Q2 2020 Triumph Bancorp Inc Earnings Call
Second quarter 2020 earnings call.
All participants will be in listen only mode.
Should you need assistance. Please take note conference specialist starchy sold by Sarah.
After today's presentation there'll be an opportunity to ask questions.
Please note that is being recorded.
I like to turn the call stuff for two likewise. Please go ahead.
Good morning, welcome to the trial Bancorp's conference call to discuss our second quarter 2020 financial results.
Get started to remind you that this presentation may include forward looking statement.
These statements are subject to risks and uncertainties that could cause actual and anticipated results.
The company undertakes no obligation to publicly revise any forward looking statement.
I want indoor webcast. Please refer to slide presentation available online, including our Safe Harbor statement on slide two.
Joining by phone. Please note that the safe Harbor statement and presentation are available on our website www Dot triumph Bancorp Dot com.
It's made during today's call are subject to the safe Harbor statement.
I'm joined this morning by transferring chairman and CEO, Aaron Brown, our Chief Financial Officer, Brian Lawlor, Todd Ritterbusch, our Chief lending Officer, Jeff.
No trial business capital after the presentation will be happy to address any questions you might have.
I'd like to turn the call over their parents. Thank you look good morning, everyone.
For the second quarter, we earned net income of 13.4 million or 56 cents per diluted share a justify the gain on sale of our trial premium finance assets diluted earnings per share was 25 cents.
Starting with credit and they see out.
Total credit loss expense was 13.6 million versus 20.3 million in the prior quarter.
During the second quarter, we recognized credit loss expense on funded loans at 11 million.
Credit loss expense on our balance sheet commitments to land of 900000, and 1.7 million of credit loss expense on subordinated notes to collateralized loan obligations and are held to maturity investment portfolio.
These are legacy assets associated with our CLL advisory business that we sold in 2017.
Its portfolio will liquidate over the next few years when we do not currently nor do we expect in the future to invest in any additional equity see yellow tranches.
[music] generally speaking our economic forecasts worsened.
Quarter over quarter as we're now forecasting unemployment to sit between 9% to 10% over the next four quarters with depressed retail sales over the next three quarters.
As a result, the allowance for credit loss or Hcl increased to 54.6 million and 1.24% of loans held for investment.
Given the focus on this ratio in the short duration I'm a significant portion of our loan portfolio, we think investor should understand that our Hcl ratio is 1.77% of total loans when you exclude P.P.P. loans factored receivables and mortgage warehouse balances.
On the loan portfolio, we experienced charge offs of 1.1 million or two basis points of average loans and an increase in specific reserves of 1.7 million.
[music] past due loans decreased by 49 basis points from Q1 to 1.5% of total loans and the ratio of nonperforming loans was relatively unchanged.
Well these levels are certainly acceptable and not out of line with recent metrics. It shouldn't be noted that a significant portion of our loan portfolio is currently in deferral in accordance with guidance from our regulators and the cares.
We will discuss these deferrals and more detail later in our remarks.
Turning now to deposits deposits were a bright spot for us again in the second quarter and our funding mix continues to improve.
Noninterest bearing deposits grew 275 million and are now up 437 million since we increased our focus on deposit gathering at the end of the second quarter in 2019.
Noninterest bearing deposits as a percentage of total deposits are now 28% of total deposit.
Which is a significant increase from a year ago.
As we noted in our last earnings call. The dislocation in the retail deposit markets that existed in March has normalized and we have retired much of the FHLB funding that we borrowed in the first quarter, while also reducing our loan to deposit ratio down from 117% to 108%.
As higher cost time deposits continue to mature and reprice, we expect our funding costs to continue to trend lower in the near term.
Turning now to margin.
Our loan yields were down from the first quarter 70 basis points, while NIM was down 52 basis points. The majority of this change was related to a shift in the mix of our loan portfolio as factoring volume and revenue decline, while mortgage warehouse average balances increased 203 million over Q1 just.
716 million.
We also had 219 million in P.P.P. loans, carrying a 1% coupon or spread of about 65 basis points at June 30.
This compressed overall loan yield 16 basis points and net interest margin approximately eight basis points.
Our P.P.P. fees recognized an interest income totaled one point fourmillion and we have 5.8 million of remaining deferred PPP fees at quarter end.
As we will detail further on this call our outlook is for our margin to expand from this low point throughout the remainder of the year.
Finally, a few items this quarter that I'd like to point out first we realise 1.3 million in gains on the sale of loans, the majority of which just from our liquid credit loan portfolio.
And 1.9 million dollar syndication fees recognized and other non interest income on a large credit line, we structured for a community bank customer.
Finally, our service charge fees were below historical levels by approximately 1 million in Q2, we do not expect us to continue in Q3 year beyond as the universal fee waivers, we provided to assist our customers ended June 1st.
As previously disclosed in the first quarter, we completed the asset sale of our try premium finance business to People's Bank on June 32020.
Wholly own loans sold it totaled approximately 85 million and we realized a pre tax net gain on sale of 9.8 million.
As part of this transaction peoples Bank received the top notch platform on which to expand the business and try and pertains to preferred premium finance referral relationship to service our clients.
Now I'd like to turn the call over to Todd Ritterbusch, Our chief lending officer to talk about our community bank lending and the efforts underway to support our communities and customers in light of the unprecedented impact of Cobot 19.
Thanks, Aaron I'd like to start by providing an update on the actions we've taken in support of our clients during the pandemic.
Our loan balances on short term partial or full payment deferral grew to 597 million in the second quarter and subsequently declined to 572 million as of June Thirtyth.
As the deferrals has begun to expire.
As of July 14th our deferred balance stood at 382 million and over the next summer we use all of our remaining deferrals will expire and clients will need to either resumed payments will receive an extension.
As of June 30, we also had 6 million of accrued interest on deferred loans.
Our largest concentrations of remaining deferrals or in our equipment finance business and community back within equipment Finance. We initially approved deferrals in anticipation of weakness in transportation in many cases, our clients performed better than we expected and do not need additional deferrals. So we expect the majority of these deferrals to continue to expire without extension.
In the community bank, our ability to discontinue deferrals depends largely on the pace and timing of the reopening of local economies.
To date, Moreover, community bank clients are rolling off deferrals than expected.
Moving to PPP loans, we are prepared to assist our clients in relationship managers and completing its been a forgiveness applications to the SPJ subject to the SP is final instructions and new portal, which are forthcoming.
We expect forgiveness applications to ramp up quickly in the third quarter. However, the Sps three month window for processing applications could mean that our clients will actually received the Sps forgiveness until the fourth quarter or later.
The proceeds or the PPP loans government stimulus checks and the stockpiling of cash by our clients contributed to 207 million in checking savings and money market deposit growth across the community bank footprint in Q2.
We've not yet seen clients begin to draw down their liquidity as demand deposits continued to grow through June but those same balances up over 95 million from Matt.
Our mortgage warehouse continues to be a bright spot in terms of book deposit gathering and loan activity was 69.8 million in deposit growth in the second quarter, while loan volumes and balances remained elevated we know that the wave of mortgage activity will eventually subside, but we don't yet seen and insight with July and August volumes expected to remain very high.
For the remainder of the year, our lending priorities were remain to complete PPP loan forgiveness, unwind blown deferrals and manage their credit risk.
With that noted we are actively pursuing marquee new relationships across our lending units.
We are forecasting a significant increase in total lending balances for the remainder of the year. We do expect a balanced declines driven by PPP loan forgiveness and credit management will be largely offset by new lending higher spreads and more attractive economics I'll now turn the discussion back over to your in for transportation update.
Thank you Todd.
Total Q2, 2020 trial business capital factoring revenue was 21.5 million.
The dollar volume of Invoiced purchased was 1.24 billion for during Q2 2020, a 12% decrease compared to Twoq 2019, we purchased 813000 invoices. During Q2 2020, a 7% decrease compared to the same quarter a year.
Yep.
As we discussed in our last call. There has been Kobin 19 related uncertainty in freight markets and that volatility negatively impacted our Q2 results.
This did not surprise us nor should it surprised those who follow us we faced challenging economic headwinds through much of Q2 as U.S. quarterly GDP and subsequent freight volumes suffered double digit percentage declines due to the widespread shelter in place orders and the temporary closure of nearly half of all small businesses.
In the country.
As we projected these headwinds express themselves in a number of challenging Q2 trends compared to Q2 2019, such as average invoice size declining 5.5% an average purchase totals per client declining 8%.
What is interesting. However is that we saw the early signs of recovery late in Q2 for example in the month of June our factoring business saw total invoice purchase volumes not only return to normal levels, but even surpassed June 2019 levels.
We also track invoice submission activities by individual clients.
Which indicates when a client suspends its historical Invoiced factory and activity and presumably their operations and then when they return in April and May approximately 20% of our Q1 client stops submitting invoices altogether, but we saw solid rebound in June.
In terms of the number of clients again submitting invoices, but also in the terms of the monthly average invoice amounts.
Those returned to its highest 90% of our Q1 monthly average in some client segments. This recovery if sustained in July and beyond could suggest a freight recovery curve that looks more like of the than an extended you.
And some we expect that our transportation factoring portfolio will continue to be our most profitable and fastest growing line of business. As a result of its growth. We expect our margin to expand from Q2 irrespective of the rate environment over the next 12 months.
Now turning to try and paid during the second quarter try a pay process 767000, invoices paying 51000 distinct carriers payments process totaled approximately 667 million a 26% increase over the prior quarter and a 295% increase from Q.
Two of 2019.
Brian pays annual run rate payment volume as of June was 3.1 billion.
We have talked over the last few quarters of our focus on the top 20 brokers in the U.S.
As of today, we have three of those brokers active on the platform.
Even more exciting and that is that we have more than five of the remaining top 20, who have submitted applications and our in various stages of contracting or integration.
We would expect the majority of those prospects to come onto the platform over the next six to nine months. Once completed this will bring us closer to our initial goal of serving 50% of the top 20 brokers and will move us much closer to becoming deemed access a billing and payment for the trucking industry.
We still plan to exit this year with a run rate payment volume of 7 billion or more.
We expect try I pay to reach profitability in the back half of 2021, even with its parabolic growth and the significant investments, we're making into the platform to improve user experience.
Finally, we remain committed to the safety health and wellbeing of our team members customers and communities over 90% of our team continues to work from home and do so with excellence. We look forward to better days ahead, and we know we as a company and we as a nation well persevere without we will turn the call over for questions.
I will now begin the question then ask your question to ask a question you May Press Star then one type stuff.
If you're using a speakerphone please pick up your handset before pressing the key.
To withdraw your question. Please press Star then too.
At this time.
Early to double our roster.
My first question will come from Matt Olney.
Please go ahead.
Hey, Thanks, good morning, guys.
Matt how are you I'm well I'm well thank you.
I wanted to start with PBC and you get you gave us good update in the prepared remarks I believe you said you.
Purchased around $5 billion of invoices in a second quarter you mentioned, some some macro headwinds the first part of the quarter that sounds like improve towards the back half a quarter and last few weeks.
We've also got I guess some of the up the the acquired loans in that book closing here over the next few weeks.
And a better end, but with pricing that you noted.
Is there a goal, but we should be mindful of as far as the invoices purchase within TBC that that you could achieve over the next quarter to once these items play out.
Yeah, Matt I'll start with this and then Jeff Brenner, who lead to try business capital can add anything.
Yeah, it's hard to set goals within a business that like try business capital that is so highly correlated to what's happening in real time in the economy.
So.
For example, I don't know that we ran the business any better than in June.
Then we did in April and May It's just truckers had park their trucks and we're sitting at home. While there was no freight now there is freight and they've come back the million dollar question or the trillion dollar question. If you will because I think what freight markets do is gonna be highly correlated to what the economy does is well.
We continue to see the strength and freight.
And as that we sit here today, it looks pretty good year over year comparisons, even where we've run as of this very day, we're still running in many cases above 2019.
So I wouldn't be able to give you a goal on specific revenue goals client goals et cetera, because there's so much uncertainty in front of us, but we can't tell you as we continue to take market share organically and that the freight market.
As we said today is pretty good now I think where it goes will depend upon political response covert 19.
Vaccination all of these things so I can't really give you a target.
All we can give you sort of the commentary on what we're seeing right now.
Okay. That's that's understood.
And then on on loan growth lots of moving parts here that you'd note in the prepared remarks.
With the expectation for overall loan balances.
Once you account for all the puts and takes over the next few quarters. Thanks, Yeah, I think our belief is that our transportation business will grow.
Our Argus, our hope would be that our transportation business would grow disproportionately to the rest of the book and the reason being more mortgage warehouse has done great. It's had a great Ron it it'll continue to do that but we don't see a growing on an absolute basis above where it sits today, that's our that's our comfort level.
For that business CRM or getting paid off not because we don't see opportunities or not because we don't want to be in the market. It's just frankly risk premiums have disappeared like they were there for a month and now we're seeing construction loans being done at LIBOR, plus 260 and.
Thanks.
As being financed and margins, we would never touch so I don't I'm not so concerned about our total loan growth as much as I am the mix shift and that's what I think some people struggle to understand when they look at triumph, our margin probably more than just about any bank in the universe.
Highly correlated to the shift.
Our balance sheet. So if transplant in Q2 are factored receivables fell because people park their trucks, our NIM compresses in Q3, it's very likely as AR factoring returns to its historical position within our loan book because the margins are so much higher in that line of business than others. That's why we're saying.
And we expect NIM to expand so on the whole I don't know that we'll see material loan growth I do think we will grow between now and the ended the year and our hope is that that growth shows up in largely in transportation, because that's our highest margin.
Business we're in.
Okay. That's helpful parent and then the last question for me you gave its good update on on trial pay.
I think you mentioned last quarter that cobot 19, <unk> caused a slowdown in the integration process modestly up for some of your your larger clients see any update as far as the integration progress how much of July has that been and where do we stand now.
Well I think the team and to their credit has done a world class job I mean, if there is a silver lining and covert 19 after everybody got through the original shock and all.
It seems to have heighten the awareness of what the value that try and pay can bring to the freight brokerage community and ultimately to the trucking industry as a whole and so as we just laid out in the prepared remarks, you got more than five of the remaining of the top 20, who now are in various forms of integration with us.
We said that's a six to nine month process to onboard that much volume and it'll happen sequentially.
I don't know at this point I wouldn't like any of any blame first of all don't think theres any Blaine delay I think thats fantastic thats beyond our expectations.
As far as the speed of these integrations Cove it may be affected at the margins, but frankly, we're talking about really complex integrations with the largest logistics companies in the United States and so that's going to be a difficult endeavor kobin or no covance. So I wouldn't say at this point, it's really slowed us down if anything.
You are seeing.
Happened, what we had hoped maybe more so bold us to predict what happened, but we're seeing this start to become ubiquitous and the transportation space and of course.
It makes the whole process more frictionless for everyone and so if we get those those that we've just mentioned onboarded over the next six to nine months that'll be fantastic and of course as you would expect or can we continue to build a Q behind that and we continue to onboard Q2, I'm sorry tier two brokers.
All along the way, we don't talk as much about those but those are currently coming on the system as well.
Got it thank you guys.
Your next question comes from.
Finally with KBW. Please go ahead.
Hey, Thanks, good morning, guys.
Good morning.
So other fee income was up pretty nicely on a linked quarter basis like it was up about.
Dollars I think I heard there roughly a $2 billion syndication fee that's in there that sounds.
He somewhat like a onetime or that I think I heard you mentioned 1.3 million of lung piece was that all so in other end prominent what was there anything else in there that impacted that in the quarter.
So just to clarify the the 1.9 million you're correct that was a sin syndication fee for a very large credit we put together for community bank customer a core customer of the bank.
We would be we do not expect we're going to be able to do that every quarter, although presented the opportunity of course, we would.
You're correct on the loan the $1.3 million gain on sale of loans.
That's on a net basis, you know one of the things if you remember Brady we talked about in Q1, there was about a six week window of time, where the market totally dislocated and in that period of time between liquid credit and AAA CLL Securities, we bought about $300 million worth of assets as I recall in Q.
You too as the market has strengthened we use that as an opportunity to harvest some gains and what we saw from where we purchased in Q1 and we also used it as an opportunity to exit some legacy positions that would have existed before corona virus.
And.
De risk the portfolio and so what you see there the net of that de risking of the portfolio.
In that and that 1.3 million dollar number.
Okay great.
On the NIM expansion in the back half of the year.
I was going to ask what do you think the magnitude of what that NIM expansion could be but I guess, it really kind of depends on.
The transportation industry, and how fast way that rebound.
Are you thinking about how much than them could be up in the back out there.
I don't have a number for you I mean, you can run your model. This just as good as mine tell me, how big transportation, specifically factory is going to be as our percentage a percentage of our loan book and I will tell you, where our nems kind of land and then the other part I mean, NIM matters, and we know what matters for everyone our margin.
As we have to think about I think holistically look mortgage warehouse pulled down our net interest margin yet it is a very profitable line of business for us because its administered so efficiently.
But on the whole.
I have we're not making any projections about where we'll be I mean this is this is.
We're facing a phone that weve never seen before and so we can't sit here and telling you where NIM is going to be you know what the yields are we get on our factoring business, we're going to grow that as much as is reasonably we're able to do it.
But we can't predict.
We could have another slowdown and of course, if we do we're going to feel that factoring and almost real time.
Okay, All right and then lastly, just the roughly $6 million the remaining.
The loan fees.
Feels like forgiveness is going to happen for Q1 Q. So is the right way to think about the timing on realizing that additional 6 million of fees same roughly for Q1 Q next year.
For the most part yes, we're hoping that the majority of it will come in the fourth quarter.
Yes, we're prepared to begin submitting forgiveness applications as soon as the SB issues. The final instructions and opens up the portal. So we might get some of that in the third quarter, but I work our projections are for most of it to come in the fourth.
Okay, great. Thanks, guys.
Our next question comes and Gary Tenner with da Davidson. Please go ahead.
Hi, John going on for Gary just wanted to ask was the OCC operating expense load rig to premium finance business, though bulimia with the trailer but TPS.
We.
We had disclosed that earlier, but I think that overall expense level in that as a percent of the portfolios home was about 2.5% on the roughly $100 million our annual basis.
Then just some early impressions on my regarding extension of the initial owned brokerage as expire you had talked about a little bit in her prepared remarks many of them.
[noise] I'm sure so.
We disclosed the loan balances under Pearl are coming down they continue to come down. So if you would ask for an update as to where we stand today we're at about.
350 million remaining on deferral, we expect those balances to continue to decline as the initial expirations occur through August and the majority of what we have left we expect to roll off after this after the first extension so.
Hopefully early fourth quarter will be down to a significantly lower balance than we are today.
At this point we don't.
Expect a very large proportion of those loans to require longer term modifications or to be in such bad shape that we would expect the business to cease operations.
Thank you.
Again, if you'd like to ask a question. Please press Star then one.
Next question comes Steve.
Highly FBR. Please go ahead.
Hi, good morning.
Good morning fee once done.
Let's start on credit or just kind of in particular, what your thoughts are with regard to your any updated thoughts on your hospitality and restaurant exposure and kind of how you're thinking about those loans going forward.
Yes, so hospitality is certainly a very big concern for US I think you probably heard from other banks that this is probably epicenter of where we're going to feel stress with respect to credit.
If you were to refer to page seven of our Investor presentation. You see there that we currently have exposure of just under 130 that was as of June thirtyth more than half of that is on deferral and so.
And most of whats on deferral will require an additional expansion of course, because the occupancy rates remain very very low.
Fortunately, we have pretty low loan to values on a lot of those properties and so we're not C. B, we're yet in a position where we are forcing.
Significant specific revert reserves.
But that could change if we began to see those properties deeply discounted and they were to need to liquidate.
Okay, and just on restaurants as well just kind of curious what are you seeing for because it goes clients and.
Kind of pro process well.
Yeah, so that portion of our portfolio, obviously, it's significantly lower in size. It's also significantly lower with respect to the percentage that are on deferral. So you should be thinking about maybe a third about a third of those loans being on deferral at this point.
And.
Keep in mind that within our restaurant portfolio, we have a significant credit in our liquid credit team that is for a very large well managed to.
Great quality credit.
And now I'm, sorry on national but it's a it's a quick service chain.
So.
You know you've got significant high quality exposure within that restaurant those restaurants continue to operate as it pertains to the other restaurants in our portfolio. The stuff that's in our community Bank. We of course, the highest concentration of deferrals in full service and we have a little over $10 million and deferrals in that space and that of course.
The space that's been most deeply affected the news trickiest to get back up and running.
Okay, and then I guess in terms of just as we think about credit cost going forward and perhaps charge off formation.
You know I mean, the reserve ex TPP and mortgage warehouse is quite strong here.
Kind of.
Where do you.
[laughter] should we think about you know a lower reserve build in future periods.
Yep plus charge offs are kind of curious as to how you think about that.
Yeah, I reserve build is largely going to be dependent on what the future economic assumptions are in forecast, that's what's been driving it so far and so I would expect that the continued to be a major driver I agree. This price. So I think the way you phrase is probably.
And I'm thinking about anyway images, we think in terms economic forecasts of things can change.
But.
So the bulk of that captured so that's a question of.
How do these deferrals and charge offs develop over the next few quarters.
Okay. That's helpful.
Then on just a mortgage warehouse portfolio, it's no wonder just.
Getting into the week, a little bit, but what was the average balance for the quarter and perhaps with young portfolio yield for it to that.
Good morning.
So 716 million barrel average balance for this quarter.
About 200 million from previous quarter.
In the yield.
<unk> three and half Threed.
The three reasons.
Okay great.
And lastly, just on expenses curious too right.
Through since there what your updated expense expectations are for the third quarter here.
[noise], how we would expect.
Q3 main marginally increase from Q2 I know normally we give you a specific number but just again sticking with the theme here of of the unknown. For example in Q2, we controlled a lot of expenses. There was no travel we intend as long as the world is uncertain to do some of that there will.
To be some natural expense growth is t. pay and other things continue to grow but I, we expect Q3 to be higher than Q2, but not materially.
Alright, Thank you very much.
Okay.
Our next question is a follow up from that.
Yes. Please go ahead.
Oh, Hi, guys.
My follow up was a address just now but thank you.
This concludes our question and answer session I would like to turn the conference back over to air France for any closing remarks.
Thank you all for joining us. This morning, we hope you have a great day and rest of your week. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.