Good afternoon, and welcome to the Triumph Bancorp Incorporated Valley Bancorp acquisition call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Luke Wyse, Senior Vice President of Finance and Investor Relations. Please go ahead.
Thank you. Good afternoon. Welcome to the Triumph Bancorp conference call to discuss the acquisition of Valley Bancorp Incorporated. I'm Luke Wyse of Triumph, and I would like to thank you for joining us this afternoon. I'll go over a few housekeeping items and then hand it over to Aaron Graft, our CEO, to lead the discussion. Last evening, Triumph announced that it has signed a definitive merger agreement to acquire Valley Bancorp Incorporated, the parent of Valley Bank & Trust, headquartered in Brighton, Colorado. If needed, copies of the investor deck filed last evening as a free writing prospectus with the SEC are also available on the investor relations section of our website, www.triumphbancorp.com, or by calling our investor relations department at 214-365-6936. That deck will form the substance of our call this afternoon.
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. At this time, if you're logged 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.triumphbancorp.com. All comments made during today's call are subject to that safe harbor statement. After management's remarks, as time permits, we'll be happy to answer any questions you may have. With those reminders, I'd like to turn the call over to Aaron. Aaron?
Thanks, Luke. Good afternoon, and thank you for joining us this afternoon. I would like to spend a few minutes discussing the parameters of the definitive agreement and the acquisition in general that was announced last evening. Included with me on the call are other management team members for Q&A. Last evening, we announced the definitive agreement to acquire Valley Bancorp Inc, the parent of Valley Bank & Trust, which is headquartered in Brighton, Colorado. If you'll flip to slide nine of the deck, you'll find a transaction summary. Here are a few of the highlights. We are buying the common equity of Valley Bancorp Inc for $39 million cash. We expect to close this deal and complete the core conversion in the fourth quarter.
Valley has all of the characteristics that we look for in an M&A deal, a strong deposit franchise, excess liquidity, low overhead ratio, and proximity to our existing footprint. This deal increases our franchise value by adding core deposit funding and increasing our presence in attractive markets. We cover these points on slide eight of the presentation. We also cover these same points for the recently announced Independent Bank branch acquisition on slide seven. With respect to Valley, here are a few items of note. First, Valley Bancorp has an appealing deposit franchise. 56% of its deposits are demand-based and deposit costs run ten basis points. This deal will improve Triumph's overall deposit mix and funding structure. Second, Valley's low loan-to-deposit ratio at 61% offers liquidity to support TBK's continuing loan growth.
Third, Valley's net overhead ratio, or said another way, the ratio of non-interest expense less non-interest income to average assets after projecting synergies, results in an acquired net overhead ratio of approximately 1.5%, and when combined with the branch acquisition, lowers Triumph's pro forma net overhead ratio to 3.01%. This ratio continues to improve over time, and we view it as the primary driver in achieving our long-term goal of a core 1.5% return on assets. Fourth, Valley and the Independent Bank branch acquisition add a mix of branches, including some very stable rural markets that we are very comfortable with, as well as some markets in the path of growth north of Denver that have real organic expansion potential, which is a bonus for us. With these acquisitions, we will have 32 branches in Colorado.
Fifth, we are paying a reasonable multiple of tangible book value and earnings. Based on Valley's June 30, 2017, balance sheet and operating results, we are paying 1.54x tangible book value for the common equity. This is 11 times actual and 14.9 times adjusted trailing twelve net income. A summary of the Valley acquisition terms is presented on slide nine of the presentation. Last, but certainly not least, we have a cultural fit with Valley. We sourced this opportunity ourselves, just like the ColoEast acquisition last year. We've developed a relationship with the O'Dell family, who owns Valley, and feel good about partnering with them as we transition to Triumph's ownership.
We expect to deliver products to Valley's customers that they have not had before while maintaining the high level of service that the O'Dell family and the Valley team have given to Valley's customers over the last 40 years. Together with the Valley transaction, yesterday evening, we also announced a common stock offering which priced this morning, in which we will sell $60.5 million of common stock at a price of $27.50 per share, less underwriting discounts and fees. The underwriters have a 30-day option to purchase an additional 330,000 shares at the public offering price. This offering will provide additional capital to support the Valley acquisition and our continuing growth.
On slide 10, we presented the combined pro forma impact of the two pending acquisitions and the announced follow-on equity offering, which yields attractive earnings per share accretion and a short tangible book value earn back, while providing the company sufficient capital to sustain our attractive growth profile. The financial metrics on page 10 were prepared prior to the completion of the stock offering this morning, and therefore assumed a different level for the common stock offering than what was actually priced this morning. Our updated estimates, reflecting the final stock offering specifics from this morning, produce an estimated tangible book value dilution of less than 0.50% or 50 basis points, approximately 1.9% accretive to earnings in 2019, and a short estimated tangible book value crossover earn back of one year. Pro forma tangible common equity to tangible assets is estimated at approximately 9%.
Further details about our pro forma operations can be found on slide 11 of the deck. In summary, we've completed a transaction that is exactly what we told the market we were going to do and that we intend to continue to do. We think everyone benefits from this deal. Valley's team members get to become part of an entrepreneurial growing enterprise that values local relationships. Valley's customers get access to resources found at larger institutions like Triumph. Triumph improves its core funding base, further penetrates an attractive Colorado market, and improves our operational efficiency. At this time, we're happy to take your questions. Operator?
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.
Hi, good afternoon.
Hey, Jared.
You guys have had a busy summer.
Indeed, we have.
Well, that's good to see you being able to get these deals done that you've wanted to. With these two deals out there, what's your appetite for future deals? Obviously, with the capital raise, you have good capital position. Do you feel you could keep doing deals now, or do you feel that you're going to settle in here for a little while?
When we talk about doing a deal, of course, there's the distinction between sourcing a deal, announcing a deal, and closing a deal. It would be fair to assume that we're already in the process of sourcing our next opportunities. As far as is it possible we announce another deal this year, that's possible, but we certainly don't plan for it to be imminent. From a closing perspective, we won't be closing any other deals this year other than the branch deal, the Carlisle or Independent Bank branches, and Valley, which we expect to close and convert in December. My comfort level is, we continue on our trajectory towards roughly $5 billion in assets. We'll be $3.3 billion after this deal on a pro forma basis after all of this is integrated. We continue to see loan growth.
I think you'll see us continue to do deals, there won't be anything that is closed certainly in the calendar year 2017 beyond these deals.
Okay. Do you think to get to your $5 billion target, do you require additional M&A activity to get there? Or do you think that you could do that? Is that a $5 billion organic target?
I think it's absolutely possible to get there organically. My concern is that I'm not the least bit concerned about our ability to generate organically the assets to hit $5 billion. I also know it's possible to organically fund ourselves to that size, I'm not sure that our organic in the short term, or if we achieve that in, let's say, the next couple of years, I'm not sure our organic deposit growth will be of the type of deposits that drive shareholder value. While I think it's theoretically possible to achieve it, if we're going to maximize shareholder value at that size and at our projected run rate of a 1.5 ROA, we think we need to do that with transactional accounts.
In order to generate what is essentially another $2 billion in deposits, that will depend upon M&A, especially to create and for Triumph to have the type of deposits that we find attractive and investors find attractive.
Okay. Shifting a little bit to the cost savings, what type of cost savings are you assuming for 2018? Also if you could let me know what type of accretion you're assuming in 2018.
I'll touch on the cost savings, and then I'll let Bryce touch on accretion. We did not project any cost savings for the nine branch deals, the nine bank branches we acquired from Independent Bank. Is it possible that we will pick up some? Possibly, but I don't think it's meaningful. For the Valley transaction, we're projecting 27.5% savings on non-interest expenses or $2.75 million that we think will phase in over four quarters. A large part of that'll come in the first two quarters, but there are things we won't finish, of course, until probably Q4 of 2018.
Jared, this is Bryce. I'm not positive I'm clear on your question. You're asking about EPS accretion for 2018?
No, I'm sorry. Discount accretion.
Loan discount.
Oh, I'm sorry. Yeah, EPS accretion. You're basically saying that the I'm sorry, EPS accretion. From your comments, it sounds like accretion doesn't actually happen until 2019. Is that accurate?
Yeah, it's pretty flat to EPS, I think in 2018, considering the transaction costs and things associated and there's time for the synergies to work in. Okay?
Okay.
then it's about 2% through now 2019.
Okay. Then finally, just for me, what do you anticipate combined goodwill and intangibles to be post both of these deals?
Give me just a second here, we're going to add Of course, anything we're doing there is still pretty preliminary at this point. Our CDI mark's not really final final, still a little squishy.
Sure, yep
the final mark. We'll be adding, Rick is digging for me over here. I think we'll get to about $70 million in total intangibles, I believe.
Yeah, I've got $19 million.
I'm not sure if you got that, Jared.
Sorry.
Roughly 70. We think we're picking up roughly $19 million through these transactions, so it'll bring our total to approximately $70 million.
Great. Thank you.
The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks. Good morning.
Hey, Gary.
Just a couple of follow-up questions. On the expense side, is there any overlap now between the Valley branches, the pending branch deal, and your existing branches that branch consolidation would be part of cost savings?
Yeah, Gary, certainly we haven't identified something specifically there. If you look on a map, you can see that there are some branches in very close proximity to one another. That's something we will continue to evaluate of what the most efficient way is to distribute these 32 branches and whether it needs to be 32 branches or not, whether we could have some consolidation is something we'll continue to evaluate and talk about in the near future.
Is it reasonable to assume, though, that that prospect is not embedded in your cost save assumption currently?
Yeah, that's safe to assume.
Okay, great. On the loan discount on the Valley deal, because I don't think I saw a projected discount. If I missed it, I apologize, but can you tell us what you sort of project that at?
Yeah. Projected discount was 4%. That was our loan mark, which is $6.8 million, I think roughly. Of course, that will move around some as we finish it up, but that's pretty close, which we viewed as a pretty conservative credit mark on that loan portfolio. That's what we felt was warranted.
Okay. Then last question, I know there were some questions asked about 2018 accretion. I wonder if you could characterize if you don't consider the branch transaction previously announced and only consider the capital raise and the Valley deal, what the projected EPS impact would be for 2018.
I'll be honest, I have not run that calculation, Gary.
If you didn't, I think what we could answer for you is if on a standalone deal on Valley without a capital raise, you would expect roughly $0.18 in 2018, which would be 8.5% without transaction costs. We'd obviously need to adjust that for the shares we just issued. Maybe that gives you a fair place to start.
Okay, great. Thanks for the call.
Again, if you have a question, please press star then one. The next question comes from Steve Moss with FBR. Please go ahead.
Good afternoon.
Hey, Steve.
Most of my questions have been asked, but I was just wondering, with all the acquisition activity in Colorado, does this narrow your M&A focus in any way?
Well, sure. Our primary markets where we're focused are in the Southwest. I would call those Colorado and Texas would be the markets where we spend most of the time looking. That's not exclusively where we look, as we certainly look at opportunities to fill in or expand adjacent to our Midwestern network in Iowa and Illinois. Colorado and Texas and, of course, what we already have in Colorado, two branches are in far western Kansas. There's some that slide just out of that specific state. Colorado and Texas are the primary geographies where we're spending most of our time looking for opportunities.
Okay. Thank you very much.
You got it.
The next question comes from Brett Rabatin with Piper Jaffray. Please go ahead.
Hey, guys. Good afternoon.
Hey, Brett.
Wanted to first ask, this deal is for cash, obviously they wanted cash, but why not any stock component to the deal? With Valley, will there be any expenses in the first half of 2018 related to tying up people with contracts? What are you assuming for any deposit or loan atrophy for following the deal?
Yeah. There's three questions there. I'll take the first one on an all-cash deal. The O'Dell family has owned 85% of this bank since 1971. I think when you look at where they are in where they want to be, I think they're ready to move on. I think our ability to offer all cash actually was one of the things that helped us win this deal. Of course, we had courted the O'Dells before they even ran the small process to involve us. On the second question, my view is that Jim O'Dell and his daughter, Donna, who is the CEO, were a large part of the marketing effort for that institution. They're extremely well-known in those markets. Certainly Jim is retiring, as is Donna. Jim is retiring immediately.
Donna will stay on with us to help and even be involved, hopefully, in an advisory board role for some time. Having them still connected to the institution, we think is helpful. You're not going to see a material expense beyond that for tying up employees there. Certainly, we've entered into agreements with some of them, but it's not at a level that would be material to Triumph's expense ratios as a whole. The third part of that question, as far as losses in deposits or loans, I don't think we've modeled meaningfully a loss of either. We also haven't modeled meaningful loan growth or deposit growth.
Okay. Thanks for the color.
Again, if you have a question, please press star, then one. This concludes our question and answer session. I would like to turn the conference back over to Aaron Graft for any closing remarks.
Thank you all for joining us today. We look forward to speaking with you again soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.