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Edited Transcript of TBK earnings conference call or presentation 18-Apr-19 12:00pm GMT

Q1 2019 Triumph Bancorp Inc Earnings Call

Dallas Apr 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Triumph Bancorp Inc earnings conference call or presentation Thursday, April 18, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Aaron P. Graft

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

* Luke Wyse

Triumph Bancorp, Inc. - SVP of Finance & IR

* R. Bryce Fowler

Triumph Bancorp, Inc. - Executive VP, CFO & Treasurer

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Conference Call Participants

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* Bradley Jason Milsaps

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Brady Matthew Gailey

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Gary Peter Tenner

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Jared David Wesley Shaw

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Matthew Covington Olney

Stephens Inc., Research Division - MD

* Stephen M. Moss

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Triumph Bancorp First Quarter 2019 Earnings Conference Call and Webcast. (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 of Finance & IR [2]

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Good morning. Welcome to the Triumph Bancorp conference call to discuss our first quarter 2019 financial results. Before we get started, I'd like to remind you that this presentation may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement.

If you're logged into our webcast, please refer to the slide presentation available online, including our safe harbor statement on Slide 2. 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. I'm joined this morning by Triumph Vice Chairman and CEO, Aaron Graft; our Chief Financial Officer, Bryce Fowler; and Dan Karas, 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?

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

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Good morning. For the first quarter, we earned net income to common stockholders of $14.8 million or $0.55 per diluted share. Return on average assets for the quarter was 1.33%. First quarter net interest income was down $3.6 million from Q4. Loan yield declined 15 basis points to 7.99% and the cost of total deposits increased 8 basis points to 99 basis points. Net interest margin declined 19 basis points to 6.15%. We accreted $1.6 million of loan discount in Q1.

Our first quarter loan growth was very soft and the drop-off in factoring caused our net interest margin to compress. This has been consistent over the last 5 years and it was especially so this year. Our factoring portfolio shrunk due to reduced individual invoice sizes and reduced utilization. Our ABL portfolio also shrunk due to payoffs. Neither of these were surprising occurrences, but it was a bit surprising by the order of magnitude.

On the positive side, our commercial real estate portfolio grew by 10% in Q1 and continues to perform exceptionally well. A second positive note is that our current loan pipeline for Q2 closings is between $300 million to $400 million, which will be our largest organic growth quarter ever. That growth is showing up in multiple lines of business, which is encouraging. As a result of that growth, much of which will come towards the end of the quarter, our provision expense for loan growth will be a drag on earnings per share in Q2.

In Q1, total factoring revenue at Triumph Business Capital decreased $4 million quarter-over-quarter or 13% to a total of $25 million. The decrease in revenue was driven by a 14% decline in purchases to $1.3 billion during Q1. The number of invoices purchased decreased 92,000 from Q4. We purchased 790,000 invoices total in Q1. This is illustrative of the drop in utilization as many of our clients park their trucks for part of the quarter due to noncompelling prices, bad weather and vacations. None of this is new or unusual, but it is exacerbated this year coming off the record year we had in 2018.

Average transportation invoices decreased $84 to $1,541 or 5%. This contributed to a $54 million decline in receivables factored at Triumph Business Capital for the quarter. We can't control either invoice sizes or utilization, but with respect to what we can control, I'm encouraged that the number of active clients increased by 191 clients to a total of 6,382 clients during the first quarter. Not all clients generate the same amount of revenue. Our smallest clients generate, on average, less than $500 a month in revenue, although the yields are very high. Some of our largest clients generate monthly revenues well into the 5 figures, with yields in the high single digits.

Net client growth matters, but it also matters that we grow the right mix of clients, which will translate to a greater volume of purchased invoices. I expect us to continue to perform well this year on these controllable variables, which will create value for the long term.

Perhaps the biggest news for Triumph Business Capital this quarter was the hiring of Geoff Brenner as CEO. Geoff will join our other senior leadership team, including George Thorson and Steve Hausman. In addition to being a great cultural leader, Geoff is going to bring greater discipline and metric-based performance analysis into this business. Given that we expect to purchase approximately 4 million invoices this year, even small efficiency improvements in each part of the invoice purchasing and collection process can have a material impact on our overall profitability and customer experience.

For TriumphPay, we have 130 clients utilizing the TriumphPay system, up from 113 clients last quarter. During the first quarter, TriumphPay processed 114,000 invoices, paying 23,000 distinct carriers approximately $141 million. We continue to believe everything we have said about this business for the past several quarters. We have a pipeline of freight brokers in the queue to join the system, and we continue to work with some of the largest third-party logistics companies in the country to become TriumphPay customers. We also continue to develop the technology to provide more flexibility and features to third-party logistics users and truckers utilizing the system.

Our asset quality remained solid. All of our reported asset quality metrics were flat or down versus December 31, and net charge-offs to average loans for the quarter were 3 basis points. Our loan-to-deposit ratio at quarter end increased to 109%. This ratio was inflated approximately 9% by our use of Federal Home Loan Bank advances to fund our mortgage warehouse lines. Total deposits declined by $136 million in the first quarter. Over $100 million of this decline was event-driven or intentional, which we do not foresee repeating. That being said, we have work to do on the deposit front. We are in the process of overhauling our retail product offerings and sales efforts. We have recently launched a major upgrade to our Treasury Management capabilities, which we expect to start growing balances this quarter and throughout the remainder of the year. Finally, we have broken ground on our new banking center in the heart of Dallas, which we hope to open by the end of this year. We expect this to be our largest branch shortly after opening.

First quarter expenses were slightly better than the $49.5 million estimate we provided in our last earnings call. We estimate that noninterest expense will increase to $51.5 million for the second quarter of 2019. We now expect full year expenses of $202 million, about 1% above our projection given last quarter. For noninterest income, we had approximately $400,000 of other noninterest income in the quarter that we do not expect to be recurring.

During the quarter, we purchased 247,312 shares into treasury stock at an average price of $30.51 for a total of $7.6 million. We believe our shares are a good value at these prices. However, we must balance that opportunity to buy back our shares versus making investments to grow our business, particularly on the deposit front. In the absence of a transaction, I suspect we will continue to repurchase our shares throughout the year if, in our view, the stock remains undervalued.

A 1.33% return on average assets is not a bad start relative to our peers, but it is not where we intend to be. We have a long ways to go to achieve our goal for Q4. A 1.8% return on average assets is where we believe we can run our business annually once we are fully optimized. Once we arrive at that optimization, we will still experience the seasonal variances we have historically encountered. We continue to work towards achieving a 1.8% ROA by Q4 of this year. We will need the transportation market to rebound in order to achieve that goal. In the past few years, that rebound has been strong. It remains to be seen how this year will unfold. Whatever the case, we won't compromise on credit quality in order to make a short-term gain that can lead to long-term consequences.

More importantly than what we do in Q4 of this year is where do we think we can run the business for the long term. As I said, we believe that we can run a full year 1.8% ROA once the initiatives like Treasury Management and other retail programs are fully functional and with TriumphPay becoming a net contributor, which we expect late this year or early next year.

My goal for 2020 is for us to achieve a minimum of a 1.65% full year return on average assets, which will likely include a few quarters at 1.8% or better, and for 2021, to achieve a full year 1.8% return on average assets.

With that, I'll turn the call back over to the operator for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Matt Olney of Stephens.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [2]

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I want to start in the factoring segment. I think you guys added 191 new clients in the business, which is good growth, but still a slowdown from the pace that you guys experienced in 2018 that was closer to around 300. Could you talk about that slowdown? And is this a reflection of market saturation, seasonality or what do you think it is? And what do you expect this number for the rest of the year?

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

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Yes, Matt, the -- as far as what it will end up being for the rest of the year, I hesitate to make a specific projection. I will say that the pipeline is still very full. So I don't view that the onboarding of 191 net new clients is that -- doesn't feel like a material deviation from last year. I will just say that everything this year so far feels a lot more like 2017 did than 2018. And 2018 was the high watermark for the spot market for a variety of reasons.

And so what we're feeling now is still better than the historical averages, but more like 2017, and I think that holds true with average invoice sizes. I also think that holds true with how much of the market Triumph Business Capital continues to capture. So I suspect we will have a year of net client growth that won't materially deviate from what we've done in the path -- past on absolute numbers, on percentages. Of course, as we grow the percentage gets smaller.

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Matthew Covington Olney, Stephens Inc., Research Division - MD [4]

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Sure. Okay. That's helpful. And then, Aaron, you mentioned that the long-term ROA for the full year remains that 1.80% range, but that would assume a full optimization. Can you just kind of clarify full optimization? I think you mention Treasury Management fully onboard as well as more contribution from TriumphPay. Can you put some more numbers around kind of what that could mean for TriumphPay?

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

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Well, we're not going to break out TriumphPay at this time for competitive reasons other than to say that, by the end of this year, it will be very close to breakeven, if not swinging above that number. It depends upon some large customers who we're in dialogue with. Once it swings, it starts to swing pretty dramatically, but you're just talking about a long sales cycle with some of these very large freight brokers that we're now coming into the later innings with.

So I mean I think, TriumphPay what you'll end up seeing there, Matt, is if you take our Triumph Business Capital, our factoring business, as we've said many times before, is between a 5% to 6% pretax ROA line of business. We think TriumphPay is probably more like a 3.5% to 4% pretax ROA business. So as you start to see scale come in that business, it's obviously going to have the same or similar effect on our overall net interest margin and revenue growth that Triumph Business Capital has had in that it's very different than our other lines of business as far as yields and margins.

As far as for a full year 1.8% ROA, what we need and the relative size of where this organization sits is we're going to have loan growth this year between $500 million and $700 million. That incremental funding cost to deliver that, we need to be getting through channels other than just the highest rate market, highest mean the highest advertised rates in the market. So one of the things we need to help with the 1.8% ROA is generating between up to $100 million to our Treasury Management and retail offerings at prices that are very different than the highest dollar incremental time deposits you can go out and get right now.

And so with that, which we think will continually get better as we slowly compel existing clients onto our Treasury Management platform and do a better job of marketing in our -- throughout our retail network, we think you'll see improvement there because without doing that, you're going to see deposit costs creep 6 to 7 basis points a quarter for the foreseeable future. So we need to have that in place to protect our net interest margin above 6%, which we think we can do.

So fully optimized for a full year, Matt, which I'm saying is 2021 to be at a 1.8% ROA for a full year, you're going to have some quarters in there that are probably more like a 1.6% and you're going to have some quarters that are like a 2% ROA. And that is just by virtue of the fact that 25% of our revenue, more or less, is tied to the spot freight market, and we can't control that. All we can do is efficiently serve that market. But even with the volatility in that market, it remains, by a wide margin, our most profitable business.

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Operator [6]

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The next question comes from Brady Gailey of KBW.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [7]

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Well, I know last quarter we talked about the net interest margin possibly seeing some mild expansion year-over-year, 2019 versus 2018. Now I know the -- that outlook on rates has changed pretty dramatically, the yield curve has flattened. How are you all thinking about the margin for 2019?

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Aaron P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [8]

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I think Brady, we're going to finish the year with a net interest margin of around 6% unless we see unusual or outsized growth in Triumph Business Capital. So that would be a very slight contraction over where we sit now. I think you will see it probably contract a little more in Q2 and then start to expand towards the latter part of the year, back up. And what the actual number ends up being relative to that 6% mark, I don't know. But if factoring stays where it is now, I think you're looking at something right around the 6% number.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [9]

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Okay. And then you bought -- you repurchased about 1% of the company this quarter. It sounds like you'll continue to be active on that front. How do you think about the magnitude of how much stock you want to buy at this level?

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Aaron P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [10]

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Well, I mean we live this company day in and day out, and the opportunity to buy our stock back at less than 10x forward earnings remains compelling to me every day. What -- it's not about the order of magnitude of what we buy back because we think we have the capital to support that. It's more about, Brady, as we think about what our next M&A transaction might be, those dollars that we spend to buy back our stock, if you end up chewing through a lot of your excess capital and liquidity by buying back your own stock, you don't have that same currency to use in a transaction. And we remain very interested in doing branch deals or deposit-rich acquisitions.

And so it's not about how -- I think the answer on how much stock would we buy back in the absence of a deal would be whatever we could buy that would still keep us above the capital ratios that we've told the market we intend to run this organization at. But we're not going to race to that number as we evaluate a few things that are in our M&A pipeline.

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Brady Matthew Gailey, Keefe, Bruyette, & Woods, Inc., Research Division - MD [11]

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All right. And then you mentioned M&A, maybe just a little more color on -- I mean the stock price is down. You don't have as much power as you once had on the M&A front, Do you think M&A is likely in the near term or is it something that may happen or may not happen?

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Aaron P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [12]

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I mean it's hard for me to distinguish between likely versus may or may not happen. If it happens, what I can tell you, Brady, is it's not going to be a large, pristine organization in the middle of a major metro market, right? That's never been our maneuver and especially not our maneuver now given that where we trade relative to tangible book and what we think it would take to do a deal like that.

So I think it's probable this year that we will announce either a branch transaction or the acquisition of a institution that has a favorable deposit profile that's within or adjacent to the markets that we currently operate. I still think that there is -- that's more likely than not, but there's nothing imminent.

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Operator [13]

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The next question comes from Brad Milsaps from Sandler O'Neill.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [14]

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Hey, I was writing quickly, but I think you mentioned you expected $300 million to $400 million of -- or your pipeline was $300 million to $400 million for the second quarter. A lot of that might close towards the end. I was just kind of curious kind of the pull-through rate on that and how that impacts your sort of annual guidance and what the mix of kind of that pipeline would look like. Is it more community bank assets or more your kind of specially financed-type loans that would have higher yields?

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

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Yes, I think it's probably safe to say, Brad, that 1/3 of it would be commercial finance and 2/3 would be community bank profiles. So fairly similar to where the portfolio is situated now. It's impossible to predict with total accuracy where and when all of this stuff will close. Bryce, I don't know if you have anything you want to add about the pull-through rate or averages versus end of period?

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R. Bryce Fowler, Triumph Bancorp, Inc. - Executive VP, CFO & Treasurer [16]

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I mean it is a very [chattery] thing from period to period on what actually is in the pipeline and closes through. But I think as proportions you talked about there are right. There's a lot in the pipeline and it's looking pretty good. I think that mix is about right, I would expect that range of $300 million to $400 million to be a reasonable estimate.

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Aaron P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [17]

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And Brad, one other thing to add that, one that doesn't get talked about or hasn't been talked about as much that I think you'll start to see this quarter, is you'll start to see ABL go the other way and meaning that I think you're going to see us start to return to growth. And I have hopes for what that group under Dan's leadership is going to accomplish through the remainder of the year. We've spent the last few quarters doing a very deep dive into that portfolio to make sure that we are comfortable with the credits that are there. We've run -- we've exited through payoffs and otherwise the credits we weren't comfortable with.

We now feel like we have that firm foundation to move forward. And I think that's important because the blended yield on an ABL relationship is between -- is around 8.5%. So next to factoring, it's the -- among the highest yielding products that we do. And so to have that back growing again this quarter and onto the rest of the year, alongside of recovery and transportation invoices, invoice sizes and utilization, those are things that are going to help us achieve our goals.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [18]

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Great. And so I mean you still feel comfortable, obviously the timing can change, but the kind of 15%-ish growth for the year in total loans.

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Aaron P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [19]

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Absolutely.

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Bradley Jason Milsaps, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [20]

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Okay. And then I appreciate the additional color on expenses for the second quarter and the year. Just kind of -- I know it's a subtle change, but just kind of curious to the drivers and if you've been able to realize kind of all the cost savings from the deals that you completed last year. I know you're working through a few things in the factoring business in the fourth quarter that may have hurt you on the revenue side with some operational changes. But just kind of curious, have you worked through everything else and any other levers on the expense side that you see out there that could be pulled?

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Aaron P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [21]

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The $202 million number we gave you, Brad, includes most of those levers, so I can't tell you that I have any degree of confidence it will drop below that. There are still some -- that number that I'm giving you still includes some initiatives, which is going to reduce expense line items from -- in certain areas of our business from where they are currently.

On the other hand, I mean, we've done things like add a CEO for Triumph Business Capital. We've got a couple other senior hires around here that we think are necessary to run this institution the way it needs to be run that offset some of those savings. So the bottom line answer, Brad, if the economy -- if revenue slows dramatically, yes, there are probably some things we can do that -- to freeze expenses that would be prudent to do if that's what we find.

If the economy reacts like what we think it will, which is where you start to see some growth and once we figure out what we're doing with China, things normalize, then I'm pretty confident that, that $202 million number is where we're going to land.

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Operator [22]

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The next question comes from Jared Shaw of Wells Fargo Securities.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [23]

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Yes, I think we hit on most things. I guess just on the factoring with the growth rate, I mean, how much -- are you still seeing any pressure from the integration of Interstate or is that fully integrated? When you look at the quarter-over-quarter growth and you've been giving the seasonality, it seems like the slowdown is little more noticeable than we were expecting. Are you getting the full benefit of that acquisition yet? Or is there still some integration opportunity there that could help boost growth in the future?

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

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Yes. Look, I think -- so let me answer the first question on the integration of ICC, we are not done with that yet. And there are some things that we're working on to really streamline that and to make sure we've eliminated all duplicative functions and that we have our colleagues down in El Paso working on the customer base that they're best at serving. And that what we're doing in Coppell, in the Dallas market, is serving the customer base its best at serving and that we -- that we're all marching together and in sync and have achieved those efficiencies. That is not done yet, but I think we are coming into the late innings of that.

That being said, no matter how efficient we run the back office of our factoring operation, it's like pushing on a string when you run into the time in the market, which is generally the first quarter, where freight slows down. When the spot market falls dramatically below the contractual rate market, I mean, we have customers who are going to say, I'm not -- it's not worth it for me to drive. So they'll just park their truck and wait until the spot market rebounds, which can happen very quickly and depends on a lot of factors like weather and things that move very fast.

So we want to be always prepared and as efficient as we can to capture the market opportunity in front of us because it's so important to our bottom line. But being efficient on the backend has nothing to do with what the market -- and we can only buy the invoices that are presented to us, and we can't control that piece of it.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [25]

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So I guess so, but you're not losing customers that were Interstate customers that aren't making a transition on to the Triumph system?

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Aaron P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [26]

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Yes, that's correct. I mean look, we lose customers every month for a variety of reasons. I think the number to look at is that we are adding more and retaining more than we're losing. I have no doubt there have been some ICC customers that as a result of the transition have chosen to go elsewhere, but it hasn't risen to a statistically significant number.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [27]

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Okay. Okay. And then at the -- on the ROA targets, understand the desire and the target to grow the Treasury Management. Did the other component -- did you say that you're looking to transition more the deposit base to overall commercial as well? Was that the second component of reaching the 1.8% ROA target? And if that's the case, do you have any other investments that need to happen to build out that commercial funding base?

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Aaron P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [28]

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No. The -- so the answer to the first question is yes. Because commercial deposit -- I mean the incremental cost of funds -- new dollars in at any scale is starting to get close to 3%. And I think that's that way for everyone. If you're bringing in time deposits without a commercial relationship, well, that certainly is going to put pressure on your margins. So we don't want to depend on that channel to be our primary channel.

On the commercial deposit side, the technology is built. We -- the conversion happened last month. And as with any conversion, you spend a few days fielding phone calls from all your customers, which our team did admirably. And now we have 5 salespeople going out to lean on the customer base we have and the communities we serve to market this new service offering. I mean we've had many commercial finance clients who have never, historically, been deposit clients of this institution because they didn't -- they're not located in our geography, and we didn't have the digital tools and robust things they needed to meet their needs. Well, we now do. So you're going to start to see those deposits show up this quarter.

And so yes, I believe to achieve a 1.8% ROA, you're going -- that -- the journey from here to where we hit that number at $5 billion in assets or $6 billion in assets can't just be funded with expensive CDs. It's going to have to be a mix. And I think we're positioned for that, but we got to go execute on it.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [29]

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Okay. And then just finally for me on the TriumphPay, I understand that you don't want to give a lot of the details around numbers. But when you look at the growth from 113 clients to 130 clients and then you're talking about it being breakeven or profitable, call it, in a year or so, is that more incrementally growth along those lines? Or do we start seeing hockey stick growth at some point in TriumphPay to transition it to a profitable contributor?

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Aaron P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [30]

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Yes. So I think it will most likely be hockey stick when -- with some of the larger customers that we have focused a lot of our attention on. So here's how I think that will play out. Because real life is always more complicated and takes a little longer than it does in a pure Excel model.

What you'll see -- the first hockey stick you'll see is a number of invoices flowing through the system and the amount of carriers we're paying through the system, which we're disclosing to you every quarter. And when you see that, I think within a 90-day lag of that and it will continue to get better as you'll start to see the quick pay adoption ratio. In other words going -- transitioning from just paying all these carriers on behalf of our freight broker clients to actually having a significant portion of these carriers adopting the quick pay, which, in effect, is like a factor perceivable for us.

So at -- and those are going to very, very closely correlated with one another because we -- in our testing and analysis, we know what the quick pay adoption ratio is relative to the total universe of payments we're making. So I think we're going to breadcrumb that for you all. You'll -- like -- I mean it was 15% quarter-over-quarter growth as far as number of clients, and we have a lot in the queue and some large ones in the pipeline. So as you see that number go up, you'll start to see the net funds employed relative to the TriumphPay channel go up, which will become a more and more meaningful contributor.

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Operator [31]

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The next question comes from Steve Moss of B. Riley FBR.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [32]

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I guess with regard to -- I guess one thing on the provision cost for the quarter, should we think about the reserve ratio basically staying stable or maybe ticking up a little bit given the late quarter growth that you anticipate?

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R. Bryce Fowler, Triumph Bancorp, Inc. - Executive VP, CFO & Treasurer [33]

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This is Bryce. I think with -- I would expect it to be pretty stable from here. I think the mix of product coming on is going to be similar to what we have today. If we have a big jump in Triumph Business Capital there, it could go up a little bit, but I wouldn't expect that to be measurable.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [34]

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Okay. That's helpful. And then on the margin, Aaron, you talk about a 6% margin. I was wondering, this quarter looks like the yield on factoring receivables came down a little bit, still up versus a year ago levels. But are you seeing some extension of the terms when it comes to receivables and is that an impact on your margin guidance?

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Aaron P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [35]

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No. It's -- I don't think if you're -- you're not seeing the contractual -- or let me say it another way. The overall portfolio is still turning in just over 30 days. So that hasn't changed. There are certainly customers, shippers that negotiate longer payment terms with carriers, which, of course, affects our yield on those, but that's been going on since we've been in this business. I think there's a couple of things at play if you just look at the overall -- if you take a longer look at Triumph Business Capital and the first would be, as we've grown and become more sophisticated and able to serve larger and larger clients, we have some factoring clients now who have the yield profile on their portfolios is in the single digits, which was unheard of when we started in this business.

On the other hand, they're selling us a significant scale of receivables on a monthly basis and so we can service those more efficiently. So that'd be number one. Number two is it's just a very competitive market. I mean the technology has leveled the playing field a bit, and that's why we continue to invest to stay ahead. And so you've seen that your smallest customers go from a 4.99% or just call it a 5% discount per purchased invoice to a 3% to 3.5%. So when you do that, on a growing sample size, of course, the yields come down. I mean I'm actually very proud of the fact that yields still hanging around 20% in this business given just those 2 factors.

So beyond that, what we see for the rest of the year, I don't think you're going to see the yield profile change. What we're all hoping for, and I think you're starting to see, although it has not, let me be clear to everyone, it has not snapped back dramatically. But what we are starting to see is the slightly increased utilization and average invoice sizes slightly better.

Now we're hopeful that due to a variety of factors, as we get later on into the spring and into the summer, it will come back more strongly. I don't believe at this point we've -- I think it is unlikely we will get back to the $1,800-plus invoice sizes we saw last year. Now we can still make a lot of money in this business between $1,600 and $1,700 average invoice sizes. But it does not appear to us at this point that we will get back to those high watermarks of last year.

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Operator [36]

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(Operator Instructions) The next question comes from Gary Tenner of D.A. Davidson.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [37]

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First, just a point of clarification on your margin commentary. Were you suggesting a 6% margin by the end of the year or 6% for the full year if there was no pickup in spot rates?

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

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I think full year.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [39]

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Okay. For the full year. And then as it relates to spot rates, and you've just sort of alluded to this a bit, Aaron, but we have not really seen a pickup yet kind of early in the second quarter. Oil prices are certainly higher now than they were in the first quarter and at the tail-end at the fourth quarter. Can you talk about any underlying dynamics, other than the fact that we had some weather issues in the first quarter that might preclude spot rates from moving higher? Any changes in sort of transportation volumes, anything that would be indicative of a broader sort of economic slowdown?

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

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Right. And we spend a lot of time thinking about this, Gary. So the first thing is you got to make sure that our comparative set is based on -- we got to set the comparison group right. I think last year, and I don't think I'm alone in this, in fact, I know I'm not, last year, you had some artificial inflation in the spot markets due to the looming tariff issue with China, so that pulled through a lot of freight. And when, of course, when you pull through a lot of freight like that, the spot markets naturally going to go up because it's got nowhere to go. So that may have artificially inflated where we were last year.

With the start of this year, there's still some of that uncertainty. And you've got -- the weather disruptions have been pretty dramatic for several of our customers. When they're already running thin margins, a lot of them will just -- if they believe there's a potential for a weather delay, they just won't drive the truck because they're not going to make any money on that haul or they're concerned they won't be able to find a profitable backhaul after they drop the existing load.

So those are some factors of weighing apart, I think, from what the overall health of the economy. What we're seeing, and we're not economists, but what we're seeing is, like I said, something that looks more like 2017 than 2018, which is not indicative to us of a recession in the next 12 months. It feels like there's going to be growth, it may not just be growth at quite the same pace we saw last year. And that's really -- and that's as clear as our crystal ball is at this time.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [41]

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All right. And then just last question. As it relates to the high growth in the community banking segment, good growth in the first quarter, you talked about the pipeline going into the second quarter. Have you guys put your foot down on the gas at all in that business because of maybe slower pace of growth in the commercial finance business or is it just timing of kind of some success there?

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Aaron P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [42]

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I think a lot of it is timing. A lot if it continues to be performance on our commercial real estate group, and they built a reputation for being easy to deal with and good partners. And so we're seeing a lot of very successful developers become repeat clients because we treat them the way we would want to be treated. We are pushing for growth in our community bank, but like the discussion I had with our team yesterday, you can't just have in the community bank loan growth, you've got to have total relationship growth.

And so we're not going to just go out and grow loans without paying attention to whether these customers have deposit balances with us because you can't get to the sort of numbers we have set for ourselves as a goal with growing one without a relationship on the other side. So I would say, on the whole, the reason you're seeing so much more growth in the second quarter is just some stuff that we had hoped might happen in the first quarter slid to the second quarter. And -- just -- I think business is building a little for us.

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Gary Peter Tenner, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [43]

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And in the commercial real estate segment, is there a particular driver for you that you've had outside success in?

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Aaron P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [44]

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No. I -- it's -- we don't do a lot of construction. So you're talking about -- yes, we're doing multifamily, industrial, some office. We have a group of, as I've said before, customers who we've now done multiple deals with, who are -- we're comfortable with the leverage ratio they apply to projects they're doing, they're comfortable with us. And so it's just like anything in life, it's getting connected with the right people doing the right things. And so it's as much relationship as it is a single-product type.

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Operator [45]

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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 P. Graft, Triumph Bancorp, Inc. - President, CEO & Vice Chairman [46]

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Thank you all for joining us today. We look forward to speaking with you again soon.

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Operator [47]

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