Triumph Bancorp, Inc.

Good morning and welcome to the Triumph Bancorp conference call to discuss our fourth quarter and full year 2020 financial results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, Please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Luke Wise, Senior Vice President, Finance and Investor Relations. Please go ahead.

Good morning. Welcome to the Triumph Bancorp conference call to discuss our fourth quarter and full year 2020 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 two. For those joining by phone, please note that the safe harbor statement and presentation are available on our website at www.triumphbankcorp.com. All comments made during today's call are subject to that safe harbor statement. I'm joined this morning by Triumph's Vice Chairman and CEO, Aaron Graft, our Chief Financial Officer, Bryce Fowler, Todd Ritterbush, our Chief Lending Officer, and Jeff Brenner, our CEO of Triumph Business Capital. After the presentation, we'll be happy to address any questions you may have. At this time, I'd like to turn the call over to Aaron. Aaron? Thank you, Luke. Good morning.

For the fourth quarter, we earned net income to common stockholders of $31.3 million, or $1.25 per diluted share. This was a very solid quarter. We made significant progress executing on strategic priorities. Our transportation payments business are continuing their strong growth, becoming a bigger part of our total revenue and with market tailwinds currently at their back. The quality of our funding mix and our liquidity position continues to improve and overall profitability for the enterprise was strong. Our asset quality is very good, and in my view, better than the reported metric may appear due to the impact of the acquired TFS factoring portfolio. Our third quarter acquisition of the factoring portfolio from Transport Financial Solutions and Covenant Logistics, or TFS, continues to present challenges. The impact of this acquired portfolio on our asset quality metrics as well as the financial statement impact of the subsequent modification to the acquisition agreement with CVLG, has resulted in several items in our financials that I want to point out. We have provided quite a bit of detail about this transaction in our earnings release in an effort to be as transparent as we can. In the third quarter, we reached a settlement with Covenant that provided us protection from loss up to $45 million on $62 million of over-advanced receivables, that were within the total $108 million portfolio acquired. The accounting for this produced a specific loss reserve for a portion of the over advances, and it produced an indemnification asset for the estimated amount we would have to collect from Covenant for any incurred losses. The modification also provided for a reduction in the purchase price we paid for the portfolio. We received a total of $10.9 million in cash in the fourth quarter from Covenant as a reduction from the original purchase price. This payment was $8.9 million more than we had recorded as a receivable at the end of the prior quarter and is reflected in non-interest income in the fourth quarter. This positive difference is due to the appreciation in our stock that was part of the consideration in the original transaction. Our plan has been to work with each of the acquired TFS clients to recoup the over-advanced amounts with an appropriate workout plan while continuing to factor their current business in the ordinary course with the Postal Service. However, we have encountered a new twist. In the fourth quarter, we purchased approximately $19.6 million of accounts receivable from the largest acquired trucking client, which would normally be collected by us from the Postal Service. After we advanced funds to the trucking client, that client instructed the U.S. Postal Service to remit payment directly to them. Inexplicably, the U.S. Postal Service, in direct contravention to the written notice of assignment we delivered to them, complied with this request and ended up paying $19.6 million of what was due to us directly to our client. The client has refused to remit these funds as required. As you might imagine, we have commenced litigation against both our client and the USPS in separate actions. The USPS has cited purported deficiencies in our notices as justifying their actions, despite initially honoring such notices, honoring identical notices for other clients without interruption, and choosing to subsequently dishonor these notices without any prior communication to us. In my view, these facts can only suggest that the US Postal Service and our client worked in concert to violate our agreement and applicable law in order to ensure timely mail delivery during the holidays and the election season. There were other and better ways to have handled this, but they did not give us the opportunity to be part of the solution. The litigation surrounding this matter has the potential to be drawn out and complicated and involves novel issues given the unique nature of the U.S. Postal Service. However, Based on our legal analysis and discussions with our counsel advising us on this matter, we believe it is probable that we will prevail in our action against the USPS and that they have the financial capacity to pay us what we are owed. Therefore, we have determined that a specific reserve on this amount is not warranted at the end of the year. Please know it may take some time to work through the legal process. In the fourth quarter, we established an additional $11.5 million of reserves to fully reserve all of the over advances to the largest carrier, who is at the center of the converted payments dispute. This expense was partially offset by a $5.3 million increase in our indemnification asset, which was recorded to other non-interest income, resulting in a net $6.2 million pre-tax loss. Our earnings release provides a summary of the impact the TFS acquisition had on our financial statements and adverse impact on our reported asset quality metrics. Now, this is a lot of detail around one relationship, but I thought it was important for investors to understand the context on a potential credit issue of this size in what was otherwise a near-perfect quarter. In my opinion, this wasn't a credit failure. It was a theft. With that tedious topic out of the way, let's turn to all the good things that are happening at TBK. First, deposits, which you can see on slide 14, you will note that we continue to improve our funding mix. Non-interest-bearing deposits as a percentage of total deposits are now 29% of total deposits, which is a significant increase from a year ago. Our loan-to-deposit ratio moved down slightly to 106% at the end of the year from 114%, at the end of the third quarter. Adjusted for mortgage warehouse loan balances, the ratio is approximately 22 basis points lower this quarter. Given market conditions and the growth of non-interest bearing accounts, we expect our funding costs to continue to trend lower in the near term. Now to margin. Our loan yields this quarter were up to 7.2% versus 7.05% in Q3. NIM is now 6.2%, which is the top of our peer group. The primary driver for the expansion of NIM is the growth of our transportation lines of business versus other parts of our business. We hope and expect this trend to continue. Our total credit loss expense was $4.7 million in the quarter. Net charge-offs for three basis points of loans and the net change in specific loss reserves were $11.6 million. $11.5 million of which was from the TFS acquisition. The good underlying loan credit performance combined with a more optimistic outlook drove an $8 million reduction in credit loss expense. Aside from the aforementioned items related to the TFS transaction for this quarter, there were a few one-time items we should point out. Our occupancy furniture and equipment expenses are inflated by approximately $1.4 million related to our decision to consolidate part of our El Paso factoring operations to our TBC headquarters in Coppell. Finally, based on year-end performance, incentive comp adjustments added about $2 million to fourth quarter expenses. Looking out into the first quarter, we expect core expenses to be approximately $58 million. Now I'd like to turn the call over to Todd Ritterbush, our Chief Lending Officer.