Triumph Financial, Inc.

Good morning and welcome to the Triumph Bancorp 4th Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Luke Weiss, Senior Vice President of Finance and Investor Relations. Mr. Weiss, please go ahead.

Good morning. Welcome to the Triumph Bancorp conference call to discuss our fourth quarter and full year 2018 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 Graff, our Chief Financial Officer, Bryce Fowler, and Dan Karras, 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 back over to Aaron. Aaron? Good morning.

For the fourth quarter, we earned net income to common stockholders of $18.1 million, or $0.67 per diluted share. Return on average assets for the quarter was 1.6%. 2018 was a transformative year for TBK. We bought a factoring company and three banks. We onboarded hundreds of new team members with these acquisitions, successfully converted them to our core systems and completed an equity offering to enable all of it. Loans grew by $798 million in total, and we generated $378 million of that growth organically. On top of all this, we completed, or will complete in early 2019, 72 separate strategic initiatives that will broaden our product offering, improve the technological advantage in our niche businesses, and lay the framework for efficient growth in the future. My heartfelt thanks to the team for a job well done in 2018. While it was a busy year in terms of our initiatives and acquisitions, our core earnings have continued to improve. Fourth quarter results reflect the first full quarter of the operations of all entities acquired during 2018. As I said in the opening, our return on average assets for the fourth quarter was 1.6%, which is the highest level we posted this year. Our return on average assets for all of 2018 was 1.33%. Average loans were up $239 million, or 7% over the prior quarter. Period end loan growth was $96 million. Our ABL portfolio shrunk during the fourth quarter by $59 million, or 22%, largely as a result of our efforts to decrease the overall risk profile of the portfolio following a fraud loss earlier in the year. Other lending lines grew during the quarter. Commercial real estate loans increased by $86 million or 9% and equipment finance loans increased by $28.2 million or 9%. Mortgage warehouse lending was up at the end of the quarter. The average mortgage warehouse balance decreased $33 million this quarter to $257 million due to a typical seasonal decrease in demand for mortgages. At Triant Business Capital, we continue to see growth. Total factoring revenue increased by $247,000 quarter over quarter, or 1% to $29 million. Purchases increased by approximately $38 million, or 3% to $1.5 billion during Q4. The number of invoices purchased climbed $45,000 over Q3 to 882,000 invoices. The average invoice size this quarter decreased $49 to $1,747. Average transportation invoices decreased $41 to $1,625. Outstanding transportation invoices comprised approximately 83% of the gross balance of factored receivables at December 31, 2018. Our number of active clients increased by 259 clients to a total of 6,191. For Triumph Pay, we will have 113 clients utilizing the Triumph Pay system up from 86 last quarter. During Q4, Triumph Pay processed 83,000 invoices paying 19,000 distinct carriers approximately $123 million. In Q4, we signed a top 25 broker to the Triumph Pay platform. We expect to integrate another top 25 broker in Q1. Collectively, these two companies will contribute approximately $800 million in annual carrier payments to the Triumph Pay platform. In addition to these large brokers, we continue to sign and integrate several smaller freight brokers onto Triumph Pay. We think the future of Triumph Pay is bright, But we do not expect it to be a net contributor to our earnings during 2019. Fourth quarter net interest income was up $3.1 million over Q3. Net interest margin declined by 25 basis points to 6.34%, which is in line with what we expected considering the acquired bank's portfolio impact on this quarter. Loan yield was 8.14% and the cost of total deposits increased six basis points to 91 basis points. We accreted $1.4 million of loan discount in Q4 and have $17 million of accretable discount at year end. We have added a disclosure about loan discount accretion to the end of our earnings release. Our loan to deposit ratio at year end increased to 105%. This ratio is inflated by approximately 10% due to our use of FHLB advances to fund mortgage warehouse lending. Overall, we continue to see improvement in our asset quality metrics. Last quarter, we highlighted a single ABL relationship with a fraud-related loss that materially impacted both charge-offs and provision for loan loss. Excluding that single relationship, the ratios for non-performing loans and assets, as well as net charge-offs, have been good and improving. Year over year, the level of both non-performing loans to total loans and non-performing assets to total assets have decreased, and they decreased again this quarter. Non-performing loans are now down to 1% and non-performing assets to 84 basis points, below our 1% or better goal for 2018. Net charge-offs were approximately $1.6 million for the fourth quarter, or five basis points. Year-to-date, net charge-offs are 23 basis points of average loans, or roughly eight basis points, excluding the total ABL fraud-related charge-off. Non-interest income was up $736,000 from Q3 to $6.8 million. This is up $1.6 million from the first quarter of this year, reflecting the addition of the acquired banks and factoring company in our financial results. Q3 non-interest expense included $5.9 million in transaction costs associated with the bank acquisitions. Fourth quarter expenses were very close to the $47 million estimate we provided in our last earnings call. The core increase was driven primarily by the full quarter addition of the three acquired banks, as well as investment in technology development and overall infrastructure, including Triumph Pay and Triumph Business Capital. As I mentioned in the first part of my remarks, 2018 has been a transformative year for TBK. We have substantially completed 72 initiatives, which include expansion and improvement in our product offerings, delivery and service, technology enhancements, and office expansion to support our growth. We will increase our investment in 2019 to support technology enhancements and infrastructure development for Triumph Business Capital and Triumph Pay. We estimate that non-interest expense will increase to $49.5 million for the first quarter of 2019 and remain essentially flat for the remainder of the year, resulting in total non-interest expense of approximately $200 million for the fiscal year 2019, assuming no M&A activity. For 2019, we expect organic loan growth of approximately 15%. As a reminder, the first quarter of each year has historically been our weakest quarter due to seasonal factors, especially in our transportation related businesses. First quarter loan growth over the past three years has ranged from negative 3.6% to positive 2.2%. If this historical pattern repeats in 2019, First quarter earnings will be weaker than Q4 of 2018, followed by a rebound in subsequent quarters. Our expectations for the 2019 fiscal year called for mild net interest margin expansion, as the commercial finance portion of our business again outpaces the growth of our community bank lending. Following the Christmas holidays, we see a pullback in factored receivable purchases in January of approximately 10 to 11%. That typically translates into relatively flat or down factoring activity in Q1 from Q4 and shifts our net interest margin down on that mixed change. We remain committed to achieving our goal of a 1.8% core return on average assets in the fourth quarter of 2019, which should translate into earnings per share of approximately 84 to 86 cents per share in Q4, again, assuming no M&A. In closing, I am encouraged by the core trends in our business. We continue to grow and improve, and we are very optimistic about the path forward. With that, I'll turn the call back over to the operator for any questions.