Triumph Financial, Inc.

Good day and welcome to the Triumph Bancorp, Inc. Second Quarter 2020 Earnings 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. Please note this event is being recorded. I would now like to turn the conference over to Luke Wise. Please go ahead.

Good morning. Welcome to the Triumph Bancorp conference call to discuss our second quarter 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, everyone. For the second quarter, we earned net income of $13.4 million, or $0.56 per diluted share. Adjusted for the gain on sale of our Triumph premium finance assets, diluted earnings per share was $0.25. Starting with credit and ACL. Total credit loss expense was $13.6 million versus $20.3 million in the prior quarter. During the second quarter, we recognized credit loss expense on funded loans of $11 million, credit loss expense on off-balance sheet commitments to lend of $900,000, and $1.7 million of credit loss expense on subordinated notes to collateralized loan obligations in our held-to-maturity investment portfolio. These are legacy assets associated with our CLO advisory business that we sold in 2017. This portfolio will self-liquidate over the next few years and we do not currently nor do we expect in the future to invest in any additional equity CLO tranches. Generally speaking, our economic forecast worsened quarter over quarter as we're now forecasting unemployment to sit between nine to 10% over the next four quarters with depressed retail sales over the next three quarters. As a result, the allowance for credit loss, or ACL, increased to $54.6 million, or 1.24% of loans held for investment. Given the focus on this ratio and the short duration of a significant portion of our loan portfolio, we think investors should understand that our ACL ratio is 1.77% of total loans when you exclude PPP loans factored receivables, and mortgage warehouse balances. On the loan portfolio, we experienced charge-offs of 1.1 million, or two basis points of average loans, and an increase in specific reserves of 1.7 million. Past due loans decreased by 49 basis points from Q1 to 1.5% of total loans, and the ratio of non-performing loans was relatively unchanged. While these levels are certainly acceptable and not out of line with recent metrics, it should be noted that a significant portion of our loan portfolio is currently in deferral in accordance with guidance from our regulators and the CARES Act. We will discuss these deferrals in more detail later in our remarks. Turning now to deposits. Deposits were a bright spot for us again in the second quarter and our funding mix continues to improve. Non-interest bearing deposits grew $275 million and are now up $437 million since we increased our focus on deposit gathering at the end of the second quarter in 2019. Non-interest-bearing deposits as a percentage of total deposits are now 28% of total deposits, which is a significant increase from a year ago. As we noted in our last earnings call, the dislocation in the retail deposit markets that existed in March has normalized and we have retired much of the FHLB funding that we borrowed in the first quarter while also reducing our loan-to-deposit ratio down from 117% to 108%. As higher-cost time deposits continue to mature and reprice, we expect our funding costs to continue to trend lower in the near term. Turning now to margin, our loan yields were down from the first quarter 70 basis points while NIM was down 52 basis points. The majority of this change was related to a shift in the mix of our loan portfolio as factoring volume and revenue declined, while mortgage warehouse average balances increased $203 million over Q1 to $716 million. We also had $219 million in PPP loans carrying a 1% coupon, or a spread of about 65 basis points at June 30th. This compressed overall loan yield 16 basis points and net interest margin approximately 8 basis points. Our PPP fees recognized in interest income totaled $1.4 million, and we have $5.8 million of remaining deferred PPP fees at quarter end. As we will detail further in this call, our outlook is for our margin to expand from this low point throughout the remainder of the year. Finally, a few items this quarter that I'd like to point out. First, we realized $1.3 million in gains on the sale of loans, the majority of which is from our liquid credit loan portfolio, and a $1.9 million syndication fee recognized in other non-interest income on a large credit line we structured for a community bank customer. Finally, our service charge fees were below historical levels by approximately $1 million in Q2. We do not expect this to continue in Q3 or beyond as the universal fee waivers we provided to assist our customers ended June 1st. As previously disclosed in the first quarter, we completed the asset sale of our Triad Premium Finance business to People's Bank on June 30, 2020. The portfolio of loans sold totaled approximately $85 million, and we realized a pre-tax net gain on sale of $9.8 million. As part of this transaction, People's Bank receives a top-notch platform on which to expand the business, and Triumph retains a preferred premium finance referral relationship to service our clients. Now I'd like to turn the call over to Todd Ritterbush, our Chief Lending Officer, to talk about our community bank lending and the efforts underway to support our communities and customers in light of the unprecedented impact of COVID-19.