Triumph Financial Inc (TFIN) 2017 Q2 法說會逐字稿

Good morning, and welcome to the Triumph Bancorp's second quarter earnings conference call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Luke Wyse, Senior Vice President of Finance and Investor Relations. Please go ahead.

Thank you. Good morning. Welcome to the Triumph Bancorp's conference call to discuss our second quarter 2017 financial results. I'm Luke Wyse, and I would like to thank you for joining us this morning. I'll go over a few housekeeping items and then hand it over to Aaron Graft, our CEO, to lead the presentation. Triumph Bancorp filed second quarter 2017 earnings release yesterday 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 at 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 events may differ materially from those expressed in or suggested by the forward-looking statements. Any forward-looking statement made by Triumph on this conference call speaks only as of today. New risks and uncertainties come up from time to time, and it's impossible for Triumph to predict these events or how they may affect it. Triumph has no obligation and does not intend to update forward-looking statements after today except as required by applicable law. On this call, we may discuss 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 yesterday 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. The second quarter was an outstanding quarter for TBK. Our performance can mostly be linked to positive core trends across our business, which bodes very well for the future in my opinion. And when you add the deal we have announced to broaden our retail footprint as well as those we continue to work on, we are creating positive momentum in the 3 things that we know drive shareholder value: improving our efficiency, improving our asset quality and growing our core deposit franchise. Our total loan portfolio grew organically by $260 million in Q2. Nearly all of our businesses contributed to the quarter's success, which I am particularly proud of since it shows that we are growing without becoming concentrated in any single area. Our Community Bank portfolio grew by $172 million for the quarter. This growth was led by our mortgage warehouse business, which increased by $107 million. In addition to seasonal growth, more than half of the additional volume was the result of new client additions. With these new clients, we expect our mortgage warehouse business to continue to grow. Complementing mortgage warehouse was over $43 million of growth in our CRE portfolio. While we remain well below the regulatory concentration guidance in the CRE area and have no plans for that to change, we believe this line of business will be a continued source of growth for us as we selectively work with clients that we believe are well positioned for the inevitable turbulence of the CRE market. Our Commercial Finance portfolio, which includes our ABL, equipment finance and premium finance lending in addition to our factored receivables, increased by $88 million for the quarter and comprises 35% of our overall loan portfolio. As we have said in the past, our soft target for this is 40%. While each business grew in the quarter, the primary driver of growth in our Commercial Finance portfolio was Triumph Business Capital, our factoring subsidiary, which contributed approximately $50 million of growth for the quarter. In our comments on the first quarter earnings call, we called out the performance of TBC as it stayed relatively flat instead of falling with typical seasonality. We believed at the time that this was a sign of good things to come for this line of business and that belief turned out to be right. To add some perspective to our factoring results, TBC achieved record highs in the number of invoices purchased, the dollar value of invoices purchased and the number of clients served in the second quarter. This growth is primarily the result of increasing our market share due to superior marketing, technology, scale and customer service. Specifically, TBC purchased 446,000 invoices or a dollar value of $639.1 million and added 151 net new clients in the second quarter to reach 2,690 clients at June 30. For the first time, average net funds employed exceeded $200 million during the quarter and the average invoice size purchased this quarter increased to $1,433 versus $1,388 in the prior quarter. Since the close of the quarter, we continue to see slight upward movement in invoice sizes, which excites us for the remainder of the year. The dollar value of the invoices purchased this quarter over the same quarter last year are up 47%. We continue to expect great things from this line of business, and it has continued to deliver.

Total deposits for the quarter grew by $47.9 million to $2.07 billion. As you will recall, on June 23, we announced that our banking subsidiary, TBK Bank, entered into an agreement to acquire 9 branches from independent bank in Colorado. We expect the acquisition to provide approximately $68 million in net funding as we will be acquiring approximately $100 million in loans and assuming $168 million in deposits. The branches fit well within our current footprint and will expand our presence in our Western division to 27 branches. The transaction is expected to close during the fourth quarter of 2017 and is subject to certain customary closing conditions. With our recent leadership hires, we continue to focus on our retail growth strategy as well as continuing our M&A work with the primary focus on acquiring solid core deposit franchises within our target markets.

With respect to asset quality, our second quarter metrics all reflect improvements. In the second quarter, we recorded a provision for loan loss of $1.4 million primarily to provide for the impact of $260 million of loan growth. Net charge-offs declined to acceptable levels of $743,000 or 3 basis points of average loans. As part of our reduced provision in the second quarter, we were able to reverse approximately $1.1 million of specific reserve related to 2 credits due to improved performance in paydowns of outstanding balances. Our past due nonperforming loan and nonperforming asset ratios all experienced improvement during the second quarter. These improvements are consistent with the communication of our expectations that the first quarter $7.7 million provision expense was largely driven by the isolated health care, ABL and ColoEast credits we identified and discussed on our prior earnings calls.

At this point, I'd like to turn the call over to Bryce to provide some additional color on our financial performance in the second quarter. Bryce?

Thank you, Aaron. For the second quarter, we earned net income to common stockholders of $9.5 million or $0.51 per diluted share. Net interest income for the second quarter increased $6.7 million or 21% over the prior quarter. This increase was driven by $188 million increase in average balance of loans outstanding over the prior quarter, as well as increases in loan portfolio yields. The yield on loans increased 64 basis points over the prior quarter to 7.79%. Net interest margin increased 79 basis points to 6.16%. Our commercial finance loans remained at 35% of total loans. However, our Commercial Finance portfolio yields increased 117 basis points to 11.42% as much of the growth was in our higher yielding factored receivables. The second quarter includes $2.9 million of loan discount accretion, an increase of $1.8 million over the prior quarter. The increase in discount accretion includes accelerated accretion of $1.8 million associated with the prepayment of certain purchased credit impaired loans, which contributed to the increasing GAAP loan yield. As of June 30, we had $11 million of remaining loan purchase discount, of which we currently expect $10 million to accrete into income over the remaining lives of the acquired loans. Of this accretable amount, approximately $2 million is expected to accrete by the end of 2017.

Excluding the impact of purchased loan discount accretion, the adjusted yield on loans was up 32 basis points to 7.25% in the second quarter, and our adjusted net interest margin increased 51 basis points to 5.7%. Noninterest income increased $494,000 over the first quarter to $5.2 million, after excluding from prior quarter the gain on our sale of Triumph Capital Advisors and TCA's asset management income, which was sold March 31. As we discussed on our last call, separate from the TCA business that was sold, we held a $21 million investment in a CLO warehouse of which we realized $964,000 of earnings and other noninterest income in the first quarter and $989,000 in the second quarter. The CLO was issued in late June and the investment funds were returned to us and will be redeployed to support loan growth and other investment opportunities. Noninterest expenses in the second quarter were $27.3 million, which is in line with what we had communicated during last quarter's call. As a result, measurements for our operating leverage, including the ratio of adjusted net noninterest expense to average assets and efficiency ratio continued to show improving trends. We project that our noninterest expenses for the third quarter should come in around $28 million.

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

Thank you. We'd like to turn the call over to the operator for any questions.

(Operator Instructions) And our first question comes from Brad Milsaps with Sandler O'Neill.

Bryce, just curious if you guys might offer a little bit more color, kind of, on the P&L impact of the Colorado branch purchase. I assume maybe not a lot of fee income, but, obviously, there would be an expense impact. And then kind of how you feel about the NIM outlook. Is those funding -- as those funds come on -- it looks like with growth the way it's going, you probably already have a place for them. I'm just kind of curious. A little bit more color around the P&L impact of the branch purchase.

Sure. I think as we mentioned there's about $100 million of loans. They've historically recently been yielding just over 5%, I think, 5.1% as a whole. The deposit base of $168 million has a cost of deposits of 39 basis points. I just mentioned of that $168 million of deposits, 42% of that is demand. And so we're looking forward to the impact of that. The net overhead contributions are kind of approximate numbers in terms of net additions of the income and impact on operating expenses, I mean, we've estimated that to be in the range of about 175 to 200 basis points of assets being brought on net-net, at least initially.

Okay, great. That's helpful. And Aaron, you talked a little bit about net gains in share in the mortgage warehouse business. It sounds like you feel pretty good about maintaining those balances. I'm just kind of curious about the difference made between the period end and kind of what that average warehouse number was for the quarter?

Good morning, Brad. It's Dan Karas. And as Aaron mentioned we do feel good about mortgage warehouse, which -- that business is up 70% year-over-year. Almost 70% of the number of packages we touched, similarly, is up about 100%. So we feel good about the sustainability of the balances, especially as we rebound it through our Q2. Average balances, let me follow back up and provide those to you, but, certainly, it's been a substantial increase in Q2 over Q1.

Okay. And then 1 final just bottom line question, Bryce. Your comments around the income from the remaining TCA business almost $1 million this quarter, is that net (inaudible) that has been funded in its -- would that income also go away?

Yes. We have got the money back during the second quarter, so it's gone.

Brad, before I let you go, let me just follow back up with the average warehouse answer. In Q2, the average balances were about $149 million and that compares to Q1. The average balance was $108 million.

Our next question is from Jared Shaw with Wells Fargo Securities.

Just on the mortgage banking growth. In the past, you've talked about you being really a secondary provider of liquidity. For these new customers, are you more of the primary relationship there? Or is this still a backup source of liquidity for them?

Good morning, Jared. It's Dan. We have been, in terms of the quality and speed of service delivery, earning our share as one of the top spots for our mortgage warehouse clients. So I feel good about the position we have. It isn't just a secondary position. Today, we are earning the top spot.

So the average balance should be a little more stable or even potentially grow as we go forward with this?

That's our expectation, yes.

Okay. And then on the acquisition. With $100 million of loans, do you anticipate over time that you will still have to be keeping your lending presence in those markets at the same level? Or could you end up seeing more funding advantage coming from that as those loans pay down over time?

So, Jared, consistent with every time we go into a new market especially in more secondary markets, look, I expect the loan balances to stay about where they are. We're going to serve that market if there's some loans where we didn't find a lot of loans. I mean, most of that loan portfolio was generated under the leadership of Carlile Bancshares or Northstar Bank followed by Independent, only owned them for a short time. Those are conservative lenders who we think highly of their credit quality. So the loans over there, I suspect, will stay. With the addition of Stuart Pattison and some other hires in Colorado providing more leadership and just greater market presence, I think that you will see the opportunity for loan growth. We want to make sure that our community banking portfolio serves customers who have deposits with us because it's pretty clear from our numbers we don't need to stretch for loan growth in markets that are new or unfamiliar to us. We want to lend to the core customers and let our niche businesses where we've built out a lot of infrastructure and market presence allow those to serve as how we use our excess liquidity.

Okay. And then when you look at the FHLB advanced growth this quarter, was some of that preinvesting anticipated cash coming from the branches? Or are you more comfortable keeping a higher FHLB-borrowing level?

Jared, this is Bryce. So I mean, I think as you are aware and I think we've talked about before, I mean, large part of the volatility in the federal home loan bank advance line is driven by the mortgage warehouse program. We're able to borrow the daily borrowing base from federal home bank, so that's a very cost-efficient way for us to fund that program. So that drove a lot of increase that you saw in this quarter just because of the warehouse growth overall. But, overall, we are expecting some funding help with the branch acquisitions. So there's probably a little bit of anticipation in that growth -- in that line item.

Okay. And then finally for me on the factoring side, you had great growth. And seasonally, second quarter, it looks like in the past has been good for you. Do you think that, that momentum will be able to continue through the third quarter? And then also if you can just touch on what's really driving the higher invoice and higher average invoices that you're targeting, the higher [like the reapers], the higher cost transportation? Or is that just more a factor of the market?

Yes. So here's some interesting metrics for you, Jared, I think, if you look year-over-year. So if you look at Q2 '16 to Q2 of '17, the number of clients grew 20%, but the number of invoices we purchased grew 29%. Now we're not economists, but what that tells us based on other market conditions is the utilization rate of the trucking fleet, especially the ones we serve have gone up, which corresponds to a tighter spot freight market, which in turn leads the higher invoice sizes. So we sort of see the predictors in our numbers, so it's a pretty good leading indicator. I would tell you things appear very strong right now and continue -- I see continued strength into the third quarter. As far as adding net new clients, I will step out there and say we're going to do that. I think we've done that every quarter since we've been public. We just have better technology. We have better marketing. We have a better team. We've invested millions of dollars and lots of time in it, and I think you're seeing us reap those rewards. As far as what the average invoice size is going to do, you've got a headwind there because oil and gas prices are low, so, therefore, diesel prices are lower. But like I said, the utilization going up, buying more invoices from the same number of clients tells us they're driving more, it tells us the market is tighter, and there's other third-party indications that also back this up. And so I see that pressure for invoice sizes continuing at least for the short term. So net-net, that business will grow on an absolute basis, and I think even on a percentage basis, it could get a little better when you add absolute client growth, absolute invoice purchase growth, and if the average invoice size goes up over which we have no control, but if it continues this trend, it could be even more positive news for Triumph Business Capital.

Our next question comes from Steve Moss with FBR.

One of you just discuss the commercial real estate pipeline going forward here and also color around the average loan size in LTVs for the commercial real estate loans originated this quarter.

Sure, good morning, Steve. It's Dan. Our pipeline in Q2 was more robust than it is in Q3, at least the expectation is. Average facility size is still for most of our targets of $10 million or less. We do a few on other side of that average. LTVs are pretty conservative, depends on the project type whether its office or self-storage or multifamily, but we stay inside the pretty conservative guidelines in LTVs. It is going to just -- depends on the property type. So I expect to see continued growth in CRE. I don't know that it will be as robust as it has been in the first half, but I do expect to see continued growth.

Okay. And then second question for Bryce. Just in terms of looking at the fee run rate going forward, I guess $4.2 million is probably a clean number for the third quarter run rate.

I think you're talking about our total noninterest income at $5.2 million?

Yes.

Right. Yes, overall, it's down in other noninterest income, there are couple of items in there that are not likely to continue. I think there's a little bit amount, we had a little bit of pickup from the revenue share agreement that we had from TCA, that was like $50,000, $60,000, we had a recovery on our old charge-off loan from prior bank acquisition, about $150,000 in there. Of course, the CLO warehouse investment income is down in that line item that was up overall, but I think we already call that the dollar amount that will go away. So I would adjust for those items going forward [down].

Our next question is from Brett Rabatin with Piper Jaffray.

Wanted to ask about the margins. Did I hear you correctly and that you said the discount accretion in the back half of the year of $10 million, you get half of that? Or can you go back over that again and then maybe just talk about the implications of the June rate hike? And just how you kind of see the margin, and particularly, the funding cost side evolving from here?

Sure, this is Bryce. I just clarified, I think we have a $10 million of accretable discount remaining as of the end of the second quarter. We're expecting $2 million of that to accrete over the remainder of 2017.

$2 million. Okay.

You know the impact of the rate hikes and all are certainly real. I don't have a precise number for you, but I can give you a little bit of color. I think if you were to look at assets that we have there or tied to or indexed to current short-term market interest rates such as PRIME or LIBOR, we've got about $1.2 billion of those kinds of assets on the books as of the end of the quarter. We've got about little less than $500 million of liabilities similarly priced overall, so it's about a net more of $750 million more of assets and liabilities that are indexed into current market interest rates overall. A lot of that on asset side is PRIME, probably 3/4 of it. A lot of other things like LIBOR, those kind of items. So it was not all 1 to 1 move with the debt moves overall on both sides of the balance sheet, but that gives you some sense of kind of the magnitude into the short-term.

Okay. And then just thinking about funding and I know the branch deal is going to help. But what are you guys doing to organically trying to grow deposits? And are you looking at other kind of branch-heavy type things to try and improve the funding base?

Yes, and yes. So, look, we recently hired Kenyon Warren as our head of retail. And we've really embarked upon a revamp of the brand strategy in the markets we're in. Some of those markets we're just maintaining the market share we have because they're small markets and we dominate the markets. But with some of our new -- newer markets or markets that are adjacent to larger ones, we really are pursuing a more robust retail strategy. So we hope to see growth from that. As we've said before, M&A for us is focused almost exclusively on acquisitions of banks in markets where we want to be that will build out our core deposit franchise. That's primarily what we focus on. I mean we do look at commercial finance opportunities that would be nice tuck-ins to what we already do. But from an M&A perspective, that's top of mind. So, look, we have the ability to grow our deposits even on the current base even ahead of the implementation in the retail strategy, of course, by running rates specials, and certainly, we're going to do that to support the very high-yielding loan growth we have. But what we're focused on, what we care about for the long-term is the organic growth of those accounts, and we're investing in it through our people and we hope to invest more in it through acquisitions. And we're working on several. And as soon as there's another one to talk about, of course, we'll be back to tell you all.

The next question is from Gary Tenner with D.A. Davidson.

Just wanted to talk, again, about the loan yields for a second. It looks like if you strip out the factored receivables and the discount accretion in the quarter, your yields in the rest of the portfolio went up by about 27 basis points, if my number is all right. So you talked a little bit about the loans you have with that adjusted PRIME or LIBOR, et cetera. But it would look like there's maybe some pickup in the yields you're gaining on new loan originations as well possibly in the quarter? Or is it more of a mix of what was produced in the quarter that maybe helped on that front?

Well, I think one thing is our CRE lending is producing slightly higher yields than the static portfolio if you exclude factored receivables. So some of that contribution would come from there. Dan, I don't know if you have any additional thoughts?

I would just add that of the $88 million increase in Commercial Finance, well, $50 million of that is in the factored receivables bucket. The balance are in equipment finance and ABL, and both of those are higher yielding than our traditional community bank loans as well.

Okay, great. And then secondly just on the factoring receivable, it looks like the average balance there is around $250 million for the quarter, so pretty close to the March 31 level and well below the period end June 30 level. So it sounds like your comments earlier on invoice size and utilization suggest that [2 90 or 2 93] period-end numbers are good jumping off points. It's possible to even grow above that from an average balance perspective in the third quarter?

I believe it is.

(Operator Instructions) This time I'm showing no further questions. I would like to turn the conference back to Aaron Graft for any closing remarks.

Thank you, everyone, for joining us today. We look forward to speaking with you down the road.

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