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Edited Transcript of TBK earnings conference call or presentation 20-Apr-17 1:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Triumph Bancorp Inc Earnings Call

Dallas Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Triumph Bancorp Inc earnings conference call or presentation Thursday, April 20, 2017 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Luke Wyse

Triumph Bancorp, Inc. - SVP, Finance & IR

* Aaron Graft

Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO

* Bryce Fowler

Triumph Bancorp, Inc. - EVP, CFO & Treasurer

* Dan Karas

Triumph Bancorp, Inc. - Chief Lending Officer

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Conference Call Participants

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* Brad Milsaps

Sandler O'Neill & Partners - Analyst

* Christopher Nolan

FBR & Company - Analyst

* Gary Tenner

D.A. Davidson & Company - Analyst

* Jared Shaw

Wells Fargo Securities, LLC - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Triumph Bancorp, Inc. first-quarter 2017 earnings release and conference call. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to Luke Wyse, Senior Vice President of Finance and Investor Relations. Please go ahead.

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Luke Wyse, Triumph Bancorp, Inc. - SVP, Finance & IR [2]

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Good morning. Welcome to the Triumph Bancorp conference call to discuss our first-quarter 2017 financial results. I am Luke Wyse and I would like to thank you for joining us this morning. I'll go over a few housekeeping items and then hand it over to Aaron Graft, our CEO, to lead the presentation.

Triumph Bancorp filed its first-quarter 2017 earnings release yesterday evening as well as a slide deck and these items will form the substance of our call this morning. If needed, copies of the earnings release and slide deck are available on the Investor Relations section of our website, www.TriumphBancorp.com, or by calling our Investor Relations Department at 214-365-6936.

To begin, I would like to offer a few reminders. Some of the remarks made today will constitute forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. We intend such statements to be covered by the Safe Harbor provisions for forward-looking statements contained in the act.

We caution you that forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results or events may differ materially from those expressed in or suggested by the forward-looking statements.

Any forward-looking statements made by Triumph on this conference call speak only as of today. New risks and uncertainties come up from time to time and it is difficult for Triumph to predict these events or how they may affect it. Triumph has no obligation and does not intend to update any forward-looking statements after today except as required by applicable law.

On this call we may discuss a number of financial measures considered to be non-GAAP under SEC rules. Reconciliations of these financial measures with GAAP are included in the earnings release and slide deck filed yesterday evening. At the conclusion of our remarks, we will open the telephone lines for Q&A. With those reminders, I would like to turn the call over to Aaron. Aaron?

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [3]

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Thank you, Luke. I will discuss the material items noted in our earnings release and give you some thoughts on our first-quarter results. Bryce will cover a few additional components of the financial results and then we're happy to take your questions. Let's start with the two items we called out in our earnings release that we consider unusual and noteworthy.

First, we completed the sale of TCA, our asset management subsidiary, on March 31. This transaction resulted in a pretax gain on sale of $20.9 million. Offsetting this gain, we incurred $4.8 million in incremental compensation costs to recognize TCA team members for their contribution to this transaction, as well as 325,000 of other indirect transaction-related costs.

On the whole, this transaction generated a net contribution to after-tax earnings of $10 million or $0.53 per diluted share. To put this transaction into perspective, TCA contributed approximately $0.04 per diluted share on an after-tax basis for the entire 2016 fiscal year.

Notwithstanding the nice multiple on earnings, the logical question is why did we sell? There were three factors in this decision. First, the risk retention rules that went into effect at the end of 2016 make our growth of this business as an off-balance sheet business unpredictable at best and impractical at worst.

When we founded this business, our intent was for it to be a fee income business with minimal balance sheet impact. The risk retention rules turned it into a balance sheet business, and whatever our thoughts are about the efficacy of the risk retention for CLO assets, we were faced with relying on third parties to issue new CLO securitizations and then hoping for them to hire us as a service provider. We found this program to be too unpredictable to commit to it for the long-term.

The second reason we sold is that we found the sale price to be attractive in light of our ability to recycle that capital. We believe we will have opportunities to deploy the capital created in this transaction into an acquisition in the near future that will be accretive for our shareholders.

The last reason we sold is that it simplifies our business model. We are now entirely focused on community banking and commercial finance. We expect that to remain the same for the foreseeable future. We do thank our TCA colleagues and wish them the very best in their new endeavor.

The second material item of note relates to our credit results for the quarter. We recorded a provision for loan loss of $7.7 million. The total provision expense is significantly larger compared to our historical standards and is disappointing. But while it is disappointing, we do not believe it is a trend.

We recorded total net charge-offs of $4 million and an additional net increase in specific reserves of $1 million. Approximately $1.4 million of the charge-offs had specific reserves previously recorded. Five individual loan relationships make up the majority of these adjustments contributing $3.1 million of charge-offs and $1.8 million of additional specific reserves.

We have talked about some of these credits on prior calls and have reported them as nonperforming assets. Of these five credits, two of the loan relationships were originated by our healthcare finance unit and three were acquired in the ColoEast acquisition.

The charge-offs and specific reserves related to the healthcare credits represent substantially all the remaining balance sheet exposure we have to these two borrowers and we believe there is no additional exposure on the three acquired ColoEast credits.

In addition, our ALLL increased by $2.3 million due to increases in the general loss factors recorded against the remaining portfolio to incorporate the first-quarter charge-offs into our overall estimates for the allowance for loan loss.

While we believe the problem loans are isolated, the outcome is disappointing. Some of these losses were due to underwriting, but a significant portion were due to fraudulent activities of two borrowers in our healthcare ABL business. We pride ourselves on the operational integrity and intensity of monitoring of our entire ABL portfolio, including maintaining cash dominion to mitigate losses due to fraud.

With respect to one healthcare loan in particular, we did not execute up to our standards and, as a result, we paid for it with this loss. We consider it expensive tuition that has caused us to revamp and continue to improve our procedures in this area. While we are working to realize some recoveries related to these loans, we are also focused on taking actions to improve all of our credit ratios.

Now on to other thoughts for the first quarter. We have historically experienced a seasonal slowdown in the first quarter in several of our lending businesses, particularly at Triumph Business Capital, our Factoring subsidiary, and in our mortgage warehouse lending. The period-end balance of mortgage warehouse loans declined by $60 million this quarter. In fact, excluding mortgage warehouse lending runoff, total loans grew $70 million or 4% this quarter.

Triumph Business Capital generated strong volumes in the first quarter despite the seasonality. TBC fared better this year than in the first quarter of the two prior years which we find encouraging. To put that into specific context, the dollar value of receivables purchased did decline from the fourth quarter but by less than 1%. We experienced declines in receivables purchased of approximately 10% in the first quarters of 2015 and 2016.

Triumph Business Capital purchased 376,000 invoices or a dollar value of $521.8 million this quarter. We added 103 net new clients in the first quarter to a record high of 2,539 clients at March 31, an increase of 17% over the prior year. The average invoice size purchased this quarter increased to $1,388 versus $1,366 in the prior quarter.

As a result of our continuing growth in clients and invoice size, total purchases in Q1 of this year versus Q1 of 2016 grew a very respectable 37%. We remain very pleased with this business, its growth and potential.

On the M&A front, we continue to engage with potential strategic and opportunistic acquisition targets. As soon as we are ready to announce something, you will be the first to know. You can expect any deal or deals will be along the lines of what we have said in the past: an in or near market franchise or branch deal that improves our deposit footprint; a strategic move into Texas; or a commercial finance company that will tuck into our existing lines of business.

At this point, I'd like to turn the call over to Bryce to provide his thoughts on our financial performance in the first quarter. Bryce?

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Bryce Fowler, Triumph Bancorp, Inc. - EVP, CFO & Treasurer [4]

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Thank you, Aaron. For the first quarter, we earned net income to common stockholders of $10.3 million, or $0.55 per diluted share. Excluding the TCA transaction, which contributed $10 million of bottom-line impact, we earned adjusted net income to common stockholders of $315,000 or $0.02 per diluted share. Tangible book value per share increased 6% or $0.74 to $13.63.

We presented a recap of the gain on sale of TCA in our earnings release. With regard to the sale of TCA, I know many of you are interested in knowing the level of revenue and expense TCA has historically contributed in our income statement.

In the first quarter, TCA generated $1.7 million of asset management fee income, offset by operating expenses of $1.3 million, resulting in approximately $400,000 of pretax earnings. Operating expenses were comprised primarily of $900,000 compensation and approximately $200,000 of intangible asset amortization.

Separate from the TCA business that was sold; we have a $21 million investment in a CLO warehouse in which we realized $964,000 of earnings and other noninterest income in the first quarter. These invested funds will be returned to us upon the eventual issuance and closing of the CLO.

Net interest income for the first quarter decreased $1.7 million or 5% over the prior quarter as average balance of loans declined $9.7 million. Yield on loans was 7.15%, a decrease of 21 basis points from the fourth quarter. The prior quarter included elevated levels of purchased loan discount accretion associated with certain loans from the ColoEast transaction, which contributed to this quarter's decline.

Excluding the impact of purchased loan discount accretion, the adjusted yield on loans was up 11 basis points to 6.93% in the first quarter. Our commercial finance loans increased to 35% of total loans, up from 34%.

As of March 31, we had $14 million of remaining loan purchase discount of which we currently expect $11.3 million to accrete into income over the remaining life of the acquired loans. Of this accretable amount, $3.7 million is expected to accrete by the end of 2017.

Regarding interest expense, the cost of total deposits increased by 4 basis points this quarter to 58 basis points. Our total cost of funds increased by 6 basis points, primarily to higher market rates of interest, primarily on our debt instruments and a modest shift towards CDs. Overall, our adjusted net interest margin increased 4 basis points to 5.19%.

We earned noninterest income of $27.3 million for the first quarter or $6.4 million excluding the TCA gain on sale compared to $6.2 million in the fourth quarter.

Noninterest expense in the first quarter, excluding TCA sale-related costs were $29.7 million. This includes an elevated level of troubled loan, legal and related expenses of $839,000. We incurred approximately $1.2 million of expenses that I would not consider to be additions to our go-forward run rate.

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

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [5]

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Thank you, Bryce. At this time we would like to turn the call back over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Brad Milsaps, Sandler O'Neill.

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Brad Milsaps, Sandler O'Neill & Partners - Analyst [2]

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Hey, good morning, guys. Bryce, maybe just first on expenses, I was kind of writing quickly there at the end. Would it be fair to say that a good starting point for the second quarter, or maybe for the first quarter, would be somewhere around $27 million after you take out the $800,000 in professional fees? And then you mentioned, I think, $1.2 million in other things that you wouldn't consider run rate. Is that about a good spot to think about?

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Bryce Fowler, Triumph Bancorp, Inc. - EVP, CFO & Treasurer [3]

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That's pretty close. I would say $27.5 million would be a better number.

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Brad Milsaps, Sandler O'Neill & Partners - Analyst [4]

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Okay. And do you feel like you've gotten most of the cost saves out of the ColoEast deal at this point?

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Bryce Fowler, Triumph Bancorp, Inc. - EVP, CFO & Treasurer [5]

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Yes, as far as the elimination of their costs that we expected to achieve, I think we've done that -- done well with that. We'll still have some chatter in this quarter, for sure. Just continuing the integration, conversion, training, travel-related things and stuff around all that has created some chatter in there.

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Brad Milsaps, Sandler O'Neill & Partners - Analyst [6]

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Okay, great. And I guess, Aaron, back to the asset quality. Do you feel -- you've given the portfolio in terms of the healthcare piece, we've seen a couple banks now with some healthcare loan issues. How do you feel about that business going forward? I know you mentioned lesson learned.

It sounded like this was a situation where maybe some processes weren't maybe followed exactly as you had hoped. I guess can you talk a little bit more about that business going forward and what you've done to make sure that things are shored up there?

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [7]

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Sure. So the first thing is we heard about, as you did, the other banks who, including one here locally who've announced issues in healthcare. And I have no idea what their issues are. Here is what I can say from our side. Nothing from a macroeconomic standpoint has changed materially in healthcare finance.

So if you think about these loans, you are either going to miss because of underwriting issues, either things weren't as you thought they were, or, from an operational issue, the monitoring, the ongoing things that have to happen not only in healthcare finance but in all of our ABL and factoring. It's just a very intense business.

And yes, we -- there were some things that were not done up to our standards. Frankly, I imagine that happens all across the banking universe and a lot of times it never comes to light because you don't have a fraudulent borrower. But in this case, where you had -- we performed below the operational intensity we would like and you had a fraudulent borrower, it caught us.

So, we dealt with it. The decks are cleared. We are not aware of anything -- if you think about the rest of that portfolio, you've got $78 million in outstandings. You've got $2.9 million in general reserves or about 375 basis points against that, and you don't have any substandard loans in there. So we don't -- we're not aware of any big problems coming down the road. I think we've approached it appropriately and conservatively.

And if you look at the performance of our team in our healthcare finance business, they've been in this business for a long time and they certainly have run their business at very reputable institutions with much better metrics than we've experienced these last three quarters.

So we're not -- I've heard what other people have said. We're not going to throw in the towel on the business. We're obviously very, very keenly paying attention to credit quality in it and making sure that we have reaped the lessons learned. But I think it's positive from here.

Like I said, these aren't new issues. You've heard about them, we've gotten to the bottom of them. We cleared the decks. It's time to move forward and I think it's undoubtedly -- this is an area, a growth opportunity area. It just has to be done with excellence. And we didn't do everything with excellence and we intend to going forward.

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Brad Milsaps, Sandler O'Neill & Partners - Analyst [8]

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Great. That's helpful. And just final question on the credit. Were the three loans that came from ColoEast, were those identified originally? Due diligence, was there any discount there? Were those new issues that bubbled up since you completed the acquisition? And kind of curious, any color on the nature of those credits, were they ag related, etc.?

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [9]

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There's a mix, so of everything you just mentioned there is some of that in all of them. Some of them were identified, but as we figured out what the appropriate reserving, we maybe should've been more conservative in how we marked them at first. Some we've seen some issues bubble up that we've dealt with.

You can't point to any one specific thing. There is just -- that group of credits that -- knowing what we know now, we would approach slightly differently, but they are dealt with now. We've obviously had six months to live with that portfolio and gotten to know it better. We don't know everything, but you can imagine with a quarter like this if we thought there were other issues, we would've taken all the medicine we can take.

So, that's what we've done and we'll obviously see going forward. But it was just a mixture of some small things on -- it wasn't one consistent theme. It wasn't, oh, the macro factors in ag have changed and that's what drove all three of them. There are just a couple of unique circumstances in each of them.

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Brad Milsaps, Sandler O'Neill & Partners - Analyst [10]

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Okay, great. I'll jump back in the queue. Thanks.

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Operator [11]

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Christopher Nolan, FBR & Company.

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Christopher Nolan, FBR & Company - Analyst [12]

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Hey, guys. Are you still standing by your ambition for $0.50 EPS by fourth quarter 2017?

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [13]

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Well of course, Chris; I have lots of ambition (laughter).

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Christopher Nolan, FBR & Company - Analyst [14]

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(Laughter) I'm sure.

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [15]

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Look, the $0.50 run rate is still a weigh point on a much longer journey. And it is still my aggressive goal to get there by the fourth quarter. Will we? I don't know. We're not going to make decisions just to manage to that, so let me be clear.

If we miss it because -- by some small amount we're not going to manage to that number because that's a weigh point on the way to what I hope is a $40, $50, $60 share price and that must mean underneath it an earnings per share number that grow substantially beyond $0.50. So that's our goal. That's what we're focused on.

I am -- as you know, I am the optimist and I have -- there is a lot of really exciting things in the queue for us that I think will be great. I think we've used this quarter as an opportunity to clean some things out and we're really excited about where we go.

So yes, we're going to get to $0.50 a share? Will it be in the fourth quarter? I hope so, but I'm not going to lay that down as like the gospel that that's all we are thinking about. We are thinking beyond that and we're going to work really hard to get there.

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Christopher Nolan, FBR & Company - Analyst [16]

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Got it. Thank you. And Bryce, in your comments you were mentioning something about the margin in second quarter. I missed it. Were you guiding for a higher or lower margin or higher or lower discount accretion income?

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Bryce Fowler, Triumph Bancorp, Inc. - EVP, CFO & Treasurer [17]

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We weren't really guiding. I was just kind of commenting on the actual performance levels. The adjusted NIM was up for the quarter. The GAAP NIM was down a little bit. We did see a decline in the dollar amount of the discount accretion. I think going forward, we expect kind of the similar trends we've historically had. As the commercial finance portfolio continues to grow as a percent of the whole portfolio we would expect overall NIM to continue to marginally improve.

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [18]

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Yes, if I can jump on there, Chris, what I would say, something that -- for those who've followed our stock for a while ought to be encouraged about is core net interest margin improved in the first quarter. And that the forces that are causing that to happen are in the commercial finance portfolio growth, and we're really excited about those. We think those will continue to grow.

And so, in an era when I think a lot of people are going to the opposite way on net interest margin, for us I see the opportunity for growth because, as you know, that commercial finance portfolio is just -- generates higher yields and we continue to see great opportunities in there.

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Christopher Nolan, FBR & Company - Analyst [19]

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Great. Okay, great. Thanks for taking my questions.

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Operator [20]

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Gary Tenner, D.A. Davidson.

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Gary Tenner, D.A. Davidson & Company - Analyst [21]

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Thanks. Good morning. Just a couple questions. Bryce, when you were going through your remarks, you mentioned I think on TCA, was it $960,000 or so of interest income from the warehouse? Was that the right number?

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Bryce Fowler, Triumph Bancorp, Inc. - EVP, CFO & Treasurer [22]

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Yes, $964,000.

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Gary Tenner, D.A. Davidson & Company - Analyst [23]

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Okay, and when -- how long should those assets remain on the balance sheet? So when will that close and get removed from the balance sheet?

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [24]

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This is Aaron. We can't really speak to that because that involves the pricing of a private securitization that now we have really no optics into. You would expect that it would be sooner rather than later.

If you followed us in the past, as far as lending into these CLO warehouses has been something we've done. I don't know that that's going to stop now. It certainly has changed with TCA no longer being here, but we certainly understand that market and have relationships.

So whether it's on this CLO or others in the future, it's something we'll continue to look at, but as far as giving specifics of when that warehouse will close, meaning that the actual securitization that Trinitas is issuing has price, we don't pass specifics on that. But I would say we would expect it to be sooner rather than later.

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Gary Tenner, D.A. Davidson & Company - Analyst [25]

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Okay and what was the dollar amount outstanding in that warehouse -- in that facility?

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Bryce Fowler, Triumph Bancorp, Inc. - EVP, CFO & Treasurer [26]

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$21 million. $21 million. I just wanted to also clarify that the income from that is In noninterest income -- other noninterest income.

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Gary Tenner, D.A. Davidson & Company - Analyst [27]

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Okay. That doesn't go through NII?

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Bryce Fowler, Triumph Bancorp, Inc. - EVP, CFO & Treasurer [28]

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It does not. Correct.

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Gary Tenner, D.A. Davidson & Company - Analyst [29]

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Okay, okay, thank you. And then just secondly, to go back to the credit conversation. So you had, apparently, some operational shortfalls, for lack of a better word in identifying those -- some fraud issues maybe earlier. Have you gone through a full review of the healthcare portfolio to make sure all the Is are dotted and Ts are crossed? How have you approached that?

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Dan Karas, Triumph Bancorp, Inc. - Chief Lending Officer [30]

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It's Dan Karas. Good morning. We have -- the issue for which we took the charge-off in the first quarter surfaced in the first quarter of 2016 and we took our first specific provision at that point and we scrubbed that portfolio and the staff and modified those procedures and had that part of our normal process. But we did that within 60 days of identifying the issue.

And so, we've scrubbed the portfolio. We have regular portfolio review meetings. Those are bubbled up both to me and to our Chief Credit Officer. So we have good visibility into the portfolio, its quality and the procedures.

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Gary Tenner, D.A. Davidson & Company - Analyst [31]

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Okay, thank you.

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Operator [32]

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(Operator Instructions). Jared Shaw, Wells Fargo Securities.

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Jared Shaw, Wells Fargo Securities, LLC - Analyst [33]

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Hi, good morning. Looking at the factoring, it was obviously a good quarter in, as you said, what is otherwise a [seasonably] weak one. Was that really just driven by the increased sales opportunity in bringing into those customers? Or did you see -- was there more of a macro change that helped keep Q1 stronger than it otherwise would have for the industry?

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [34]

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Yes, great question. The -- so it seems to me that there were three things. Number one, we had more clients, right? As we take more clients, that obviously helps. Client growth was really good.

Number two, it feels like there was a tad more optimism in the first quarter and that shows up in transportation; it just does because of people spending money buying goods.

And then, of course, you had a 2% increase in invoice size. Invoice sizes are still small -- or lower, excuse me, relative to historically where they've been with -- since we've been reporting publicly, but we did have a slight increase.

So those three factors are the reasons. I just -- I think we have a really great business. We are -- some of the expense that you hear talked about in that $27.5 million run rate is investments in technology and things to position us to be the best in the market. And I firmly believe we're going to get there very soon and we will probably be the largest in the market.

And, we're really excited. It's a business that I think we're really dialed in on. And, of course, it's cyclical and it's going to track the economy as a whole. But I think you are just -- in the first quarter you've just seen the fruits of a lot of labor, a lot of investment, building up a great brand name in the market.

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Jared Shaw, Wells Fargo Securities, LLC - Analyst [35]

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When you look at the invoice size growth, was that due to -- was that primarily due to the change in fuel costs? Or was that actually due to change in rates or fares or however you would describe, you know --?

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [36]

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We really, at the move that we are talking about, it's impossible to really break that down. There was no large shift in either. I think it was just an incremental upwards pressure in both. There is still some tight capacity out there, so we don't really -- I can't scientifically tell you it was one or the other.

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Jared Shaw, Wells Fargo Securities, LLC - Analyst [37]

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And then as you continue to grow this business, is there still opportunity for operating leverage in your model or are you pretty much efficient at this point? And any incremental business is coming on at the, call it, the current cost structure?

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [38]

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Oh, there's -- I mean certainly there is opportunity for incremental leverage, but the incremental leverage opportunity in that business versus our business as a whole are two materially different things. I mean in our factoring business, it's going to be -- maybe you get 10%, 15% more efficient as you grow. That would be outstanding.

I mean the business is already, as you know, incredibly profitable. Whereas as I step back and look at what I think the real story here, the story that hasn't changed is the operational -- operating leverage opportunity at Triumph as a whole, which can get much better as we grow and do acquisitions and integrate.

So, I look for more of that operating leverage to come from other lines of business than factoring, but there is some incremental pick up were we to do an acquisition or -- and/or as we grow organically.

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Jared Shaw, Wells Fargo Securities, LLC - Analyst [39]

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And that actually segues into what I was going to ask next. When you look at acquisitions -- and earlier you had mentioned looking at different business lines as well as whole bank acquisitions.

I mean with your loan-to-deposit ratio fully at 100%, do you really have the opportunity to add more lending without bringing on the funding side of it first? What are some of your funding options I guess if you found a great asset generator but it didn't come with the self funding mechanism?

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [40]

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Well, so, answering the first question or what's embedded underneath all that, look, we believe the three things that drive the value of our stock, not different than anyone else, would be asset quality, return on assets and then core deposit franchise.

And, I think everybody -- or at least I can look at how asset quality -- we dealt with it this quarter, but I mean I see end of period this quarter is better than end of period last quarter, and I'm optimistic about where we go from here. We'll see.

Return on assets, I think you're going to continue to see that grow. But on that last point on core deposit franchise; look, we could buy a factoring company and pull it into our organization and fund it with CDs because the margins are so high, but that's not our goal. We don't think that creates the best premium for the future, nor do we think it's the safest way to grow the bank.

So the stuff we're looking at, the stuff you've heard us allude to and talk about are on both sides of the balance sheet. I mean, there are some specific asset generators we're looking at and then there's some deposit rich footprints we're looking at.

But the specific answer to your question is would it be possible to acquire an asset generator and fund it through our other options which Bryce can speak about? Yes, I mean they can. And I think we're really well positioned to do that.

I mean we just completed a safety and soundness exam which we're very pleased with. We've gotten a lot of things really right. I think we're really well positioned for the rest of this year what we can hopefully announce and acquire and integrate into our operations.

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Jared Shaw, Wells Fargo Securities, LLC - Analyst [41]

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Great. Thank you very much.

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Operator [42]

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Christopher Nolan, FBR & Company.

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Christopher Nolan, FBR & Company - Analyst [43]

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Hey Dan, on your comments earlier, you said the issues in those two healthcare loans emerged in 1Q16. Did you mean 1Q16 or 1Q17?

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Dan Karas, Triumph Bancorp, Inc. - Chief Lending Officer [44]

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16.

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Christopher Nolan, FBR & Company - Analyst [45]

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So --?

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Dan Karas, Triumph Bancorp, Inc. - Chief Lending Officer [46]

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I'm sorry. Go ahead, Chris.

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Christopher Nolan, FBR & Company - Analyst [47]

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Yes, no, so you guys knew about percolating issues for about a year or so on these things?

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Dan Karas, Triumph Bancorp, Inc. - Chief Lending Officer [48]

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Yes, the issue, Chris, is that -- as is the unfortunate case with some workouts, is that the information we uncovered at the outset was not the full story. And as we investigated, engaged counsel and dug much deeper, we uncovered what we believed to be a fraud. And, by the time it surfaced fully in this quarter, felt the need to take that charge-off. So it has been an ongoing workout for about 12 months.

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Christopher Nolan, FBR & Company - Analyst [49]

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Okay, and then there were -- if I understand correctly, there were two fraudulent borrowers or two separate credits which were fraudulent?

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Dan Karas, Triumph Bancorp, Inc. - Chief Lending Officer [50]

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Yes, there was. The other one was not a function of an operational or procedure issue in our healthcare group. It was, frankly, just a straight up diversion of funds and fraud by an unscrupulous borrower.

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Christopher Nolan, FBR & Company - Analyst [51]

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Okay, and then --.

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Dan Karas, Triumph Bancorp, Inc. - Chief Lending Officer [52]

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And [both] -- I'm sorry, Chris.

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Christopher Nolan, FBR & Company - Analyst [53]

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Okay, actually back to Aaron. How do the regulators look at this in terms of when you're looking at it in that potential acquisition -- how do they view your underwriting or your controls internally? Does that create an issue in terms of being able to get approval for the next deal?

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [54]

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Well, most certainly if the regulators lose confidence that you appreciate the risks you are taking, that creates an issue. I do not think we have any issue. I mean if you look at the stuff we've been able to do in the past, at the growth of our commercial finance business, we've always been very upfront owned. When there was an issue, owned it with them, with the market.

You look at some of the things we do and how far afield they are -- take transportation factoring, for example, from what a lot of banks do, and we've quadrupled the size of that business. I can't speak for regulators but I can speak for what our experience has been. And I think that they expect us to have some lessons learned along the way.

And going back to what I said in the opening, the key is to turn it into tuition, to show that -- demonstrate what you've changed. And then the second thing is to be clear and confident, both for ourselves and for our regulators, that these issues we're seeing are not some small wave of a greater trend, where we were overestimating something like missing some macroeconomic movement or just overly aggressive in underwriting.

And we've -- I think we're very comfortable with that. I would hope our regulators are very comfortable with that. As I said, we've just completed an exam. So they certainly have seen all this. And I think that when you see our results going forward, the market can be very comfortable with that.

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Christopher Nolan, FBR & Company - Analyst [55]

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Okay. Thank you for taking my questions again.

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Operator [56]

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Brad Milsaps, Sandler O'Neill.

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Brad Milsaps, Sandler O'Neill & Partners - Analyst [57]

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Hey, thanks, guys. Hey, Bryce, just wanted to follow-up one more time on the expenses. Appreciate the $27.5 million run rate, but you've also got the CLO business dropping out, which I think you mentioned was around $1.3 million in expenses in the first quarter.

Just curious -- I guess those dollars -- those savings there are being earmarked for something else. It just seemed like the expense number was really heavy this quarter and just trying to get a sense of where you can really run. I just want to confirm that the $27.5 million was inclusive of the CLO business falling out of the run rate.

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Bryce Fowler, Triumph Bancorp, Inc. - EVP, CFO & Treasurer [58]

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It is. I think that overall, as we just have talked about, we've got a lot of initiatives from growth companies still going and that's our best guess at this point.

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [59]

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Yes, Brad, I would just jump on that and say, look, could this business be run at less than a $27.5 million run rate for this year? Yes. But with the stuff we're planning on and investing for, just -- I'll give you an example. Just completed a very thorough M&A playbook. We engaged consultants to work alongside us in that, something we wanted the regulators to see.

As we view ourselves being a serial acquirer going forward we want to be as well prepared for that as we can. So that was an investment, and investment in the future. And I think -- we can get down in the weeds as you want, but I think using the $27.5 million number is a good number.

Obviously, with that being the number we are anticipating revenue growth, which we are, both organically and through acquisitions, but we have chosen to invest for the future, and that's our run rate to do that. And obviously now we have to deliver a lot of operating growth to make up for that and create the operating leverage that we need to get to our 1.5% or better ROAA.

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Brad Milsaps, Sandler O'Neill & Partners - Analyst [60]

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Great, that's helpful. Thanks for clearing it up.

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Operator [61]

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This concludes our question-and-answer session. I would like to turn the conference back over to Aaron Graft for any closing remarks.

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Aaron Graft, Triumph Bancorp, Inc. - Founder, Vice Chairman & CEO [62]

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Thank you all for joining us today and we look forward to talking to you again in the future.

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Operator [63]

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