Triumph Financial, Inc.

Good morning, everyone, and welcome to the Triumph Bank Corp, Inc. third quarter 2020 earnings call. All participants will be in a 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 and then one. To withdraw your questions, you may press star and two. Please also note, today's event is being recorded. At this time, I'd like to turn the comments call over to Luke Wise, Senior Vice President of Finance and Investor Relations. Sir, please go ahead.

Good morning. Welcome to the Triumph Bancorp conference call to discuss our third 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 risk 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 third quarter, we earned net income to common stockholders of $22 million, or $0.89 per diluted share. Excluding expenses related to merger and acquisition-related activities, diluted earnings per share was 91 cents. Total loans grew $459.6 million, or 10.5%, mostly related to factoring and mortgage warehouse balances. Total loan growth includes $107.5 million in factored receivables acquired through our TFS acquisition in July. We have prepared slides 24 and 25 in our deck to walk through the accounting treatment of this acquisition. Total credit loss expense was actually a $258,000 benefit versus $13.6 million of expense in the prior quarter. The allowance for credit loss, or ACL, increased $36.4 million to $91 million, or 1.88% of total loans. The over advances acquired in the TFS acquisition are accounted for as purchased credit deteriorated assets resulting in a $37.4 million increase in the ACL in purchase accounting without a charge against expense. As a result, excluding the impact of the TFS acquisition, the ACL balance decreased by $1 million. This net decrease of $1 million in ACL is due to CECL loss factors remaining relatively in line with Q2 and the continuing shift in portfolio mix to shorter duration loan products with lower reserve rates, primarily from strong growth in factoring and mortgage warehouse. Our economic forecast for CECL were relatively flat quarter over quarter and we maintain an unemployment forecast of 9 to 10% with marginal retail sales growth over the next four quarters. We experienced net charge offs of $700,000 or two basis points of average loans and an increase in specific reserves of less than $100,000. Past due loans to total loans increased 90 basis points from Q2 to 2.4% of total loans. Approximately 79 basis points of this ratio consists of $38.5 million of past due factored receivables related to the acquired TFS over advance portfolio. Non-performing assets to total assets increased 32 basis points to 1.52%. Approximately 17 basis points of this ratio consists of $10 million of the over-advanced receivables acquired through the TFS acquisition. Turning to deposits, which you can see on slide 15, you will note that we continue to improve our funding mix. Non-interest bearing deposits grew $195 million in the quarter and are up to $632 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 31% of total deposits, which is a significant increase from a year ago. Our loan to deposit ratio moved up slightly to 114% from 108% in the second quarter. Adjusted for mortgage warehouse loan balances, the ratio is approximately 23 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 7.05% versus 6.52% in Q2. That number includes an unexpected $1.7 million in discount accretion on loans paid off during the quarter. However, the majority of this change was related to a shift in the mix of our loan portfolio as factoring volume and revenue increased materially over Q2. Net interest margin was up 72 basis points to 5.83% on both the strength of our transportation businesses and our continued improvement in our cost of funds. As to whether this will continue into Q4 and beyond, I would say that we are not in the practice of making forecasts regarding net interest margin or other key metrics. What I can tell you is that when our factoring segment leads our loan growth it is almost a certainty that our net interest margin will expand. As for Q4, The spot rate market for transportation remains very much in favor of truckers and our new client pipeline is more full than ever before. I'd like to point out a few specific items this quarter that we noted in the earnings release yesterday. First, we realized $3.1 million in gains on the sale of securities. These were available for sale CLOs we purchased when the market froze up during the first quarter. Given the run-up in these asset values, we elected to sell a portion of our portfolio and recognize the embedded gain. We also realized in other income $2 million to account for the estimated increase in cash we expect to receive from the date of our settlement of the TFS dispute due to the run-up in our stock price through quarter end. We also had approximately a $700,000 write down on a former branch donated to the city of East Moline to be used as a library. Lastly this quarter, we finalized our agreement with Covenant on the TFS transaction. The revised deal is dilutive to tangible book value by 21 cents or about 1%. We expect EPS contribution of around 10 to 12 cents annually from the conventionally structured portion of the acquired portfolio. However, our resolution efforts on the over-advanced portion of the portfolio, supported by the indemnification from Covenant, could create some additional upside or downside in the near to medium term. As previously noted, we've prepared slides 24 and 25 in our deck to summarize the final accounting and the range of outcomes around the transactions. The structure of the settlement and accounting caps our pre-tax loss exposure on the over-advanced portfolio to $10 million while preserving some potential upside. Looking out into the fourth quarter, we look for expenses to remain contained with quarterly core expenses relatively flat with the $55.3 million printed in Q3. Now I'd like to turn the call over to Todd Ritterbush, our Chief Lending Officer, to talk about our community bank lending, and our continued efforts to support our communities and customers during this pandemic.