Good day and welcome to the Triumph Bancorp, Inc. Second Quarter 2019 Earnings Conference Call and Webcast.All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [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.

Good morning. Welcome to the Triumph Bancorp conference call to discuss our second 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 statements.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 am joined this morning by Triumph's Vice Chairman and CEO, Aaron Graft; our Chief Financial Officer, Bryce Fowler; and Todd Ritterbusch, our Chief Lending Officer. After the presentation, we'll be happy to address any questions you may have.At this time, I would like to turn the call over to Aaron. Aaron?

Good morning.For the second quarter, we earned net income to common stockholders of $12.7 million or $0.48 per diluted share. Q2 was an interesting quarter. Our financial returns were average to below average for us. However we made significant improvements in our business that we believe will create long-term value for our team and shareholders.If anything, Q2 proved out that our business model is susceptible to revenue volatility due to the short tenure of our assets, particularly our factored receivables purchased from truckers.Loans held for investment increased $223 million or 6% in the second quarter. We have added an additional category to our reporting on our loan portfolios starting with this quarter, which we will call national lending. The loans in this category are not new to us. You can see by the composition by loan product for each of these categories in the investor deck on Slide 9 and tables in the earnings release.Loan growth was diversified as the community bank portfolio grew $54 million or 3%. Most of this growth was C&I lending.The commercial finance portfolio grew $78 million or 7% despite the soft growth in transportation factoring.Equipment lending performance and growth remains strong and we saw nice growth in asset-based lending.National lending includes mortgage warehouse lending, premium finance, and liquid credit. For mortgage warehouse, we had $62 million increase in average balances this quarter or 26% over the prior quarter. The liquid credit portfolio consists of widely syndicated leverage loans. This is a niche line of business we have participated in opportunistically in the past and we intend to do so in the future. We have a small team dedicated to this activity and we expect this portfolio to grow from its current size and to vary over time depending on opportunities in the syndicated loan market…

Thank you. We will now begin the question-and-answer session. [Operator Instructions].Our first question today comes from Brady Gailey with KBW. Please go ahead.

We have another quarter of the average invoice size moving down here. I think it's kind of been this way for at least the last like three or four quarters. Aaron, I heard your comments, you had open the call. It feels like you're thinking that 2Q's level could be a bottom. And as we move to the back half of this year, you could see average invoice sizes go up. And then, I just wanted your take on kind of how that plays into your loan growth expectations. I think last quarter we were talking about kind of a $500 million to $700 million amount of loan growth this year; is that still the right way to think about loan growth in 2019?

Sure. There is a chart if you look, Brady, in the slide deck that we put in this quarter that I think is interesting that shows the high correlation between the spot market and new truck orders and you can see on the far right hand side of that chart, the most recent data you can see the spot rate creeping up. Now whether that trend line will continue is difficult to predict. You've got a lot of different things going on. Freight, the mix shift that happens quarterly within freight for example refrigerated freight really peaks towards July and then starts to taper off, other types of freight pickup.If what it looks like right now it appears spot market is strengthening as we work through this excess capacity. It is not going back to 2018 levels at least in short order. Now again that market moves fast and we're well into that market. But I think overall unless something happens, I would expect the overall spot freight market at least reflected by the invoices, we purchase to be marginally better in the third quarter than it was in the second quarter.With respect to total loan growth and I hope this came clear in what we're saying, we absolutely have the opportunity to grow loans $500 million to $700 million for full-year. I don't know whether we will, Brady. What we really are focused on growing the things that are the most profitable. Our loan pipeline is full; we're just not sure if we're going to open this ticket as much as we talked about. When we're looking at the high cost of incremental funds, I think we're far more interested in approving and growing loans that exceed our internal rate hurdles than just total loan growth. So this was a good quarter for total growth but we're paying a lot more attention to shifting the balance sheet than we are totally growing the balance sheet.

All right. And then a follow-up, so I mean if you look at the growth you experience in 2Q, you also look at the buyback activity you had your TCE ratio went from about 10.4% last quarter down to 9.8% this quarter. It feels like with your currency trading now, now it's trading M&A is less likely for you guys as you look to the buyback as a way to deploy capital and with the stock being even cheaper today than it was when you repurchased the stock in the first half of the year, and it feels like you'll be a pretty aggressive on the buyback here. How low do you think you would be comfortable seeing the TCE ratio decline?

Well we don't just look at that ratio. I mean our total capital, the total risk weighted assets at 11.5%, I think we disclosed to you in the past is -- is something we've looked at. We certainly have room to complete the $25 million buyback plan that was recently announced. We're not going to be cavalier about that. And look the ideal thing for us would be a large branch deal. We've worked on some, they haven't come to fruition because if you think about it on our deposits -- of our deposits $1.6 billion of those deposits are what you would or what we would call high cost deposits. If you could roll those $1.6 billion in deposits into 40 basis point deposits where sort of our community bank retail network is priced, you would drop at least $30 million in net income to the bottom-line, without growing the balance sheet at all just churning the deposit portfolio. So a branch deal that would move us in that direction is still interesting.That being said, whether or not we get a branch deal done, with the position we have in Triumph Business Capital and what we keep telling you is going to happen in TriumphPay, I at least I'm interested in continuing to repurchase shares when we can buy them at less than 10 times forward earnings because we believe that in relatively short order in a couple of years, we will be rewarded on that. So, yes, you should expect us to be active in repurchasing shares. It is unlikely that there is full bank M&A that will make sense. We continue to look at it. Any M&A for us is almost exclusively going to be focused on improving our deposit network.

Our next question comes from Matt Olney with Stephens. Please go ahead.

Aaron, you mentioned the possibility of participating some loans out and generating some fee income. Can you give us some more color around that? Is there a timeline of when this would become more realistic and would move the needle?

Sure. Well there's two and those references were specifically with respect to exposure to transportation. Okay, so there's two ways that two things that would lead us to do any sort of participation.One would be exposure to a single name, a one of the top two or three third-party logistics companies could exceed our legal lending limit for exposure to one borrower in which case we've already laid the groundwork to participate additional exposure for that name or those names with other institutions.The second way would be where total transportation exposure for us meets. We always have to think about how much of our revenue are we comfortable having coming from transportation. Right now, it's around 35%. So I suspect, Matt that in the next 12 months, there will be individual names that we will start to do participations out to other institutions. We've even looked at capital market structures and we have some, I think creative ideas how we can do this yet retain the fee that we that we think we earned from building this platform. So I think you'll see some internally at least, we'll see some individual participations out in some fee income starting in for surely next year. And then TriumphPay becomes what we think it will become then that will become a significantly growing exercise because the volumes that we're talking about moving through the system will be far more than a $5 billion or $7 billion bank balance sheet or frankly a $12 billion bank balance sheet can handle. So I think you'll see that just continue to progress, and in 2021, I think it could be material.

Okay good. That's helpful. And then on the credit front, it looks like you guys had another strong quarter of credit trends but one of your peers highlighted some credit issues around Ag. So could you just kind of remind us what your Ag exposure is and what type of Ag exposure it is and are you seeing any incremental pressure there?

Hi Matt, this is Todd Ritterbusch. Yes, so our Ag exposure if you combine both our traditional agricultural lending and farm land is just south of $300 million. So we don't have the same concentration that you've seen with some of our competitors.And it's important to note that some of the recent news just focus specifically on cattle lending where we don't have a high concentration. We're more concentrated in corn farming, and within cattle lending, the problems have been more in dairy than at beef and we have virtually no dairy, so some of that news isn't really all that relevant to us. Nonetheless we watch the agricultural portfolio very, very closely. And so while it represents less than 10% of our loans, it's more like a quarter of our specific reserves and we have made sure that we continue to monitor those relationships as they continue through time very carefully.One other important point here is that these agricultural loans are largely sourced out of our community markets where we have long relationships with the individual farmers. So it's a very granular portfolio and built on long-term relationships and success. So even though there's been some stress in that space, we're not abandoning those farmers and we're working with them to work through those situations one on one.

Our next question comes from Brad Milsaps with Sandler O'Neill. Please go ahead.

Aaron and Bryce, just curious if you could just talk about the NIM a bit and why is the potential for the Fed reducing rates and obviously you guys have had pretty high deposit betas on the way up given your need for funding. Just kind of curious against that backdrop how quickly you think you'll be able to lower deposit cost if the Fed does make a move?

Sure, Brad. This is Bryce. I think overall there I mean we continue to be priced fairly low across our retail branch network. I don't see room really to reduce those rates overall quickly at least, I think the impact of this will be just the overall impact that's happened more on our, more national tight price deposit base, CD portfolios, some of the money market accounts we have out there. There are some money markets probably a couple hundred million or so that have repriced down pretty quickly with the Fed move. We've already seen a back off in incremental deposit rates in the CD market on a national basis very significantly. I think we're probably at least 75 basis points below where we were on your money for that just a couple of months ago and I would expect with this move that would continue to go down. So marginal cost, there's already dropped significantly for us.

And Brad, one of the thing that I would point out that is different from us than I presume any other bank in your coverage universe is while the -- what happens in Triumph Business Capital has a tremendous effect on our net interest margin. And so for us NIM -- certainly deposits and costs of deposits matters but if transportation factoring is going up, our NIMs naturally going to expand just due to the margins we earn on those assets.

Right, right, absolutely. And just to follow-up on the transportation discussion. Aaron, I guess the pace of new clients is still positive but it has -- it has slowed in terms of additions. I know the market is massive. But do you think you need to make -- are additional people needed to further accelerate client acquisition or is it just maybe a soft spot in the market as you spoke to earlier, maybe people just not moving around as much, just kind of curious on the pace of new client addition?

Yes. So I would not read too much into what happened this quarter. I think we have the team, the technology it continues to get better. What you -- I mean the jump in independent owner/operators who come into this industry and then versus going back to working for a fleet happens very, very quickly. And so like I said, I think the chart that you see in the slide deck, I mean it is amazing how quickly this market responds and then it corrects. So what you saw in this quarter is there were less entrants into the market. Now there's still more -- a significant amount of new entrants into the market relative to historical levels but it wasn't like it was in 2018 when people were hearing stories of how much money their friends were making in trucking.I mean in trucking if you live by the spot market alone, it is a feast or famine way to live and that's we hope our truckers do some contract hauling et cetera. But the -- I would not read into the fact that there were just 73 new clients this quarter. The pipeline is strong. I still -- there is no need for us to add a bunch of things other than time. I mean as you all know, you've heard from me in the past, we've added net new clients almost every month going on six or seven straight years. And so it may not happen always as fast as we like. But every month we continue to take ground from the rest of the industry and I think we'll continue to do so.

Great. And just one follow-up for Bryce on expenses, if I kind of annualize your fourth quarter 2018 expenses versus your guide for 2019 implies about 8.5% growth. As you get into 2020, I mean is that kind of the rate of investment we will continue to see or do you think you can back off of that kind of expense growth rate as you make some of these investments they start to bear fruit?

Sure, Brad. I think that we really haven't guided out into 2020 but I think you're thinking correctly there. I would expect with the things we have going here, expense growth next year on a percent basis be a little lower than that.

Our next question comes from Jared Shaw with Wells Fargo. Please go ahead.

Yes, maybe just following-up on Brad's margin question though, if we're seeing overall easing on that incremental dollar of deposit cost and the potential for the average ticket to go higher on the factoring side, I mean we should be generally expecting to see margin moving up from here. Is that probably the best way to look at it especially as you're looking at focusing more on the higher profitable little part of the business?

Yes, I just -- things don't change in the quarter. But, yes, that would I mean if both of those things are true then that will remain true. I expect you're going to see seasonality continue in trucking like as we've talked about, we think this past quarter was or even what happened in the last year was distorted by a few things. So trucking will start to slow again in Q4. But I don't think, Jared, you will see us go out and grow deposits the way we did this quarter at that level, at that high of cost any time in the near future because as I've said we're far more interested given where the market is, where we are in the cycle, and just really just an assessment of what we want to be as a company. We're far more interested in quality growth than overall growth and we think we can do a lot of that growth and specifically talking about growing earnings inside the balance sheet that currently exists. So I don't foresee us putting on high cost incremental CDs approaching 3% again anytime in the near future.So that being the case, if rates are falling and transportation factoring continues to grow as a percentage of total assets which it will over time then yes NIM should expand.

Okay. And then, if -- so if we're looking at this generally a smaller balance sheet focusing on the more profitable side of the business, does that just get us to that 180 ROA goal faster or does that ultimately cause that 180 goal to be a higher goal?

I think that causes eventually. Sure. I would say we will go beyond that 180 goal eventually because if we look at these business lines once we have -- once we achieve maturation or the full absorption of what TriumphPay and Triumph Business Capital are doing plus they're generating fee income, yes, I think the opportunity and expectation would be to eventually go above that. Right now, I'm more interested on getting to that number which just requires solid execution from here to -- for the next few quarters. And so our long-term plans don't just stop at 180. That's just been a signpost for the investment community of where our progress was but we don't intend to stop there.

Okay. And then TriumphPay in the past you had talked about wanting to work towards bringing on some of those larger carriers. Can you give an update on how that has progressed and some of the pickups in new carriers you have this quarter, any of them -- any at the high-end of the business range there?

Yes, there's still the bellwether clients that we're pursuing. I don't have anything to announce about those specifically, I will say that we believe we will have four of the top 20 within the next few quarters on the system. And as those come on, of course we'll be talking about those individually and at some point once you've added brokers of that size, we expect many more to follow. And the pipeline is very full, at this point we've got integrations going out for the remainder of the year, the team is doing an excellent job and don't be continuing to add I mean 20% quarter-over-quarter growth and 160% year-over-year growth, is pretty impressive. And I expect it will continue to grow from here.

Okay, thanks. And just finally for me, with the pressure on the spot rate market are you seeing smaller competitors just are holding up and going out of business. Is that where you're getting that market share from or is it you're picking up incremental market share and adding as part of that relationship to those new customers?

We haven't seen any of our transportation factoring competitors hold up by any means. I think there are always new entrants coming into the transportation market and we get a significant portion of those due to our market position. And then we're always trying to compete for good clients that our competitors have and they're trying to compete for our good clients. So it's not been any that I know of transportation factoring competitors have left the market, it's just us taking a piece of the market that's there to get.

[Operator Instructions].Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead. [Operator Instructions].The conference is now -- 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 for joining us today. We hope you have a great rest of your week.

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