Q2 2019 Earnings Call
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Good day and welcome to the Triumph Bancorp Inc. second quarter 2019 earnings conference call and webcast.
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I would now like to turn the conference over to Luke Wise Senior Vice President of Finance and Investor Relations. Please go ahead.
Good morning, welcome to the Triumph Bancorp conference call to discuss our second quarter 2019 International.
Before we get started I'd like to remind you that this presentation may include forward looking statements. The 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 walking into our webcast. Please refer to the slide presentation available online, including our Safe Harbor statement on slide two.
For those joining by phone. Please note that the safe Harbor statement and presentation are available on our website at www Dot triumph Bancorp Dot com.
All comments made during today's call are subject to that safe Harbor statement.
I'm joined this morning by France, Vice Chairman and CEO , Alan Graf, our Chief Financial Officer, Bryce Filer, and Todd Ritterbusch, our chief lending officer. After the presentation, we'll be happy to address any questions. You may have at this time I would like to turn the call over to Aaron Aaron.
Good morning for the second quarter, we earned net income to common stockholders of $12.7 million or 48 cents per diluted share.
Q2 was an interesting quarter, our financial returns were average to below average for US. However, we made significant improvements in our business that we believe will create long term value for our team and shareholders.
If anything Q2 proved out that our business model is susceptible to revenue volatility due to the short tenor of our assets, particularly our factored receivables purchased from truckers.
Loans held for investment increased $223 million or 6% in the second quarter.
We have added an additional category to our reporting on our loan portfolio, starting with this quarter, which we will call national lending.
The loans in this category are not new to US you can see by the composition by loan product for each of these categories in the investor deck on slide nine and tables in the earnings release.
Loan growth was diversified as the community bank portfolio grew $54 million or 3%. Most of this growth was cnine lending.
The commercial finance portfolio grew $78 million or 7%, despite the soft growth in transportation factory.
Equipment lending performance and growth remains strong and we saw nice growth in asset based lending.
National lending includes mortgage warehouse lending premium finance and liquid credit.
For mortgage warehouse, we had $62 million increase in average balances this quarter or 26% over the prior quarter.
The liquid credit portfolio consist of widely syndicated leveraged loans. This is a niche line of business. We have participated in opportunistically in the past and we intend to do so in the future.
We have a small team dedicated to this activity and we expect this portfolio to grow from its current size and to vary over time, depending on opportunities in the syndicated loan market and in other parts of our business.
Total deposits increased by $345 million or 10% in the second quarter.
Most of this increase was related to the Dallas branch slated for a fourth quarter opening as well as higher rate Cds offered outside our retail footprint on a national basis and broker deposits.
Our loan to deposit ratio at quarter end decreased to 105%.
This ratio is inflated approximately 10% by our use of federal home loan bank advances to fund our mortgage warehouse line of business.
We continue to develop our retail deposit gathering efforts and expect to rollout new product offerings to our branch network in late third or early fourth quarter.
Our treasury management capabilities are actively being marketed and are beginning to bear fruit.
Second quarter net interest income was up 2 million from Q1 own yield declined four basis points to 7.95% largely due to the softness experienced it experienced in transportation factory.
The cost of total deposits increased 15 basis points to 1.14% largely due to the relatively high marginal cost of the deposit growth this quarter.
Net interest margin declined 16 basis points to 5.9%.
We accreted $1.3 million of loan discount in Q2.
Our asset quality remained solid mph to total assets ticked up two basis points to 86 basis points past due loans to total loans decreased by 43 basis points.
Net charge offs to average loans were five basis points.
Second quarter expenses at $50.7 million or better than the $51.5 million estimate of Q2, we provided in our last earnings call.
We estimate that noninterest expense will increase to $52.8 million for the third quarter of 2019.
We now expect full year expenses of $204 million or 2% above our projection at the first of the year.
Next let's talk about transportation or specifically over the road trucking, which generates a significant portion of our revenue.
In Q2, the spot market rate per mile continued to be down from late 2018 levels and we did not experience. The typical seasonal rebound mid second quarter in spot rates.
We believe there are several short term factors pushing the spot market rates lower with the primary factor being the supply and demand imbalance. We saw in 2018, starting to correct itself, we believe manufacturers and retailers pulled forward freight demand ahead of both the threatened and implemented tariffs, which created the record spot market demand in 2018.
Those levels of demand brought lots of new capacity into the market evidenced by historical new and used truck sales, but these levels were not sustainable to that end times view is that the current softness in the spot market in the first half of 2019 is definitely not secular and probably not even cyclical, but instead tied to a supply demand imbalance created by the trade issues from 2018.
2019 field like 2016 for us, which was not a bad year.
Trucking will continue to be cyclical, but we'd like the secular trends driving over the road trucking in the US we believe the US will continue to prosper. So consumers will be buying companies will be moving more goods 20 years from now which will drive ever more demand for trucking.
Regardless of what the trucking market does in any given quarter. We are committed to this business for the long term.
In Q2 total factoring revenue at triumph business capital increased about $1 million quarter over quarter or 4% to a total of $26 million.
This increase in revenue was driven by a 6% increase in purchases to $1.4 billion. During Q2, the number of invoices purchased increased 84000 from Q1.
We purchased 874000 invoices in Q2.
Growth this quarter was slower compared to Q2, a year ago. When we were in the midst of a record year for transportation.
The average transportation invoice size decreased $49 to two to $1492 or 3%.
To illustrate the impact of invoice size, all else being equal and holding the average invoice size flat on 807000 transportation invoices purchased this $49 decline in invoice price reduced total factoring revenue approximately 700000 for the quarter and reduced total factored receivables at quarter end by approximately $15 million.
At the end of the second quarter and ended the third quarter. So far we have seen spot rates stabilize and settle into a more traditional rate per mile similar to the years before the end of 2017 and 2018.
And a more traditional seasonal pattern based on trailer type.
Our transportation factoring portfolio turns about 11 times per year, creating revenue volatility from quarter to quarter.
But its loss experience continues to be very acceptable and it remains our most profitable business line.
We are hopeful the market for the business for the remainder of the year can improve we can control either invoice sizes or utilization, but we can't control the client growth that despite a slower market and less volume than is typical in Q2, we saw active clients increased by 73 clients to a total of 6455 during the second quarter.
I continue to be very excited about our progress with tribes triumph pay in terms of integrating new clients marketing to new perspective clients and enhancements to the system. We now have 146 clients up from 130 clients last quarter.
During the second quarter triumph pay processed.
150000, invoices paying 28000 distinct carriers payments process totaled approximately $169 million, a 20% increase over the prior quarter and a 169% increase from Q2 2018.
We have a pipeline of freight brokers in the queue to join the system, including some of the largest third party logistics companies in the country.
I expect that growth to continue to be dramatic.
We are trying to make it clear to investors that we are doing something unique here and if you just look at the Breadcrumb trail, we've laid out over the last few quarters, you should see how it is unfolding.
Triumph pay will be profitable for us in 2020, and I believe make a significant impact on 2021 full year performance.
Investors should not overlook the fact that triumph pay also generates float for US in addition to interest income and fee revenue.
With that as background, let me speak to what we're seeing in the general market.
During the quarter, we repurchased approximately 591000 shares into treasury stock at an average price of $29.42 for a total of $17.4 million.
This completed the original $25 million repurchase program authorized by our board.
Yesterday, we announced the authorization of a second $25 million repurchase program, we will continue to repurchase our shares throughout the year if in our view the stock remains undervalued.
We also continue to evaluate the implementation of a dividend.
For several years, we carried excess capital to stay prime for M&A opportunities.
We will still evaluate those opportunities to the extent, we believe they can enhance our deposit franchise, but there are fewer and farther between.
We have no interest in growing for growth sake, when I look at our business model, we have the ability to generate the same or potentially better returns on capital at 5% to 7 billion in assets than we would at $12 billion to $15 billion.
In other words, we can achieve our 1.8% goal or better consistently without an increase in the size of our balance sheet by focusing on the lines of business and products, where we are uniquely positioned with our scale and industry knowledge.
For us that means transportation or more specifically over the road trucking.
This balance sheet discipline will cause our assets to shift organically, which will lead to higher returns because our fastest growing businesses are also our highest margin businesses.
When those businesses achieve certain concentration levels within the bank, we have the ability to turn the additional growth in the fee income through participation channels. We are building.
Overall, we're not opposed to growing our balance sheet, but only if we can grow by acquiring high quality deposits at the right price.
With that ill turn the call back over to the operator for any questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on you touched on that if you are using speakerphone. Please pick up your handset before pressing the keys.
Is it any time your question has been addressed or you would like to withdraw. Your question. Please press Star then two at this time, we will pass momentarily to assemble our roster.
Our first question today comes from Brady Gailey with KBW. Please go ahead.
Hey, good morning, guys.
Good morning Brady.
Can we have another quarter of that average invoice size moving down here.
I think it's kind of been this way for at least the last three or four quarters.
Aaron I heard your comments.
Yes, as you open the call it feels like you're thinking the.
Two twos level could be a bottom and you as we as we move through the back half of this year you could see average invoice size is go up and then I just wanted your take on kind of how that plays into.
Your loan growth expectations, I think last quarter, we were talking about kind of a five to 700 million dollar amount of loan growth. This year is that still the right way to think about where growth in 2018.
Sure.
So.
There's a chart if you look.
Brady in the slide deck that we put in this up for this quarter that I think is interesting that shows the high correlation between the spot market a new truck orders and you can see on the far right hand side of that chart. The most recent data you can see the spot rate creeping up.
Now whether that trend line will continue is difficult to predict you've got a lot of different things going on.
Freight the mix shift that happens quarterly within freight for example, refrigerated freight really peaks towards July and then starts to taper off other types of freight pick up.
But what it looks like right now it appears the spot market is strengthening as we work through this excess capacity. It is not going back to 2018 levels at least in short order now again that market moves fast and we're wed to that market but.
I think overall unless something happens I would expect the overall spot freight market at least reflected by the invoices, we purchase to be marginally better in the third quarter than it was in the second quarter.
With respect to total loan growth and I hope this came clear and what we're saying.
We absolutely have the opportunity to grow loans, 5% to 700 million for full year.
I don't know, whether we will be writing what we really are focused on growing the things that are the most profitable that is our loan pipeline is full we're just not sure. If we're going to open the spigot as much as we talked about when we're looking at a high cost of incremental funds I think were far more interested in approving and growing loans that exceed our internal rate hurdles than just total loan growth. So this was a good quarter for total growth but.
We're paying a lot more attention to shifting the balance sheet than we are total growing the balance sheet.
All right and then a follow up so I mean, if you look at the growth you experienced in Q2, you also look at the buyback activity.
You are too.
With from about 10.4% last quarter down 9.8% this quarter.
It feels like with your currency trading now it's trading in a.
Is less likely for you guys as you look to.
The buyback as a way to deploy capital.
And with the stock being even cheaper today than it was when the repurchase of stock in the first half of the year, but it feels like you will be a pretty.
Aggressive on the buyback here, how low do you think.
You would be comfortable seeing the Tc ratio decline.
Well.
We don't just look at that ratio I mean, our total capital to total risk weighted assets at 11.5% I think we've disclosed to you in the past is is something we've looked at.
We certainly have room to complete the $25 million buyback plan that was recently announced.
We're not going to be Cavalier about that and look that the ideal thing for us.
Would be a large branch deal we.
We've worked on some they havent come to fruition, because if you think about it out on our deposit of our deposits $1.6 billion of those deposits are what you would or what we would call high cost deposits. If you could roll those $1.6 billion in deposits into 40 basis point deposits, where were sort of our community Bank retail network is price you would drop at least 30 million and net income to the bottom line without growing the balance sheet at all just churning the deposit.
Portfolio so.
A branch deal that would move us in that direction is still interesting that being said whether or not we get a branch deal done with the position we have in triumph business capital and what we keep telling you is going to happen in triumph pay.
I at least.
I am interested in continuing to repurchase shares when we can buy them at less than 10 times forward earnings because we believe that in that.
In relatively short order in a in a couple of years, we will be rewarded on that.
So yes, you should expect us to be active in repurchasing shares. It is unlikely that there is full bank M&A that will make sense. We continue to look at it any M&A for us is almost exclusively going to be focused on improving our deposit network.
Got it thanks.
Our next question comes from Matt Olney with Stephens. Please go ahead.
Hey, thanks.
Good morning, guys.
Good morning, Matt.
And you mentioned the possibility of participating some loans out and generating some fee income can you give us.
Some more color around that is there a timeline of when this would become more realistic in would move the needle.
Sure well, there's theres too and that those.
Those references were specifically with respect to exposure to transportation.
Okay. So there's two ways that two things that would lead us to do any sort of participation one would be exposure to a single name a one of the top two or three.
Third party logistics companies.
Could exceed our our legal lending limit for exposure to one borrower in which case, we've already laid the ground work to participate additional exposure for that name or those names with other institutions. The second way would be where total transportation exposure for us.
Meats.
We always have to think about how much of our revenue are we comfortable having coming from transportation right now it's around 35%.
So I suspect Matt that in the next 12 months there will be individual names that we will start to do participations out to other institutions, we've even looked at capital market structures and we have some I think creative ideas. How we can do this yet retain the fee that we that we think we earned for building this platform.
So I think you'll see some internally at least we will see some individual participations out in some fee income starting in for surely next year.
And then if try and pay becomes what we think it will become.
Then that will become a significantly growing exercise because the volumes that we're talking about moving through the system.
Will be far more than a five or 7 billion dollar bank balance sheet or frankly, a $12 billion bank balance sheet can handle so I think you'll see that just continue to progress and in 2021.
I think it can be material.
Okay. Good that's helpful. And then on the credit front looks like you guys had another strong quarter of credit trends, but one of your peers highlighted some credit issues around AG. So can you just remind us what your AG exposure is and what type of AG exposure is and are you seeing any incremental pressure there.
Hi, Matt This is Todd Ritterbusch.
Yes, our AG exposure, if you combine both our traditional agricultural lending and farmland is.
Just south of $300 million. So we don't have the same concentration that you've seen with some of our competitors and it's important to note that some of the recent news is focused specifically on cattle lending, where we don't have a high concentration were more concentrated in corn farming.
And.
Within cattle lending the problems have been more in dairy than to be firm, we have virtually no dairy so.
Yes, some of that news is it really all that relevant to us. Nonetheless, we watch the agricultural portfolio very very closely and so while it represents less than 10% of our loans, it's more like a quarter of our.
Of our specific reserves and.
We have made sure that we continue to monitor those relationships as they continue through time very carefully one other important point here is that these agricultural loans are largely sourced out of our community markets, where we have long relationships with the individual farmers. So it's a very granular portfolio and built on long term relationships and success. So even though there has been some stress in that space, we're not abandoning those farmers and we're working with them to work through those situations one on one.
Okay. That's helpful. Todd. Thank you I will hop back in the queue.
Our next question comes from Rod Mill.
Chairman. Please go ahead.
Hey, good morning, guys.
On a run.
Enterprise just curious if you could just talk about the NIM a bit.
In light of the potential for the fed reducing rates.
You guys have had pretty high deposit betas on the way up given your need for funding.
Just kind of curious.
I get that backdrop, how quickly you think you'll be able to.
Lower deposit costs, if if the fed does make a move.
Sure.
Brad This Bryce I think overall, there I mean, we continue to be.
Price fairly low across our retail branch network I don't see.
Room really to reduce those rates overall quickly at least I think the impact to us will be just the overall impact as have been more on our more nationally.
Price deposit base CD portfolio some of the money market accounts, we have out there there are some money markets.
Probably a couple hundred million reversal of the reprice down pretty quickly with the fed move.
We've already seen.
Back often and incremental deposit rates in the CD market on a national basis is very significantly I think we're probably at least 75 basis points below where we were when your money for that.
Just a couple of months ago I would expect with this move.
To go down so Marshall costs, there is already dropped significantly for us and Brad one of the thing that I would point out that is different from US then I presume any other bank in your coverage universe is.
While.
The.
What happens in triumph business capital has a tremendous effect on our net interest margin.
And so for us NIM, certainly deposit and cost of deposits matters, but if transportation factoring is going up our nims naturally going to expand just due to the margins we earn on those assets.
Right right absolutely.
And then just to follow up on the.
The transportation discussion.
And I guess the pace of new clients, it's still positive, but it has it has slowed in terms of additions.
I know the market is massive but do you think you need to make.
Our to additional people needed to further accelerate client acquisition.
Or is it just maybe a soft spot in the market as you spoke to earlier with.
Maybe people just not moving around as much just kind of curious on the pace of.
New client additions.
Yes so.
I would not read too much into what happened this quarter.
I think we have the team the technology it continues to get better.
What you said I mean the jump in.
Independent owner operators, who come into this industry and then versus going back to working for a fleet happens very very quickly.
And so like I said I think the chart that you see in the slide deck I mean, it is a it is amazing how quickly this market responds and then it corrects. So what you saw in this quarter is there were less entrance into the market now there are still more and a significant amount of new entrants into the market relative to historical levels.
But it wasn't like it was in 2018 when people were hearing stories of how much money, they're friends were making.
In trucking I mean in trucking if you live by the spot market alone.
It is a feast or famine way to live and Thats.
We hope our truckers do some.
Can contract hauling et cetera, but the.
I would not read into the fact that there was just 73 new clients this quarter and the pipeline is strong I still.
There is no need for us to add a bunch of things other than time.
As you all know Youve heard from me in the past we've added net new clients almost every month going on six or seven straight years and so it may not happen always as fast as we like but every month, we continue to take ground from the rest of the industry and I think we'll continue to do so.
Great and just one follow up for Brian on expenses, if I kind of annualize your.
Fourth quarter 18 expenses.
Versus your guide for 2019 implies about 8.5% growth.
As you get into 20, I mean is that kind of the rate of investment we will continue to see or do you think.
You can back off of that kind of expense growth rate as you as you make some of these investments they start to bear fruit.
Sure Brad I think that we really haven't guided out into 2020, but I think you're thinking correctly. There I would expect with things we have going your expense growth next year on a percent basis be lower than that.
All right great. Thank you guys.
Our next question comes from Jared Shaw with Wells Fargo. Please go ahead.
Hey, guys good morning.
Good morning Darren.
Yes, maybe just following up on Bretts margin question, though if we if we're seeing.
Overall using on that incremental dollar of deposit cost and the potential for the average ticket to go higher on on the packaging side I mean, we should be.
Generally expecting to see margin.
Moving up from here is that probably the best way to look at especially as you're looking at focusing more on the higher profit levels.
Yes, I just.
Things don't change in the quarter.
But yes that wouldn't I mean, it both of those things are true then that will remain true I expect you're going to see seasonality continue in trucking like as we've talked about we think this past quarter was.
Or even what happened in the last year was distorted by a few things so trucking will start to slow again in Q4.
But I don't think Jared you will see us go out and grow deposits. The way we did this quarter at that level at that higher cost anytime in the near future because as I said were far more interested.
Given where the market is where we are in the cycle and just really just.
An assessment of what we want to be as a company were far more interested in quality growth than overall growth and we think we can do a lot of that growth and specifically talking about growing earnings inside the balance sheet that currently exists. So I don't foresee us putting on high cost incremental Cts approaching 3% again anytime in the near future. So that being the case if rates are falling and transportation factoring continues to grow as a percentage of total assets, which it will over time than yes, NIM should expand.
Okay and then if so if we're looking at this is generally a smaller balance sheet focusing on the more.
Profitable side of the business.
Does that just get us to that.
180, ROI goal faster or does that ultimately caused that when 80 goal to be higher goal.
I think that causes eventually.
Sure.
I would say we will go beyond that 180 goal eventually because if you look at these business lines once we have.
Once we achieve maturation or are the full absorption of what try of pay and try and business capital are doing plus they're generating fee income, yes, I think the opportunity and expectation would be to eventually go above that right now I'm more interested on getting to that number.
Which just requires solid execution from here.
Two.
For the next few quarters and and so.
Our long term plans don't just stop at 180, Thats just been a sign post for the investment community of where our progress was but we don't intend to stop there.
Okay.
And then on.
Okay in the past you've talked about wanting to work towards bringing on some of those larger carriers.
Can you give an update on.
How how that is.
As progress in some of the pickups in new carriers, you have this quarter any of them at the high end of the.
Business range there.
Yes, they are still the bellwether.
Clients that.
We're pursuing.
I don't have anything to announce about those specifically I will say that we believe we will have four of the top 20 within the next few quarters on the system.
And as those come on.
Of course, we'll be talking about those.
Individually and one.
At some point once you've added.
Brokers of that size.
We expect many more to follow and the pipeline is very full.
At this point, we've got integrations going out for the remainder of the year. The team is doing an excellent job in.
Bill Dolby continuing to add I mean, 20% quarter over quarter growth and 160% year over year growth pretty impressive.
And I expect it will continue.
To grow from here.
Okay, great. Thanks, and just finally for me with the pressure on the spot rate market are you seeing.
All are competitors.
This are holding up and going out of business is that where you're getting that that market share from or is it.
You are picking up.
Incremental market share and.
Adding as part of that relationship to those.
Are those new customers.
Yes, I don't we haven't seen any of our transportation factoring competitors fold up by any means.
I think there are always new entrants coming into the transportation market and we get a significant portion of those due to our market position.
And then we're always trying to law.
Compete for good clients that our competitors have in there trying to compete for our good clients. So.
It's not been any that I know of transportation factoring competitors have left the market. It's just us taking a piece of the market.
That's there to get.
Great. Thanks.
Again, if you have a question. Please press Star then one.
Our next question comes from Gary Tenner with <unk>.
Davidson. Please go ahead.
Hi, guys I have a question. Please press Star then one.
The conference has now this concludes our question and answer your question I would like to turn the conference back over to Alan Graf for any closing remarks.
Thank you for joining US today, we hope you have a great rest of your week.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.