an annual growth rate of just under 14%. Of this growth, approximately $24 million was in our higher-yielding purchased factored receivables. Our loan portfolio has now surpassed the $2 billion level, and we remain optimistic about our future growth opportunities.

I think we will see continuing loan opportunities in 2017. Of specific note is the opportunity to grow our CRE portfolio. We are well below the regulatory concentration guidance in this area, and we have seen other lenders pull back as they have come up against that threshold, which has slightly tipped the scale back in our favor on the terms we are able to achieve.

Third, factoring is still fun. Triumph Business Capital, our factoring subsidiary, continued to perform well. The dollar value of invoices purchased at Triumph Business Capital this quarter increased $36 million over the prior quarter to $524 million, and we continue to gain market share as we have added 76 net new clients in the fourth quarter and 330 net new clients for the year.

We are also starting to see other positive trends as the average invoice size purchased this quarter increased to $1366 versus $1291 in the prior quarter, an increase of nearly 6%, and a number of invoices purchased increased from $378,000 to $384,000 in the current quarter. For the year 2016, we purchased over 1.4 million invoices. Total factoring revenue at Triumph Business Capital increased this quarter by $723,000 or 8% over the previous quarter to $9.9 million and was $35.1 million for the year. Consistent with prior experience, we expect a seasonal decrease in Q1 of 2017 in this business, but we are optimistic that the absolute dollar effect on the business will be mitigated by an increase in average invoice size and by a marginally stronger economy.

Fourth, our margins remain in line with our long-term goals. If you have followed Triumph for any period of time, you know that we consistently produce margins at the top of our industry. Our adjusted yield bond loans and adjusted net interest margin, which excludes the impact of purchased loan discount accretion, declined slightly quarter over quarter due to the full quarter effect of a shift in our loan mix from the ColoEast acquisition. As we discussed last quarter, a result of that transaction was a decrease in the percentage of commercial finance loans to total loans down to 33%, even though the actual balances of our commercial finance portfolio increased. Our commercial finance portfolio is up $56 million in the fourth quarter to 34% of total loans at December 31, 2016. For the year, we grew our commercial finance portfolio $173 million or 33% year over year.

Fifth, credit quality has improved. It is still not where we want it to be, but it has improved. Our ratios of past-due loans, nonperforming loans, and nonperforming assets all experienced positive movement in the fourth quarter.

That being said, we still have work to do in this area as our provision for loan loss was $2.4 million in the fourth quarter, and we recorded $2 million of net charge-offs or 10 basis points of average loans for the quarter. Part of our provision was due to the loan growth we experienced during the quarter, and of the quarter's $2 million in charge-offs, approximately $1 million of the losses were previously reserved for.

We also recorded a net increase in some of our ALLL factors to reflect recent asset quality trends that increased the provision by about $500,000.

Our agricultural customers are still experiencing headwinds, but we know that as long as people eat food grown by farmers, this will be a core part of our economy, and we remain committed to it. The same holds true for energy, transportation, commercial real estate, et cetera. All these markets will experience volatility. The key for us is to have the credit discipline and the diversity of business lines so that we are profitable through the cycles.

So those are my five specific points. Now on to M&A opportunities.

On the acquisition front, we continue to be in search of opportunities that we believe would enhance our franchise values. These include infill acquisitions within or adjacent to our current branch footprint. This includes Iowa, Illinois, Colorado, Kansas and adjacent markets. We are looking for depository institutions or branch acquisitions that will improve our retail funding and elevate our position within these markets. We also expect these transactions to improve our overall operational efficiency.

Second, we continue to evaluate expansion in the Texas markets, specifically West Texas. We have been fans of West Texas for several years and have come close in the past. Almost 40% of our original investors have West Texas roots.

Contrary to popular sentiment, we like energy exposure and expect it to be a growing portion of our portfolio. While it will never be our primary business, we think West Texas energy producers are the best house in the energy neighborhood and that there is an opportunity, especially with our factoring and commercial finance disciplines to fill a vacuum and use our currency to create shareholder value.

We also continue to evaluate retail expansion into our DFW market. We have a significant commercial loan portfolio in the DFW market due to the depth of our relationships here. We also have commercial deposit customers in this market. We do not have a full-service retail operation in Dallas, but it is something we continue to evaluate.

Lastly, we always evaluate bolt-on acquisitions for our commercial finance lines of business.

In closing, we are excited about 2017. We expect our core earnings to continue to grow. We hope to announce and possibly close multiple acquisitions. Our recent stock appreciation has made those opportunities far more compelling. We also cross our fingers for corporate tax reform given our high marginal rate, but we stopped short of holding our breath. We look at every new opportunity through the lens of achieving our long-term goal of being a geographically diversified community bank and achieving a core return on assets of 1.5% or better. We are committed to serving our community banking customers in a nationwide network of small businesses focused on the transportation, healthcare, manufacturing, distribution, agriculture and staffing industries.

At this point, I would like to turn the call over to Bryce to provide his thoughts on our financial performance in the fourth quarter. Bryce?

Thank you, Aaron. For the year ended December 2016, net income to common stockholders was $19.8 million or $1.10 per diluted share. Adjusted to exclude approximately $1.4 million of tax effected ColoEast acquisition costs expensed during the year, our 2016 diluted earnings per share were $1.17. For the fourth quarter of 2016, we earned net income to common stockholders of $6.1 million or $0.33 per diluted share. Net income to common stockholders improved from the third quarter by $1.6 million or $0.08 per share.

As a reminder, comparisons to the fourth-quarter versus third-quarter results on the statement of income are significantly impacted by the acquisition of ColoEast, which closed on August 1. So third-quarter operating results include the acquired ColoEast operations for only two months and also included $1.4 million of tax effected acquisition costs.

Net interest income for the fourth quarter increased $3.1 million or 10% over the prior quarter. Yield on loans this quarter was 7.36%, a decrease of 6 basis points from the third quarter. The adjusted yield on loans, which excludes the impact of approximately $2.6 million of purchased loan discount accretion recorded in the fourth quarter, was down 28 basis points to 6.82%. These declines are largely attributable to the inclusion of ColoEast for the full fourth quarter.

As of December 31, we had $16 million remaining loan purchase discount, of which we currently expect $12.2 million to accrete into income over the remaining lives of the acquired loans. Of this accretable amount, $5.5 million is expected to accrete by the end of 2017.

Regarding interest expense, the cost of total deposits improved, decreasing by 3 basis points this quarter to 54 basis points. Our total cost of funds increased by 12 basis points in the fourth quarter, primarily due to the interest cost incurred on the $50 million of subordinated notes we issued on September 30.

We earned noninterest income of $6.2 million for the fourth quarter. In addition to ColoEast, we experienced a $330,000 increase in insurance commission revenue as a result of the Southern Transportation Insurance Agency acquisition on September 1.

Noninterest expense increased $1.1 million from the prior quarter to $26.9 million. Third-quarter expenses included $1.6 million of pretax costs associated with closing the ColoEast transactions. Items including the overall quarter over quarter increase in expense include approximately $600,000 in rebranding, conversion and integration-related costs on ColoEast, about $500,000 in loan legal costs incurred on problem credits, a $300,000 increase associated with the Southern Transportation Insurance Agency acquisition, and, of course, the inclusion of ColoEast for a full quarter.

With respect to the cost savings expected from the ColoEast acquisition, we have realized anticipated staffing reductions, the last of which was completed in December. I estimate that about 75% of the total expected -- total cost savings have been realized as of the end of December.

With that, I would like to turn the call back over to Aaron.

Thank you, Bryce. At this time, we will turn the call over to the operator for questions.

(Operator Instructions) Jared Shaw, Wells Fargo.n

Could you just gave an update on the outlook? I know on the CLOs, I know there is an arm's-length relationship, but your thoughts on how things are going over there in terms of growth.

Sure. I suspect that CLO issuance will -- the market as a whole will do well this year. I believe that Trinitas will be in line to benefit from that. So hopeful that Trinitas will issue a couple of deals this year and hopeful that we will be retained as staff and services provider for those deals should that happen.

Okay. Thanks. And then, on your comments on the M&A side, specifically looking at the comments around the bolt-on deals for commercial lines, as we look in the past, what is holding up factoring M&A in the space overall? You've mentioned in the past how fragmented the market is. It seems like it would be a really ripe market to just be able to have a couple acquirers go in and pick up some smaller players. Is there any -- can you give a little discussion around the background on some of the deals -- or the opportunity for deals there?

Sure. So a couple things. Number one, just know that until recently, we have been believers that our stock price has been undervalued, and so we have had a great deal of hesitancy using it as currency for a transaction where we think that -- when we think it is not valued where we would value it. So that is something that has changed.

Speaking to factoring specifically, it is an incredibly fragmented industry, and I think, Jared, we are probably number three in the country right now, probably the third largest when you focus on transportation exclusively. So, if you look at the top seven or eight companies out there, after you get past those, it falls off pretty dramatically. So there are opportunities to -- obviously, if you could do a transaction with one of the larger players out there, it would be pretty dramatic growth. If you talk about the remainder of the universe, which might include up to 100 active factors if you are talking -- or 200 active factors if you are talking about transportation specifically, there is a lot of small ones.

And so what we have been able to do thus far is achieve our growth just through, in my view, building a better mousetrap. And some of the technology things that we have just begun to roll out, like TriumphPay, MyTriumph, providing a mobile app to our truckers, that those things -- we are taking market share organically as it is.

So it is not that we can't do deals in that space. It is just that we've wanted to wait until our stock price appreciated. We want it to be big enough to make sense. I don't know if it makes sense for us to go buy a $5 million or $10 million book of business given the size of our business now, just the integration and operational and credit risk you would take to underwrite probably doesn't move the needle. So, if we are going to do something in the commercial finance space, it is going to need to be large enough to matter.

Okay. Great. That's good color. Thanks. And then, just finally, when you talk about the opportunity for CRE growth, are you positioned -- are you sort of staffed up to start seeing that growth, and would that be self-originated CRE, or are you talking more an opportunity to participate in shared CRE credits?

Definitely not talking about shared credits. Dan -- I'm going to have Dan Karas, our Chief Lending Officer, speak to our staffing and ability to grow that portfolio organically and what we have even done in the past.

As Aaron mentioned previously, we have not found opportunities that met our risk return profile and have been cautious in pursuit. But, over the past six months, we found some terrific opportunities in multifamily, in some acquisition construction developments, and we have staffed appropriately. So we are not inclined to look to buy participations and other deals, but originate an agent and hold ourselves, but feel we are comfortable with where the market has moved and the staff we have to execute.

Okay. Thank you.

Brad Milsaps, Sandler O'Neill.

Aaron, can you talk a little bit about the growth in asset-based lending this quarter? It was up quite a bit from September 30 and certainly on a year-over-year basis. Just what are you seeing there? Any bigger credits, or just -- is that just more a function of your team really starting to gain traction there and pushing some relationships across the finish line?

Good morning, Brad. It is Dan. It is a little bit of both. We have had the team and the profiles better established. We have seen an increase in number of clients. A slight increase in size of relationship. One of the benefits of having some history at this point is we have current relationships that have grown, and so facility size has increased, which drives growth as well. So it has been a nice balanced approach, and we feel pretty comfortable that we are achieving the yields that we have been looking for in the past. And those have not changed either.

Okay. And then, maybe, on the other side of the balance sheet, there was a fair amount of growth in non-interest-bearing demand. Curious if that was more kind of a year-end run-up, or are you guys finding new sources of low-cost deposits that you have been able to add to the balance sheet?

Hey, Brad. This is Bryce, and I will take that one. That is really a function of seasonal factors, mostly around municipal deposits, those types of things. It would not be fair to say that is like we found a better mousetrap all of a sudden in consumer checking growth there.

Okay. Great. That's helpful. And then, Bryce, maybe just sticking with you for a second, I think I heard your comments around expenses. There were several, maybe -- and I don't think you called them out in the release, but in your commentary, some acquisition-related costs, some restructuring costs that maybe totaled up $900,000 and then there was maybe $500,000 of additional workout expense related to some of the problem credits. Do I have that correct for the fourth quarter, or did I mishear that?

Yes. You got it about right. Let me kind of recount that. We have got in total about $600,000 of costs, rebranding, conversion, integrated-related costs on ColoEast. We also had an increase quarter over quarter in the operating costs associated with the Southern Transportation Insurance Agency that we acquired September 1. And then, you did have it right (multiple speakers).

Which was about $300,000.

$300,000 (multiple speakers). Got the number there, but about $500,000 in legal costs. There is always a little bit of that, but that is an unusual number for us there. (multiple speakers).

Okay. So it sounds like the $300,000 from the -- that is ongoing costs, right? But the other might -- certainly, the $600,000 would reverse out and then some portion of the $500,000?

Yes.

Maybe a way to look at it would be to say there was $617,000 that you would almost think of as part of the acquisition, but it was more about integration and conversion. The $500,000 in legal expenses for problem credits, we don't expect to run at that rate consistently. There will always be some, but it's just that, all fell out, a lot of that expense ended up in this quarter.

Great. That's helpful. And maybe just one final one. Dan, any update on the three larger credits that got added in nonaccrual last quarter?

Great question. Two of those are foundry related. One has a CRO in place, and its operations are improving. So we are cautiously optimistic, but happy with the progress. The second foundry is in liquidating Chapter 11. We expect to have resolution by the end of the quarter on that situation. We feel pretty comfortable with the outlook at this point. And then, the other is healthcare related, and part of the charge-off in Q4 is related to that. But, at this point, we feel like we are properly reserved and working out of that situation. So hope that helps, Brad.

Yes. Thank you, guys.

(Operator Instructions) Christopher Nolan, FBR.

On the net charge-offs, is that a different credit from last quarter, or is this the same credit?

Part of the charge-offs, one in particular was a healthcare client that we had identified as a problem, but felt we needed to take the charge-off in the quarter. And the others are just sort of ongoing, normal client challenges.

And how big was the healthcare charge-off?

About $887,000. $300,000 of that had been reserved in the prior quarter on a specific reserve, but the charge-off of the gross is about $880,000.

Got you. And, Bryce, did I hear -- understand correctly that the adjusted loan yields [decreased 28 bps]. That is really just the inclusion of ColoEast?

Yes. I mean, just math aside, that portfolio was $490 million or so and is coming on at still a net coupon rate that is lower than our average before. So, including it for the full three months instead of just two months in the prior quarter diluted that -- the overall raw yield down.

Okay.

Chris, before you transition on -- before this -- before you transition on, I think we did not accurately answer your question about the healthcare credit and when those charges were taken. So, Dan, can we clean that up for him?

Well, the charge-off in the fourth quarter that I referenced is $887,000, and that is the healthcare relationship I mentioned. And we had about $300,000 reserved. In the third quarter, that was an unrelated healthcare relationship, and that charge-off was $1.4 million. I hope that better answers the question.

Yes. Okay. Great. Thank you very much. And I guess, Aaron, strategically, I know you guys are looking for deals and so forth. Has the expectations for sellers really changed? Are they looking for more cash, or are they more inclined to take stock? I mean, what sort of -- how would you characterize the sellers' expectations and deal that you are looking at?

Yes. Well, I think, from the sellers we are talking to, it is entirely dependent upon what their desires are. We have some sellers where there is a strong demand for cash. Maybe they have been in the deal a long time. There are others who really like our stock and want to ride along.

As you might expect, we are probably not looking at publicly traded acquisition targets that, themselves, trade at 2 times book. So I would say that the expectation of the sellers we talk to is a bit muted, maybe, from what you have heard other potential acquirers talk about in the marketplace because maybe we look at locations they don't look at or we pursue less well-known opportunities. But, certainly, they know that we have experienced appreciation in our stock, and they would at least like to see a percentage of that. I do think the runup in our stock probably has made our currency in an interesting way more appealing to some of them as we have approached a $500 million market cap. And just the liquidity you have seen since -- in the last 60, 90 days and the shares trading, those have all been viewed positively by the people that we are having discussions with.

And, I guess, as a follow-up, I mean given where you are looking at the M&A picture right now and given where your loan to deposit ratio is close to 100% and so forth, are we -- do you anticipate any slowdown in terms of your balance sheet growth in 2017, or are you anticipating a fairly steady percentage growth rate as you saw in 2016?

No, I don't anticipate any slowdown.

Okay. Thank you very much for taking my question.

(Operator Instructions) Jefferson Harralson, KBW.

(multiple speakers). I wanted to ask you guys about the average invoice size on the trucking invoices. Is it up this quarter? Were gas prices on the diesel side up enough to move that invoice size?

Yes. I mean, the function of that moving up is a correlation between freight rates being slightly higher and then diesel prices being higher.

All right. And how much was the average invoice on that? I may have missed it.

For the quarter, it was --

$1366.

Yes.

Okay.

And, Jefferson, just some commentary around that. $1366 for the quarter. Right now, invoices are running about $1415 since the beginning of the year. If you were to look back a year ago, at this time, invoices were running about $1324. So you can just see -- and we have no predictions what will happen through the end of 2017, but the invoice size has strengthened from this time last year and continue to strengthen even after the fourth quarter.

Okay. And (inaudible) predictions you would expect invoice for, I guess, a number of invoices, too, in 2017 versus 2016?

Absolutely, unequivocally yes.

Okay. And, again, I came on a little late. I may have missed this, too. So it is sort of a big picture question. You have been talking about getting to $0.50 in the fourth quarter of next year. In the quarter, I need to go back and back out some of these one-time costs, but on the surface it looked a little soft. Do you still think you can get to the $0.50 number next year?

Yes. Now, there are a lot of things we don't control, but if that -- if we didn't believe that were the case, I would be the first to tell you. I mean, here is what I would say. In the fourth quarter, there are some unique things that flowed through. There are still some synergies yet to achieve with Colorado East. We had some other interesting things as we changed the factors around some of our reserving methodology and we did so appropriately, but I don't know that we will see those in this coming year.

For us, my view of our provision expense for this quarter, while it was in line with the previous quarter and where I believe the analysts' models have us, it is way higher than we are used to running this institution or where we believe we will run it in 2017.

The loan growth pipeline looks very strong. We expect -- we don't know what will happen and, of course, we might be one tweet away from some economic disaster. But assuming that doesn't happen, things feel pretty good for us. And I suspect, Jefferson, that, along that path, there are some M&A deals included in there. And given where our stock price trades, they should be pretty accretive.

So we know we have got a long way from where we sit right now to $0.50 a share, but that is the goal, and we are running hard and still under the belief that we are going to get there.

All right. Outstanding. And one last one is on the share count. It jumped up, I guess, just because the stock price is higher. You also had some preferred dividend expense that was coming through. Can you just talk about the -- that sensitivity there? And I suppose if the share price stays here, then the stock price and the share count stays up here, too, and that is factored into the thoughts you were just talking to as well.

Let me attempt to address that. I think you had it right there, that the diluted earnings per share of the denominator for the numbers of shares certainly, with the earnings level that they are at, the biggest impact is under the as converted method there. I mean, basically, the math becomes when our ROE, return on common equity, goes above the 8% coupon rate on the preferred, a shorthand accounting, but basically those will be diluted in that calculation. And so that has pushed those over.

And the other items that are listed out, that is why we put that EPS table in the release so you can see that.

The other items are largely driven by the stock price appreciation that causes those to jump into there.

The preferred dividend on the (inaudible), so that is really not a deferred dividend. It is just the dividend that was paid on the preferred has been paid every quarter. You see it on the face of the income statement coming down to net income to common. It is just that, when you do that diluted calculation, you add back that to earnings to do the diluted EPS count because (multiple speakers) it is as if they hadn't converted and didn't exist. That is good old GAAP accounting stuff.

Got it. Thank you, guys.

Thank you and I am showing no further questions at this time. I would like to turn the call back to Mr. Graft for closing remarks.

Yes, thank you all for joining us. We look forward to 2017 and hope you have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.