Q4 2019 Earnings Call
Thursday
Thursday
Good day, and welcome to the Triumph Bancorp Incorporated fourth-quarter and full-year 2019 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then one on your telephone keypad to withdraw your question, please press * then two, please note this event is being recorded. I would now like to turn the conference over to Luke wise senior Vice President of Finance and investor relations, please go ahead.
Welcome to the bank or conference call to discuss our fourth quarter 2019 Financial results before we get started. I'd like to remind you that this presentation may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ the company undertakes. No obligation to publicly revise any forward-looking statement. If you're logged in to our webcast, please refer to our presentation available online including our Safe Harbor statement on slide to for those joining by phone. Please note that the Safe Harbor statement and presentation are available on our website at w w w dot trying to think off. Com all comments made during today's call are subject to that Safe Harbor statement. I'm joined this evening by Triumph Vice chairman and CEO Erin graft our Chief Financial Officer price Filer and Todd ritterbush our chief learning officer after the presentation will be happy to address any questions you may have at this time. I would like to turn the call over to Aaron Aaron. Thank you. Luke. Good evening. I will job.
right in with the review of the quarter and then
follow with some general comments
for the fourth quarter, but it is not fair to point out a few items to provide context as well as Insight on new items for 2020.
During Q4, we sold two loans acquired in a previous Bank acquisition. The sales generated a gain on sale of one point four million reflected in the other income line item on our statement of faith.
Provision expense for the quarter was modest at $382,000 as a result of a slight decline in total loans and a change in the mix of total Bones the Mix Change reflected reductions in commercial real estate Agriculture and asset-based lending and growth of mortgage Warehouse.
In November of fixed-to-floating subordinated notes due 20-29 the notes initially bear interest at 4.875% We expect to use most of the net proceeds to repurchase shares of our common stock.
Do you?
The fourth quarter we repurchased 393000 shares of our common stock in an average price of $36.69 per share at year end. We had $35 off remaining under the $50 million share repurchase program authorized by our board in October 2019.
Cecil adoption is a big topic for publicly traded Banks this quarter. We plan to disclose the impact of Cecil adoption in our 10-K our preliminary model, which has not been fully vetted through our internal control and review processes estimates. The allowance on the funded loan portfolio will increase approximately 300,000 and the reserve for off-balance-sheet exposure will increase by approximately 1.6 million again, these are estimates at this time in the final numbers will be in the 10K.
Our credit quality for the quarter was good net charge-offs were in the fourth quarter and for the full year 2019 month past due loans decreased 28 basis points from Q3 to 2.19% of total loans while non-performing assets to total assets decreased by 4 basis points to a walk-in basis points. We will continue our focus on credit discipline and improving our risk profile. I cannot predict when or where we might experience a spike in credit stress, but I do know is that our credit standards have heightened in the last 12 months. We are diligently working to insulate the balance sheet in the event of a downturn and even if that causes our asset growth to suck. We think it's prudent.
I will turn the deposit.
This next this was a bright spot for us in Q4, non-interest-bearing deposits grew $55 million in Q4 and our up $125 million since we increased our gathering efforts at the end of the second quarter, we have moved from talking about our investments in this area to actually doing it. We still have a long way to go to get where they you'd like to be nevertheless. We are seeing incremental progress and I expect we will continue to see that next year. We also anticipate seeing a boost in deposit growth when our Dallas Branch opens in the third quarter.
Operating efficiency remains an area for improvement and will remain through at least 20 20 the operating efficiency of our community banking lines of business is actually similar to the efficiency wage appear group. What moves us outside of peers is the cost of our Factory and operations and the continued investment in our transportation fintech platform, which is a substantial part of our stores We Believe those investments will pay off handsomely for investors and our team in the future.
Turning to the largest.
Part of our business Our Community Bank. I'd like to turn the call over to Todd ritterbush our chief learning officer to point out a few highlights in our community banking performance for the quarter in this business. We define success by maintaining excellent credit quality operating efficiently and growing core deposits Todd.
Thanks. Aaron has noted on our third quarter call. There's a lot to like about our community bank and our focus on building full banking relationships with a Community Bank. Lending clients is bearing through Thursday. It's mentioned at the outset of the call deposit growth was a bright spot for us during the fourth quarter. We've hired a terrific group of Treasury management specialist to work with our relationship managers and leverage our enhanced productivity and treasury Services capabilities. Their pipelines are full of cross serve opportunities and we're winning attractive new relationships. The brightest example of this is in our Western Division and Western Division leadership bankers and treasury management specialist have been leading the way in increasing our share of wallet with existing clients and adding new clients to further enhance their efforts. We are excited about the Plan conversion of our Colorado Springs Loan Production Office or lpo into a full service branch in the coming quarter. This expansion will allow us to provide existing lending clients and new prospects with a full array of Treasury Services capabilities dead.
And expertise for the first time and further accelerates our deposit and see growth in this key Market. We are also making significant progress in improving the risk profile of our community bank. We have reduced exposure to offer credits and we're becoming more proactive and anticipating and addressing potential issues with our
Clients and the fourth quarter. We reduced Community Bank past due credits by 21 million and mpls by two million. There's still a lot of work to do in this regard that we are very proud of a grateful for the effort of our Bankers investing in mitigating risks while maintaining our relationships and presence in our Community Markets back to you Aaron. Thank you Todd.
Investors know we generate approximately one-third of our revenues from the Transportation industry this includes our Factory in business equipment Finance our insurance brokerage and try and pay off touched the transportation industry specifically Over The Road Trucking in more ways than any other financial institution I know of it is the most profitable differentiated indefensible area of our business office.
During the fourth quarter Triumph pay processed 442000 invoices paid 41,000 distinct carriers payments process totaled 475 million, they 150% increase over the prior quarter and a 286% increase from Q4 2018 the growth in Q4 am trying pays run-rate payment volume to 1.97% of run rate payment volume that we continue to invest in try and pay to prepare for the growth. We are experiencing the increase in the expenses for Triumph pay includes both continued investment in personnel and business development team as well as expenses associated with Integrations and onboarding new clients, those integration costs include it expenses referral fees and commission bonuses among other items.
Total factory in Revenue in Triumph business Capital was relatively flat quarter-over-quarter at 26 million. This was primarily the result of average Transportation invoice prices remaining flat Dead Rising less than 1% to $1,500 and $7. The dollar volume of invoice purchased was also flat holding at one point five billion during Q4 month. We purchased $896,000 invoices during the fourth quarter and increase of six thousand invoices or less than 1% as it was throughout all of 2019 off remain slower this quarter versus 2018 overall, which as we have noted multiple times was a record year for transportation.
Beginning this quarter. We will no longer report net clients for Triumph business capital and try and pay we have pointed to this number in the past as an indicator of our Market penetration and a project effectively. We are growing the business while that is true. It has become much less indicative and we believe it has led to investor confusion. For example, we recently added a client and try and business World Capital that generates volume equal to approximately five hundred small Truckers when we talk about net client growth we treat that large Fleet the same as an independent owner-operator, although clearly their impact to our business is vastly different. We believe that purchases and invoice volume are much better metrics to focus on
The same Dynamic is true for Triumph pay.
Our client count treats a tier one broker which we Define is one of the 20th largest brokers in the country the same as a small broker in Q4, our client growth was very often but as mentioned earlier our payment volume was up 150% from Q3 thus going forward for trying to pay we will only disclose new clients who are either tier-one Brokers or Fortune 1000 shippers.
The bottom line we will continue to give specific information with regard to these metal on that note and as we've reported previously we do believe truckers have left it will continue to leave the market rather than operate below break-even. We maintain this is causal link to spot rate declines that have occurred in 2019 vs. 2018 our attrition analysis continues to suggest that the vast majority of those exiting are the most vulnerable competitively and the motion sensitive to spot Market fluctuations and insurance premiums bikes. Being the small Trucking segment looking into twenty-twenty. We believe the transportation Market will continue to work off excess carrier capacity created in 2018, and that there will be further attrition within the small segment. Well into the first half of the year.
in the first quarter
20/20 we anticipate a 46% decline in total revenue from Q4 2019 consistent with patterns in Prior years. This is due mainly to the annual cyclical nature of our transportation business in the first quarter of 2029 interest expense will increase over the prior quarter due to the annual reset of payroll taxes and 401K contributions off and quartered impact of queue for hiring an increase in our medical benefits costs and the cost of operating our new Dallas branch and the expected resumption of FDIC insurance premiums we anticipated not interest expense in the first quarter to be approximately $55 million with that. We will turn the call over for questions.
Thank you. We will now begin the question-and-answer session to ask a question. You may press * then one on your telephone keypad. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then to our first question will come from Jared Shaw with Wells Fargo, please go ahead.
Hi, good afternoon, Jared maybe if we could start just on the on the margin, I guess how are you thinking about that as we as you go further back into the year with more of a normalized, uh Factor business, you know, I saw the yield Factory yields were lower this quarter. Is that really just a function of the the average ticket size or was there some other pricing dynamics that that impacted that yield is quarter?
Well, I mean first let me answer that question from a mix perspective. The reason you saw them compression and Q4 was you saw mortgage Warehouse grow disproportionately to anything else mortgage Warehouse while a very efficient business for us is a lower margin business. Our thesis still holds true. We expect Nim expansion pack over the course of the year as our factoring volume and are trying to pay volume contributes the majority of our growth that maybe waited in the back half of the year, but that's still where we expect to see the growth that would be true. Even if factoring yields drop and I would say factoring is a very competitive market and so it's you know, I don't see us expanding our pricing power in that market. But even at Seventeen per you know, even if we're 5 to 7% off yields where they were a year or two ago that business growing more wage.
Then other lines of business will can.
Tribute to Nim expansion and that's what we expect to achieve by the end of the year.
Okay, and then you know, I guess sticking with the mortgage Warehouse business that growth there. How much of that is is gaining market share versus just the overall market doing better. And you know, if we see a slow down or pull back and sort of mortgage broader mortgage volume, where do you think that that can stabilize in terms of you know a more normal environment business? I'm yeah. So when you think about our market share or penetration in the mortgage Warehouse, it's important to recognize that many of our customers have several mortgage Warehouse lines off. And so with the clients that we have we are getting a larger share of their business. We have not had a significant increase in the number of relationships we're serving and so from what not active we are increasing share from the other maybe not but I do think that there is a move towards us being more of the preferred partner for our mortgage Warehouse clients in terms of
the overall volume, you know, we saw the spike at the end of the year, which
Occur to the time of year when you wouldn't necessarily expect a lot of mortgage volume. And so that was a pleasant surprise for us since the end of the year. We've seen the same sort of monthly and seasonal Dynamic package seen in the past. So we see balances are off today about two hundred million from where they were at the end of the year that's perfectly normal still at an elevated level in the office warehouse is still about twice the size of where it was a year ago, we expect to continue to serve our clients. So if mortgage activity remains strong, we will continue to see balances at about the same level as we have them today. If we were to see something change in the rate environment and mortgage activity decline, of course our business would decline as well.
And then just looking at trying to pay and and your slide there what what percentage of those invoices or or invoices process or process center quick pay versus you know, not using quick pay and percentage stayed stable, you know, even even though it seems a big growth this quarter is that is that the ratios holding steady so Jared we do not and have not disclosed quick pay penetration thumb. I will tell you that what you would expect is when you on board a large new relationship a tier one broker. There's a lack between that on boarding and then the when the QuickPay process she picks up I will tell you our long-term goal of a 20% quick pay penetration is what we've used as the metric when we've tried to direct investors to wage.
think the profitability of this
This lies of course to the extent were able to structure it where we exceed that 20% number to a higher number of the profitability of this business goes up exceptionally, we're not at that number now, and I don't think we will be until a year at least a year or two out as we continue to onboard new clients it drags you back down and then the client relationship Seasons the QuickPay penetration goes up.
Okay. Thanks. How about someone else then? Our next question will come from Brady gaily with KBW, please go ahead. Hey, thanks. Good afternoon, guys, I'm ready. I know ninety days ago Aaron you talked about 20 20 and range of 225 to 250. Is that is that still the right way? They think about earnings for this year. I would say our our belief is the bottom end of that range. It all depends upon what Transportation. Does, you know, there's a bunch of different opinions. I I personally have a somewhat gloomy outlook for the first two quarters. I think there's still excess capacity in the market, you know, 2018 was a party 2019 was the hangover and 20/20 everybody's trying to figure out what the appropriate balance is. There is some
some rationale that you
Can see some strength in the back half of the year, but all that being said as as clear as our crystal ball is is that range is what we gave and I would if I you know, we're off prognosticating the day I would be at the bottom end of that range.
Okay, that That's all folks and then on the buy back your brought back a lot of stock here and 2019. But I mean the stock recently has done pretty dead. It's now trading it in around 3850. I think on average repurchase stock a little below Thirty one last year. So how how does the price per share impact? You know, how may rest of your going to be on the buyback front and 2020? Yeah, that's a great question. So first thing for everyone to understand our share buyback program is not just to defend the stock price. I mean, I know that's you know, and you always of course want to buy when the prices are in your favor. But if you believe what we believe about where we're going is a company the the pipeline we have and try and pay in some of the things we're going to do and try and business Capital. Then there is no higher internal rate of return on investment we can log
Then buying back our shares at these prices.
Is or even higher than these prices which is why as we've talked about I don't think you'll see material growth of our balance sheet. We're turning our balance sheet and we intend to use excess Capital to walk steadily repurchase shares now, I mean, there is a threshold and we we talked about it with our board and you know should the stock run up significantly that may give us pause but our long-term plan to over the next three years where we think we're going to demonstrate that we're accomplishing all the things we've told you we intend to accomplish. We we want to buy as much stock back in June front end of that 3-year plan as we can because if we're right everyone's going to be well rewarded.
All right, and then finally for me maybe just an update on trying to pay have y'all had a lot of success bringing on, you know, some of the the top 25 guys now. Like if you look at the top 20, how many are on the Triumph pay platform now, there's one who is live. Now, there are several more in the queue to come on and I think as I've guided to previously I would view a successful year if we were at four or five of the top twenty or what we call the tier-one Brokers at the end of this year. That would be a wild success cuz you would have 25% of that set of the market. So that's what we're pursuing. You know, the the timing of these Integrations is not just driven by us. It's driven by the needs of our clients and what they have going on, but we know we will on Borgia.
I'll pull this year. The question is whether it will get all the way to to 5 and then you know within their they'll be some shipper clients as well that that come on so as those large clients as we talked about as a tier one broker comes on or a fortune one thousand company that that uses try and pay will disclose those and and all I can say right now is you know that the pipeline is very very full for us from this day, you know, pretty much all the way through the the rest of the year.
Thanks, Aaron.
Our next question will come from Brad Millsaps with Piper Sandler, please go ahead.
Hey, good evening, guys. Hey Brad, I was writing quickly, but it sounds like you're you're trying to pay. Is that a run rate of about 2 billion down volume on an annualized basis. Is that correct? Correct? Okay, and just you've kind of touched on this a bit, but I know maybe previously talked about maybe a four billion dollar run rate down by the end of the first quarter and then hopefully ten by the end of the year, you kind of approach the differently by saying, you know, the number of clients you just addressed and raised questions, but those be sort of in the realm of the volumes that your loss for words you kind of move through the year. I hesitate to I wouldn't Focus. I don't want to give specifics about q1 because companies are doing a lot of things in q1 and burning Us in managing through those Integrations. Um, I would say this Brad a successful year it would be you know by all accounts a successful.
Here if we exit.
20/20 over five billion dollar run-rate. I think we have a potential if everything goes perfectly mm be higher than that. I do not think it's foreseeable that we would exceed ten million. But you know, we're Growth Company and we take these opportunities as they come. So, you know wouldn't put none of this is I'm glad I'm just trying to forecast what the pipeline looks like. So there is an outside chance we could get to that tin number by the end of this year or you know, it could spill over into q1 of Twenty-One. I think what I'm focusing on and encouraged about is this is what's in the pipeline is several billion dollars, you know, which is
3 a multiple of what we are currently our current run rate is and the pipeline continues to fill in that's that's what's exciting to me. And so I can tell you I think you will see progress every single quarter and and you know, you can see the effect of adding a tier one broker how much it moves purchases in a single quarter, you know, as you continue to add those you can create how much it would move the total purchases.
Okay, great. And then that that's helpful and then just in in in your regular factoring Transportation factoring. I appreciate your comments around the first couple of quarters. Do you think you know the Improvement that you expect in the bath tub? Is that more volume driven, or I know you got a modest increase in the average invoice this quarter. Do you think that's going to be the bigger drive or just kind of curious kind of what are the moving Parts, you know to kind of get back with, you know re accelerated in in that segment. Yeah. So there are a lot of moving Parts the part we can't control is of course what the spot Market does offer. A lot of carriers are leaving the industry not I mean statistically not a lot but there's an anecdotal story every week of these Thirty and forty year old trucking companies in the industry because they can no longer haul in the spot Market at a break-even rate given where Insurance prices are and how soft that market is. So every time those people leave and and then there's a lot of birth.
Or of The Independents who are leaving them.
That you're sucking capacity out and um, you know, if you look towards the back half of the year at the economic factors we look at I think that you can see some strengthening in the spot Market in the back half of the year, but she also presumes a lot of things. We don't know about geopolitical events and other things that can affect transportation and Freight tonnage on as to change the part we can control I think what you're seeing is and what I expect you'll see for us this year is through a bundled Services. We're offering I think you'll see us on board more large factoring clients, which will have the effect of bringing yields down on the total number because large clients so you large batches of invoices and so the yields are off, but they're also much more efficient to administer and so we'll take Plan growth and all segments, but I think given some of the things we're working on. I expect that growth primary job.
lie to come in that larger Fleet segment and so we're excited about
That we think we have a as good a product as anyone in the industry a bundled service offering that meets truckers needs were well known and we expect to continue to take markets here.
Okay, just kind of information your load and mid single-digit growth loan growth guidance. You gave last quarter. It's still basically, you know kind of plus or minus a couple percent at the community bank. And then you said something in that fifteen fish kind of percent range in your specially Finance type businesses. Okay. All right. Thank you guys.
Our next question will come from Matt only with Stephens, please go ahead. Hey, thanks guys. Good evening. Good evening. Hey, I want to piggyback up rats question. As far as the the mix shift of the loan balances, I think in the past it was expectations for 2020 outflows of commercial real estate office and warehouse and the inflows would be in T pay and and try business Capital that I I get that correct or any any updates on that.
well, I think you're
Actually, correct mad. I mean as part of alluded to our mortgage Warehouse business. We serve us a limited number of clients. We have less than 20 clients in that business, but when they grow we grow with them so we don't control that as much but yes for the year, I expect you'll see a contraction and c r e a contraction and Agriculture and a contraction or flat in a b l a for the year. I think you will see growth in transportation specifically in the factoring business and then the receivables generated from trying to pay. Okay got it. That's that's helpful. And and then with that obviously pretty big mix shift and and de-risking the portfolio. What's the right way to think about net charge-offs for you guys on a more normal life basis. I would assume with the risking. It would be well below where you run the past, but that's something we're trying to figure out now.
Yeah, I mean on the whole the last three years have been.
You know and for us they've actually been really good marred by some single one off events that we've had to deal with and that's when I said why our loan underwriting is tighter now than it probably ever been and I suspect it will stay that way partially because we're driving growth to transportation and partially because we think some of these businesses wherever we are on the psycho, there's a little more risk being taken than than we're comfortable with. So I would say if 17 basis points was the number for this year. You know again, I my crystal ball is not it's not super clear for twenty twenty, but I think I mean there's no problem with using that number, you know, we don't have a materially different view than 20/20 as far as expecting deterioration in credit quality. We may have to work through some equipment loans, but on the whole we we feel like as we sit today we off.
Balance sheet and our loan portfolio.
Quite a bit relative to last year. So you would hope to see that bear out in our net charge-offs for 2020.
Okay, and then switching over to try and pay I'm curious when you on board a new company on the Trappe platform. Can you talk about the same time. That it takes before you see any meaningful revenue? And then is there anyway you can help quantify kind of what what the initial expenses as you are bored a a larger new client sure. So one of the expenses that showed up in Q4 and that you're going to see I hope throughout all of twenty G20 and twenty Twenty-One and maybe Beyond is the incentive compensation for our team is front-loaded on these relationships. And you know, we think that's healthy. It's good for the team who's building the relationships. We also think these relationships will last a really long time and so that the operating efficiency or the the profitability of these relationships over a five and 10-year. We'll just continue to improve
So you've got some compensation tied to?
Onboarding the client that comes on the front end of of the revenue. The second piece is it's hard to answer this exactly Mac cuz this is not a mature business. For example, when we're off on boarding new freight brokers now and we're getting a download of the carriers. They've that that are in their system each time. We do that we're starting to see repetitive carriers show up who number of profiles built-in trying to pay. Well the revenue comes much more quickly when the carrier has an active profile built-in T pay if they want to take a quick payment or you know, how they choose to use try and pay for their benefit. So I would say that time. There's it's shrinking but I can't tell you what it is at a you know, an exact point in time. It would certainly be within the first 90 days you start to see Revenue come in and then almost immediately when these clients are boarded you start to see some, you know Improvement that there is dead.
Component to this that is beneficial to us that that happens.
Almost immediately. So I'm not trying to be evasive on the answer. I'm just saying it's a business that is growing. So rapidly that I can't give you a specific answer. That would be true today that I think would be true nine months from now.
Yeah, understood. Okay, very helpful. Thank you.
As a reminder, if you would like to ask a question, please press * then 1 hour. Next question will come from Gary tenor with d a Davidson, please go ahead Thursday afternoon. Gary questions were we're actually answer already. But I think I missed in your prepared comments. The revenue that you would suggest the first quarter wage. Yeah. It were calling for a four to 6% contraction in Revenue in q1 consistent with type of seasonal patterns and consistent with prior years.
Okay, thanks. And then just I guess one one additional just question on trying to pay to be clear. You you just gone gone through a a question about when revenues generated today. Most of the revenue-generating from trying to pay is just fee on penis right? It's not much in the way of any yield from received going on the balance sheet. I would say there's a mix that there there is a revenue component tied to receivables. Although it's immaterial and light of the size of what Triumph business capital is on our balance sheet. So I would say it's equally weighted to both right now.
Okay. Thank you. Our next question is a follow-up from Brady gaily, please go ahead.
Hey, yeah, thanks guys, just to be clear on m&a, you know in the past you guys have kind of downplayed m&a even buying back your own stock and investing and trying to pay it. Is that still the right way to think about m&a? It's not likely for you guys in the near-term. That would be correct. The only caveat to that is to the extent. There are Technology Solutions provide burgers or companies that are helpful to our transportation fintech platform that give us an expanded product Suite or help us penetrate a market more deeply we would certainly look at those as full Bank m&a it is highly improbable that that would happen in the year 2020.
All right, and then the 2% plus r o a goal if you look at kind of the lower end of the guidance range this year. I think that's suggesting r o a club of like 110. So how how any idea you know, roughly how many years it'll take you to get to the 2% or away. I mean that is where we think we exit this that Roa is our exit point for this 3-year plan. And if we do everything perfectly in this 3-year plan that's calling for try and pay to be between twenty and twenty-five billion in payments for the net income of Triumph business Capital over the next three years to double through operating efficiencies from the technology Investments for making an increased marketing and if we do those two things and keep everything else the same um, and and we see, you know, marginal loan growth and our other lines and improvement in our deposit franchise then in our numbers that's wage.
That's where we're exiting 22.
Need to add so um, you know, I know it feels like we're far away from there now, but if you could see, you know how the Investments were making in these businesses and the immediate payoffs were seeing if we think that that we will have realized enough of that by 2022 for it to just fall into that range.
Got it. All right. Thanks Aaron. This will conclude today's question-and-answer session. I would like to turn the conference back with you all for joining us. We look forward to speaking with you again in the future. This will conclude today's presentation. Thank you for attending today's conference. And you may now disconnect.
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